Neogen Corporation (NEOG) Q4 2013 Earnings Report, Transcript and Summary

Welcome to the Neogen Fourth Quarter Fiscal Year 2013 Year-end Results Conference Call. My name is Adrienne, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I'll now turn the call over to Jim Herbert. Jim Herbert, you may begin.

Thanks, Adrienne, and good morning, and welcome to our regular quarterly conference call for investors and analysts. Today, as Adrienne said, we will be reporting to you the results of our fourth quarter that ended on May 31 and, of course, also, the full fiscal year for the company. I'll remind you, to start with, 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 actual results may, in fact, differ from what we discuss today. 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, and our Form 10-K will soon be on file for this year at the SEC. In addition, to those of you who are joined today via this live telephone conference, I'd also welcome those who'll be joined by way of a simulcast on the World Wide Web. These comments, along with some exhibits, will be available on the web for approximately 90 days. Following comments this morning, we'll entertain questions from participants, who are joined by this live conference. And I'm joined today by Steve Quinlan, our Chief Financial Officer; Lon Bohannon, Neogen's current President; Steve Snyder, Neogen's President-elect, who will also be assuming the role of President, Chief Operating Officer at Lon's retirement at the end of August. And I suspect that most of you saw our press release a few weeks back when we announced Lon's pending retirement and the selection of Steve Snyder. Lon's decision to retire was not a surprise. As many of you know, Lon and I worked together for over 27 years in building the company. And Lon told me sometime back that he'd…

All right. Thanks, Jim. And welcome to everyone listening on the conference call, as well as those joining us via the Internet. Jim has already reported on the overall sales and profit performance for the 2013 fiscal year, and I'd like to echo his comments that we're very pleased overall with the results. The company's operating units generated increased momentum each quarter during the year, culminating in double-digit growth for each unit in the fourth quarter and double-digit organic growth for the company overall. In the next few minutes, I'll address some of the significant highlights for the record quarter and year. The Food Safety group delivered an outstanding fourth quarter with revenues up 20%; almost all of that growth was organic. Sales growth, similar to previous quarters in the year, was broad-based across almost all of our market segments. Overall, the Lansing-based diagnostic group grew revenues by 16% for the year, with the milling and grain group, the strongest performer, up 43% as a result of the aflatoxin outbreak in the fall 2012 harvest. Our international operations, which are primarily focused in the Food Safety area, were also strong in the fourth quarter, led by our Neogen Europe business unit, with sales up almost 40%. Part of that increase was due to the horse meat scandal, which began in late winter when it was discovered that significant amounts of ground beef going into the European market have been mixed with horse meat, an example of economic adulteration of food. Neogen has an easy-to-use field test for the detection of horse meat and also has an approved laboratory facility in Scotland and was able to capitalize on this opportunity. This incident has also resulted in speciation testing for other adulterants including pork and chicken. We believe that increased levels of…

Thanks, Steve, for those updates. And again, our thanks always to that group that makes it happen. As Steve pointed out, some of the great things that happened during the year, they seemed like there was always some excitement somewhere, some that came along that we hadn't quite expected and always turned out to be the positive and that can-do, will-do attitude certainly permeated throughout the year. And as we've expanded our product line and our geographic coverage, I think we've become more effective suppliers of solutions for both food and animal safety, as our mission states. And I think we'll be able to continue steadily developing those programs. Speaking of programs, I'm sure that some of you may be curious to know what's happened to the Food Safety Modernization Act. It was passed and signed into law by the President some 30 months ago, and the answer is not much. There were 7 major rules that comprise that Act, 2 of these have been published in draft form and were put out for comment. Now the comment period has been extended. I don't know -- our contacts in Washington say that surely we'll see these 2 rules make the rounds within the next 12 months and become law and begin to be enforced. There are 5 other major rules that are still remaining. I think it's interesting that a consumer group filed a lawsuit against the FDA for failure to act, and the federal court in the Northern District of California ruled a couple of weeks ago that FDA be required to publish those proposed rules -- on those 5 between now and the end of November and that the comment period on those 5 be held open until March of 2014 and that all 5 would be under…

