Neogen Corp (NEOG) 2018 Q3 法說會逐字稿

Welcome to the Neogen Third Quarter Fiscal Year 2018 Earnings Results Conference Call. My name is Hilda, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Mr. Jim Herbert. Mr. Herbert, you may begin.

Well, good morning. And as Hilda announced, welcome to our regular quarterly conference call for investors and analysts. And today, we'll be reporting to you the results of our third quarter of the -- of course 2018 fiscal year that ended on February 28.

As normal, I'd 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. Actual results may differ from those we discuss today, but also call to your attention that the risks that are associated with our business are covered in part in the company's Form 10-K as filed with the Securities and Exchange Commission.

In addition to those of you who are joining us today by this live telephone conference, I'd also welcome those who joined by way of the simulcast on the World Wide Web. Following comments this morning, we'll entertain questions from participants who joined this live conference. And I'm joined today by Steve Quinlan, Neogen's Chief Financial Officer; and John Adent, Neogen's Chief Executive Officer.

For those of you that have been on the last couple of calls or so, you will remember that John joined us about 9 months ago and is doing a great job of drinking from a fire hose. John is now responsible for the major operating divisions of Neogen that account for about $350 million of our revenues, and I've continued to help with some responsibility on acquisitions, R&D and a few couple of other areas.

But earlier today, Neogen issued a press release announcing the results of our third quarter of the 2018 year, which ended on February 28, as I mentioned earlier. Announcements of the quarter once again introduces several new factors. To hopefully clarify some of that confusion in the next minute or 2, I'll try to pick apart those quarterly financials.

There were a few unusual twists in the revenue numbers, but they came in at a solid almost $96 million for the quarter, which is up about 7.5%. Compared to the prior year on a percentage basis, this worked out to more than 8% increase for the quarter, and this pushes Neogen's year-to-date revenues to approximate $293 million, and that's up about 12% compared to the same period a year -- same 3 quarters a year earlier.

Now the third quarter net income compared to the prior year was up a whopping 61%. The net income for the third quarter was approximately $16.6 million as compared to about $10.3 million a year earlier. There are a number of factors in play, and even though they are new occurrences, I can assure you that the income is real. If we adjust for the 4-for-3 stock split that was effective at the end of December, earnings per share for the current quarter are about $0.32 a share compared to $0.20 a share a year ago.

A lot of things worked to our benefit related to the bottom line. Of course, we did -- we benefited from the corporate tax reform that was enacted in December. Adjustments associated with this tax reform gave us an effective tax rate of only about 4% for the quarter.

Our current year-to-date income was $45.6 million, and this converts to $0.88 a share after we adjust for the split, and that compares to $31 million the previous year or $0.61. So $0.88 compared to $0.61 in the prior year.

Before I get into this any more complicated [though], let me move along and let Steve Quinlan discuss the tax issue further a bit later in this call. However, I see a lot of stability as we move into the fourth quarter, and I still expect that we should come close to our annual revenues to be almost double what they were 5 years ago, which has been our goal.

Again, thanks go to our 1,500 employees around the world. This third quarter was the 104th in the past 109 quarters that Neogen reported revenue increases as compared to the previous year. That record now spans over 27 years.

Gross margin for the third quarter was 47.5%. That compares to 46.3% in the same quarter last year. We had a couple of our groups, including our genomics operation, that had some nice cost improvements for the quarter that helped here. Expressed as a percent of sales, our operating income was 16.6% compared to last year's 16.2%. And once again, there were some things that kept some downward pressure on the net operating profit. But we still doggedly are sticking to that ongoing goal of 20% operating income on a normalized basis, and many of our operating groups are now achieving this goal.

I'm pleased with this third quarter, and I think it represents a good solid performance. I'm also pleased that within the quarter, we continue to do some important integration of some of our recent acquisitions. I believe that this will not only increase revenues, but it will also increase our bottom line. And I will cover a few of those when I come back in my concluding comments.

So let me stop my introductory comments at this point, but not before calling to your attention the continued nice growth of assets on our balance sheet and the fact that the first 3 quarters of our 2018 year, we've added 15% to shareholder equity compared to where we were at the beginning of the year.

I'll come back a little later in the call and talk about Neogen's international activities and also talk about some of those, I think, exciting integrations that we're going to be doing going forward. But let me stop first and call on Steve Quinlan to add some more color to the financials, and I'll also ask you, Steve, to talk a little bit about our worldwide genomics operation as we've now made some major moves there towards some consolidation. Then I'd ask John to follow up with that with some of the color on the great operating divisions that John is involved with, our Food Safety and our Animal Safety operations. And I think you're going to hear that they're well-poised also for continued growth. These groups account for over 80% of Neogen's total revenue. So what's happening there is obviously very important.

Let me stop there and turn the call over to Steve.

