U.S. Markets open in 2 hrs 9 mins

Edited Transcript of NEOG earnings conference call or presentation 3-Jan-18 4:00pm GMT

Thomson Reuters StreetEvents

Q2 2018 Neogen Corp Earnings Call

LANSING Jan 5, 2018 (Thomson StreetEvents) -- Edited Transcript of Neogen Corp earnings conference call or presentation Wednesday, January 3, 2018 at 4:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* James L. Herbert

Neogen Corporation - Executive Chairman

* John Edward Adent

Neogen Corporation - President & CEO

* Steven J. Quinlan

Neogen Corporation - VP, CFO, Principal Accounting Officer & Secretary

================================================================================

Conference Call Participants

================================================================================

* Brian David Weinstein

William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst

* David Michael Stratton

Great Lakes Review - Research Analyst

* David Michael Westenberg

CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst

* Gerard J. Sweeney

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Kevin Kim Ellich

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Kurt Anthony Kemper

Hilliard Lyons, Research Division - Analyst for Healthcare and Pharmaceutical Industries

* Paul Richard Knight

Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to the Neogen Second Quarter Fiscal Year 2018 Earnings Announcement. My name is Richard, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

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

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [2]

--------------------------------------------------------------------------------

Thanks, Richard, and good morning, again, and welcome to our regular quarterly conference call for investors and analysts. And as Richard stated, we'll be reporting to you today the results of our second quarter of the 2018 fiscal year that ended back on November 30.

And 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. The actual results may differ from those that we discuss today. And as a reminder, the risks that are associated with our business are covered in part in the company's Form 10-K as filed with the Securities and Exchange Commission.

In addition to those of you who are joining us today by live conference, I'd also welcome those who might be joining by way of simulcast on the World Wide Web. Following our comments this morning, we'll entertain questions from participants who have joined this live conference.

And I'm joined today by Steve Quinlan, Neogen's Chief Financial Officer; and John Adent, Neogen's Chief Executive Officer.

For those of you who were on the September conference call, you will remember that John -- you will remember now that John has assumed the role as President and Chief Executive Officer and did that back in mid-July, meaning he will soon be on board for about 6 months now. I retain the title of Executive Chairman. And John and I are sharing responsibilities as he gets the opportunity to get up to speed.

Earlier today, Neogen issued a press release announcing the results of the second quarter. The announcement for the quarter introduces several new factors. So as not to be confusing, let me pick apart the quarter one piece at a time.

Revenues for the quarter increased by 12% to almost $102 million compared to the same quarter last year of about $91 million. This is the first time Neogen has had a $100 million quarter. This pushes Neogen's year-to-date revenues to slightly over $197 million, and that's up 13% compared to last year.

The second quarter net income was approximately $17.1 million, and that's an increase of 53% compared to last year's approximate $11 million. On a year-to-date basis, our net income was approximately $29 million as compared to $21 million last year.

Now let me give you some explanation regarding that big jump in net income. In the second quarter, Neogen's net income benefited by approximately $3.4 million due to our required adoption of new accounting standards. This new accounting standard changed how companies report their excess tax benefits of employee stock option exercises. And without going any further, I'll let Steve Quinlan talk a bit more about that later in the conference call.

Now another good announcement, and in the event that you might have missed it, we're pleased to reward our shareholders with a 4-for-3 stock split that was effective on December 29. Stock began trading yesterday on the basis of the post-split automatically adjusting to the new price of $61.66. The previous price was reduced by 25% to get to that number. As a result of the split, the shares outstanding increased from approximately 51 -- to approximately 51.5 million from approximately 38.6 million earlier. This split, by the way, marks the fifth time in the last 14 years that we've been able to reward our shareholders with additional shares.

Now when we take a look at earnings per share, the earnings in this quarter were 33% (sic) [$0.33] compared to $0.22 a year ago. About $0.07 of this is due to the adoption of the new accounting rules. Or if you wanted to look at something which is more normalized, I think you could look at $0.26 a share this year as compared to $0.22 last year or about an 18% increase.

