Neogen Corporation

Neogen Corporation

$11.5
-0.04 (-0.35%)
NASDAQ Global Select
USD, US
Medical - Diagnostics & Research

Neogen Corporation (NEOG) Q2 2010 Earnings Call Transcript

Published at 2009-12-18 11:00:00
Executives
James Herbert – CEO Lon Bohannon – President & COO Richard Current - CFO
Analysts
Steven Crowley - Craig-Hallum Capital Scott Gleason - Stephens Inc. Brian Jeep – Sidoti & Company Marco Rodriguez - Stonegate Securities Inc Stephen O'Neil - Hilliard Lyons Anton Brenner - Roth Capital Partners [Joseph Potman] – Wells Fargo
Operator
Good morning ladies and gentlemen and welcome to the Neogen second quarter fiscal year 2010 earnings results conference call. (Operator Instructions) I will now turn the call over to Mr. James Herbert. Mr. Herbert, you may begin.
James Herbert
Good morning and welcome to our regular quarterly conference call for investors and analysts. Today we will be reporting on Neogen’s fiscal year 2010 second quarter that ended on November 30, 2009. I’ll remind you that some of the statements that are made here today could be termed as forward-looking statements. These forward-looking statements of course are subject to certain risks and uncertainties, and the actual results may differ from those that we discuss here today. These risks associated with our business are covered in part in the company’s Form 10-K that’s filed with the Securities and Exchange Commission. In addition to those of you who are joining us today with this live telephone conference, I’d also welcome those who may be joined by way of simulcast on the worldwide web. These comments along with some exhibits will be available on the web for approximately 90 days. Following our comments this morning, we’ll entertain questions from those of you that are joined on the live conference, and I’m joined today by Lon Bohannon, Neogen’s President, and Richard Current, our Chief Financial Officer. Earlier today Neogen issued a press release announcing the results of our second quarter and the first six months of the company’s 2010 fiscal year. I’m very pleased with these results considering the economic situation that’s been encountered by many of our customers. Revenues of our second quarter were approximately $35.3 million or a 13% increase from the previous year’s second quarter. The second quarter net income increased 18% over the same quarter a year ago to approximately $4.6 million, and that’s another quarterly record for our 27 year old company. This translated to $0.20 per share compared to the prior year’s $0.17 when this is restated for the 3-for-2 stock dividend. You will remember that the company declared a stock dividend of one additional share for each two shares held, that dividend became effective on Tuesday of this week and the shares outstanding increased from approximately 15 million shares to approximately 22.5 million shares. The results of the second quarter extends our consistency record to the 71st quarter in the past 73 when Neogen has reported revenue increases as compared to the previous year. That’s a record that now spans 19 years. Year to date revenues for the first six months now stand at approximately $67.6 million, that’s a 13% increase compared to last year’s first half. The year to date net income for the first six months now stands at approximately $9 million or an 18% increase over last year’s $7.6 million. A lot of the credit for this accomplishment goes to Lon Bohannon’s operating group, and in fact the credit goes to all of Neogen’s over 500 employees throughout the world. Because of some timing issues it was again a particularly good quarter for cash flow as we generated over $7 million in cash from operations for the quarter. Of course all these factors continue to strengthen Neogen’s balance sheet and this has resulted in a 10% increase in shareholder equity compared to our position just six months ago on May 31. At this point I’ll stop talking about the quarter and in a few minutes Lon can give you some of the real color of the various areas of our operations. Instead let me talk about what I see for the company in the upcoming quarters and some of the factors that effect the marketplace for our products. We were successful in putting a part of that cash that I just mentioned to work effective December 1st with the acquisition of the BioKits Food Safety Division of Gen-Probe. This company located in Deeside, Wales is only a few hour’s drive from our headquarters of Neogen Europe Ltd. located in Ayr, Scotland. The business had sales of approximately $3 million in the prior 12 months. The business is concentrated in diagnostic test kits for the detection of foodborne allergens and an interesting group of tests to determine meat speciation. We believe that this latter piece of business is apt to grow as there’s more concern about economic adulteration and the desire to better authenticate meat products for ethnic reasons. The majority of the business is within the European Union where we are already building a good market share. Furthermore the acquisition brought approximately 50 new diagnostic test kits to Neogen’s offering. A number of these test kits for the detection of foodborne allergens had not yet been developed by Neogen. Neogen has enjoyed strong double-digit growth in the foodborne allergen business for the past number of quarters. We’ve talked about that in several quarter conference calls. In fact based on a new study just released by the Center for Disease Control, food allergies among US children jumped 18% from 1997 to 2007. That’s a 10-year period. Some of this increase may be due to a greater awareness of the disease by parents and healthcare providers, but for whatever reason there’s a greater concern and a continuing need by food processors to guard against the inclusion of allergenic products that are not included on the label of the food. Weekly reports of food recalls due to food safety issues and of course from widespread coverage by the popular press has continued to draw the attention from lawmakers. These food safety concerns are also impacting our US international trade. As an example last week, Russia added four more US pork processing plants that are banned from selling product into Russia. Russia by the way is one of the five largest export markets for US pork. This brought about a total of banned plants to 11 that Russia now has that