Thanks, Jim. Jim mentioned that our effective tax rate was 4% for the quarter. I think it'd be helpful to flesh out just why that rate was so low. As you all know, that tax reform was passed in the U.S. in December. The reform has a number of provisions which affect us, with the most impactful in the long term, lowering the statutory federal income tax rate from 35% to 21%. For our full 2018 fiscal year, we're estimating a blended statutory rate of 29%, and this is simply the weighted average of the 35% rate in effect through December and the 21% rate thereafter. Using the blended rate of 29% used during this quarter, we adjusted tax expense downward for the year to date by approximately $2 million compared to what we would have recorded under the old rate based on our pretax income. We also revalued the net deferred tax balances on the balance sheet down to 21%, and this adjustment resulted in a gain of $5.6 million.

Going the other way, the transition tax or repatriation tax on our foreign earnings and profits resulted in a tax charge of approximately $2.7 million during the quarter, and the net result of all these adjustments is approximately $5 million in lower tax for the quarter and a 4% effective tax rate.

Now there will continue to be noise in our tax reporting through the end of the fiscal year as a number of our estimates are refined, but we'll be using the statutory rate of 29% as the starting point for our full year provision calculation. Effective with the first quarter of fiscal 2019, federal income taxes will be calculated off of the 21% statutory rate.

Now let me now give you some financial color and then discuss some highlights in our genomics business. Looking at the consolidated financials, Jim mentioned that our gross margins were 47.5% for the quarter compared to 46.3% in last year's third quarter. And improved cost position in the genomics business and favorable mix within the Animal Safety segment resulting from increased sales of higher-margin products drove the increased gross margin and more than offset the impact of lower mycotoxin kit sales in the quarter. Now for the year to date, our gross margins were 48% versus 47.6% last year.

Operating expenses overall rose 12% in the third quarter and increased 14% for the year to date. Our sales and marketing expenses rose by 14% for both the quarter and year to date with the increase primarily personnel-related expenses but also advertising expenses in advance of new product launches.

General and administrative expenses rose 9% for the quarter and have increased 16% for the year to date. Increases in amortization expense for acquired intangible assets, IT consulting and related equipment depreciation were partially offset by reduced stock-based compensation expense resulting from employee retirements and lower legal expenses related to acquisition activity in fiscal '18.

Our R&D expenses were 7% over the prior quarter and are up 10% for the year to date, and the company continues to invest in product development program in both new products and enhancements to existing products across the company. Our operating income rose 11% to a total of $15.9 million for the quarter or 16.6% of sales, and this compares to $14.4 million or 16.2% recorded in the third quarter last year.

Our other income was $1.4 million for both the third quarters of each 2018 and 2017.

Our normalized earnings under the prior tax rate using about a 33% effective rate would have risen about 12% on the 8% increase in revenues. We generated $19.2 million in cash from operations during the quarter and invested about $5.9 million of that in property and equipment. For the year to date, we've generated $46.6 million from operations and spent $16.3 million in property, equipment and intangible assets.

Our inventory balances have increased 7% since the beginning of the fiscal year, and we continue to control growth in these balances while minimizing back orders and maintaining customer service levels. Our accounts receivable balances have grown 6% for the year. Our DSO has moved slightly, from 62 to 63 days since the beginning of the year. The balance sheet continues to support our growth strategies.

Now going to the genomics business. Now this business continued to develop nicely with worldwide growth of 25% for the quarter. The business, which originated in Lincoln, Nebraska, has expanded nicely over the last few years as we've added laboratory capabilities in Ayr, Scotland to serve the growing European market; purchased Deoxi Labs, the leading genomic laboratory in Brazil; and then moved into Australia, acquiring the genomics business from Queensland University in September of 2017. The development of these regional labs with standardized operating procedures, robotics and automation has resulted in operating efficiencies and improved our turnaround times. We've continued to expand our product offerings and bioinformatic solutions to help meet our customer needs.

As an example, we've partnered with a large poultry producer to enhance their data analytics, helping improve the quality of a good portion of the world's chicken supply. Our commercial beef and dairy cattle business has achieved significant growth as we've continued to provide customized solutions for specific market needs such as the Angus GS chip developed specifically for the American Angus Association. Our companion animal business has also expanded nicely as new chips developed in the past year have been well-received in the market. We are thinking globally while acting locally, focusing on our customers' needs, and the strategy is working.

I'm now going to hand it over to John to discuss highlights of our Food Safety and the rest of the Animal Safety business. John?

Thanks, Steve. And welcome to everybody listening. As Jim has already reported on our overall sales and profit performance, I'd like to spend this time to provide a little more detail on the performance of our Food and Animal Safety segments and highlight some of our top-performing businesses.

Our Food Safety segment revenues were approximately $48 million for the third quarter, an increase of 11% compared to the same period in the prior year. For the 9-month period, Food Safety revenues increased 17% to nearly $144 million. Highlights for the quarter include sales of our AccuPoint Sanitation Monitoring product line, which increased 18% with strong sales of both our reader equipment and consumable supplies.