On a year-to-date basis, split-adjusted earnings were $0.56 a share as compared to $0.41 for the first 6 months last year. Obviously, these quarterly revenues and the net income results are both records for our 35-year-old company.

Thanks to our 1,500 employees around the world, our second quarter was the 103rd in the past 108 quarters that Neogen reported revenue increases as compared to the previous year. This record now spans an even 27 years.

Gross margins for the second quarter were 48%, almost -- 48.4%, actually, almost identical to last year's 48.1%.

Our operating income for the quarter was almost $18 million compared to last year's $16.8 million. This calculates to a 17.7% of sales or almost a full 1% below the same quarter last year.

Timing of acquisition expenses and a few other costs drove administrative expenses for the quarter up about $2 million as compared to the previous year. However, rest assured that on a normalized basis, we hold the goal of the 20% operating income.

I'm pleased that the second quarter, it added to the solid start of our first quarter and, I think, as a company, well poised for mid-year. This was accomplished basically through organic growth and the continued integration of earlier acquisitions.

I think I'll stop at this point, but I'm also pointing out that our balance sheet continues to be solid with nice asset growth in the first 2 quarters. We have now added approximately 10% to shareholder equity compared to where we were at the beginning of the year.

I'll come back later in the call and talk about Neogen's genomics business and as well as talk about something that I call -- I'm not sure there's a real word for it, but I call it the internationalization of several of our products and our businesses.

But let me stop now and call on John Adent first to talk about the growth of our Food Safety and Animal Safety businesses in the second quarter. And then Steve, if you would follow and give a bit more color behind the accounting changes and impacts of foreign currency, stock splits and other more technical data that I didn't cover. John?

--------------------------------------------------------------------------------

John Edward Adent, Neogen Corporation - President & CEO [3]

--------------------------------------------------------------------------------

Thank you, Jim, and welcome to everyone listening. Jim has already reported on the overall sales and profit performance for the second quarter of our 2018 fiscal year. I will provide more detail on the performance of our Food and Animal Safety segments as well as offer some perspective.

Those of you who have followed Neogen have often heard Jim detail Neogen's 4-legged growth strategy: first, increase market share; second, develop new and innovative products that our customers need; third, grow internationally; and fourth, to grow through acquisitions.

We have successfully used all 4 strategies for the last 35 years to grow the business, and it's important to monitor the contribution of each. While growth through acquisition and innovation is a core competency, those strategies are subject to timing and cannot be relied upon quarter in and quarter out to drive consistent growth. Organic growth is what we need as a foundation for consistent performance that our shareholders expect from us and what we expect from ourselves.

In my first 6 months here, I focused on working with our sales and marketing teams to drive that growth. I am pleased to report that our second quarter results included significant organic growth in a number of our core product lines, which is particularly impressive considering we had to overcome difficult comps relating to a terminated distribution agreement in a clean crop in North America this year.

Now for the Animal Safety side of our business. Sales of our veterinary instruments increased 19%. The line includes disposable and durable needles and syringes, including our patented detectable needles that help pork processors keep needles out of meat in the supermarket.

We have recently opened a 40,000 square-foot facility in Lansing to accommodate our need for future growth.

Our animal care products grew by 10% in the quarter. This line includes biologicals, vitamin and mineral supplements and feed additives primarily for the global livestock market. A significant mover within the line was our injectable products, whose sales grew by 38% in the quarter. Our injectables are used mostly to treat vitamin and mineral deficiencies in cattle.

Also of note on our Animal Safety side was a 14% organic growth in sales of rodent control products. Neogen has now been in the rodent business -- or rodenticide business for about 14 years, and it remains a key component for our overall biosecurity strategy. Our cleaners, disinfectants, insecticides and rodenticides form a comprehensive biosecurity suite of products to stop the spread of disease before it can start.

On the Food Safety side of our business, we had a number of product lines that had solid organic growth in the second quarter, including our general sanitation products, which increased 23%. The line includes our AccuPoint ATP Sanitation Verification System, which is a key product to help food manufacturers comply with new food safety regulations. We debuted AccuPoint back in 2004 and launched our latest Advanced version in 2015. It continues to earn us significant new business.

