Welcome to the Neogen First Quarter Fiscal Year 2016 Earnings Results Conference Call. My name is Eric, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will not turn the call over to Jim Herbert. Mr. Herbert, you may begin.

Thank you, Eric, and good morning to all of you, and welcome to our regular quarterly conference call. Today, as Eric stated, we'll be reporting to you the results of the first quarter of our 2016 fiscal year, that quarter ended on August 31. I'll remind you that some of the statements that are made here today could be termed as forward-looking statements, and these forward-looking statements of course are subject to certain risks and uncertainties, and actual results may differ from those that we discuss today. And the risks that are associated with our business are covered in part in the company's Form 10-K, as just recently filed with the Securities and Exchange Commission. So, in addition to those of you who are joining us by this live conference, I'd welcome those who maybe join later by way of the simulcast on the World Wide Web. And following comments this morning, we'll entertain questions from participants, who are joined by this live conference. And I'm joined today by, Rick Calk, Neogen's Chief Operating Officer; and Steve Quinlan, Neogen's Chief Financial Officer. Earlier today, Neogen issued a press release announcing the results of its first quarter that ended on the 31 of August. Revenues were approximately 74.9 million, that's an increase of 11%, compared then to last year's first quarter revenues that were approximately 67.6 million. The net income for the first quarter increased to approximately 9.3 million, that's a 5% increase compared to the year earlier. This equates to $0.25 a share, as compared to $0.24 last year. Both the revenue and the net income figure represents first quarter records for our now 33-year-old company. This quarter too, we continue to take pride in pointing out that this quarter, which is the 94th quarter in the past 99 quarters…

Well, thank you 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 first quarter of our 2016 fiscal year. And our press release issued earlier today provided additional details related to our quarterly results. But I'd like to try to provide a bit more detail on the quarter's performance. As mentioned in our press release, we continue to see double-digit growth in two of our most important product lines, our rapid diagnostic test for mycotoxins and our test for food allergens. In both cases, we were innovators in developing the first rapid tests for these contaminants many years ago, and we continue to earn new business with each of these product lines. Sales of our rapid test for mycotoxins, which we first launched 30 years ago, increased 12% in the quarter with increases in sales of test kits for each of the six major mycotoxins. This increase came despite the fact there were no major mycotoxin outbreaks anywhere in the world. Sales of our rapid test for food allergens, which we first launched 17 years ago, increased 17% in the quarter with increases in sales of test kits for 11 of the 12 food allergens, for which we market tests. These increases were led by our test for gluten, peanuts, and soy, and then bolstered with our new Reveal test for multiple tree nuts. In both cases, we've made numerous product improvements over the years to keep a step ahead of competition, and now offer the worldwide food and feed industries the best test kits available. I'm highlighting these product lines because their increases were not the result of major new product developments as you see with…

Thanks, Rick. Let me call on Steve Quinlan to talk a little bit about the financial side of what's happening, in particular, our food and animal safety splits, more on the currency problems that we faced. And then in particular, some of the particular financial highlights of the quarter. Steve?

Thanks, Jim. The first quarter of fiscal 2016 was indeed a mixed bag, with some solid underlying growth offset by the considerable currency headwinds we encountered during the quarter, which continue the trend that began in the second half of last year. All the currencies we operate in have declined against the dollar, compared to the same period in the prior year. The Euro was down 18% on average compared to last year's first quarter. The real was down 32% for the comparative quarters. Peso was 18% lower, and the pound sterling was down 8% on average. The negative impact of the stronger dollar on our comparative revenues for the quarter was $2.2 million, and as Jim mentioned, about $0.02 on the bottom line. In constant currency, our growth would have been 14%, versus the 11% reported. And reported organic growth of 9% would have been 12%. Food Safety had a solid start to the year with overall revenues of $34.5 million, growth of 11%; Rick has already mentioned the growth in natural toxin and allergen product lines in this segment for the quarter. Our line of optical microbial test systems, which are used to detect spoilage organisms such as yeast and molds recorded strong gains aided by 1.3 million in revenues from the BioLumix product line, which we purchased in October of 2014. Consumable vial sales from our existing Soleris product line grows a strong 24%; sales of AccuPoint samplers and readers used to monitor environmental sanitation grows 12% in the quarter as we launched our next generation system. Revenues for our line of our test kits to detect the presence of antibiotics in milk declined by 12%. Now, these products are primarily sold in Europe, and although volume rose slightly, the decrease in the value of the Euro…