Sales of our test kit to detect pathogens increased 22% in the quarter, led by strength in Listeria products, including our Listeria Right Now test kit that launched earlier in the fiscal year. In the quarter, we also had a strong increase in sales of equipment used for our ANSR line of test kits to detect various foodborne pathogens, including Listeria.

Sales of our food allergen test kits continue their steady climb, increasing 14% in the quarter as product recalls due to contamination with 1 allergen or another continue to expand the global market. In the past 3 months, our worldwide lab and branded dehydrated culture media sales increased 21%. Jim will spend a little bit more time talking about this when he reports on our international business.

In the quarter, we continued to see strong growth in our sales of dairy drug residue kits. Their sales increased 29% as new products continued to gain market share, particularly in international markets. This increase does not include sales of our new BetaStar Advanced product line, which we officially launched in February. Our BetaStar Advanced products have been well-received by customers in the U.S. and abroad, and we're very optimistic about this new product line. We believe that the combination of our new BetaStar tests and our new Raptor incubator reader form the easiest method to test for antibiotics in milk. The new tests have also already been approved by the FDA, national milk shippers and AOAC. We have cleared all the barriers and have a market-ready product.

Sales of our Animal Safety segment were approximately $48 million in the third quarter, an increase of 6% over the same period a year ago. Revenue for the 9-month period increased 7% to $149 million. Highlights for the quarter on our Animal Safety side included a 26% increase in sales of our animal care products compared to the prior year. The increase is due to market share gains of supplements for companion animals, vitamin injectables and also increased sales of vaccines. Sales of our veterinary instruments lines increased 6% in the quarter, primarily the result of strengthended sales of syringe and detectable needles, specifically in international markets. We also recorded an 11% increase in rodenticide sales in the quarter as we gained incremental business with several large animal protein producers.

Sales of our Life Science products within our Animal Safety segment increased 19% in the quarter. This improvement was due in part to increased sales of forensic test kits to commercial labs in Brazil.

I'm really proud of the work our team has done this quarter, and all of us are really looking forward to a strong finish to the fiscal year. Jim?

Well, thanks, John. It's been called to my attention that I twisted my tongue up in the very beginning on some comments here, go back and make sure that I get it right on revenues. Revenues for the quarter were about $96 million, and that's up $7.5 million compared to the prior year, which is, I don't know, 8.3%, 8.4% increase compared to the year earlier. So I must have turned 1 or 2 of those around, but nevertheless, I still -- I liked them either way.

Let me -- as John said, let me now take a minute and cover what's happening in our international market. So in this third quarter, revenues from international sources increased to 39% of total revenues as compared to 36% of total revenues in this same quarter last year. Growth of our international sales were up 17% for the quarter compared to the same quarter a year ago, and that's in absolute U.S. dollars. So our international business is growing at a faster clip than the overall corporate one, which is what we expected. It's part of what our projections are.

Our Neogen Europe operations based in Ayr, Scotland, once again had a nice quarter with revenues up about 16% compared to a year ago. Not included in those Neogen Europe numbers, though, are revenues from our Lab M operations, which, though they are part of nee -- the Neogen Europe group, they report separately for now. Their revenues were up almost 20% compared to the same quarter last year. So both of these operating groups show nice strength through the first 9 months and not just for the quarter. And I think they're well-poised -- that operation and that management team is well-poised to expand on our existing operations and take on some potential other business over that. That perhaps might come through acquisitions.

We've got about 260 people in Scotland and England in operations today, and I got the opportunity to spend last week, most all of last week, with that group of managers here in Lansing. And I can tell you the St. Patrick's Day party that we had on Saturday night was a [feting] celebration as we look at our increased growth for the new opportunities for the new 2019 year that we're already beginning to plan.

All right. Mexico-based Latinoamérica sales increased 19% for the quarter as compared to last year. This includes our Food Safety and Animal Safety business in Mexico and the 8 Central American countries. We continue to view Mexico as a significant world food producer over the next couple of decades. The other region that's likely going to be a bigger and bigger world food supplier, of course, is Brazil. We actually have 3 different operations in Brazil and they're all under the same management team, but 3 different operations. These revenues for this group for the quarter were up almost 80% compared to the prior year. Now there are some acquisition dollars that went into part of those numbers. But nevertheless, when we look at total revenues compared to prior year, that's a pretty impressive number.

The Neogen China operations were up 28% for the quarter as compared to a year earlier, and China has been strong all year. I think the first 9 months of revenues for China are up about 21%. And as Steve mentioned a bit earlier, the baby of the group is our new Australian operations that have been onboard just for a short time, and that revenue has built up now of about $1 million. We're looking to those operations as a beachhead for some strong revenue growth in Australia and New Zealand as we move forward.