are not eligible to ship product into Russia, and Russia now states that US pork process producers and processors could face a complete halt based on antibiotic residues that they have found in finished pork products. The US Congress would likely have adopted legislation calling for much more stringent food safety provisions already if they had not been embroiled in a debate over the healthcare issue. Earlier in the year the US House of Representatives passed the Food Safety Enhancement Act, and referred the matter to the Senate. A couple of weeks ago the Senate subcommittee unanimously approved its version of a Food Safety Act, which has cleared the way now to go to the floor for a full Senate vote. It may likely get to the floor I suspect in the early part of the year. There’s a lot of momentum behind these new measures. The President has exhibited a high degree of interest in food safety and the Congress is clearly not happy with the food safety situation. Since the Senate bill as it now stands is bipartisan, its likely to win the necessary votes as soon as it goes to the floor and then the two bills will be referred to committee. There’ll likely be a number of differences between those two bills and they’ll likely be ironed out behind closed doors when the Senate and the House versions are reconciled. But I guess I’d say regardless of how the final law gets on the books, its expected that it will be the most sweeping changes in FDA regulations in at least 50 years. It appears that the bill is going to have an impact on inspection, and testing not only for foodborne pathogens but also for drug residues, food allergens, and likely some other food contaminants. The final law will not only impact US food producers and processors, but its also going to bring more attention to inspection of the huge amounts of food that we import into the US each year. I just returned from our operations in Mexico City last evening, where FDA announced that they were establishing inspection offices in Mexico City to help improve the safety of the food that we import from Mexico. There’s already one new law in place even before the enactment of this new legislation that will increase the scrutiny of food safety. A number of months ago a regulation was activated in an attempt to reduce the amount of salmonella and [aridatives] in eggs. This will have an impact on the producers and processors of about 98% of the US egg supply and it becomes effective in July of 2010. This regulation not only deals with testing but also with intervention. Egg producers and processors will be confronted with compliance on intervention methods such as rodent and fly control as well as the proper cleaning and disinfecting of bird facilities. And Neogen has the proper test kit for the detection and the products for each of the needed interventions. The FDA has recently put in place what’s referred to as the reportable food registry. This requires that any food processor that learns that food may be adulterated report it to the FDA within 24 hours of the finding. In turn this becomes a part of an electronic food registry report that is now available to the general public. This is a departure from the past practice since such information was not available to the general public in the past. More importantly in the past if a food processor had test results that indicated some adulteration, they had the opportunity to validate that with secondary testing before reporting. Its now possible that a food processor could get a false positive report and would be required to immediately report it even though upon validation they might find that no adulteration had actually occurred. This is, in my opinion, is going to put even more attention on testing, and likely is going to put some pressure on the producers of diagnostic test kits. Beginning a number of months ago Neogen substantially stepped up its activities and its budget for the development of diagnostic tests. We now have 55 scientists in our R&D groups at three primary locations. They have 66 projects that will lead to new diagnostic tests or improvements in our existing products. We spent approximately $0.50 million more in research and development in the second quarter that we just completed than we did in the same quarter last year. To sum things up in looking forward, our growth strategy that has served us so well in the past will continue to be deployed as we look forward. We’ll grow revenues through increased market share. I believe that we’ve gained some market share in several places during the past several quarters. Secondly we’ll achieve growth through internal development of new products coming from our R&D programs that I just mentioned. A third leg of our growth strategy is to increase our international business. We’ve made great strides in each quarter in accomplishing this and our BioKits acquisition will now help give us an additional boost in the market share growth in the important European union geography. And the fourth strategy is to grow through acquisitions of synergistic businesses and we believe there’ll be continued opportunities in this area as our industry consolidates. Before turning the conference over to Lon, let me say that we believe that Neogen’s future continues to be as bright as ever even though the financial health of many of our customers does present some restrictions. We believe that we are continuing to build good value for our shareholders and frankly, I felt great pride last month in representing our employees and our stockholders when Nasdaq invited us to New York to ring the bell to close the market that day. That event marked the 20th year that Neogen has been a publically held company. Five years earlier, Nasdaq invited us to ring the bell to open the market and in those five years our revenues have more than doubled and net income is up about 120%. Also felt good about our ability to issue the stock dividend earlier this week. Those shareholders who had some desire for cash dividends can now convert that stock dividend into cash, whereas others may wish to just let it ride based upon their rewards for future growth. Let me stop at this point and turn the conference over to Lon to talk about more of the color of what happened in the quarter we just finished and then following Lon’s comments, we’ll open the conference for questions from participants.