Yes, thanks Steve. And as Steve pointed out in cash, we did go through acquisitions in the quarter. I mentioned that in my opening comments. And these acquisitions both were strategic. Actually we had three, but they were strategic in nature and have been part of our ongoing planning process. One of the highlights was the acquisition of the Sterling House operation, which gave us the opportunity to officially plant a Neogen flag in India. This operation is on the southwest coast of India in Cochin, in the state of Kerala. The company has 25-year history of providing exceptional food safety testing services, perfectly aligned with our goal of establishing a strong presence in India. This is India's leading region for exporters, spices, and tea, along with some fresh fruits, and vegetables, and some seafood. Now, we have now 40 employees in this Indian operation that are expanding the testing business to act also as the distribution point per Neogen's many food safety diagnostic tests no long with our above security cleaners and disinfectants that we haven't had, and didn't have our market presence in before. Now some patience will continue to be required in dealing with that economy. We think that we will see some solid steady growth on a month-to-month basis going forward. So not of the same scope, we did officially form Neogen Canada during the quarter to give ourselves the Canadian-based corporation to deal with several issues, including quarantines related to the movement of animal test material back and forth across the border. Of course, Canada has always been our single largest export country, and continues to grow nicely. In many ways, we treat it like another state. The other international acquisition took place right at the end of the quarter, and as our Neogen Europe…

Thank you. [Operator Instructions] And our first question comes from Paul Knight from Janney Montgomery Scott. Paul, please go ahead.

Hi, guys. This is actually Bill March on for Paul Knight. How are you doing?

Good.

First question, could you guys speak to the GeneSeek partnership with Illumina, how is that progressing, and then specifically, have you guys seen an uptick in penetration or interest in international markets?

Yes. It's really just beginning to get some traction. For those that might not be totally aware of the question, we developed -- within the animal genomics business, there is the pure testing business in which you run samples and you're able to pick out snips and you get lots of As, and Bs, and Xs, and somebody takes those and then put them through a bioinformatics program, and says, this means that this animal is going to give more milk or raise healthier calves or whatever the story might be. And we developed -- of course we're Illumina's -- probably their biggest agricultural customer, as far as their equipment in testing chips are concerned. We've developed our own bioinformatics that, and particularly into the cattle business, and had a number of people that were using or like to use the bioinformatics that we developed, which was okay with us because it was outside our reach, a lot of that was in the international market. So we made an agreement with Illumina that they could sell our bioinformatic, if you will, with as a part of their chip, and they pay us a fee for all that they sell there. It's not strictly a royalty program, but it's kind of similar to a royalty program. That's been helpful to us because the people around the world we currently do business with, 11 of the beef breed associations, which is I think all, but one in the U.S., and their programs are all kind of based on our bioinformatic products, so that helps establish us in the future and at the same time has helped Illumina with their sales of, what they really like to sell is chips and instruments has helped them going forward. So it's a little early to tell. I checked to see if we had any real numbers. We did last year sell whole chip. We sold a chip for $100. We recorded the $100 at the top line and whatever profits at the bottom line. In some of these programs this year, however, we don't record the whole sale; we just record the margin between what the chip would have cost and what Illumina sells it for. And that's not all completely tidied up yet. I don't know whether Steve has a better answer to that or not, but it appears like it's going to be successful. We get a lot of good uptake on it. But I don't think this had any impact on our revenue at this point. Steve, is that roughly…

I think that's a fair statement.