I know that somebody is going to ask about India, so I might as well fess up to start with. As predicted, it's requiring some patience, and though close, I suspect we will not be profitable for the year. However, as we look at the strategic positioning over the next decade, being in India with that rapidly growing middle class, I think is important. The need for safer food and the desire for higher-quality food says that we have the right products, and we won't lose our patience.

I spoke in my opening comments about consolidation and integration of some of our businesses. Those that we have underway right now will give us better opportunity for revenue growth and at the same time help in reducing costs. Steve Quinlan talked a bit about our worldwide genomics business. This worldwide reach is helping not only with the economics but is also helping us with the service large customers that have multinational locations. We're well along in the worldwide harmonization of our culture media business. This is going to give us a worldwide advantage of being able to offer the exact formulations to customers regardless of their geographic location. This includes our Lab M operations in England. I just spoke about our Acumedia operations here in the U.S. I think we'll see all of this bundled together under what we'll probably call Neogen culture media banner, probably by the end of the fiscal year.

And we've got some similar opportunities in a number of other product lines. As an example, we're currently producing cleaners and disinfectants for our Animal Safety biosecurity business in 5 different locations. The integrations here will allow Neogen to better serve the needs of the whole worldwide animal protein producer market, and that's exciting.

The strategies that have driven our solid growth over the past number of years, I think, continue to be very viable. As we look at the next quarter and going forward, we'll continue to make certain that we're picking the right growth markets that fit in our mission. And at the same time, and I think you'll hear more and more from John about this, we're going to be continually striving to gain a bigger share of those markets.

As a second strategy, we'll continue our strong R&D activities to provide new products for those same markets. Today, we have approximately 80 scientists in several research locations around the world.

The third leg I will continue to push is that international growth that I just spoke of. And I'm not sure what percent of our total revenues could eventually be from international sources, but I'm guessing we could increase that by another 20% or greater from where we are now.

Now the fourth important piece of our growth strategy continues to be through acquisitions. We didn't actually make a new acquisition in this third quarter, but we have acquired 37 companies since the year 2000, and they all continue to be accretive at both the top and the bottom lines. Though today, we don't have any accepted letters of intent from anyone, we do have several nice businesses similar to those other 37 that we're looking at and nurturing, and I suspect some of those may mature (inaudible) in our growth.

Our team grows every day, and this is obviously pretty critical. I checked with our HR department last week and found that just in the U.S., we'd hired 146 employees in the last 6 months. However, at the same time, we have almost 40 employees that have been with the company for more than 20 years. So our management team is transitioning with this growth, which is very healthy.

As I mentioned in the beginning of the call, John has been getting -- been with us now for almost 9 months and is, I think, getting more and more comfortable with the various businesses and the strong management teams that we have in place. So we've started the fourth quarter and looking forward to continuing in the same feisty manner that we've been in.

So let me stop at this point and entertain any questions from those of you who might be joined by this call. Hilda?

(Operator Instructions) We have a question from Kevin Ellich from Craig-Hallum Capital Group.

Just a couple of questions, guys. I guess first off, Steve, could you give us what -- did you mention what the organic growth was for the quarter?

I did not mention the overall organic growth. That -- so our total sales growth was 8.5%, and overall organic was about 7%.

Wow, pretty -- that's pretty good. And then, I guess, just thinking about the tax rate and all the color that you provided was great for this quarter. When we think about those moving pieces that affected this quarter, how do you think that will play out in Q4?

Well, we kind of -- in this quarter, we got caught up with the new blended rate. So we'll start at the 29% in the fourth quarter. But as I said, there's going to be a number of adjustments. We did an estimate of our deferreds in this quarter, but we'll square up with those, kind of sharpen the pencil as we go through year-end. It's going to be -- I can't give you a great estimate there for the fourth quarter, except if we start 29, we're going to be somewhere, I would say, in the low to mid-20s, but I have no real clarity there.

Got you. That's helpful, though. And then lastly, looking at your sales and marketing expense, I think you made a comment about some personnel and increased advertising ahead of new launches, can you give us a little bit more color? I mean, should we be modeling increased sales and marketing? And what -- which products specifically should we be thinking about with that?

Well, let me start and then turn it back to John. John's got 13 years of running one of the biggest sales organizations in this industry, so -- among other things, but [he spends partly his time] there. As we've got new products coming out of the chute, you got -- John talked about our dairy business, as an example. You have to lead that product into the marketplace. You don't want to push it out into the lab bench and expect the salesmen to go write orders that day. So as we've gotten bigger and got more sophisticated, I think we do look at leading the market, so and that was a part of it, and we've increased headcounts. We used to always try to increase headcounts just a little bit ahead of where we needed them because the first day a salesperson and a marketing person is on board, they're not productive. So that's -- a part of that is in anticipation, but John -- I've stolen enough -- John, talk further too.

