Hello, and welcome to the Neogen Second Quarter Fiscal 2017 Earnings Results Conference Call. My name is Jason and I will be your operator. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and please note this conference is being recorded. I will now turn the call over to Jim Herbert. Mr. Herbert, you may begin.

Thank you. And good morning, and welcome to our regular quarterly conference call slated for investors and analysts. Today as stated we'll be reporting to you the results of our second quarter that ended on November the 30th. And I'll remind you that some of the statements made here today could be termed as forward-looking statements and these forward-looking statements of course are subject to certain risk and uncertainties. Our actual results may differ from those that we discuss today. These risks that are associated with our business are covered in part in the company's Form 10-K as filed with the Securities and Exchange Commission. In addition to those of you who are joining us by live conference, I'll also welcome those who may be joined by way of simulcast on the worldwide web. Following comments this morning, we will 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. Some of you may remember Rick Current was with us for a lot of years and sometimes I mispronounce the names. Earlier this morning, Neogen issued a press release announcing the results of our second quarter that ended on November the 30th. Net income for the second quarter of this 2017 fiscal year increased 23% to a $11.2 million or $0.29 per full diluted share. This is an increase from last years approximate $9 million that equated to $0.24 per share. Current year-to-date income for the first six months is approximately $21 million or $0.55 per share. This compares to last years $18.4 million or $0.49 a share. Revenues for the second quarter increased by 14% to $90.7 million. This compares with the previous years second quarter revenues of $79.6 million.…

Thank you, Jim. And welcome to everyone who is listening. Jim's already reported on the overall sales and the profit performance for the second quarter of our 2017 fiscal year. What I'd like to do is provide a little more detail on the performance of our Food and Animal safety segments, as well as offer some perspective behind the numbers. As stated in the press release, revenues of our Food Safety segment increased 9% during the second quarter compared to the prior-year, aided in part by the acquisition of Deoxi, which reports through our Neogen do Brasil subsidiary. Organic growth for the Food Safety segment was 8% for the quarter. Food Safety highlights for the quarter include a 27% increase in sales of our rapid test to detect natural toxins. This increase was largely due to the increase sales of tests to detect the mycotoxins DON and zearalenone in grain and that includes both wheat and corn grown in the US, Canada and Europe. Zearalenone is one of the lesser-known toxins, but still one of the six mycotoxins of most concern to grain producers and processors. It’s important to note that Neogen offers test kits for each of those six mycotoxins. In a twist, the size of this year's record North American corn harvest is thought to have contributed to the growth of molds that produce these mycotoxins. The exceptionally large harvest is forced producers to temporarily store ground - store grain on the ground outside of their normal storage facilities and do their best to protect the corn with tarps and other means. Unfortunately, molds can thrive in these conditions. Sales of Neogen’s rapid test for food allergens, such as milk, such as gluten increased 20% in the quarter compared to the prior-year. Consumers and regulators around the world…

Thanks, Rick. I'll turn the program over to Steve Quinlan and get Steve to give us some color behind the financials. Steve talked a bit about the currency conversion issues and discussed our international growth and maybe something on the genomic side of the business.

Sure, Jim. Thanks. As Jim and Rick have both indicated the second quarter of fiscal 2017 was solid in most respects, with strong earnings growth achieved despite the continued currency headwinds we've had to overcome, particularly as they relate to the pound Sterling and the Mexican peso relative to the US dollar. The pound has declined 17% on average, compared to last years second quarter, with most of that movement following the Brexit vote in the UK in June of this year. The peso was 14% lower with almost all of the downward movement immediately following the US elections in early November. The negative impact of the stronger dollar on our comparative results for the second quarter was $2.1 million, and on the bottom line it was about a $0.02 hit. In constant currency, our growth was 17% versus the 14% we reported and reported overall organic growth of 7% would have been 9%. On the Food Safety segment where most of our international operations report and where the effects of currency movements are primarily recorded and felt, the impact was even more pronounced. Their reported 8% organic growth was 14% in constant currency. Now Ricks already discussed the highlights of our growth in the domestic Food Safety business and a good portion of our Animal Safety business, I am going to focus on the international operations in the genomics business. And Neogen Europe, which is based in Ayr, Scotland, had a 33% revenue growth in its local currency, the pound sterling in the second quarter, primarily the result of the DON outbreak in grain crops in Western Europe and the addition of an in-house genomic lab constructed to better serve our European customers and provide us with additional genomic testing capacity. Year-to-date revenues have risen 38% in pounds, and…

