Neogen Corp (NEOG) 2018 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Neogen First Quarter FY 2018 Earnings Announcement Conference. My name is Cameron, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I would now like to turn the call over to Mr. Jim Herbert. The line is yours.

Good morning, and as Cameron announced, welcome to our regular quarterly conference call for investors and analysts. Today, we'll be reporting to you the results of our first quarter of this 2018 fiscal year, which ended on August 31.

And to start with, of course, I'll remind you that some of the statements that are made here today could be termed as forward-looking statements, and these forward-looking statements, of course, are subject to certain risks and uncertainties. The actual results may differ him from those that we discuss today, and that the risks that are associated with our business are covered in part in the company's Form 10-K as filed with the Securities and Exchange Commission.

In addition to those of you who are joining us by live telephone conference, I also welcome those who may be joined by way of simulcast on the World Wide Web. Following comments this morning, we'll entertain questions from participants who are joined by this live conference.

And I'm joined today by Steve Quinlan, Neogen's Chief Financial Officer; and John Adent, Neogen's new Chief Executive Officer, who assumed his responsibilities in mid-July. John and I, by the way, are sharing a number of responsibilities which is giving us the chance to pursue some great opportunities that have been difficult to pursue in the past.

Earlier today, Neogen issued a press release announcing the results of our first quarter this 2018 year. Net income increased 21% to $11.9 million or $0.31 a share. This compares with the previous year's first quarter of $9.9 million or $0.26 per share.

Revenues for the first quarter increased by 14% to $95.3 million, compared with the previous year's $83.6 million. Both these revenues and net income represent first quarter records for our company that celebrated its 35th birthday in June.

The first quarter is the 102nd of the past 107 quarters that Neogen has reported revenue increases compared to the previous year. That spans almost 27 years now and includes all consecutive quarters in the past 12 years.

I was in New York last week with a group of financial analysts who continued to be curious about how we maintain our consistent growth. And as always, I say you need to talk to 1,500 Neogen employees around the world who've kept our success record growing. It's almost like they won't let the record get broken on their watch.

Gross margin for that -- for this first quarter was about 48.2%, compared to almost an identical 48.4% in the first quarter last year.

Operating income for the first quarter was $16.4 million. That's 17.2% of revenue as compared to 17.6% a year ago.

Comparing our quarters, there're probably a couple of noteworthy areas that Steve will talk about later this morning. The first of those was currency translation, that for the first time in a while, we saw a moderation in negative currency translation for the quarter. And it really didn't have much material impact at all on our revenues or our earnings.

Our net income increase was aided somewhat by new accounting guidance regarding stock option exercises, which resulted in some changes in federal income tax expense. But Steve can bring you up to speed on that one.

I was pleased that this first quarter was a solid start for our 2018 fiscal year and especially coming off a good 2017 year. I think the results reflect the positive impact of growth in many of our core product lines. We're also pleased with the rate of integration of several of our recent acquisitions that contributed to these financial results.

I think I might stop at this point by simply pointing out that our balance sheet continues to be solid with nice asset growth, and as in the past, we continue to build shareholder equity quarter-over-quarter. In this first quarter, we added another approximate 3.3%.

I'll come back later in the call and talk some about the growth strategy and give you a peek at some of our corporate development projects, as well as our views on the international growth side of the business.

However, let me call on John Adent to talk about the growth in our food safety areas in the first quarter, and then ask Steve Quinlan to follow him, if he will then give us highlights of Animal Safety Division and some more color behind the financials that I'll briefly discussed.

John?

Thank you, Jim, and welcome to everyone listening. Jim has already reported on the overall sales and profit performance for the first quarter of our 2016 (sic) [2018] fiscal year. I will provide more detail on the performance of our food and safety segment, as well as offer some perspective.

But before I do that, I have a few observations about my first 2 months at Neogen. First and foremost, Neogen is in the right markets. Helping our customers improve the safety of the worldwide food supply is a dynamic and growing market. And with our products and services that reach from behind-the-farm-gate to the dinner plate, we are uniquely positioned in the market.

Secondarily, this is a team that does not rest on its laurels. Our recently launched Listeria Right Now, 16s genomic tests for bacteria, water-based mycotoxin tests and new DNA profiles for beef seedstock and commercial cattle are all exciting, potential game-changing technologies. And lastly, our employers are excited about the future.

The transition plan that Jim and I have developed has been exceptionally smooth in my first 60 days. We are aligned on the short and long-term objectives of the company and are working on our business plans. Jim has been a great leader for a long time and I look forward to his mentorship for years to come. It's an honor and a privilege for me to be here and I embrace the opportunities and challenges of being Neogen's new CEO.