Yes. I think, Kevin -- and good to talk to you. The -- that bump-up was because we had 3 big launches that came right here recently with Listeria Right Now, our BetaStar Advanced and Raptor, and what's exciting about all 3 of these is these are game-changing technologies. So we didn't want to underfund what we think is going to be a growth, a great growth strategy for us going forward. So great markets, really big market potential, so we're going to put the funds to them and make sure they're successful.

The next question comes from Jason Rodgers from Great Lakes Review.

Yes. Just to follow up on the organic growth. Do you have the total organic growth in genomics for the quarter? And if you could break that out between Food Safety and Animal Safety as well?

I'm going to jump in the middle of that one and tell you that on genomics, that's moving so fast. What is -- first of all, you got to define what is organic growth. So we -- and I think maybe you've heard me tell this story. We bought this operation in Brazil, and let's say that it was running at, just pick a number. It was running at the rate of $1 million. So then we put all of our sales force behind that. We started bringing in product from everywhere else. We grew that business. I would say, to me, the big growth in that business was from growth of our current business, not something that was added by acquisition. So I really -- I guess, it doesn't matter to me where we get the money. It's - if it's good solid profits and good solid revenues, I can tell -- I told you, we didn't buy anything new this quarter. So we're not growing the business based on acquisitions, but it's pretty hard to start separating what is actually organic growth and what is growth based on adding extra resources, extra salespeople. We got a worldwide reach. Our Australian is an example. Our Australian operations are new, so you'd say well, is that -- that must be acquisition growth. No. A big part of that is a Merino fine and wool sheep product because now we're running in Australia, but this time last year, we had the same business, and it was in Lincoln, Nebraska, we brought the samples into there. So it's -- anything I tell you about the genomics, I think would be misleading other than say to you, we do have a worldwide strategy. Every piece of the stuff that we're buying is really -- adds to organic. We're not out buying car washes or something that's totally unrelated to the business. So I don't mean to be facetious there, but I just don't know -- I think, I want to make sure people don't assess too much as to whether they're buying the business or growing the business because we're doing both.

Did that help?

Sure. But I did want to ask about the mycotoxin test kit sales. What was the number there for the quarter versus a year ago?

Right. Good question.

So the DON outbreak that we had last year that didn't recur this year, that resulted in about a $1.4 million reduction in sales in the third quarter.

And then you talked about lower sales there and lower sales in the cleaners and disinfectants. Were there any other areas beyond those 2 that performed less than expected or were weaker in the quarter?

No. I don't think so. I mean, when we look at it we had 2 big headwinds: 1 one was the DON, and the other was the Lanxess contract, and that was about $1.5 million. So those...

You know, we anticipated that. Those of you that have been watching, the Lanxess, which went back to the old DuPont product line, we said this thing is -- we're a distributor for them, and it's in disarray and they're not developing new products like we hoped, so we're just going to paddle our own boat. And we bought Preserve, and Preserve -- in the end of things Preserve is a lot bigger than what the old Lanxess business was, and it's ours, and we're growing it, so.

I mean, other than what Jim talked about with India, we're all -- we're pushing hard. We know it's a great market. We're pushing hard, but that one's not really where we want it to be yet. But we fessed up to that one early.

Yes. And I'm feeling even better about China now. Adent's they tell me [for what] in Mandarin Chinese. He talks to some of our Chinese people, and they all pretend like they know what each other's saying, so I assume they do. And that's -- I think that's added to our knowledge in, not just of the business but knowledge of the culture there. So as we see that, plus if you look at the 2 fast-growing populations, 1 is India and 1 is China, and China is China, and it's centrally controlled is what's happening with that economy, whereas India is trying to operate under a democracy that was invented by the English, so it's going to be a lot slower.

And if I could just squeeze one more in, last quarter, you talked about some changes in the competitive landscape, and you have -- taking some actions there. I wonder if you could give us an update on that.

I don't know. I'm not sure what I told you.

[I think you thought] your competitors were gaining share, so you were looking to change maybe some strategy there.

Yes. I don't know that I'm willing to give up that change in -- gain in share. They've been more competitive. We had a couple of big -- a couple of players that decided to get out of the business. DuPont with their diagnostic test for the detection of pathogenic organisms, decide to sell that business, and it was a very good strong competitor, good product. It was inside the gates at DuPoint, so you had to get it outside and go manufacture it someplace else. And Equity Capital got attracted to it, and as they got the price and ran with it, we said we probably don't need it anyway. We'd like to have had it. We had a bid on the table, but we got outbid there. So that one is yet to be determined, and there was another one, a company, a little company that's a decent-sized company in California that is a competitor, and just one small market on the food side, but they've got some nice share there. It was also acquired by Equity Capital. So -- it will be kind of fun to watch these new guys, they've got deep pockets, but it will be kind of fun to watch them come to the table I think here over the next year. We've got a place or 2 where we need to bolster up on allergens, as John talked about allergens, we've got 1 or 2 spots there where we need additional products, certainly at least for a halo effect. We don't have a diagnostic test now that's probably what it needs to be to detect the presence of [fish]. So we got the competitors that have that out there, and that'd be nice to -- we need that, it would be nice to have that one. I don't -- John talked about -- I think we're making big gain on the milk side, and John talked a little bit about that. We do have the best, fastest, easiest-to-use test to detect the presence of antibiotics in milk anywhere in the world today, and I'd stand on that one. And we're already a big player. We're a big player in most of the world, not in the U.S., but this is going to give us a chance to be a bigger player in the U.S., so...