Thank you, Jim. I appreciate that Jim has allowed me the opportunity to take a few minutes to make some general comments and, as he said, more importantly, give listeners my perspective on the bright future I see for Neogen. However, I do like to begin by commenting on our excellent 2013 fiscal year-end results. As Jim indicated, 5 years ago, we established a goal to double our annual sales from $100 million to $200 million. I know I'm going to sound like a broken record, but I am very proud of the efforts of Neogen's outstanding team of over 800 employees, who made it possible to achieve this important milestone. And I do want to congratulate them for their efforts to make a 5-year plan to double sales a reality. I think Jim has also accurately described some of the thought process surrounding my pending retirement from Neogen. While I'm definitely going to miss the employee relationships, the excitement and the success that I've been lucky to be a part of at Neogen, it is true that I'm looking forward to working more closely with family on some new business adventures. I also want to take a brief moment to thank the analysts and listeners -- or investors, excuse me -- the analysts and investors listening in on this call, who I've had the good fortune to work with for quite a long time now and who have supported our efforts to build Neogen into a world leader in the development and marketing of solutions for food and animal safety. And that brings me to the most important part of my comments, which is to describe a few of the reasons why I continue to believe Neogen has a very bright future for many years to come. A lot…

[Operator Instructions] And we have Steven Crowley from Craig-Hallum on-line with a question.

Now in terms of some of the drivers to your business looking forward, Jim, you mentioned some new products that were coming to market as we speak, and we're on the near-term horizon, but there's also the product seeds like ANSR that you planted in the last year or so. Could we maybe talk about some of the new stuff that you're hoping to get rolling over the next year and then some of the stuff that should be sparks and real contributors to the financial performance this year that may be launched over the last year or 2?

Yes. And of course, as you know, Steve, research and development doesn't know corporate calendars, as far as success is concerned. A lot of what we are doing now and have done is a bit invisible in the marketplace, as some of it is improvements of existing product to make them faster, to make them better, to make them less expensive for the end user. And so those continue to find their way out. In the pathogen area, which is where we've now got 3 platforms that are aimed, we talk about ANSR, and it's coming along just about where we expected it to be based on our overall plans, but we've also got our Reveal product line. It's really a great product that's out there that's a lateral flow device that is based on antibodies. It detects the presence or absence of a number of pathogenic organisms. And then we've got our earlier product line that came over from the acquisition of GeneSeek products back -- sometime back. But I think we've going to see pathogen detection continue to grow. We're all waiting to see what's going to happen with the FSMA rules. I think there's going to be some need -- or basis for validating FSMA rules. We think some of those are going to be based on -- go back, maybe look at just generic E. coli, whether E. coli is present in a food system or not. So that's -- I think we're pretty well positioned for that. Our Soleris vials, I think Steve said that our Soleris product line of the centris format was down a little bit in instrument sales in the fourth quarter. There's really nothing to be concerned about there. It's just how these things happen to fall. But those are all…

And in terms of your progress with the company in doubling sales over the last 5 years, is there another one of those goals to double again in the next 5 years, or putting a dollar number on the long-term objective of the company? Or is that really just implied by a continuation of the kind of growth we've seen in the last 5 or 10 years continuing in the next 5 or 10 years?

Well, I think you just won the lottery. We had a question going around here earlier how long before somebody asks what we're going to do in the next 5 years because what we did in the last 5 is now history, and we understand that. We think we probably can do that. We've got a little work to do as to decide exactly how we're going to get there. I think we got there the last time by having a good plan, thinking it out, knowing where we were going. There were a few curves in the road that we didn't anticipate. But I think that -- I think we got another doubling left in us, Steve. And we're going to be looking at how we put that together here over the next few months.

And we have Tony Brenner from Roth Capital Partners on-line with a question.

A couple of things. Gross margins were up year-over-year in the quarter, but sequentially, they were almost 300 basis points lower than in the first 9 months of the year. What is that attributable to?