Yes. That was a long answer to a short question.

No worries. And then secondly, could you maybe just speak to your strategy in China, and what you guys are seeing over there?

Yes. We are feeling good about China. We have readjusted our strategy two or three different times, and we've got a good operation headquartered with offices both in Shanghai and Beijing. We are doing business in China with a number of products on our animal safety and food safety side, and a big part of our focus now is not to try to compete with the Chinese companies that may be making diagnostic products, and as you would expect, there are a number of those that have the Chinese version of a mycotoxin test kit. We think that ours are obviously better, but we focused on the major companies that have a real franchise to protect in the marketplace. There are a number of Western companies who actually by invitation of China, are producing animal proteins. Tyson Foods, the largest meat producer here is also a major producer of chickens in China. Cargill is a major chicken producer in China. We've got several dairy companies there. The three largest dairy businesses in china are Chinese companies, and we have a close working relationship with them as they look at various diagnostic tests as well as other products. So, our focus is not then to play down in the lower level and try to compete with the Chinese companies that are apt to be able to offer something cheaper, but to make sure that we continue to maintain our quality program in working with those people who can afford to pay a little bit higher price for what we are doing. Your first question about genomics is certain, it comes into play there. We will do [technical difficulty] more than $1 million this year in samples coming from the China dairy business. Three or four companies are building large dairy operations in Inner Mongolia with milk in the 10,000 cows or better in the farming operation, and one of their big challenges is to save the right replacement heifers to grow that business. So we are seeing a hair pulled from the tail of a week-old heifer calf find its way to Lincoln, Nebraska. And a week to 10 days later, we send the result back and tell them which ones of those calves are going to make the best replacements to go into that milking herd a year and two years out. So China and India both with a strong growth in their middleclass, and a strong disposable income in the middleclass makes it just perfect places for us to be, and we're excited to be there with our own feet on the ground.

Great. And then just one quick one, lastly, if you could just speak about the long-term strategy around the e-commerce platform and whether that's already contributing a meaningful percentage to the sales. And I'll jump in the queue. Thanks for your time.

It is meaningful. I ought to have the numbers off the top my head. I'm looking across the table at Mr. Quinlan. He's got -- his memory is as short as mine this morning, but our food safety guys are really -- where we are dealing direct with the end-users have really seen nice growth. Ed Bradley is in the room with me. What are we seeing there, Ed?

About 10% of our business on the food safety side comes through e-commerce.

Yes. So, Ed reports that 10% of the revenues on the food safety side, this would be most primarily our diagnostic business, come through e-commerce, which is up from nothing two years ago. So that's nice growth. And it fits that tier of customers who know exactly what they want. They're going to order 10 kits of this, and five kits of that, and they're going to do it on a monthly basis. They can do that through e-commerce. They don't have to worry about chasing invoices and all the other things that go with it. So we're seeing nice growth there. We're seeing some growth over on the animal safety side, but that's a different business there. There we are dealing with -- whereas on the food safety side, something three times the size of a cigar box is a normal shipment. We're talking about pallets or part truckloads when we get to the animal safety side. So they are doing some things there that fit, and we will continue to grow that business. But it will not be as big probably ever on the animal or won't be as big on the animal safety side, because a lot of those products require warehouses and trucks, and UPS doesn't deliver it to the end-user's door.

And our next question comes from Brian Weinstein from William Blair. Brian, please go ahead.

Thanks for taking my question. I was hoping we could talk a little bit more about FSMA. I'm just trying to understand, with everything that you guys have going on, obviously you cited [ph] rather with the EU, China, India and the FDA and everything going on in these respective areas. How should we think about longer-term growth [ph] rates here? Do you expect growth overall will accelerate for the company over the next 12, 24 months? And if so, can you give us any idea about quantifying any of that, and any idea of when we'd really see any inflection from any of this? Thanks.