The next question comes from Paul Knight from Janney.

Jim and John, could you address where you think you want the international mix should be? It's 60%, 61% U.S. now. Do you want it to be, in a 5-year horizon, 1/3 Asia, 1/3 Europe? Where do you want to be? And do you get there via distributors? Or are you doing this via a direct sales build-out?

Let me talk a little bit and let John add to that if he'd like. But I don't know where our number came from. We've been saying it for so long, I think it's become gospel. But way back earlier, somebody asked a question like that, and I said I think about 2/3 of our total market potential lies outside the U.S. There must have been some basis for saying that, but we can't find the source now. But at any rate, if we're 30% now and 2/3 could come from outside the U.S. And you'd probably never get the share of market in one part of the world that you've got here at home. But that would -- I think I mentioned in my comments, we probably could add another 20% to that. And if we're at 37% now and you could add another 20%, that'd be pushing getting towards that 2/3. It's kind of -- it's picking where we go. I think we'll make some big gains in Australia and New Zealand because we haven't been there. And so it's picking up part of that market and I think it will be big. We've been in the 38 countries in the EU for a while, and we're going to continue to grow there, but we've already picked the low-hanging fruit. So it's -- it'll be a little bit more difficult to grow it on a percentage basis. I don't know, John, you've been around the world and looked at these markets. What's your thoughts there?

Yes. So Paul, I think the way we look at that is, what is the market potential in different parts of the region, all right? So if you look at market potential by EU, U.S. and Asia, then we look -- then we go out and say, where can we compete, how do our products fit, and where can we solve solutions for customers, and then we set our expectations based on that. And as you know, while the markets are big, sometimes the technology is ahead of the market. Like in Asia, while the population is big and there's a great opportunity there, they're not as sophisticated in the way that they look at kind of food safety as some of the more developed countries. So we try to track that along. The other thing you mentioned was how do we go to market, and I really think Neogen has done a great job of this under Jim for a long time is, first we start with export. So we work with distributors in local international countries. As we start to develop and we get bigger share, and we start developing significant revenues, then the teams will go in and look at either acquiring or working with the distributor or setting up our own shop. Once we have a sales office that continue to grow, then we look at, okay, is it big enough to support some type of manufacturing, like we did in Brazil and some of the other countries. So I really like that strategy of grow it, fund it, move into a sales office, fund it, move into manufacturing if it makes sense. So I like that strategy, and it's something I want to continue with.

Okay. And then genomics specifically, could you talk to the growth rate of Scotland? What was the overall -- genomics growth rate overall, I think, was 25%. How quickly did the European genomics business grow specifically in Scotland? And then how quickly do you want to move into or add technology and people into Brazil and Australia?

Well, we've already got the -- we've got the genomics in Australia, and what's been so great about this, is that we've got the same model. We bought an existing business in Australia, and they were using pretty much the same techniques that we were. I mentioned earlier that, in fact, some of the samples that were coming from Australia were actually going to Lincoln, Nebraska to tell them how to make selections for a fine-haired Merino sheep. And now they're doing it -- we're doing it in our own lab in Australia instead of shipping them around the world, but it's a model. And we send a team in ahead of time, and they -- if it's an already-existing operation, they kind of Neogenize it, and we're all working off the same things. In the case of the -- Scotland, as Steve just pushed a note across to me, the genomics business in Scotland for this quarter was up 38% compared to last year. And I -- when I say that, I also say that some percent of that was probably product that we ran in Lincoln, Nebraska this same time last year, and now we're running it in Scotland. But I really don't care. I mean, we're going to do it where it's most efficient. Turnaround time is exceedingly important, and we're dealing in days. We've got some contracts that we get 120% of published rate if we could provide them the results back quicker than what they specify. So turnaround time is awfully important. As an example, the gestation period of cow is still 9 months, but -- so if you don't get answers back the day after tomorrow, that may not be that important. But as you look at chickens, it takes 21 days to hatch an egg, and so the turnaround time there gets to be pretty important to know what to say. So this opportunity of shortening our turnaround time using the same models around the world, we, in fact, run internal lab analysis to make sure that all our labs are operating right. We swap samples once a month, take a sample and send it to every lab, and we record the results and make sure that they come back with the same answers. So that's a long politician's answer to what was probably a short question. But we're growing -- even Lincoln is growing, but Lincoln's boat as Dr. Bauck will tell you, he's been in that -- he's given that to the [Yankees] he's inherited out there. So he's not keeping all of the [frames up] right now.