Now on to the first quarter performance of our Food Safety segment. As stated in the press release, revenues of our Food Safety segment increased 19% during the first quarter compared to the prior year's first 3 months, aided in part by the acquisitions of Quat-Chem and Rogama in past year. Organic growth for the Food Safety segment was 9% for the quarter.

Sales of Neogen's rapid test for food allergens, such as gluten and peanuts, increased 17% in the quarter compared to the prior year. Neogen developed the first rapid test for food allergens in 1998, and we have remained a leading provider of food allergen test kits ever since. With increasing global consumer demand and regulatory efforts to reduce food allergen contamination, our food allergen product lines will remain one of our food safety growth drivers going forward.

Sales of our mycotoxin test for the first quarter increased 9% and included a 23% increase in the sales of test kits to detect aflatoxin. These increases were due to increased testing of the grain stocks that remained from the 2016 harvest season, heavy contamination in the corn crop in Brazil and a new aflatoxin test format that totally eliminates the need to use a biohazard in the test process. For years, methanol was used in the testing process because it was the only known way to quickly extract several toxins from grain. We have developed a testing process that replaces methanol and yet yields the same test accuracy. As you can imagine, it's an extremely popular test improvement.

Also in the first quarter, sales of our AccuPoint Advanced ATP Sanitation Verification System increased 14% compared to the prior year. Like many of our Food Safety diagnostics, AccuPoint is a key product to help food manufacturers comply with new regulations. Our test allows companies to check their equipment and facilities for contamination. With AccuPoint, you can almost instantly know if a surface is clean or requires further attention.

And although I didn't yet as Jim would say, ring the cash register in the first quarter, we're very excited about a product launch that's expected to completely change how testing is performed for some foodborne pathogens. In July, we launched Listeria Right Now, an innovative test that detects Listeria in environmental samples in under 60 minutes without the need to run new samples. Other test systems take up to 24 hours to produce the same results.

The advanced technology in Listeria Right Now truly changes everything about testing -- about the testing environment for Listeria. The new test system enables food safety professionals to very quickly identify and fix whatever is wrong, which could include improving sanitation efforts or processes. The new test also means that companies no longer have to grow potentially dangerous cultures in their facilities during the testing process, nor store test cultures for potential follow-up testing.

Overall, sales of our products to detect foodborne pathogens increased about 6% in the quarter. Of our other major Food Safety product groups, sales of our dehydrated culture media products increased 13%.

On a personal note, I'm looking forward to seeing all of you who can make it to our annual meeting taking place here in Lansing on October 5.

Steve?

Well, thanks, John. As both Jim and John have indicated, we got off to a strong start for fiscal 2018 with a 14% increase in revenues in the first quarter. And I'm happy to report that for the first time in over a year, currency did not have a significant impact on comparative revenues for the quarter. There were some puts and takes, with the pound slightly lower than last year's level and all other currencies we deal in, such as the euro, peso and real, higher relative to the dollar than this time last year. The total net negative impact from currency movements on comparative revenues was only $150,000.

John has already discussed some of the key highlights of our growth in the Food Safety business, so I'm going to focus on the Animal Safety segment.

Animal Safety recorded an overall revenue increase of 9%, which was all organic. This is the first quarter which hasn't had a negative comparison against the prior year due to ThyroKare, the thyroid replacement drug for dogs that we withdrew from the market a little more than a year ago. We are continuing to pursue regulatory approval of this product and hope to sell it again in fiscal 2019.

Increases in our Lexington-based business came from sales of veterinary instruments, which increased 11%, with strong sales of needles, syringes and animal marking products. Life sciences revenues increased 8%, primarily due to forensic test kits, which continued to be in demand at U.S. commercial labs due to regulations in Brazil requiring drug testing of commercial drivers.

Our rodenticide business increased by 3% as increased sales in the retail agricultural market were offset by a decline in toll manufacturing revenues due to lower demand at one of our larger customers. Our line of insecticide products, manufactured by our Chem-Tech operations in Iowa, had a strong quarter with growth of 11% led by high demand of some larger customers and distributors.

Sales of cleaners and disinfectants were down 9% in the quarter due to an $860,000 loss in revenues caused by the termination of a distribution agreement in the third quarter of our last fiscal year. However, sales of complementary products from our acquisition of Preserve in April of 2016 helped to offset this loss. Preserve had a nice increase in the quarter as we continued to convert customers from the former distributed product to our own manufactured cleaners and disinfectants.