Yes, thanks, Brian. That's a great question, thank you. We talk about all the great things that's happening, but really nothing has happened. Other than we finally got regulations, and we finally got them in print, and we warned the industry that they're fixing to have to start complying. But the two regulations that went into effect at the end of August 31st, they don't become compulsory for large producers for, I think, Rick, it's a year from then, so it's next August. And for the smaller guys, it's two years away. So they won't have to be fully compliant. Now, people are already aware of those regulations. And the industry is very responsible, and they are working already toward making sure that they're compliant. But that's the very first two of the seven, that won't really take effect; some of them for a period of two years away. So I guess in some ways that's good, because it's not like the floodgates got opened. We'll be able to adjust that business as it goes. These last two that went into -- that are actually announced. I don't think those regulations actually even get on the books until, like next spring it's going to be important. Then after that it's a year or better before you have to be fully compliant and subject to penalties if you don't comply. So they're taking place, the seven, slowly over time. And that will be good for us.

Okay. And then on GeneSeek, we're very bullish on what you guys are doing there, but it looks like it was down sequentially for the second straight quarter. Is there anything going on, is there emerging competitive dynamics there, or is there something with the changing business model with Illumina where you used to sell the chip, but now you're getting a royalty? Anything you could talk about the sequential situation there? Thank you.

Yes, I'm trying to think back two quarters. I'm trying to remember -- some of this business comes in chunks. Our guys say it's kind of a chunky kind of a business. We'll get a big order -- we'll get several 100,000 or several 1000 samples coming out in New Zealand or Australia that will -- and then they get all booked together, and they come in on one particular month, this year. And maybe we don't see them again the same time next year or may be not quite as many. I don't think -- Steve, that -- I think we showed a little bit of a decrease this year. And a part of that was chips. We sold a fair number of chips last year in that first quarter. And this year, we didn't have any chip sales to speak of. A big part of that was in Europe, at Neogen Europe. We are redoing or strengthening, I should say, our program for genomics in Europe. We're in the process of establishing a little Lincoln, if you will, in Ayr, Scotland. We've already been working with that industry. We extract the DNA there, and send extracted DNA, instead of actual samples, to Lincoln now, that for the most part. But we're putting in our own Illumina system there, which will be operational somewhere in the December time frame. So that we can take care of stuff coming out of the U.K. right there in the U.K. That fits in -- got good business over there in the canine business, as it relates to canine breeding registry. Got good business over there as it relates to the cattle business and some strong business swine genomics. So that will help us grow, what we're doing. It'll also take a little pressure off of Lincoln. We're in the process, so we just moved into that facility a year ago. And we are now in the process of expanding it already to give ourself more lab space. So that will help as to what we're doing there. I'm not sure, may be Steve can help offline, Brian, to tell you where those number come from. But I certainly don't see any weakness in what's happening.

Great. I appreciate that. Lastly, on rodenticides, can you talk just how big that specifically is? I know it's classified within an area with rodenticides, insecticides and disinfectants, but specifically, how big is rodenticides? You called it out with big growth this quarter. And any thoughts on the update with your partner SenesTech? That's it for me. Thanks.

I think Steve can tell you the rodenticide number. That business is growing. It's pushed our Randolph, Wisconsin plant to -- I think we're still taking off Sundays out there, but I think we're working 16-6 now to keep up with what's happening. Of course, as we move into fall, that's a heavy rodenticide time. That's the time that little mice and rats start trying to find a warmer place to live, and they move inside our barns and chicken houses, so on. So our pressure -- we've been building opportunity to build some inventory during the summer, but we will continue to be strong as we move through Neogen's second quarter. Have you got the --

Our revenues for rodenticides are annualized out at about 20 million-21 million.

What was the question?

And our next question comes from Kurt Kemper from Hilliard Lyons. Kurt, please go ahead.

I just have a quick one for Steve. Could you give an estimate for the incremental revenue added this quarter from Sterling Test House and Lab M?