Lon Bohannon
Thank you James, and welcome to our listeners on the conference call as well as those joining us via internet access. Considering how close we are to the holidays I would like to begin by wishing all of our listeners a Merry Christmas and a prosperous New Year. As James mentioned Neogen issued a press release earlier today reporting our operating results for the second quarter and first six months of our 2010 fiscal year. Neogen’s percentage growth in sales and net income for the three months ended November 30, 2009 mirrored our exceptional first quarter results and provides Neogen excellent momentum as we move into the last two quarters of our 2010 fiscal year. James touched upon a number of the second quarter’s outstanding achievements including new quarterly records for Neogen in terms of sales, net income, and earnings per share, along with the continuation of our remarkable track record for consistent growth in sales and profitability. Given the difficult economic conditions that stubbornly persist for a number of our important customers and market segments, management was pleased with the second quarter performance. The sluggish economy is having some impact on certain product lines within Neogen, for example customers that are involved in virtually any facet of animal protein production are suffering. Smithfield, the largest US pork producer recently announced the pork industry needed to cut production by another 3% to 5% to help support prices and avoid another year of losses. Dairy farmers continue to experience milk prices far below operating costs and are moving to cull herds to stem the tide of ongoing losses. As a consequence sales of some of our over the counter or what we call OTC products, have slowed somewhat. This is probably most evident in our line of OB gloves and hoof care products, sold primarily for use in the dairy industry. Nevertheless we still feel very good about the overall opportunities for our OTC product line which has consistently delivered double-digit organic growth for the last four to five years. In addition in that same announcement referenced above, Smithfield indicated that the challenge period was coming to an end and they went on to forecast [inaudible] that for the last half of their fiscal year. So clearly there’s some improvement in overall market conditions for customers in those market segments. The other area of Neogen most impacted by the poor economy has been placement of high value Soleris instruments used in conjunction with disposable vials to detect spoilage organisms like yeast and molds. As we move through calendar year 2009 more and more customers implemented restrictions on capital expenditures which pushed back and delayed sales of Soleris instruments. Neogen has added a new lease purchase financing alternative for the Soleris instruments and we do expect some relaxing of customer CapEx restrictions at the start of the new calendar year. With a very, very strong, and full pipeline of prospects for the unique Soleris technology we are optimistic about the growth potential for this product line as we look ahead to calendar year 2010. And in spite of the pressure on a couple of our product lines caused by the poor economy, Neogen was still able to achieve impressive organic growth that exceeded 11% for the second quarter. I believe this is attributed to the breadth of our product lines, our successful efforts to gain market share and the fact that our markets continue to expand even in the face of a troubled economy. Let me discuss just a few of our many successes in the second quarter. Diagnostic products experienced an exceptional second quarter with overall same store sales growth of approximately 20%. Sales of drug residue test increased significantly for the second consecutive quarter led by strong sales of kits to detect dairy antibiotic residues which were up more than 40% compared to last year. This growth was due to increased sales of higher value test kits, unit volume increases, and compared to the same period last year, better currency exchange rates for test kits sold in Euros. Bolstered by the May, 2009 acquisition of International Diagnostic Systems, sales of test kits for drugs of abuse used in the forensic market experienced a strong 33% increase in the second quarter. Sales of food allergen tests continued their recent trend of outstanding organic growth in the second quarter with an overall increase of 23%. All allergen test kits including peanut, milk, egg, gliadin, almond, and soy achieved solid sales growth ranging from 8% to 80% in the quarter. One of the biggest growth drivers in the second quarter came in the area of diagnostic tests to detect naturally occurring toxins. Throughout much of the US corn belt cool and often wet weather conditions persisted during the summer growing months and again during the fall harvest season. As a result much of the nation’s corn harvest was struck with a fuserian mold that leaves behind a harmful toxic residue known as vomitoxin or DON. Elevated levels of DON were found in corn as the harvest progressed resulting in a significant increase in demand for Neogen’s industry leading DON diagnostic test kits. Some of you may recall that Neogen announced in mid September it had received AOAC approval for its Veratox DON 2/3 test. The AOAC approval made our DON 2/3 test the fasted quantitative DON test available with third party approvals from both AOAC and USDA. Neogen has been a leader in the supply of diagnostic tests for mycotoxins which includes DON for 20 years. Total sales for mycotoxin tests increased 27% in the second quarter led by the aforementioned growth in sales to detect DON. I think its also important to point out that this year’s corn harvest is very late compared to historical averages. As of November 30, the USDA reported that this year’s corn harvest was only 79% complete for the key 18 states that represent 94% of the country’s total corn acreage. This compares to an average harvest completion rate of 98% as of November 30 for the five previous years. Obviously a significant amount of this year’s corn crop will be harvested in December and even into the first quarter of calendar year 2010. As a result Neogen expects to continue to see strong demand for its DON test kits for the next several months. Neogen also realized significant second quarter growth for several of our intervention products, small animal supplements, including the company’s [care] line of products used to treat pancreatic, renal, and urinary track disorders in companion animals achieved organic growth of 39% for the quarter. It was also gratifying to see strong growth performance in Neogen’s portfolio of products focused on biosecurity solutions. Sales of cleaners and disinfectants used in food animal production and processing facilities were up 22% in the second quarter. The growth in cleaner and disinfectant sales I think is particularly noteworthy since last year’s second quarter included a significant one-time stocking order of disinfectants shipped to the Asia Pacific rim region. Rodenticide sales were another bright spot for intervention products in the second quarter. A strong marketing promotion helped push domestic rodenticide sales to a 27% increase over the prior year. rodenticide sales growth included one month of new business to a large food animal integrator representing an important gain in market share that will also benefit sales in future quarters. The addition of new packaging formats and new technical ingredients for our [rat base] has helped Neogen expand its one stop shop and overall value proposition for biosecurity solutions. Operating profit for the quarter was 20.5% of sales compared to 18.8% in the same quarter last year. This also represents the first time in Neogen’s history we have achieved back to back quarters where operating profit exceeded 20% of sales. On a year to date basis operating profit stands at 21% of sales, compared to 19% in the prior year and I think gives us a reasonable chance to achieve operating profit equal to 20% of sales for the 2010 fiscal year. We continue to maintain that the best way to evaluate Neogen’s overall performance is to focus on our growth in the operating profit line. Our 13% increase in revenue for the second quarter combined with our ongoing cost control efforts contributed to an excellent 23% growth in operating profits. Many months ago when we embarked on our budget planning process we realized that our 2010 fiscal year was not going to be business as usual. We encouraged our sales organizations to be more effective in implementing strategies to gain market share. We also asked employees to look for ways to reduce cost, lower inventories, and improve productivity without jeopardizing the company’s future growth. I think Neogen’s strong 11% organic sales growth and the even more impressive 23% growth in operating profits for the first two quarters of this fiscal year is proof of the accomplishments of our employees and I do think its important to recognize Neogen’s team of more than 500 employees for their significant contributions to our overall success in the first two quarters of this fiscal year. Now as James has already discussed the attention focused on food safety by consumers and regulators remains at a very high level. I think part of this ongoing attention is due to what seems to be a never ended parade of food recalls. There were 53 food recalls during Neogen’s second quarter, an even higher number than the 47 recalls announced during our first fiscal quarter. And as you know these announced recalls often result in many more follow on recalls as contaminated product moves through the food chain. Foodborne pathogens such as salmonella and listeria, and undeclared food allergens remain the primarily causes of food recalls. As we look ahead to the remainder of our 2010 fiscal year we do so with a great amount of optimism. We have established some very good momentum with a number of product lines. In addition I do think that the overall economic conditions are improving and will continue to do so as we move through calendar year 2010. Our business model is working and the necessary drivers for future growth appear to be solidly in place. And finally we are optimistic because we have a dedicated team of management and employees who are focused on maintaining our consistent track record of top and bottom line growth. That concludes our formal comments for today’s conference call. At this time we’d be happy to answer questions from our listeners.