In the quarter, our global culture media business increased 20% over the prior year. When Neogen acquired England-based Lab M back in 2005, we did so with the belief that combining Lab M with our existing U.S.-based Acumedia operations would put both businesses in the global marketplace, and that has happened.

Our culture media markets include media used in food safety programs and also in industrial applications. Sales of our established line of rapid food safety diagnostics to detect food-borne pathogens, including E. coli, salmonella and Listeria, increased 14% in the quarter and included a 43% increase in sales of tests to detect Listeria.

Listeria has gained more attention as pathogens are now being detected in food products that once seemed unlikely to be contaminated with dangerous bacteria. For example, ice cream is found to be contaminated with Listeria monocytogenes and led to a large recall. There was a large recall of sunflower seeds based on testing that also detected Listeria monocytogenes in edible seeds. Neither had been previously thought of as carrying a high risk for such contamination.

As I mentioned last quarter, our new Listeria Right Now test detects Listeria in environmental samples in under 60 minutes without the need to enrich samples. Other test systems take up to 24 hours to produce the same results.

Sales of the Neogen's rapid test for food allergens, such as gluten and peanuts, increased 9% in the quarter compared to the prior year.

A new product that we're rolling out in 2018 is BetaStar Advanced, which is combined with our new Raptor Integrated Analysis Platform. Working with dairy producers, processors and regulators, we've developed a new method for testing antibiotics in milk that we believe is far superior than anything else out there.

A little bit about Raptor. Raptor is a combined reader/incubator platform that has the ability to run up to 3 samples simultaneously and independently. So it's like having 3 readers and incubators in one. You just put up to 9 samples into the reader and walk away. The system does everything else, including produce -- producing permanent results that can be accessed in a variety of ways. This system can also be used with some of our mycotoxin tests, which increases its versatility. You will be hearing more about the system in the near future.

I would like to thank all of you for your support of Neogen this last year and wish you all a very happy and prosperous 2018. Steve?

--------------------------------------------------------------------------------

Steven J. Quinlan, Neogen Corporation - VP, CFO, Principal Accounting Officer & Secretary [4]

--------------------------------------------------------------------------------

Well, thanks, John. As Jim and John have both indicated, the second quarter of fiscal 2018 was a solid one, helped in part by the adoption of the new accounting standard that I'll discuss in further detail in a few minutes.

Currency had a relatively minor impact on the quarter. On an overall basis, revenue was approximately $900,000 higher in the second quarter on a constant currency basis, with the pound sterling, the euro, peso and real all somewhat stronger relative to the dollar than this time last year. On a split-adjusted basis, there was no impact to earnings per share due to currency fluctuations.

By looking at the financials, our gross margins are 48.4% compared to 48.1% in last year's second quarter. Improved gross margins at GeneSeek due to raw material cost decreases and favorable product mix within the segments contributed to the increase in overall growth margin. But for the year-to-date, margins were 48.3% versus 48.2% last year.

Our operating expenses overall were up 17% for the second quarter and 16% for the year-to-date period.

Sales and marketing expenses rose by 14% for both the quarter and year-to-date. The largest components of this increase were shipping expense and personnel expenses such as salaries, fringes and travel, the result of increased staffing and higher sales.

Our general and administrative expenses rose 27% for the quarter and 20% for the year-to-date. Salaries due to new positions and compensation increases, amortization of intangible assets resulting from the recent acquisitions, and costs associated with IT projects and infrastructure were the main drivers of the increase. But we're continuing to invest in information technology to better deliver data and solutions to our customers and to improve and protect our internal data and network systems.

Our R&D expenses were 7% over the prior quarter -- prior-year quarter, and have risen 11% for the year-to-date as the company continues its investment in new product development, particularly in the Food Safety segment.

Our most recent acquisitions, Rogama and Quat-Chem, each purchased in December of 2016; and GeneSeek Australasia, acquired in September of 2017 are all continuing to operate in their existing locations and added an additional $1.4 million to our operating expenses in the second quarter and $2.6 million for the year-to-date. These amounts do include amortization expense.