The genomics testing business, as reported through the Animal Safety segment, was up 29% for the quarter. Now this is the revenue from our location in Lincoln, Nebraska. Volume here has grown 42% in the last 12 months, and we will process over 3 million samples there this year. Worldwide, revenue from genomics, which includes our customers serviced by our locations in Scotland, Brazil, China and Mexico, which all report through Food Safety, also had an impressive 29% increase in the first quarter. At the Lincoln operation, the highlight was a 211% increase in business from commercial dairies. Now this market has been a particular focus of ours in the past year.

New products introduced and penetration in the companion animal market helped drive a 48% increase in the first quarter, and revenues to the poultry market increased 38%. Sales to the sheep market increased strongly off a smaller base and we're excited about our opportunities there. Volume growth, efficiencies gained through automation and improved input cost have resulted in significant improvements in both the growth and operating margin percentage for this business.

Corporate-wide gross margins were 48.2% for the quarter, down just slightly from the prior year's first quarter margins of 48.4%. Margins were impacted by mix changes resulting from last year's acquisitions of Quat-Chem and Rogama, which used to have lower gross margins than the company's historical average.

Operating expenses overall were up 14% for the quarter. This increase included $1.2 million in expenses related to our recent acquisitions. Sales and marketing expenses rose 15%, primarily due to increases in salaries and commissions resulting from higher headcount and revenues and higher shipping expense. Approximately $0.5 million of this increase was due to the recent acquisitions.

General administration -- administrative expenses rose 13% for the quarter, with $625,000 directly related to the acquisitions, including amortization expense for the acquired intangible assets. Additional increases were for salaries and other compensation-related expenses and depreciation expense primary resulting from continued investments in information technology.

Our R&D expenses increased 16% in the first quarter, primarily from personnel-related expenses and contracted outside services related to our new product development efforts.

As Jim mentioned, our operating income for the quarter was $16.4 million, an 11% increase from last year's first quarter operating income of $14.7 million. Expressed as a percent of sales, operating income was 17.2% compared to 17.6% in the first quarter last year.

Our other income was $812,000 compared to other income last year of $492,000. We recorded currency gains in the first quarter of about $465,000 compared to currency gains of $246,000 in the prior year. We also had $369,000 of interest income, a nice increase compared to $123,000 in the first quarter of last year as interest rates have risen and our cash and marketable securities balances are $31 million higher than they were a year ago.

Our effective tax rate was 30.7% in the first quarter, compared to 34.8% in the prior year's first quarter. This quarter's tax rate included a $396,000 credit to federal income tax expense, the results of adopting a new accounting standard regarding share-based compensation at the beginning of this fiscal year. Previously, excess gains on the exercise of stock options would have been recorded as a credit to shareholders' equity on the balance sheet. Now going forward, this standard will result in fluctuations of our effective tax rate and our overall net income each quarter, depending on the price of the company's stock and number of options exercised in that quarter. And we currently believe the impact to range from $0.01 to $0.03 per quarter.

The company generated $19.2 million in cash from operations in the first quarter, aided by improved utilization of working capital. We invested $4.5 million in property, equipment and intangible assets this quarter. Inventory balances were essentially flat from last year end as we continued to work on minimizing our back orders while improving inventory turns, and formal programs have been instituted fiscal 2018 to improve those inventory turns.

Accounts receivable balances decreased 3% and average day sales outstanding were 59 at August 31 compared to 60 days at May 31.

Now we're pleased about the strong start to the new fiscal year and believe that we continue to be well positioned for the growth opportunities, which are ahead of us.

I'll now turn it back to Jim for some additional comments.

John and Steve, thanks for adding that actually important color. Let me bring you up to speed on our international businesses and take a look at that from a broad perspective.

First of all, our revenues from international sources for the first quarter are 19% ahead of that same quarter last year, and accounted for 36.2% of total revenues. Last year, that percentage was 34.7%, so it's up a bit there.

Looking first at our largest company-owned international operations headquartered in Ayr, Scotland. We now have about 200 employees as a part of that Neogen Europe operations. They're responsible for all of our Food Safety sales, either directly with our own sales force or with distributors in all of Europe and a part of Africa. The U.K. portion of that business was up about 7% for the quarter, but revenues for both France and Germany were down because those countries had high mycotoxin levels last year in their grain crops, but not this year. However, when we look across the rest of that whole market area, it was all up -- it was up in total about 13%, so continued good, strong growth in that part of the world.

Our Lab M Dehydrated Culture Media business, that's a part of that management group, had an increase in revenues for the quarter of 34%. The Quat-Chem operations that recently came on board and also report through our Ayr, Scotland management team, continued to do well. Their revenues were in keeping with our integration plan for that business.