Operator
(Operator Instructions) Your first question comes from the line of Steven Crowley - Craig-Hallum Capital Steven Crowley - Craig-Hallum Capital: Congratulations on a great performance. A couple of things that I’d like to ask about, you mentioned international is a focus going forward that you’ve supplemented the business with the most recent acquisition but do you have the data for the quarter and the year to date as to what international was as a percent of sales and maybe the year ago periods.
Richard Current
Current year, for the current quarter was 39%, year to date was 40%, and the prior year 41% in the quarter and 42% year to date. Steven Crowley - Craig-Hallum Capital: And the products that you acquired that should supplement your international product offering, you mentioned a number of new products in the food allergen area, in the meat area, those food allergen products that you had not yet developed here in the US, how quickly can you bring them to the US. Is there any kind of regulatory pathway that you need to go through.
James Herbert
That’s a good point, in fact we’re already bringing them in. They were some of what we would consider to be the more [manner] food allergens, things such as walnuts and lupine and a few others. I think there are like 23 food allergens that have been identified as having some allergenic reaction. And we were immediately able to bring those products into the US. Another thing that that acquisition brought about is that they had perfected their format of what we call lateral flow devices, two formats that are used in food allergens. One is a more quantitative test that determines how much food allergen is there. Another one is used typically by the clean up crews that just used to detect with a simple lateral flow device, is just to take a simple sample on the line and make sure that there’s nothing left on the line. That was the group of products that where we had not developed a number of those, of our more analytical products into those quick environmental tests. But the BioKits guys had done that so we’re already beginning to incorporate those sales, stated I think probably the next day after the closing, second or third of December we were already taking orders and selling those products in the US. Steven Crowley - Craig-Hallum Capital: Now switching gears over to the disinfectant side of your business, it sounds like you had a pretty good quarter with your disinfectant line which includes the acquired products from DuPont, maybe you could give us a little more information as to how that product line did and also importantly update us on your move of the manufacture of that product into your Randolph, Wisconsin facility.
James Herbert
Let me add to the second part of that, we’re about on schedule is what we planned to do at Randolph. We had some remodeling to do in one facility to accommodate some of our product but we are making cleaners and disinfectant products in Randolph now. Some of those products had originally been made at the Antec facility of DuPont, actually in the UK. We discontinued a number of months ago having part made there and we’re moving along, I think in pretty good shape. We’ve got some more construction to do at Randolph for warehouse space more than anything else and I think we got our footings poured for that ahead of the frost line creeping up on us. So we should be able to proceed with that new construction in the coming months to more fully integrate that operation.
Lon Bohannon
In terms of the disinfectant line we have seen nice increases in a number of areas. In total that business was up in excess of 20% in the quarter. I know we had strong growth internationally in terms of sales going into the Andean region countries in South America. I know we had strong sales growth in Mexico, strong sales growth in Canada. I mentioned the fact that we needed all that because we had a very large one-time stocking order that went into the Asia Pacific rim last [region] but we were able to offset all of that with the growth we had in those areas I just mentioned. And then in addition to that on the distributed products that we acquired from DuPont, we had very nice strong growth domestically in the US. So it was particularly good to see. I think that whole idea of being that one stop shop with those biosecurity solutions and having the disinfectants in addition to the rodenticides has really helped grow that business overall and we’re seeing it in some strong on the disinfectant side. Steven Crowley - Craig-Hallum Capital: Is the plan still to generate the profitability increase that you’ve previously talked to us about as you move manufacturing into Wisconsin, has anything changed there.
James Herbert
No, in the meantime we’re picking up more business, so its helping from both sides.
Operator
Your next question comes from the line of Scott Gleason - Stephens Inc. Scott Gleason - Stephens Inc.: Congratulations on a strong quarter, just starting off, obviously if you look at the Food Safety organic growth it was very impressive in the quarter at 20%, can you talk a little bit about in terms of inventory restocking cycles, the weather, how much impact that had and maybe give us a little bit of directionality on a go forward basis with how we should think about organic growth in that segment of the business.
James Herbert
Just a quick observation, there’s no doubt that weather conditions certainly helped and it helped in the corn crop across the central corn belt. A lot of that corn as it was planted this year for one reason or another was late maturing corn. They counted on getting another couple of weeks of growing season in the field. They didn’t get it. So that crop got frost bit before it got matured enough to dry down. And then we got all the problems that resulted from wet cold weather that brought on the fuserian. Its not a normal occurrence to see late weather problems in the corn crop. But if you remember back we never quite know where to predict what’s going to happen as we move from the northern hemisphere to the southern hemisphere and we have certain natural toxins in grain that are a result of hot dry weather and we have others that are a result of cold wet weather and we have different issues relating toxins that form in wheat and oats, the cereal grains, as compared to corn and the grain. So its kind of difficult to predict where weather is going to deal a bad hand. Having said all those things, Lon can give you some more color on what he saw.