Lab M, we purchased right at the last day of August, so there is nothing from Lab M. That will be a going forward type thing. Sterling Test House, that's about half a million -- $550,000 piece of business, so quarterly revenues somewhere in the 165,000 for this quarter. It's going to be a minor contributor initially. It's going to pick up strength as we move forward.

Okay. And then at the last end of last quarter, you announced that there were about four targets, and with Lab M, does that leave three still out there? That could be -- you are right. I think one of those we announced is no longer there, but I think we replaced it. Now, we still got some interesting acquisitions. They tend to be kind of strategic in nature like these two were that we just did. They're bolt-ons to what we we're already doing. But they clearly fit in our program of making sure we understand the business. We know how to make the product, and we have access to the market. So I feel good about it. And Steve has kept enough cash put aside for us, so we got enough money to make those acquisitions. So I feel good about where we are. I don't know what to tell you about currency translations, but -- I don't know that any of us will know how to model that. Okay. Thanks for taking my questions. That's all I have.

You bet.

[Operator instructions] And our next question comes from Charles Huff from Craig-Hallum. Charles, please go ahead.

Hi, thanks for taking my questions. I have a question for you on GeneSeek. So the market growth has been very strong. I think you sometimes break out the volume growth number. Did you give that? If you did, I missed it, I'm sorry.

Charles, we did not the break out the volume number there.

Okay.

I'll get back to you offline.

Okay, sure. And then I just wanted to ask you about the volume and the pricing. Some of the end-users, some of the smaller have for farmers and stuff have told us that the panel pricing has come down quite a bit, and they just had to adopt this technology. I guess it's about $200 five years ago. Now it's come down to around 45 bucks for some of the panels that they are using. I'm wondering do you think that pricing is kind of stabilizing here, or do you think it may still fall further? I know with all technologies, as you improve you tend to lose it on price. Do you think there is some offsets on mix and may be some additional panels that may start to be used that you are not seeing today that are used in a widespread way? Any color there would be helpful, thank you.

Well, it's really all a matter of economics. The number is probably a little less than even those that you quoted, the heifer replacement programs now are in the 20s and $30 range. So that's certainly a reasonable number to look at. They've got to be influenced by technologies of how much the markets worth, it's easy-easy in the dairy business. And so far it's been easy in the beef cattle business though beef prices are the highest they've been in almost forever. But when one stops to think about picking the right beef heifer replacement programs is an example that I can take the -- the cows is going to bring me eight or 10 calves versus three or four calves. And those calves are going to worth 50 pounds more its stamina. They go to market and then one that I might pick is their own kind. It doesn't take very long for those numbers to pick up and get added. There are some temporary influences when we see milk prices fall or when we see cattle prices fall, but those shouldn't have any long-term effect. Talking all around it, we brought calves down. We brought calves down to try to maintain the same kind of gross margins. I think we are about to bring in calves down now. One of the big parts of genomics is not to run into the samples, but extraction of the DNA. And that's a matter of time to automate how do you take the tail hair of a little calf that got shipped halfway around the world and extract the DNA out of that? But any kind of labor saving device is pretty tough. But I think we are going to see based on today's dollars those numbers and for that side of the market in the $20-$30 place. By the same token now, the big bucks are over on the poultry side. We do a lot of stuff for the poultry industry. That's much more proprietary. We do a lot of stuff for the pork industry. We do a lot of stuff for the artificial insemination companies, the AI companies. And they can pay $200 to decide which is the best bull to keep. So there is a lot more genomic opportunities on the upper end of that model too. So it's going to be good. And I think we are going to be able to maintain the same kind of profit from operations that we set going forward. And that's I think the best guide for us.

Okay. And then just to understand that a little bit more, because I don't know how your GeneSeek business is divvied up between heifers and bulls and poultry. Is poultry a pretty small piece of the business today?

Oh it's probably -- what, 15%, Steve, would that be about right? I think somewhere in the 10-15% range in terms of revenues.