Tony, this is Steve. In the fourth quarter, GeneSeek had a couple of very large projects, which were lower gross margin products -- projects. And that really drove -- that was the biggest driver of the lower gross margin in the quarter. Another part was -- we talked about rodenticides being up 20% in the first 3 quarters. And with that growth slowing, it was up about 5% in the fourth quarter. It was really the mix there. The weakening of that growth caused the margins to decline a little bit in the...

And the risk factors?

Yes, on the GeneSeek side, remember that we play with gross margins that are less than what we look at in others, but our operating costs are also considerably less than some of the other product lines.

I understand. Are those factors carrying over into the new year as well?

No. I think -- the GeneSeek project is basically completed. It might be running over a little bit into June's numbers, but for all intents and purposes, that wasn't done. And the mix between cleaners and disinfectants and rodenticides in the Hacco business, it's always changing. So I can't really answer that until we get further along in the quarter. But there should be no significant long-term degradation of that margin.

Okay. Lon, you mentioned that Mexico was up 68% in the fourth quarter. It was up, as I recall, 30% in the third quarter. And it's up 12% for the year. I don't recall during the first half any discussion about how weak Mexico was. I'm wondering why those disparate results for the full year.

Well, we did have some one-time sales in the prior year in the first 6 months, particularly in the area of some of the animal safety products that did not repeat. We knew they were one-time sales, large orders for stocking, inventory and also then a transfer [indiscernible] order that was very large that went to, at the time, Pfizer and stuff. So those were just things we had to overcome. The Food Safety was the big driver of the revenue growth. They were -- that continued to grow in the first 2 quarters, and then once we got past those ugly comparisons in the first 6 months, the second half of the year was very strong for Mexico. We anticipate ongoing solid growth there. Occasionally, when you're small or operational like that, you're more impacted sometimes in quarter-to-quarter comparisons for those one-time kinds of sales.

Could you discuss what sales in China was for the year, or what kind of increase there was?

Virtually flat, Tony, slightly down there, about $2.3 million in fiscal '13. And part of that is, there'll be -- it's some of the Soleris order timing. You might get -- we had significant number of units in fiscal '12 that weren't repeated in '13.

That's another area where, because of government tenders and things that occur, we have some sales that sometimes can occur in one year and not the next year. We've had that occur, I know, for AccuPoint test systems. But overall, we continue to make progress in terms of growing our business there. But again, when you've got relatively small level of sales, you can be impacted from quarter-to-quarter on those kinds of comparisons.

Last question. Your cash position is built up pretty significantly to a point where it seems unlikely that you're going to require that amount of cash or anything close to it for acquisitions, and you're generating enough cash for your CapEx program. So I wonder what other uses for cash are being considered.

Well, we've got some pretty spectacular plans on what might be available for us, Tony, but I probably shouldn't say much more on that.

That's a good non-answer answer.

I know what the rest of that question is, so -- no, we fully understand that we've got a lot of cash built-up that we need to put to use. It's the worst time in macro here to have a lot of cash laying around as far as the value of the cash is concerned. And we've got an extremely good line of credit at very low rates. And we need to be using those assets that are available to us. We've done 24 good acquisitions in -- since the year 2000, and there's some good opportunities out there, but I think our model works and we don't want to be tempted away from that model. So we're still actively looking in the acquisition area. We've got -- I can tell you that we have several on our radar screen now. We do not have any active fully-developed letters of intent in place. But we've got some opportunities that would fit well and be synergistic to our current businesses, so -- and again, as I said in the very beginning, we might do 3 or 4, who knows, we might not be able to get any of them done, so -- but we have high hopes of continuing to add some significant growth through acquisitions.

And we have Jason Rogers from Great Lakes Review on-line with a question.

Could you provide the FX impact on sales and operating profit for the quarter and the year?

Sure. If we look at last year's rates and this year's volumes, the effect on the revenue would have been lower by $1.7 million and operating income would have been lower by $900,000.

That's the quarter?

No, I'm sorry, that was for the year. Did you want the quarter as well?

If you have it.

Sure. The revenue is $325,000 decline, and operating income, $73,000 lower.