Thanks, Steve. I don’t want to belabor the currency translation situation that Steve's already covered, but I think we certainly can't ignore it in our planning efforts. Just as a reminder, for the first of the year our international sales were approximately 34.6% of total revenues and that’s flat relative to last years 34%. So however, every country in which we have our own company base, as Steve was referring to, is enjoying nice increases in their local currencies. We picked those locations of those countries because we think they represent the best international growth opportunities as we look out over the – at least the next decade. We do business today in about 100 countries around the world. Obviously some of these are bigger than the others. Last week I did, as a cowboy I would say, a gate cut on the sources of that international revenue and looked at all of the countries where we are doing a million dollars in revenue or greater on a annual basis and there were 24 of those countries in that count, and all but five of them are showing nice increases in revenue as compared to the same period last year. So I think we are in the right tranche. The continued rise in the value of the dollar against international currencies is of course problematic. The dollar hit a 14 year high against all the major trading currencies this last week and as Steve pointed out, it was after the move by the Fed to raise the tax rates and on top – piled on top of the reaction that we had, that came out of the US elections. However, these are the cards that are dealt to us, and as usual, we'll play them. A significant portion of our…

Thank you. [Operator Instructions] Our first question comes from Tony Brenner from ROTH Capital Partners.

Thank you. Good morning.

Morning.

A couple of questions. First of all, you mentioned that the forensic drug residue tests were up 59%. What's driving that big increase?

Its coming – most of that’s coming out of Brazil, so its sales into our Brazilian – through our Brazilian subsidiary and then some of it is coming direct to labs from our Life Sciences group in Lexington. It has to do mostly with commercial transportation. Drivers of anything that moves I guess in Brazil now required to go through drug test on some sort of a regular basis. That's been a piece of our business all along. We began, Tony, you may remember developing those diagnostic tests way back early to detect drugs of abuse in racing animals.

Right.

We still market those products in that in that way. But some of those also find their way over to the human side, and that's what this is an example of.

Okay. Regarding allergen tests, are a large portion of those US based or is the global profile similar to your total Food Safety profile?

I don’t know, Steve may have – as Steve may have some hard facts. But it’s widespread. We're – because 32% of our revenue is outside the US. So that explains why most – probably the same kind of revenue relation. I don’t know, Ed Bradley could probably tell me closer. But…

It’s widespread.

The more developed countries of course are more concerned about allergen. We get more allergen business in Europe, a lot of allergen in the EU countries and a lot here. And you know a lot of it is coming through the multinationals where we've got multinational companies that are operating in lot of places, less concerned today in Asia, less concerned today in some of the poor countries in South America. As you you'd expect, where people have a full stomach, they worry more about the safety of what they're eating.

Okay. And lastly, is there any notable progress in China or India that you might share?

Yes, Patience is still the buy word in India. We're convinced we're in the right place. We got a lot of activity. Revenues, Steve – I don't know whether you got the exact revenues, they escape me at the moment. But they're I think maybe up at tad, but they're small enough it really probably didn’t matter. China continues to get stronger. Our China market and what's happening in China, what's happening in Food Safety there, what's happening in food supply there is beginning to show, I mean, that is the country that’s going to have the fastest growth of that middle-class economy as we look out over the next 10 years. India is going to be behind them in total number, but probably not with a disposable income. So we continue to be in right place. Steve, you got a number to add that?

For China we're up about 11% for the year…

Okay.

And really running right to our budget and we're somewhere north of $2 million in revenue there.

Okay.

Thank you. Our next question comes from Brian Weinstein from William Blair.

Hi. Good morning. This is Matt Larew on for Brian. Thanks for taking my question. First, on the genomics business, obviously it looked like a record quarter here for revenue. Could you give us a sense of what the gross and operating margin profiles look like at this point in genomics? And then what you anticipate that to be at scale in whatever way you define scale?