As some of you are familiar with the story know, we are positioning our international strength where the middle class population is expected to grow the most rapidly in the next decade. That, of course, clearly centered on China and India. We've been in China for a while now, and we've shifted our strategy to keep up with what appears to be the changing strategy in that marketplace. And I'm pleased that our local management teams in both Shanghai and Beijing are really beginning to click now, I think. Their revenues for the first quarter were up 12% compared to a year earlier.

India is a newer story and one that still requires some patience. We are making progress, and in fact, our revenue increased this quarter by 25% though from a smaller base, obviously.

As a part of our overall food security story, you all remember that we talked about who's going to supply the food for these rapidly growing middle class populations. This clearly points to Brazil as the country who will likely be the largest food exporting country in the world. Our revenues there increased 39% for this first quarter.

Another of our emphasis countries that fit the global food supply provisions is Mexico, largely because of the close proximity of its West Coast ports to Asia. Our Mexico City-based Neogen Latino America covers not just Mexico, but also the 7 Central American countries. Revenues there were actually down about 2% as we worked toward replacing some of that old DuPont cleaners and disinfectant business that have been a part of our distribution agreement we had a year ago. However, that business group is poised for rapid growth, and I think it will go forward very strongly. We are hopeful, of course, that the peso has stabilized there.

Let's shift briefly to our U.S. focus. Steve and John both talked about new products that are coming to the market in both Food and Animal safety. And we think we expect that those are going to keep revenue growth growing in the double digits, as we have in the past. There is likely a bit of setback on some of our products that go directly to farmers and ranchers through retail locations. U.S. farm prices are weaker than they were a year ago and will likely continue to be weak due to the high carryover of grains and soybeans, as well as projected bumper crop that's now in harvest. All the animal protein segments have larger populations and will likely keep some price pressure on meats, beef in particular.

I know that there are probably questions about the impact of the 2 southern hurricanes on the food industry and on Neogen's revenues. It's a bit difficult to fully ascertain that now. However, I don't think it's affecting parts of the business that's going to have any real material impact on Neogen.

In Texas, that grain crop had been harvested in extreme South Texas 10 days or so before Harvey struck. However, as the impact of the rains went further north, it could still have some effect on the grain crops there that haven't been harvested, but nothing that we know yet.

It would probably be another week before we know how to handle that, as well as the cattle populations in South Texas. We did drown some cattle, we know. Perhaps even worse than the cattle we drowned as those cows that were in water that were belly-deep for several days with calves at their side, who, of course, couldn't get milk from their momma to get their head underwater. So the calves problem -- maybe is going to be a little bit more damaged even than the cows were.

We know that we've got genomic cattle customers in both Florida and Texas that have been impacted. And though we're very sympathetic towards their losses, it's not likely that it will have any noticeable impact on our cattle genomics business.

Though I'm sure there will be some bumps in the road as we look out over the next 3 quarters, at the moment, we don't see any roadblocks. Of course, we continue to keep our eyes on the impact of Brexit on currency translation and the stability of some of our good South American business. I think I raised -- it's pretty safe to say that all of our markets are growing at some rate, and that we ought to be able to keep up with that market growth and take a little extra market share.

Our second growth strategy, in addition to market growth, is on the new product front. I had the opportunity to spend a couple of days last week with 84 of our R&D scientists from around the world. They excitedly told me about the new product opportunities in their labs, and I think that's great to look forward there as we see that going forward.

I've already talked perhaps enough about our geographic synergy and what we're doing for international growth, which is the third of our growth strategies, as you remember. I should point out, however, that we did business in 127 countries in this past quarter. That's 13 more than we had last year.

The fourth of our growth strategy is, of course, our acquisition opportunities. There are several of those opportunities that are on our radar. Our balance sheet is strong, and I think that we've demonstrated our ability to buy synergistic companies and, more importantly, to effectively integrate them. The acquisition of our Australian genomics business at the beginning of this month is an example of that, I think. Potential integration may be a bigger follow-up. As we look at acquisitions and as we look at over the next few months, we want to make certain that our management teams have adequate time to aggressively handle integrations of new things that we might bring on board.

And in that light, we're sure welcoming John Adent, who brings some important management talents to the company. And also, we're proud of the management bench that we're continuing to be all back inside our businesses.

Let me stop at this point and entertain any questions from those of you who may be joining on the call.

(Operator Instructions) And our first question comes from Jason Rodgers from Great Lakes.

Just wanted to look more at the genomics area. Very strong growth, even with the, I believe, tough comps from a year ago. I wonder if you could talk more about what's driving that and if there was any onetime type of business in the quarter that drove that strong number and how sustainable it would be going forward.