The next question comes from Brian Weinstein from William Blair.

This is actually Andrew Brackmann on for Brian. I wanted to start, actually, on the genomics as well. You had talked about some growth drivers through partnerships and through introducing new products. But could you talk about any other things that's driving the business there? Is it greater awareness, adding more content, or increase in sales force?

Yes. Thank you. Did we rehearse this question? I'm glad you asked it. As I think one of the key things we probably don't spend half as much time on what [I'm alerting] you to is what's happening to genomics on the Food Safety side. And way back early when we first acquired that business, I said to a supergroup of scientists in an R&D meeting one day, I said you know, we do such a good job in running the genomics up on a Duroc hog or a Jersey cow. What could you do? Could you do the same thing with Salmonella? And they said, sure, we could. So we've started saying, yes, we're going to start doing that. And we got the -- some significant piece of the business now that's going into our genomics has to do with looking for spoilage organisms in food. I don't know whether I've used this story or not, but it's good enough, I could tell it twice. We had a customer, a good genomics customer that is one of the -- largest worldwide breeders of hogs and a large -- larger -- one of the large producers, came to us one day and said, "We got a problem with spoilage in our fresh pork, and we can't find the organism that's causing it. Can you help?" We said, "Yes, we will sure try. We probably could." So in a few days, they got a package of rotten meat in Lincoln, Nebraska and started trying to sort through it. And with only a few days, they came back and said, "We need to talk to this guy," and got him on the phone and said, "We've identified the organism that's causing your spoilage in these fresh pork chops, but we don't quite understand it because the organism that we've identified is normally found in marine conditions." And there was a brief silence, and the guy said, "I guess I forgot to tell you that we use sea salt as a part of our curing process." So there is an example of how genomics can [be an aid] -- and that's just a little one, I can give you several more like that. But -- so as we expand the use of genomics beyond just parentage or carcass freights or whatever we might be looking -- [fat on] breeding for animals, there is going to be a lot, I think a lot of food-based genomics work.

That's interesting. And then is there any update on hiring a new head of Food Safety?

Yes, we continue to go through that process, and we've got some great candidates. We've had a number of interviews, and hopefully shortly, you'll be able to hear something.

In the meantime, John is drinking out of 2 cups. So he does a pretty good job at it.

The next question comes from Kurt Kemper from Hilliard Lyons.

I have a couple on the Raptor platform. First of all, with the milk opportunity, how are you all thinking about that in terms of price increases versus cannibalization and possible taking market share as well?

So in the -- thanks, Kurt. I think there's a couple of things. One, in the U.S., this is about growth for us because we're not involved in that market, so this is the opportunity for us to take share. And externally in the international markets, it's allowing us to really solve customer needs and speed up the amount of time that it takes them to analyze these samples. Because we can run up to 9 samples on this reader, it allows them to skip the incubation process because we do it with our reader. And so what we think is we're going to grow share there, but also, it's going to simplify the -- really, our customers' challenge around this on an international side, and from a margin perspective, our current products, we wouldn't launch something if we thought it was going to be dilutive to our current margin structure.

And it's, I think, John priced pretty much in the same slot that our other tests are today.

Yes.

Okay. And a follow-up for the Raptor platform. Seems like a very convenient option for your customer base. I think you all have said in the past that you're thinking about moving that technology to some other platforms, whether it's allergens or pathogens. Can you kind of talk about what that process looks like and maybe the R&D time frame that's necessary for that?

Well, we're not going to tell you too much because I know we got a couple of competitors that may be listening and even recording this call. So I don't want to tip our hand. I'll let John talk some about it. But I think, John, you're already nearly there with several of the mycotoxins.

We are. And Kurt, that's right. I mean, the thought is to help the customer, so he doesn't have to have multiple readers to run different types of tests across different spectrums. So we're extremely close on mycotoxins, and yes, the thought is, is to have the flexibility to run multiple types of tests on a common reader. And that's what we're working towards.

Okay. And then, my last one. I guess, there's a little bit longer time frame because it doesn't appear to affect you all immediately, but I thought it was interesting to see Church & Dwight, their ARM & HAMMER division buy up Password Food Safety's solutions. To my knowledge, one of the very few that are now positioned both inside of the farm gate and the food on the plate like you all. So I was just interested to hear your thoughts on that news.

Yes. That's a group that came out of Elanco with some technology, and we knew that. We actually looked at a little bit of that business. It's kind of a different space because it's more of a treatment than a carcass wash. So while it's ancillary to us, it's really not around detection. I believe it's more around treatment.