I don't know how you define scale. When we turned in 218,000 samples in the month of November, I wanted to make sure that they didn’t transpose the number. That’s an incredible amount of samples to be run. We've done a lot - we've done a lot to improve our costs out there, it’s a lot of it is people related. We've got robots in that are amazing that can take those samples and manipulate them, do the extractions, put them in the right places of all our businesses, the equipment costs and demands there are the greatest, but that’s fine. The- I don’t know, Steve, you got a number where we think we – we work in that to get to the 20% net operating profit. And you know it has a little bit different increment in, we look at - we take gross margins and then we look at operating cost and you know where we've got less and more sales and marketing expense or G&A, R&D to try to end up with the 20%. We're not there yet, but we're getting closer. Our supply cost is coming down, our raw material cost is coming down. We'll have a better feel on that as the year wears along. I think we expect Steve, that number to get small. As the raw material cost as a percent of sales should go down in the last half of the year as compared to first half of the year. And it’s a little bit of integration, translation. We put in – we have operator service lab in Ayr, Scotland place and we're pretty proud of what they've been doing, but they weren’t doing any direct genomics over there. They were taking genomic samples, shipping them to Lincoln, Nebraska. We did the work and sent the results back. But we're now in a position there, or now are processing our own samples in Europe. It shortens the turnaround time and it also relives a little pressure on what was happening in Lincoln. It will take a few quarters to get that shaken down. It’s profitable, I like what's happening there, but it’s little too early to pronounce victory. We acquired the leading animal genomics lab in Brazil with Deoxi back a few months ago. It’s still small, so the economies of scale have not picked up there yet. They will pick up and we will put more automation into that operation too. So did that -- that sounded like a politician's answer to a simple question. But did I get close to what you wanted to know?

Yes. Thanks for that, Jim. Second one here, just thinking about your biosecurity portfolio, just curious, following the recent acquisition and obviously the Preserve one before that, do you have a sense of what type of market share you have in at least what you define as your biosecurity business? And then also what you think the size of that business is at this point?

Ask me that question three months from now, I will be able to give you a better answer. Depending on where you are, there is a lot of little players in, particularly in the cleaner and disinfectant business. I think we - the major players - a couple of the major players in the C&D side in the US that our competitors of ours, I think we are probably bigger than both of them now. But they still have some substantial interest in the marketplace. There's little guys that I refer to as guys with 50 gallon barrels and boat paddles and they're making it up in their garage, they're beginning to disappear as regulations have gotten tighter. And in Europe there is still consolidation happening over there. We know several companies that are part of the European theater that probably would be so could be sold or could be bought today. But we're going about trying to build it on a uniform basis. So anywhere in the world that you go if you want to buy disinfectant they would control a certain disease or certain organism, you'd find it under that name and registered in that country. So that's a part of what we're doing as we look at acquisitions both domestically and international. I think we probably will find some opportunities more opportunities internationally for some more biosecurity acquisitions. As I said in my prepared comments, that’s particularly good because we could buy more with a dollar today that we could a year ago in most markets.

Okay. Thanks, Jim. My last question is for Steve. Steve, just given the growth in this quarter in the mycotoxin business and the allergens business, could you just remind us what the size of the businesses are? And then, I believe they have slightly higher gross margins than other products in Food Safety. Could you give us a sense of what those look like?

Sure. The mycotoxin market is you know, we're probably given the growth this year we're probably going to be somewhere in 35 million or so, mid-30s, allergen market is not quite as big. But the north of 20 million and margins for them are - these are some of our best margin, they are strong…

Some of those are 60 perhaps, yes.

Yes.

Okay. Thanks for taking the questions, guys.

Sure.

You almost made us give more information than I want for competition.

Our next question comes from David Stratton from Great Lakes Review.

Hi, thanks for taking the question. Regarding the DON outbreak and the other toxin that I can't pronounce, what does the time line look for something like that? Is that going to go into the third or fourth quarter or have all the test samples been applied currently?