And then, do you have the cash flow from operations either the quarter or the year?

We do. For the quarter, it's $6.9 million. And so that would make the year's $26.6 million.

Okay. And then, would you be able to provide your CapEx plans for fiscal '14?

We don't really talk much about that. I mean, this year, we spent about $8.9 million. And remember, we -- that included the purchase of a building in Scotland for about $1.5 million. So we don't really talk about it, but the level is probably going to be similar.

And we have Michael Castor from Sio Capital on-line with a question.

Great. A couple of questions for Steve. First, can you provide some color on the expected tax rate for next year?

Well, that's always interesting. I think we'll probably going to be somewhere in the 35.5%, maybe 36%. The more states that we do business that are claiming nexus on dragging us in increases that rate. But if you noticed, this year, our rate was a little bit lower, but actually, when we compare it to last year's rate, remember we took a -- we had a pickup of about $0.5 million in last year's fourth quarter for a tax reversal. We were under audit in 2012 and had set aside some money, and actually the results of the audit were favorable, so we took that -- we reversed that, took it to income. This year, the rates are a little bit lower than the 35.5%. Some of our R&D credits were larger than they had been in prior years. And then [indiscernible]

So the 35.5% rate, is that a sort of a stable rate that you anticipate going forward?

That's probably a good approximation.

Second question was, minority interest actually contributed about $150,000 this year, $125,000 last year. Give an outlook for minority interest over time?

That minority interest is actually a -- that's an operating loss by the minority. We actually have -- our Brazil and Mexico subsidiaries have small positions in the company. Their operating losses are added back to our net income to basically give the income that's attributable to Neogen. So those are small losses. I would expect that probably somewhere in the same range going forward.

And the last question was on other income. I think it was roughly $300,000 or so this year, again, can speak to some of the components and your expectations for coming years?

Other income is usually a mishmash of numbers. The pieces -- we have some currency loss in there, and -- about $170,000. We pay some royalties -- I'm sorry, we received royalty income, and that was about $360,000 of income. And then we recognized some change in some of the secondary obligations that we -- in some of the acquisitions that we do. So that's pretty nominal amounts there. We don't plan for currency amounts each year. I can't really give you a number. It's -- I think going forward, royalty will probably still be there, maybe a couple hundred thousand of royalties. But anything else is really just a mishmash of numbers.

And we have Joseph Pattman [ph] on-line with a question.

Jim, that raises another consideration, and that's, if Lon feels that taking the world tour is a worthwhile endeavor, are you satisfied that you've pretty much seen all of what you need to see? Or are you thinking about gracefully exiting?

No, I'm going to stay around. I've told them that when I start, somebody will have to catch me and if I start slobbering out of both the corners of my mouth, well roll me off somewhere and get me out of the way. But until then I'm having fun. And I think I'm being useful. And there's 3 or 4 people who've got keys to tell me whether I'm useful or not, and I think they'll usually apply them justly. So no, I'm having fun, Joe. And my health is good. And I expect to stay around. I got to get Steve Snyder off on the right foot. I mean, Lon's going to get him oriented but I got to train him to sort of start finishing my sentences up. Lon could always -- when I'd slow up, he could finish the last half of my sentences when I got into a southern drawl, and Steve's going to learn how to do the same thing. I will be around a while.

And we have no further questions. Mr. Jim Herbert, do you have any closing remarks?

I sure do. And as Joe Pattman [ph] indicated, please don't forget that tomorrow, that Thursday afternoon, is our annual barbecue for investors, analysts and friends. And it's -- if you didn't get an invitation, it was -- something happened to the mail or whatever, you're -- please consider yourself invited. To get the details and particulars, well call off this number and talk to Terry Maynard. He can give you all the details, starts tomorrow afternoon. Thank you for -- excuse me, not tomorrow. Joe, you got me messed up. That's Thursday afternoon. And to all of you, thank you for your continued support. It's been a great year, and we're off to start another new one. So we'll look forward to talking to you as we end the next quarter. Good day, and thank you, Adrienne.

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