No, I'll be happy to entertain that. I'm not quite sure what the reference to the prior year is, but that business has continued to do well. Take a quick look, for those people who might not have seen it, we started with the business that we acquired. We wanted to be in the genomics business. We acquired a nice little company in Lincoln, Nebraska. We added to that over the course of the first year a couple of other acquisitions, so people that were players in that business, and we grew the business. We've grown it to the point that we needed to be able to increase our international presence. So we set up a little sister lab that looked just like Lincoln in Ayr, Scotland as a part of that group. Then we later, just last year moved and acquired the largest genomic -- animal genomics lab in Brazil, Deoxi, which is operating well there. And then just the first of this month, we kind of finished out that wrap around the world with the genomics lab in Australia. The growth margins there and the net -- operations from -- product from operations are both very much in keeping with where we wanted to be. I don't think we do a lot of talking about it, but our growth operations, profit from operations will be somewhere above the 20% level, which is, of course, the bogey that we look toward. We see that business just continuing to grow. I was on the phone with them yesterday all day in our monthly management meeting and met people from our reps from around the world. And everybody had exciting new things to talk about. So -- and that genomics business has expanded beyond just selecting the right animals for animal agriculture and animal breeding, but it's also over in our food safety area. We've got good growth there as companies are sending samples of organisms that may be causing spoilage. They don't know what they are. We're able to do the genomics on them, predict what's -- tell them what's going on, give them the right place to look, doing the same thing when helping people track pathogenic bacteria in their operations by using full-fledged genomic applications there. So we're really excited about where that is going. There were no onetime opportunities. It was just, I think, overall general growth. And it was growth from the cattle business, the beef business. The dairy business had nice growth. The hog business on genomics was strong. We continue to do well with the poultry side of that business. And it's -- it fits well with what we wanted to do. It's in keeping with what we thought we could do too, by the way.

All right. And John, you mentioned some positives that you noticed with Neogen over the past 2 months. Any areas that you look at that might have room for improvement?

Yes. I think there's always room for improvement in general organizations. I mean, some of the things that we look at is just trying -- for me in the last 2 months, is really listening, trying to understand, taking what Jim's done and building upon his vision of the company and really getting to know the leadership group. I think that's really the key for me right now is spending time with that team and really building a relationship with that group to make sure that we're operating as a high-functioning group and continue to get the double-digit growth that we've done consistently for the last 12 years. So we'll look at more opportunities we go forward in the next couple of quarters and build those into our business plans.

And just finally, a numbers question. What's the best estimate for the tax rate for the remainder of fiscal '18?

Jason, that's going to be tough just because this new wrinkle with the new accounting guidance on stock option expense. It could range depending on the number of options exercised. It could be 2% -- and a $0.01 impact could be a 2% on the effective rate. A $0.03 impact would be a 6% effective rate. So I'm not smart enough to predict what's going to happen each quarter, but that's kind of the range it could be.

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

This is Andrew Brackmann in for Brian today. I'd like to go back to operating expenses there for a minute just to make sure I understand this. It sounds like a significant amount of these increases are due to acquisition-related costs. Can you quantify the total amount that was related to these acquisition costs? And am I right in thinking that these are more onetime in nature?

Yes. Let me interrupt before Steve gives you the real number and give you a bit of philosophy. We play whatever hand has dealt us. But the hands that dealt us on acquisitions today are quite different. We have to expense all the cost involved in the due diligence of a company. Anything that we spend on it, the legal expenses, putting all the documents together, the day we close it, the acquisition, we expense it. Now we could spend, and we wouldn't, but we can spend $0.25 million in acquisition cost doing due diligence and acquire the company. Before we ever got the first dollar worth of revenue, we hit the operating statement with the cost of doing the acquisition. So that plus the fact that once you brought the assets on board at whatever the book value was at the company that you bought, now in its wisdom accounting rules say, you bring them on at whatever the fair market value is. So if I had products in my inventory that was worth -- that cost $0.50 to make them, I used to bring them on at $0.50. But if the fair market value is $1, I'd bring them on at $1, then I've got to turn around and sell them. And if I sell them for $1, I'd made new money. So you look at some of the interesting things that occur, especially at companies, is we've done 37 acquisitions, I guess, since the year 2000 and we'll continue to do them. We just need to know -- we play the hand that's dealt us, but that hand begins to look a little different from time to time. Steve, with that prelude, do you have a dollar figure?

Well, the total dollar amount for acquisitions -- directly on acquisitions was about $1.2 million. And then I think -- did you have a follow-up question as to...

I mean that was -- it was a dollar amount (inaudible). Yes.

Yes. Exactly.