Lon Bohannon
I’ll address you’re question related to inventory restocking levels, I think when we talk about diagnostics, particularly on the Food Safety side of the business, I don’t think we experienced any growth in the second quarter on the basis of our customers restocking inventories. I think a number of those products have shelf lives. I think they turn over very rapidly and I think anything that happened there would have occurred earlier in the year. As it relates, I can’t say I’ll add a whole lot to what James indicated, there was a time 15 years ago when I was much more concerned about weather conditions which mostly the biggest impact is in the area of mycotoxin testing around the harvest time. And I used to be a lot more concerned about it because as James indicated now that we’re selling into a hundred different countries, usually every year we’re seeing some kind of outbreak in different regions around the world for some kind of problem that results in an increase in growth in testing for mycotoxins. Last year for example right at this time we were seeing particularly strong growth in our Neogen Europe operations because they had a major problem in Europe last year in their wheat crop. So it is difficult to predict. We think we’re in good shape because we’ve got a lot of different products now and a lot of product lines and we’re selling internationally and we just think that there’s enough opportunities out there to grow organically and gain market share that we can overcome a year like we’re having this year when it rolls around to next year. If not in mycotoxins, then some other products and we might very well see some kind of problem with mycotoxins in some other part of the world.
James Herbert
Maybe just kind of a quick update, Lon talked about where the harvest was at the end of our quarter, as of Monday morning, this week, USDA estimated that 8% of the US corn crop is still in the field. That’s 8% of the planted acreage is still in the field. That would equate to about a billion bushels of corn. There’s two or three states that are pretty far behind, Illinois being a major state. In fact Illinois I think plants 14% 15% of the nation’s corn crop is planted in the state of Illinois and as of Monday morning they still had 10% of their crop that was still in the field. Ed Bradley reported earlier today that its kind of damned if you do, damned if you don’t. They’d like to get that corn out of the field before the weather gets so bad that as he terms it, it becomes deer food but at the same time the moisture level is there and its difficult to get it dried down. So the problem is they harvest it, they bring it in. They don’t have room to get it through the dryers. It lays on a concrete slab somewhere until they can get it through the dryers and unfortunately it continues to deteriorate until they can get the moisture out of it. So this crop is going to have a long tail on it. I think we’ll be testing for DON in the corn crop straight on through as Lon indicated probably some of this harvest won’t get, unless we get some weather breaks in a few places, some of that corn won’t get out until early January and then its going to move from one elevator to another and it’ll get tested as they move it. There is a lot of blending that’s going on. I understand from our operation in Wisconsin, they were talking about the fact that they’re having a problem finding enough good corn to blend with the bad corn to try to come out with the kind of averages that are salable. So its going to be an interesting corn year even though it should be a record harvest. The quality of that harvest though because of product weight, its going to be a little bit light weight in some cases plus the mycotoxins, I think we’re still looking at 13.7 to probably 14 billion bushels of corn this year. Scott Gleason - Stephens Inc.: So I guess when we think about an organic growth on the Food Safety side at least in the near-term here should we maybe think about more of high teens number and then just when we think about inventory positions, have we made full recovery at this point, we’re basically from a customer standpoint we’re more at kind of normalized historical levels.
Lon Bohannon
In terms of organic growth on the Food Safety side we certainly have a very good year. I think we’re sitting at 16% year to date or something like that. We like not to raise expectations. We don’t like to over promise and then under deliver and stuff. We feel very good about achieving double-digit organic growth in our product lines and I think we’re in good shape there.
James Herbert
Restocking, I think people are, I think they’ve got their stocking levels up. Its not a problem as Lon mentioned on the Food Safety side, the Animal Safety side is where there’s more inventory carried in stocking and based on what I picked up, I believe they’re kind of back to their normal levels. I don’t think that there’s many people that have, probably we’re approaching year end and some people pull inventories particularly outside of the US for tax reasons, they may pull inventories down a bit in December but I don’t think that there’s any big gaping holes out there in inventory now.
Lon Bohannon
I think what we’re seeing is exactly what James said, there are still some customers that depending on where their at in terms of financing for inventories, and the ends of their quarters, we see some adjustment to ordering patterns to meet whatever their needs are for their own particular situations. But I don’t think we’re seeing further pull downs of inventory levels anywhere across the market segments that we’re serving. Most of those people did that at the very beginning of calendar year 2009 and late in calendar year 2008 and that’s all behind us and people are buying whatever it is they have to buy to service their customers. I mean they’ve tried to increase their turnovers but we’re not seeing any further reduction like we saw nine to 12 months ago.
James Herbert
And you’ve got different issues depending on which country as it relates to holidays this time of year. our operations in Mexico City close, today is their last day until January 7. We’ll have people in that will take care of some customer shipments but that’s a typical situation there and in many of the Spanish American, Latin American countries, we see that they take long holidays over Christmas but they always do that, so December is a tough month for us, always has been a tough month for us just simply because of holidays that are taken particularly in Latin America but some of the same is true in Europe. I think based on the economic situations today we are seeing a lot of people that are closed down between Christmas and New Years. Scott Gleason - Stephens Inc.: Can you give us what the currency impact was on the quarter and it looks like as we transition into next quarter based on the weak dollar currency is going to start giving us, becoming a tailwind, can you give us a little bit of a guidance just kind of on what to anticipate as far as maybe the top line impact.
Richard Current
I can answer your first question which is what was the impact as far as what the future holds that one is a little tougher. But revenue was, we were effected positively $200,000 on the top line and on the income line we were effected by a little less than $0.01 plus.