Yes. Okay, great. Thank you. And then last question for Rick Calk, Tyson made an announcement Rick that they were eliminating all antibiotics in poultry by 2017. That's a pretty aggressive target by industry standards. I'm just trying to understand the materiality of a change like that as others continue to adapt this antibiotic programs, I mean how material could this be for your business?

Well, I think it's going to be a strong opportunity for us, because we are a company, who as you've heard us say many times works from behind the farm gate all the way to the dinner plate. So, a company like Tyson, who is interested in protecting their brand while trying to implement something like rates without antibiotics is the perfect partner for us as we look at what we do on a regular basis. So as I spoke the ability to bring the bio-security piece all the way back to the hatcheries and looking at whether it's cleansers, disinfectants, and then that ability to continue on, and look at the actual animal feed with our mycotoxin test etcetera, I think positions us well going forward with these large-branded multinational companies, because we have set our businesses up to be able to support them worldwide.

I think to add my two cents. I think somehow you've got Donnie Smith's quote a little bit misquoted. They are of course friends of ours, what President of Tyson said was about '17, they are going to cease use of any antibiotics that might also be used in human medicine to treat humans. So that mean that they are going to be able to get rid of all antibiotics as -- there is going to be a market for raised without antibiotics that's going to be a premium market. But there is no way you can raise an animal -- chickens even now rolling, you've got to keep them alive 42 to 48 days. Pigs, you got to keep them alive a lot longer. You got to be able to treat sick animals. So no, there will never be a time come that there won't be some meat, milk, and eggs out there that will be from animals that have been treated by antibiotics. The big concern that Tyson, and probably the right one is to make sure that we are not using Penicillin and Tetromycin and kind of products that we use on the human side that we are not using those products as a part of antibiotic program in animals.

Okay, great. Thanks, guys. And I appreciate the clarification, Jim.

You bet.

And we have no further questions at this time. So I'd like to turn the call back over to Mr. Herbert for closing remarks.

Okay. Well, I came into this room this morning saying I'm going to abide by the old quote of Henry Ford, who said way back somewhere when he announced things that the market didn't like. He said, I won't explain, I won't complain, but I can't quite do that. I noticed, and I sort of prophesied our group that somebody would pick up the headline this morning after we announced our results that Neogen disappoints analyst expectations. I don't think that was quite that strong, but I would point out that we announced $0.25 a share a year ago and $0.26 -- we announced $0.25 and the market goes -- analysts were expecting $0.26. That was $0.02 that got lost, as I say, got robbed in currency conversions would have put us at $0.27, which would have exceeded analyst's expectations. On the top line that we recorded 74.9 million, which is almost $75 million, and as those pointed out analysts expecting 76 million, but we lost 2.2 million there in currency conversions, which would have again put us to 77 million, which would have been ahead of analyst's expectations. So in that text, nothing away from the analysts, there is no way an analyst go to figure that how to put in their model that the Brazilian Real was going to climb up 32%, or the Mexican Peso was going to be down by 18%, or the Euro was going to be down by 18%. So we have to play the hand that's dealt us. We are working diligently to do what we can to hedge currency. We think that the dollar is going to be continued to be strong as compared to foreign currency, as we look out for the rest of the year, and we're doing what hedging we can when the timing appears appropriate. But that's one of the things that we can't tell you what we expect that the revenue is going to be and what we expect the bottom line is going to be so long as we can work in native currencies. We're not very good at predicting what the dollar is going to be, compared to some of these others. Your company is just as strong as it ever was, and I feel good about the quarter that we just finished. Thank you, all. I'd be remiss if I didn't remind you that the annual meeting of the company will be held here in Lansing on October the 1st. We look of course to see you in person, but you can't be here, and you are holding proxies related to voting at that annual meeting, well, please get them in, so we can make sure we get them recorded. And thank you again for joining us today, and thank you for your continued support of the company. Good day.

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