Yes. A lot of that will be ongoing because those are the people that came with the acquisitions. But there are a number of expenses in there. Of the $1.2 million, I would say, you could probably say, there's a couple of hundred thousand of legal expense, and amortization of intangibles would be another probably $100,000 or so. And then as we integrate these businesses, those expenses could change going forward.

I appreciate it. And then one follow-up I have here is on the M&A front. The Queensland AGL seem to fit nicely with your strategy. Where should we think about the next move for you guys in M&A? Is it still in genomics?

Well, I don't know that we want to pinpoint it. I think we're probably okay on genomics for right now. We're moving strongly with the new operations in Brazil. Well, by the way, our Lincoln, Nebraska laboratory has now moved into a second adjacent building. We're expanding there. We'll do over 3 million samples in that one lab this year, which will easily make it the world's largest animal genomics laboratory. We've got a lot of things coming on there on the food safety side, working particularly with some processors, including meat processors that are trying to figure out what they need to do to improve the shelf life of a fresh product. We can do some things genomically that are helping them. We've got guys on the lab side of production that are saying, I got a problem in the chicken -- with a chicken farm somewhere. Our group of complexes not need to know what that is. We're able to help there. So there's a number of opportunities that we already have. So I don't see right now us doing any acquisitions over the additional front on genomics. I think there are opportunities as we look at what we've done with biosecurity, with our cleaners, disinfectants, rodenticides. And there's always opportunities that we look around with what we're doing with our Food Safety group. We're acquiring license. We're doing a lot of things that probably fly a little under the radar. But a lot of the things is strengthening that part of our business. But nothing that -- no letters of intent. Nothing that I can really pinpoint. Wouldn't be appropriate for me to pinpoint today.

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

Steve, I had trouble keeping up a little bit on those prepared remarks. But the worldwide genomics, you gave a 48% number and a 28% number. What segments of that were those?

So worldwide, Charles, was 29% overall. And the pieces inside there were the ones we were talking about. The poultry market -- hang on a second. Those would have all been U.S.-based increases. And let's see, Companion animal market was the one that I was talking about that was 48%. That poultry -- poultry revenues were up 38%.

38%. And you said something about sheep, too, right? Did you give a number for that?

Yes. I didn't give -- the number for sheep was -- it's a big number on a small base. So I didn't give it.

And Charles, one of the important things, sheep is -- obviously, you'd have to do a lot of guesses to understand why we're in Australia. The largest Merino population of sheep in the world is there. It's fine-haired sheep. It's the wool that you can wear next to the body. They've got a tremendous program going in cheap genomics. We've been a supplier there, as we've been getting a lot of the samples from Australia going direct to Lincoln. We did the work, send it back to them so they knew which block, which side of the block is saved and what was going on. A lot of -- in addition to not just wool, but also with meat there. So this is a part of what we're going to be doing in Australia. We'll shorten the pipeline of stuff that was going to Lincoln at one point. But there's also a big opportunity to grow there. And that's not just sheep. They've got a big population of 5 different cattle breeds, a couple of different imported dairy breeds. And then also, in addition to Australia, we'll pick up New Zealand as the adjacent island and couple all that business together, which we needed that, and it'll help grow that business.

Yes, that makes a lot of sense. And it seems consistent with what you did in Scotland, too, where you're shipping things out to Lincoln. And then once it got big enough, then you put in a domestic facility there. And I guess, Brazil came through acquisition but kind of similar. Do you see a lot of other opportunities to kind of grow organically or inorganically in some of these other markets in the genomics segments where you can -- stuff that you -- to send out volume that's going to Lincoln is getting large enough that it justifies kind of building a domestic market?

Yes. And we're looking at those today. It would be inappropriate to pinpoint where we're looking. But some of that is certainly true in Europe as we see -- we're picking up a lot of product coming to Ayr, Scotland. But there's big populations that deal with genomics. As you look all over Europe, brands in particular and some things that are happening in Germany, it might mean that we need to do something to expand our efforts there. We don't have anything on the radar for this year, but could be some opportunity.

Okay. And then, this growth here in genomics is really starting to accelerate. And I've always kind of thought about pricing has always kind of come down. Like most areas of technology, comes down and then you make that up significantly with increased utilization. And as the price per test comes down, you can pull more lower-volume producers in and so on and so forth. It's more economical for your customers. Can you just kind of talk about the competitive landscape and the pricing environment? Have we finally kind of based out on pricing? Or just kind of help me understand the long-term drivers here on the organic genomics side.