Operator
Your next question comes from the line of Brian Jeep – Sidoti & Company Brian Jeep – Sidoti & Company: On the Soleris financing option, since implementing that have you seen pretty good uptick.
Lon Bohannon
We really just rolled that out, in fact there was even, we’re in the midst of conducting two days of monthly operational meeting for our Food Safety group as we speak and there was more discussion about that. So I think there’s a lot of interest related to it. Our sales people, we’re training them in terms of what the program is and I think all of this is intended to have a positive effect as we turn the new calendar year over on January 1st and that’s where we’re going to see most of the impact.
Richard Current
I would echo that since all those things tend to at some point in time flow through my office. We certainly are seeing a pick up in interest on that and I think early reading would say to me is its going to be a successful program. Brian Jeep – Sidoti & Company: Can you give us an update on how things are moving with BetaStar US.
James Herbert
BetaStar US in fact reality. We got that product ready. We got it through FDA, through the inter state milk shippers. When we got to the marketplace with it, of all the beta-lactams there was one beta-lactam that we did not detect. It wasn’t required to be able to detect that. I guess I’d have to say the competition used that pretty effectively against us. We had a number of customers lined up and that sort of, since we weren’t able to detect that one additional beta-lactam it turned our widespread interest in getting sales out there. Since that time of course we immediately began working, had already begun working on inclusion of that other beta-lactam from and R&D standpoint that went back to our R&D group. It looks imminent as far as being included in the actual diagnostic tests. There will be some time that will be required then to get that approval back through the Drug Administration and back through the inter state milk shippers. I guess that’s sort of the negative news. The positive news is that we’re growing the business without it. So we’ve had good growth in our dairy antibiotics testing business and I wished we have had all of our US clearances done and our ducks in a row a year ago. But in the meantime we’re able to make some additional continued to make some success in sales growth in other areas and this will just be another boost to help us kick things off when we do get it all completed.
Lon Bohannon
That dairy antibiotics testing growth does include a new product for us though that we really didn’t talk a whole lot about but the BetaStar combo test which tests for the beta-lactams in addition to that test for tetracycline has been a great success and has helped drive that growth. So we’re fortunate that we were working on a number of new products at the same time and improvements to products in that line and the BetaStar combo has been a great success at helping to drive that growth.
Operator
Your next question comes from the line of Marco Rodriguez - Stonegate Securities Inc Marco Rodriguez - Stonegate Securities Inc: I was curious in regard to the 20% operating margin you mentioned in your prepared remarks, pretty good chance of getting there for fiscal 2010, I was wondering if you could discuss the assumptions that are driving that and then how you expect those assumptions to trend into your fiscal year 2011.
Lon Bohannon
We are having some very good success at the operating profit line when expressed as a percent of sales. Its not due to any one thing. Part of it is the ongoing growth, we have had a good mix of diagnostic products thus far which have better margins and we have had some success in improving productivity and in implementing some of those cost controls at a number of different operations that have helped us to keep cost in line while sales are going up. And that has increased the margins as you go down the income statement. We’re a little bit ahead of our pace. We had said I think a year or so ago, that our overall objective was to get to the point of achieving an operating profit that was equal to 20% of sales for a year. At the time I don’t think we’d ever done a quarter that was that high. We’ve now done two consecutive quarters like that and we feel good about that. Our budgets do not call for that kind of increase in operating profit to continue like that but and when you get this kind of momentum going there’s good opportunity that we can continue to achieve some favorable results there and hit that 20% for the year. obviously when you do that we’d like to think that we’d budget a similar kind of number going forward. But that kind of depends on the mix, depends on what kind of acquisitions we do and it depends on if we continue to see favorable results and where we’ve got to make expenditures to grow the business.
James Herbert
And we’re also at the mercy of some commodity purchases. I think we’ve talked before about our, we’re a major buyer of wheat and corn at our Wisconsin operations as we make rat rations and we started off the beginning of the year with corn prices about a $1.00 a bushel cheaper than where they are right are. So on one side of the corn problem has been aid to us in revenue, on the other side corn is going to cost more to make rat feed and as a consequence to, our margins won’t be quite as good there. That’s not by itself a huge issue. On our Acumedia side the diagnostic kits and the Acumedia issue, we’ve got a good break this year on the purchase of certain milk products such as casing. We talked about the fact that last year we were paying a high price for casing. The dairy farmer and places most around the world especially in this country, has been beset with low prices for fluid milk but that creates a problem for them but at the same time we’re able to buy casing a little cheaper. So there’s some influence of the commodities markets out there that are making it a little bit difficult to predict.
Operator
Your next question comes from the line of Stephen O'Neil - Hilliard Lyons Stephen O'Neil - Hilliard Lyons: On the international business if I did the percentages right, it looked like the absolute dollars in international increased about 8% and then you noted a positive currency impact so I guess my question is has there been some slowing in the growth of international or am I confusing some of the Asia operations with Europe and how they mix together. If you could just kind of go over the international side.
James Herbert
Richard can give you the exact numbers, I’d say there’s not been a slowing in international. Its just that we’ve had good growth domestically and international growth has not necessarily kept exactly up to pace with our domestic growth is probably more clearly the answer. We hedge you remember that in certain currencies where we can we hedge the euro versus the dollar so we hedge it to the point that when we have receivables at risk so that’s sort of blurs some of what’s happening. That gain or loss ends up showing in the other line down below operating so a little bit of that gets that blurred there. I think we’re, nothing has really slowed in the international growth. Lon, you remember the needs in Europe growth this quarter was slowed a bit from what it has been.