This crops got a long tail on it. Rick talked about part of the crop, particularly domestically, mostly in the US, we got a lot of corn on the ground. And it's on concrete slab somewhere and it's got a tarp over it, but that tarp may have a foot of snow on it now. And some of those molds that grow in hot dry weather cause one toxin. But there are those that grow - that would also leave a toxin behind. So there is some of that, that’s a little bit what I was referring to when I talked about the ethanol producers. They're not going to – you say they're going to make alcohol out of it so does it matter? But you know a third of that grain is going back in the animal feeds, so it does matter. I think the crop is being tested which is going to be ongoing testing, particularly with this out-of-position grain that can't get to the river, to export and you know, its going to – they may stay there on the ground for a while. I think the wheat, the wheat's in. It's safe, some of that goes back early. But anybody that's making flour today is going to continue to be testing, particularly in those areas where there's troublesome areas. We provide, every Monday morning during the growing season, reports to millers and grain handlers, buyers, so they kin of know where the trouble spots are in parts of the country. For instance, Southern Indiana and Southern Illinois have had a big mycotoxin problems and they'll be there, they will be testing that grain until it's used up. Whereas Nebraska and the Northern plains, was much, much cleaner. So it's not a normal year, so I think we will benefit, we'll continue to benefit, not to the extent we have this quarter, but we will continue to benefit as we move into third and fourth quarters.

All right. Thank you. And then when we look at the ThyroKare, did you break out what that was in the prior year?

We did, that was about a $6.5 million product for us in fiscal '16 and pretty evenly spread, $6.5 million for the year.

And then in 2Q '16, was it even across the year, a steady run rate?

Yes, so it’s about a $1.5 million a quarter for every quarter.

All right. And then were there any new products this quarter that have been really catching your eye, something that's garnering attention?

No, I'd say there is a number of introductions coming out of the pipeline there. We've done – we're continually working to improve products that we already have, some of our products now in their fourth or fifth generation where we figured out, particularly on the diagnostic side, where we figured the buy word there is faster, easier, cheaper and that's the buy words. So we're continuing to develop products for the industry that they can get results faster and easier. And we got some of those introduced into the market. We'll be cleaning up another section with some good, nice improved products. I don’t know, I think probably between now and the end of January, that will continue to have an impact. Some new products that are coming out with - yet in this year, but I don't think I want to talk much more about those now.

All right. Thank you very much.

Yes.

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

Hi. Thanks for taking my questions. I had a question first on Quat-Chem. So when you've kind of outlined your forecast for Quat-Chem, how do you think the growth is going to kind of unfold there? Is it now that you've owned it, is it going to be right off the bat or is there going to be a lag for a couple quarters? Or can you just help us understand the ramp that you're expecting for the next year or two there?

Yes. Thank you, Charles. Good question. And you know, having followed us for a while kind of what our strategies and acquisitions. It’s easy to acquire them, more difficult to integrate them. We sort of have standing rule around here, we don't change - when we buy a company, we don't go in and start making changes. We try to leave it alone for the first year and figure out what we know about it and not screw up what we just bought. That will certainly be true of Quat-Chem as we look at over the next 3 to 6 months there. This is a new market area for us. We don't have - this is part going into Europe, we don't have a lot of cleaner and disinfectant products that we're selling there now. So we got to add new distribution. We've got some good distribution, we need add other distribution to grow that business for Quat-Chem. And then we're getting lined up to do that. The original owners will be leaving the business before too long, so we had to be in the business – in a position to handle them. There are some products there that have a worldwide – they are attracted worldwide, but you know it would an EPA type registration. So we'd have to register those products in countries where they are not registered today. They had - Quat-Chem had essentially no real business at all in North America. So nothing in US, Canada, and Mexico, which was great for us. We've got a pretty good toe hold there. But we needed a toe hold for Europe. So that one will be – it will be the flag bearer for our European biosecurity business that's based in Europe. We'll add to that - it should be the platform that will care for the production of cleaners and it will introduce the cleaners and disinfectants of rodenticides and insecticide. So you know we'll either make those somewhere else in the world and ship them in there attached into that platform or we'll plan the local production over there. At this point, we are wide open to all the possibilities.

Okay. And the one aspect I'm very interested about for Quat-Chem is in China. So they have I guess, about $0.5 million of revenue over there, and that seems like a nice size shot in the arm to your pretty less significant revenue base that you have in China right now. I'm just wondering how Quat-Chem kind of fits in with your China strategy or is it just kind of came along as part of the acquisition or is there's something maybe larger that you're signaling on the China side?

No, I'd say just kind of came along. It's too expensive to ship water from Manchester, England to Shanghai, China. We're in business there. We do share some production operations with between China, South Korea and India. We are producing product in India now that’s going to China under toll manufacturing of our own. They've got some business that was going in there, but it was more of a technical basis, it’s probably not anything that has much growth opportunity Charles.