Our operating income for the quarter was $18 million or 17.7% of sales compared to $16.9 million or 18.6% of sales recorded in last year's second quarter. The 17.7% compares favorably to the 17.2% achieved in the first quarter of this fiscal year, but is down compared to the prior-year second quarter due to the incremental expenses from our recent acquisitions and the increased information technology expenses I mentioned.

Our other income for the second quarter was $1.1 million compared to expense of $80,000 in last year's second quarter. Now this quarter included currency gains of $497,000, interest income of $429,000 and royalty income of $75,000. In last year's second quarter, we incurred currency losses of $424,000, which was partially offset by about $300,000 of interest income and $20,000 of royalty income. The interest income in the current year quarter is significantly higher compared to the prior year due to rising rates, higher cash balances and interest received on funds on deposit in Brazil.

Our effective income tax rate in the quarter was 10%, compared to 33.4% in the prior-year second quarter. Now for the year-to-date, the effective rate was almost 20% compared to 34.1% in the prior year.

As Jim mentioned and we discussed on the first quarter call, on June 1 of this year, Neogen adopted Accounting Standard Update 2016-9, which requires us to take the excess tax benefit from employee stock option exercises as a credit against income tax expense. Now previously, this was recorded as additional paid-in capital in equity on the balance sheet. Adoption of this new standard increased our earnings by $3.4 million in the second quarter or $0.07 a share after adjustment for the 4-for-3 split. And adoption of this standard will add variability to our earnings each quarter as we cannot predict the number of exercises, nor the price of the stock at exercise.

Additionally, during the quarter, we recorded a credit to income tax expense of about $800,000 based on the favorable outcome of an IRS examination on our income tax filings for the 2012 through 2015 tax years. Now we had reserved this amount when we amended our returns for those years to increase our credits for research and development activities.

As we look at the impact of the new tax reform legislation just enacted, our effective rate will certainly decline long term based on the new corporate rate of 21%, and we're currently evaluating the impact of the complex transition requirements of this new legislation on our tax rate for the remainder of the fiscal year.

We generated about $9 million in cash from operations during the quarter and invested about $6 million in property and equipment. For the year-to-date, we've generated $27.4 million from operations and spent about $10 million on capital expenditures. Inventory balances are essentially flat since the beginning of the year as we've instituted formal programs to improve our inventory turns.

And our accounts receivable balances increased 9%, less than the rate of increase in revenues.

Our DSO at November 30 was 62 days compared to 60 days at May 31.

Overall, it was a solid quarter from a financial perspective, and we certainly look forward to the rest of the fiscal year. Jim?

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [5]

--------------------------------------------------------------------------------

Thanks, John and Steve. Let me go cover a couple of areas that we have not yet covered. First, I'll take a look at our genomics business. We built this business through a series of acquisitions, following each with good organic growth as we made the acquisitions. Revenues of the genomics group increased by 19% in the second quarter and 23% on a year-to-date basis.

I think that what we've done here is a good example of our international strategy in product areas. We bought the first piece of the genomics business back in mid-2010 with a revenue base at that point of about $12 million. We added to that another acquisition in 2012 and then another one in mid-2013.

From this base of 3 acquisitions, we then established a new genomics laboratory in Ayr, Scotland, where we already had good lab facilities, that can provide easier access to the European markets.

At the end of 2016, we acquired the Deoxi genomic business in Brazil, which was the largest animal genomics lab there, in order to give us better reach into that important cattle business and to that part of the world.

And then, our most recent move was the acquisition of the genomics business located near Brisbane, Australia. Though this might be termed, I guess, as a forward-looking statement that I warned you about in the very beginning, I'll speculate that revenues from this worldwide genomics business will likely touch the $50 million mark by year-end, and that's a growth of over 4x.