Well, I think we have been and continued to be in an era when there's some compression of the industry. The guy with 1 or 2 instruments in his backroom can't compete anymore, can't compete price-wise, can't compete technology-wise. Our strength, and we believe it is and continues to be from the very beginning, we said, we don't want to just be a genomics lab, just go and bring in samples, spit out raw data and let somebody else do their own genomic work. We need to own the bioinformatics and we do. We've got 5 big models of bioinformatics that we developed that we own. And if you want to use that model, and then you use it. We get to do the testing and we give you the predictions. We said, if we don't do that, then it will go to the cheapest provider. And it gets to be more political. All those guys that are making the instruments out there today are -- will end up selling them cheaper tomorrow. And we'll have to compete with India and China, who will be lined up to work around the clock, running new samples, and that's not where we want to be. I think we are -- we haven't quite gotten there, but I think we're achieving that in a lot of direction that if you want to use -- if you want good genomics to be able to tell you 14 traits that you'd like to know about saving a dairy heifer or that you want to know for cattle going to the feed line, you've got to go to Neogen because they've got the bioinformatics. So we'll continue to build that. We just finished the bioinformatic model for the Nelore cattle. That's a sort of a special breed in Brazil. It's a little different genetically than other breeds that we might have, and this one specifically provide predictions, projections on the Nelore cattle. Nobody else has got that product. So that's working well and will continue to work well for us. So I'm not sure whether that answers your question or not, but that's (inaudible) covered.

And in terms of the competitive environment, these micro breeds or whatever you want to call them, is that something that's the [latest?] Your large competitor in the marketplace doesn't have the specificity going after these individual breeds that you do?

Well, they're strong. I've never played down my competition. I watch them every day. They're an ally on some days and an enemy in others. But they do a good job. They're not nearly as widespread as we are, and I don't think that's in there. That's not their strategy. Number one, they're a pharmaceutical company, and they'd like to sell more pharmaceutical products, more vaccines, more antibiotics. That's the thing that drives our company. The animal genomics business is just sort of an add-on piece. And I think they got into it, looking at the fact that if you buy the antibiotics to cure mastitis in dairy cows, we'll make you a special deal so that you can run some dairy genomics and figure out which heifer to take. Having said that, I'm certainly not downplaying them. They do a good job. I like, I think, any market ought they have good competitors and they're a good competitor. They put out good product and that helps the overall market. I don't think that they have any intention to want to run us out of business. We're in a lot of businesses that -- I don't think they want to be in [white shrimp]. We're looking at things like white shrimp yesterday. Even in fact, we're looking at anything at this in the animal protein area in particular. And I don't think they have any ambition of using their genomic platform to do things on predicting what it is that's causing spoilage in pork chops or products like that. So -- but they're a formidable competitor.

Okay. And one last one on genomics, and then I missed the cash flow from operations number, Steve. On Illumina, on genomics, the partnership you signed a couple of years ago. Is there any impact -- material impact now from the Illumina distribution agreement? Or is that still de minimis right now for your genomics business?

No, let's bring it in. I don't know, we've got -- I probably won't tell you if I did know. Remember. But it's an increasing number. They sell our GDP product in a couple of places. That's where we developed the bioinformatics. They've put it in to Illumina chips, and we have an agreement that they can sell those chips to certain customers around the world. And we get paid sort of an accelerated royalty payment on those -- our product that they sell to others. At the same time, that endears us to those guys because it's our system. So they're using the Neogen GeneSeek GGP model to do that development. And to continue doing that going forward, they'll have to continue to use that model as they continue to do breed development over time. So I think it's working well. Now they've got plenty of folks to sell their products to other than just us, and we know that and we respect that. But our relationship, I think, is pretty good.

Okay. And Steve, that cash flow number? Sorry, I missed that.

It's okay. It's $19.2 million from operations.

(Operator Instructions) And our next question comes from David Westenberg from CL King.

So this question is for John. I just want to talk about having an outsider's perspective and what you're seeing there, but also balancing that with the fact that you are stepping into a company that's already pretty well run. So how do you balance the -- offering that fresh perspective, but not reinventing the wheel here?

So what's interesting is I've -- this is the second time that I've followed a founder that has been the CEO for 35 years, so I have a bit of a perspective on how to do it. The key, David, for me is to just ask a lot of questions. Because you're right, when -- as an outsider, you view things, and I ask why do we do that? And sometimes the answer is, well, we've always done it that way. And the question is, okay, well, why again do we do it and is that the right way to do it going forward? And so asking questions really helps me do that. To keep aligned with the organization, Jim and I communicate all the time. We talk 3x or 4x a day. We have very clear responsibilities on what I'm doing right now and what he's doing right now. We make sure that we're aligned as we move forward on different things because it's important for the employees to understand that while John is doing this side of the business, Jim is going to continue to work on others. And for me, it's important to continue to talk to him because he's got such a breadth of knowledge in the industry. And so even though he tells me he's getting ready to go to the ranch, he's not going anywhere. He thinks that he's going to have more time off, but I'm changing the HR policy that he's getting 2 weeks and that's it. So he may think that he's getting more time off over here, but that's not going to happen. So that's kind of the way I approach it, David.