Jim, you want to...

Yes. It's -- we tried to figure out what to do with it, the technology was all confused. This would be a way to, if you spray a dirty old 1,500 pound steer that's coming into the holding line before he's going upstairs to the slaughter floor into 2 or 3 hours, you spray him down, but something has got to kill the bacteria, hopefully the E. coli that's in the manure patches or whatever that's on the animal, and it reduces the load going in. It's an -- as John pointed out though, it's an intervention, but -- I don't want to make light of it. But it's an intervention process, not a diagnostic tool.

(Operator Instructions) The next question comes from Gerry Sweeney from Roth Capital Partners.

Just a quick one -- 2 questions really. Want to talk about -- in the commentary, you talked about consolidation and efficiency improvements, and I think we talked a little bit about this on the last call. I think you were looking at some SKU pruning. But it sounds as though there's some opportunities just across the board to make improvements. How do we look at this longer term? It this an opportunity to drive margins? Or is this more just standard blocking and tackling, offsetting some increasing costs, et cetera?

I think it's for me probably, first and foremost, we talk about the harmonization of what's happening around the world. And what we're doing with, we were -- we're manufacturing culture media at an operation here in Lansing that we bought some years ago from Idex. It was stuck out in New Jersey and we brought it in here. And a few years later, we found a -- bought a company that was making media. We tried to buy it on couple of occasions, and we got the opportunity to buy what we call Lab M. Between them -- and they're both making product and shipping it around the world and it's used for part of the diagnostic tests, also big piece of that market is culture media that goes into production of vaccines and things like that. And we started -- we knew in the beginning that we wanted to try to harmonize that, so that -- a big vaccine company, as an example, they want to produce a product in the U.S., and they want to produce the same product in Europe, but they'd like to be able to have the same media to go with it. We had, I think 400 -- when our team started, they had something like 450 products, different SKUs, when you combine the number of products offered between, in both of the companies. We now have got that pruned down, and I think the number is like 205. And even more importantly, those all won't be made in Manchester, England and Lansing, Michigan. Some of them will be made both places if the volume is big enough. But in other places, we may make them here in the U.S. and trans ship, and they may make others over there and trans ship. And today, we've got containers [that would] We got a 40-foot container or 2 coming in dang near every week, some of them are coming from the different parts of the world, but you can move stuff around on a container pretty easy, and they open that whole harmonization. So I think first of all, it's harmonization. Yes, it does get rid of a lot of redundant products. It was -- it's kind of crazy. You start looking at that list, and you say gosh, we did all of this, and we only sold $3,500 last year. Yes, but that one customer really does want it. And so you can sort of sort those things out, but it's working. And -- but it was part of our original plan. We said all along that we wanted to be recognized as a worldwide leader in a number of places. And anyplace you went, if you were looking for a product [and you adanasian pass beside it] you could depend on it being good.

That's helpful. And then on the tax side, obviously, I mean, these are real changes, positive impact to the cash flow, and as you look at operations, there's always a balance. But with this increase in cash flow, does it change your view on going -- on reinvesting in R&D, driving organic growth? Or does this money just sort of continue to build on the balance sheet? And then as a follow-up to that, are you seeing any increases in some of your customer spends because of the tax increase -- or tax decrease?

I don't know that -- John, I'll let you noodle that last question. I'm not close enough to -- I mean, they're buying the product now, not because they can afford it, but because they have to have it, I think, primarily, but maybe I'm missing something. As it relates to where we're going, we're continuing to look for aggressive opportunities to use that money. And some of it is -- we talk about automation. We had a meeting not long ago, there are a couple of different projects that are roaming around now in excess of $1 million just for a piece of equipment, each of them. We're looking at what we might do in consolidation of -- where we've got an operation, one in part of the Midwest and another one somewhere else that -- and we're not real proud of the facility. We're putting that into some expansion in bricks and mortar, which we [happen to have] so I think we're going to continue to find a use for the capital.

And Gerry, what I'm see from the customer base is that, are products and our prices this prohibitive that they can't afford it? If it's where we can get it and they're doing the same thing we are and saying, okay, this gives us an opportunity to invest in capital and more people and grow the business, then their usage of our product is going to go up. So that's what we're seeing.

We have no further questions at this time. I would like to turn the call over to Mr. Herbert for concluding remarks.

Well, thank you so much for your continued support, and a great set of questions this morning. Always love these because I know what our investors are thinking based on what questions you're asking, and it's awful helpful as we make sure that we're doing the right thing. So we're off and running for the fourth quarter, and it'll take us a little longer to announce the end of the fourth quarter, but we're always available. And of course, you know that anybody that's got specific questions on the analyst side, Steve is available. Terry is still -- his phone still rings, so don't forget Maynard's around. And we'll look forward to talking to you next time. We're off, and have a good spring.

Thank you.

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