Lon Bohannon
Let me respond further to that question, one thing to keep in mind when you’re looking at comparisons particularly for the second quarter this year compared to the second quarter last year, we had that one-time large stocking order, actually went to China last year for disinfectants. So we experienced really good growth internationally with our disinfectants this year in those three different areas that I mentioned earlier, but we needed all those just to offset the impact of not having that same one-time stocking order this year. So we are seeing growth in all of the areas but we had to overcome that particular shipment last year which has an impact when you’re talking about growth from year to year and I think that when you look at on a year to date basis we still, we have to translate those British pounds for our Neogen Europe operations into dollars, that’s the impact of that is less than last, and it wasn’t very strong in the second quarter overall. But still on a year to date basis I think they’ve had 17% 18% growth but I think when you get it converted to US dollars its like 7%. I also know if I remember right that the Neogen LA operation in the second quarter on the basis of pesos was up about 40%. But again when you translate that into US dollars it was 25% or 26% for the quarter. So I still think we’re seeing good growth internationally, we just have very strong growth in our domestic product lines in the second quarter and we did have a big one-time shipment last year in China that effected those comparisons.
James Herbert
I think the peso as I remember we budgeted it about 11 to one and the translation rate is, I exchanged money this week down there was 1275, so the peso has gotten weaker against the dollar. Stephen O'Neil - Hilliard Lyons: That’s a good point about the China shipment and I guess I maybe should have been more specific, how did Neogen Europe perform and then as a part of that are the dairy antibiotic test sales that you’re talking about included a Neogen Europe or are they considered separately.
James Herbert
We do some work over there but its just an inter company transfer on the labor work that we do. They are a part of all of the dairy antibiotic revenues and profits get reported here.
Richard Current
Europe was up for the quarter 13% in their own currency, in pounds and 18% year to date. When they transferred over they were 10% for the quarter and 8% year to date.
James Herbert
The wind was still in our face through the first and second quarters as far as the translation of the pound sterling to the dollar which is a little different than the euro to the dollar. Now going forward it appears that the wind is going to be neutral to maybe a little draw back as we stand right now looking at December now compared to December a year ago. We could have a little tailwind coming off of this. Stephen O'Neil - Hilliard Lyons: You’ve had continued good results in the dairy antibiotic testing and I think you may have mentioned this earlier but that is principally European business, is that correct.
James Herbert
Well its non-US business. Its around the world. We’ve got Asian business, we’ve got Latin American business and we’ve got European business. So we’re well represented in all of the continents, we’re just doing anything to speak of in the US. Stephen O'Neil - Hilliard Lyons: Also last quarter you had a really good quarter with some of your, in your Animal Safety area with some of your pharmaceutical products like BotVax and EqStim, was that just kind of a one-time thing or how have those continued to perform.
Lon Bohannon
That’s another area where its just really, its just a comparison issue. We had a second consecutive very good quarter. The level of sales for our biologics business in Lexington was pretty close to the total sales number that we achieved in the first quarter. It was just that we had very, very strong sales last year in the second quarter as well. So they’re holding up fine. It was just the comparison thing that caused me not to mention it specifically in terms of percentage growth. Stephen O'Neil - Hilliard Lyons: What’s the status of the moving the disinfectant production in house.
James Herbert
We are manufacturing disinfectant products at our Randolph, Wisconsin location. Remember we said that’s what our intent was to begin with. That is an EPA location there so disinfectants, just like rodenticides are under the authority of Environmental Protection Agency and our licensed. We are manufacturing disinfectants and cleaners at Randolph. We are, we’re probably not quite as far advanced as I’d like to be there, but a part of that has come about by the fact that we’ve had continued growth in sales. So we’ve got some building to do, we remodeled some existing facilities, that’s all finished and in good shape now. We need to add some extra space out there for warehousing. We did get footings poured, got concrete poured before the frost line began to creep up on us so we’ll be proceeding going forward to add some more warehouse space which will slow us up a little bit on that. But we’re doing I think okay there.
Operator
Your next question comes from the line of Anton Brenner - Roth Capital Partners Anton Brenner - Roth Capital Partners: Can you give us a little more information as far as the integration plans of the BioKits business, is that going to be production brought into existing Neogen facilities.
James Herbert
As I think I said in my opening comments, its fortuitous, its in Wales just south of our Ayr, Scotland operations. They will operate under, as a part of Ayr, Scotland. That was an asset purchase not a stock purchase. And they’ll operate as a part of that business. So there will be some integration between what’s happening out of [inaudible] and what’s happening in other parts of the company. It’s a little early to have a very complete plan about what we might move to where. One thing that’s very clear is the sales and marketing activities. We did not bring on board any of the sales and marketing staff though it was not very large frankly, at the BioKits group because we have that well covered ourselves. So our sales and marketing group worldwide began selling and taking orders for that product on December 2nd so that’s up and moving and we’ve got somebody in every country where in Europe where they were strong, we have a sales team there which is stronger than what their sales team would have been. So we as far as integration have some great opportunity to expand it from a sales and marketing standpoint. Anton Brenner - Roth Capital Partners: And just related to the salmonella regulation, it seems like a great opportunity on it for a number of your product lines and I don’t know if you could quantify that opportunity or at least talk to how you’re anticipating that business ramping. Is it something that will build over time after July. Is it something that some of them are complying with, are you expect them to comply with prior to that date or how should we look at that.