Okay, and then a question for Rick on Food Safety modernization acquisition [ph] I think previous comments you've made are saying a gradual uptake, if you will, from the final regulations now being all done. Is that still your current view, are you seeing any need to revise your comments over the last couple quarters that you've made to us?

No, thank you for the question. I don't think that we need to revise those at all. I think there's still some more question with the change in organization at the top that will have to see how that plays out over the next year. But if you believe what he's been or what he is been saying publicly, he may try to put the brakes on FSMA a little bit. We believe that it's fully rolled out and it's going to be a matter of enforcement how they're going to do that going into the next couple of quarters.

Okay, thank you. And then on animal genomics for the vet market, you mentioned that you are starting to sell there. That seems to be very interesting to me. Are you using distributors for that or is that going to be a direct sale to vets? And is that something that you could see being material to your business, say a couple years from now?

Well it – we'll not use distributors. At this point its testing service, it’s not a testing product that we can sell. So its samples that come back to a lab somewhere. Just like today we run what we jokingly call the test to make sure your poodle's really a poodle. I think we can detect with a cheek sample from a little dog, we can tell you whether it’s any one of a 133 different varieties of dogs. And this the animal wellness, as you look at what's happening with the growth of veterinary clinics, PetSmart, every PetSmart of any size has got one in it. There's couple other major pet clinics out there that make it easy time together sometime pet stores and pet supplies. Those vets are looking for an opportunity to provide wellness treatment for the animal, not bring them in once a year to get their rabies shot. And it also makes a lot of sense as we try to look how to make animals healthier and live longer and they become a part of the family. So those genomic work test that we're doing their at least for now would be samples that a vet send, just like we're getting samples for determining parentage. We might at same time, if we know it's a Labrador retriever, we know if it's carrying the genes for hip dysplasia, for example. But at this point, vet side, for veterinary use would be companion animals.

Okay. Well, thanks for taking my questions.

No, thank you for continued interest.

Our next question comes from Kurt Kemper from Hilliard Lyons.

Thanks for taking my question. I won't make you divulge any more information on that gross margin, but I just got a couple quick ones for Steve. Earlier this year, I think you guided to around a 36% effective tax rate. Has that changed at all?

Its appearing that may be a little bit on the high side, we are probably conservative when we're talking about that. I think we're probably going to come in somewhere with 35. I think 35 might be a more accurate, more refined number for you Kurt.

Okay. And then what were the revenues for the GeneSeek International that reports through Food Safety for this quarter?

Give me a second.

Its kind of hard to remember those because they ebb and flow, we're almost through December and now we're trying to remember what happened last month. I can tell you what happened last week, but I can't remember for sure what happened last month. We'll come back to you on that one, okay? Maybe you can find before the end of the call.

All right. Well, that's all I had. Thank you.

Thank you.

Thank you. [Operator Instructions] Our next question comes from William March from Janney Montgomery Scott.

Hey, guys. This is Bill on for Paul. How you doing?

Good.

Good.

I just have one question. Just looking at the balance sheet and free cash flow and acquisitions, how do you think about returning cash to shareholders just as the cash balance on the balance sheet continues to rise? Thanks.

My answer is the same as it is been now for 15 years. When we get to the point that we think you know, we can make money for you by keeping your cash and growing the business will I guess start sending you some them back. We still think there is some great opportunities. We are building cash, but I guess, will get that question more often as interest rates improved. But you know, there is still pretty – if I sent you the money back you put in time deposit, you still wouldn’t be real proud of it. And so I think we can do more. The problem is with cash, dividends is once you start, you can't quit. Some people say oh, yes you can, but you know, it’s been my experience to that. So we think we got used to that cash.

Thank you. And we have no further questions. I will now turn the call back to Mr. Herbert for closing remarks.

Okay. Well, thank you all for your continued interest in Neogen and the support that so many of you have provided us during this past year. This led to a successful growth. I wish you all a happy holiday season and certainly a prosperous New Year and plan to give you the same kin of results going forward. Questions, Steve?

I just want to say that question from Kurt earlier it’s about $2.6 million Kurt if you are still on the call in genomics for that question.

Good. Thanks, folks. Have a good holiday season.

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