He doesn't know, David, but I've got a communications setup at the ranch. So on a good day, he won't know where I answer the phone from. Haven't made it yet, but they tell me it works. And I think too -- I think it's a little bit too much sometimes emphasis given to the old guy. The big thing that John has got going for him is he's got a hell of a management team. He's got people that are running pieces of this company that have been doing it for -- I look at the Ed Bradleys and the Terri Morricals that have been doing it for 25 years. Terri and I celebrated the 25th anniversary of bringing on her business. It's now part of our Animal Safety group. And the Bradleys and the Morricals, I'm leaving that 50 other people, were all strong. They're all there. And that's the, I think, the strength that the company brings.

All right. And you talked about the good reception with Listeria Right Now. Can you talk about maybe building around that franchise and what the opportunities are to develop around that Right Now kind of product?

Yes. It's different, and we think there's some opportunity. Again, I don't want to go too deep because I mentioned there's a competitor too that's listening to this call, so no need to play our hand. But what we've been able to do and giving an answer to Listeria Right Now is it allows a company to quick do a test before they ever start to find out if they've got a problem. It's particularly important in some of the dairy businesses. As an example, we all know the story of Blue Bell Ice Cream. They had a machine that wasn't -- they weren't able to clean good. They didn't know what the problem was. They didn't find it. Couldn't find it. And they had a huge Listeria outbreak at ice cream that damn near put the company out of business and made a lot of people sick. With our product, if they had tested in the right area on that line before they cranked it up, they would have been able to find Listeria, go ahead and clean it up before they all started freezing ice cream. So that's the opportunity that we have there. Listeria is a bit of a different -- everybody around the table knows where I got my Ph. D. in microbiology, which I don't have, so I don't want to go too deep into science. But the Listeria organism is a bit different in the genetic makeup than some of the other 4 major pathogens. So we think there's some opportunity for a similar approach to other pathogens, but we're not quite there yet, and we probably don't want to talk anymore about it anyway. So...

Fair enough. Fair enough. And then just one last question for Steve. Gross margins have creeped down a little bit despite Food Safety being -- my estimate anyway. You did call out Quat-Chem and Rogama, but is there anything else there that we might need to think about?

There's nothing unusual in there, David. There's -- we basically have 10 different product lines throughout the company. So there's a lot of mix type of issues that flow through gross margin. But there's nothing other than really the absorption of the acquisitions to really talk about, except I did mention on the call that GeneSeek's gross margins improved in the last -- half of last year and the beginning of this year. Other than that, it's really a mix issue. We talked a little bit about the [DON] outbreak dissipating in Europe last year. It's really just mix within the product lines.

And our next question comes from Michael Castor from Sio.

Great. I just wanted to go back to the prepared remarks. I missed a couple of things. What was the gain from currency?

It was -- the currency gains -- just a second here. No. Currency gains were actually positive in other income. It was $465,000 overall.

The other question I had was on the tax rate, just clarifying. So were you indicating that the normal tax rate being around 34% or 35% and from the exercise of stock options, if I'm interpreting your comments that every quarter, it could offset the tax by a couple of hundred thousand dollars. Maybe $200,000 to $500,000, if I'm interpreting what you were saying correctly. Is that a correct interpretation?

Well, it was $400,000 this first quarter. And we estimate that, that could range -- and that was about $0.01 per share. It could range between -- we're estimating this is brand-new for us. It could be $0.01 to $0.03 a share, which could be $400,000 to a little bit over $1 million. And that could have a 2% to 6% impact on our effective tax rate, depending on the quarter.

And that would be from the baseline tax rate of 34.5% roughly?

Correct. And obviously, there's other noise that goes through that tax rate in any given quarter. But yes, that's -- what you heard was correct.

At this time, I have no other questions in the question queue.

Okay. Thank you. Thank you, folks, for being on board. Thank you, Cammy. Let me again make sure to remind you that the Annual Meeting of the company will be held at 10:00 Eastern time here in Lansing on Thursday, October 5. That's not far away. If you've got a proxy in hand, return it, please do so. I'm up for election this year and I'd like to get back on the board. So vote your proxies if you've already got -- if you haven't voted them. And (inaudible) we'd sure love to see you at the Annual Meeting.

Thanks for your support and thanks for your interest this morning. We're out.

Ladies and gentlemen, this concludes today's conference. We thank you for your participation, and you may now disconnect.