James Herbert
There’s two sides of it, there’s the diagnostic or the testing side and then there’s the intervention side. It’s a little bit unknown as to who’s going to do the testing now. It is required as part of the regulation that every laying hen flock in the United States will have to be tested twice during their lifecycle and that’s never before been a regulation. Is that going to be, testing is going to be done by the company who owns the birds, or is it going to a third party lab and probably some of it will go in both directions. At this point we have the only test out there that is specific for salmonella and aridatives. Now we’ve got a number of competitors out there that have salmonella tests, but what the, in this particular case they’re not interested in general salmonella. They want to know if there is an infection of this one specie of salmonella. So its clearly, we’ve got some business going on there now. There’s clearly going to be some more business but I would say that the real testing is going to be done the day they have to start doing it. Some people are beginning to get, build some baseline information now but the ramifications are pretty serious. If you have a positive flock you have to do something with them and that means the do something with them is those eggs have to be diverted from chill eggs in the carton that bring the highest premium to breaker stock where they go to an egg breaker and they end up being pasteurized and as a part of the pasteurization or the drying process, they of course can kill the salmonella. But those eggs are worth less money. From the standpoint of the intervention side which is clearly a part of the things that we’ve been talking about that our Animal Safety division is up on, we’ve got disinfectants and cleaners that are going to be needed to take care of cleaning those houses. One of the things that spreads salmonella is rodents and flies and there’s also the contamination within the facility. We think we’ve got the best group of products to help clean those facilities when they get a positive facility and they depopulate that facility there’ll be more requirement than they’ve done in the past as far as clean up. There’s going to be more concern about taking care of rodents and there’s going to be more concern about flies. Now we don’t have a full line of fly products but we’ve got some fly products that’s doing pretty good. So we think that we’re set with the, all of the intervention products as well as the diagnostics that go there. But I suspect its going to be late warm weather, its going to be June or July before we begin to see a whole lot of activity there.
Operator
Your next question comes from the line of [Joseph Potman] – Wells Fargo [Joseph Potman] – Wells Fargo: Congratulations another great quarter. It kind of gets boring after a while you know, one great quarter, I know you’re were overworked but there’s no cash flow statement in there. I assume the cash flow in the quarter was about $19 million.
Richard Current
Well the cash flow for the six months was $16.5, for the quarter then would have been about $7.5. That’s cash flow from operations. [Joseph Potman] – Wells Fargo: So we are now sitting $32 million in cash and investments.
James Herbert
We spent some of that first of December. [Joseph Potman] – Wells Fargo: I wanted to ask you what was the cost of BioKits. I haven’t seen that in any of the—
James Herbert
You haven’t seen it because we haven’t said what it was. With the assumptions from debt it was $6.5 million. [Joseph Potman] – Wells Fargo: Did they take any stock in the deal or did they just want cash.
James Herbert
No, they wanted cash and we didn’t want, cash is cheap compared to equity today. So we wouldn’t have given any equity in the deal anyway. [Joseph Potman] – Wells Fargo: Keep up the good work, this is fabulous.
James Herbert
We’re sorry we got you bored. The alternative is to have a bad quarter so you could get excited and I don’t like that alternative. So I think we’ll just keep you bored.
Operator
Your next question is a follow-up from the line of Steven Crowley - Craig-Hallum Capital Steven Crowley - Craig-Hallum Capital: You were nice enough to give us some statistics on the number of food recalls in Q2 and Q1 of this year, might you have any comparative data for the year ago periods or maybe just a number for all of 2008.
Richard Current
I don’t say that definitively but I believe its true, we should be able to have that.
James Herbert
Can’t tell you off the top of our head but we have all of those, we catalogue those every day. Terry Maynard of our group puts out that report at the end of every day and puts them in a database so I’m sure we’ve got it. But its something that we can sure give you. Steven Crowley - Craig-Hallum Capital: I suffice its fair to say that the number has grown noticeably year over year.
James Herbert
Yes no question. Steven Crowley - Craig-Hallum Capital: I’ll look forward to the follow-up there now that we’ve sort of stumped you, I think you can put a bow on this and let everybody go home.
Operator
Your final question is a follow-up from the line of Stephen O'Neil - Hilliard Lyons Stephen O'Neil - Hilliard Lyons: I forgot to ask earlier, you mentioned some slowdown in sales of products requiring capital expenditures like Soleris and I would guess AccuPoint but given all the food recalls as you mentioned how is the micro organism testing business doing overall.
James Herbert
Its good, its still now where it needs to be. But maybe as early as next quarter I’m going to be able to give you some good positive information. Our problem there is that we’ve got in a couple of those pathogens, we’ve got tests that are as good as our competitors but their not distinctly better and one of the things that we really never learned how to do very good around here is sell by cutting price. And in order to get market share out there its been a pricing issue and we just have not had a product that was distinctly better than our competitors. I think we’re pretty close to that and when we get that all lined up and in a row, could be within the next quarter, I think we’ll begin to start to take back some of the business that we’ve lost or business that we hadn’t been able to gain because we didn’t have any distinct competitive advantage. Stephen O'Neil - Hilliard Lyons: I’ll be looking forward to that then.
Lon Bohannon
Let me just also say that relates to what we call the general micro area, we’re still seeing growth in terms of the disposable biosales. Where we’ve got instruments placed we’re doing very well and it continues to grow and there’s more opportunities and we can develop more products. Its been solely on the instrument side where the comparisons have hurt us compared to the instruments we’re replacing last year versus this year. And I already said we’re really are optimistic as we head into 2010 about being about to get that moving back in the positive direction because the pipeline is very significant there with identified names of prospects and actions that we think we can accomplish that will allow us to get those placements and then of course that will also further increase the sales of disposables. Stephen O'Neil - Hilliard Lyons: That’s a good point, thanks for making that distinction.
James Herbert
I think that’s, maybe we can put a bow on it and thank you to all of you who participated this morning. Thank you for the continued support that you have provided us from a shareholder standpoint and as I said when I left Mexico City last night, Feliz Navidad.