We're using that same worldwide growth strategy for our complete line of biosecurity products. As John mentioned earlier, this includes cleaners and disinfectants, rodenticides and insecticides. We began to build this strategy almost 13 years ago through the acquisition of a couple of companies here in the U.S. We then poured on some great organic growth through the next few years. We added then to that base through the acquisition of our Preserve International -- of Preserve International, a company here that was our chief competitor in the U.S. We made that acquisition about 18 months ago. We then followed it with the acquisition of a strong cleaner disinfectant company located near Manchester, England and then a company located in Brazil in the insecticide and rodenticide business.

We'll continue to build on this network of around-the-world offering so that we can offer similar and effective products and biosecurity programs in total. This, I think, is particularly important, this whole area, particularly important as the world becomes more concerned about protecting against epidemic-type animal diseases and to reduce the use of antibiotics that might find their way into the human food system.

We are also internationalizing our culture media business. Though you hear a lot about rapid diagnostic test that detects spoilage organisms and pathogens, and of course, we have a number of those, but there's also a very big market for culture media to pursue detection in their traditional fashion that's been used for decades. These culture media products are incorporated in the detection of harmful organisms in food and in the environment, but they're also important in the production of vaccines for animal health. As an example, Neogen supplies media to a major worldwide producer of foot and mouth vaccine to probably still perhaps the most dreaded of all animal diseases.

Our Acumedia operations located here in Lansing produce culture media products for a number of different applications. And as John mentioned, because of the need for worldwide supply, we added to that capability the Lab M operations near Manchester, England about 18 months ago.

I think you can see by these examples how we're growing our international business with a very strategic plan. International sales for the second quarter were $38.6 million or an increase of about 24% compared to last year. Expressed as a percent of total sales, we'll now get almost 38% of our revenue from outside the U.S.

Taking a quick trip around the world. Our Neogen Europe operations located in Scotland, with about 200 employees, showed an increase in revenues of 15% for the second quarter.

Our Neogen Latino America operations that cover Mexico and Central America recorded a sales increase of 36% for the second quarter.

Our Neogen do Brazil revenues increased by 22% for the quarter.

Neogen China revenues increased by 23% for the second quarter.

And revenues for India looked good on a percentage basis, being up about 48%. However, this is, of course, from a small base. India continues to require some patience, but we continue to believe that it will be important over the next decade due to the growth of their middle-class population. One must be encouraged about that middle-class growth since close to 1 million people enter the Indian workforce every month.

Looking forward to the rest of the year, I'm sure that there will be some bumps in the road that we don't see today, but I don't see anything that looks like a roadblock. Our overall growth strategy continues to be sound. All our markets are growing, and I think in most cases, we're keeping up with that market growth. We have a lot of activity going on in new product -- in the new product area and we should begin to see more revenue derived from the launch of those new products in the last half of the year. And of course, I already talked about our international growth, and I believe that we have the momentum that will continue to help us grow for the rest of the year there.

In the area of acquisitions, we don't have letters of intent on the table today, but we do have some strong candidates that are on the radar screen located both in the U.S. and outside and from both Food Safety and for Animal Safety.

From a personal standpoint, I continue to welcome John Adent, who is bringing some important management talents to the company. And I'm also proud of the young management bench within the company that we're continuing to build.

John and I established a transition plan when he arrived, and we're continuing to work on plan. Be assured that I have no plans to exit. We did announce last week, though, that Ed Bradley, Vice President of Food Safety, is retiring after 23 years. He's been -- he's planned for a couple of years to move back to a farm that he owned in Southwest Tennessee. But as his legacy, he leaves behind perhaps 20 experienced people who helped him build the business for a decade or more. He will continue to be working with John as a consultant for the near future.

But let me stop at this point, if I could, Richard, and turn it back to you for any questions that we might have from those who have joined this call.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question online comes from Mr. Kevin Ellich from Craig-Hallum.

--------------------------------------------------------------------------------

Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

--------------------------------------------------------------------------------

I guess, Jim, I wanted to start off with some of your comments about management, specifically how soon do you expect to have a replacement for Ed in Food Safety? And do have some good internal candidates or you're looking mainly external?

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [3]

--------------------------------------------------------------------------------

I don't know if we want to elaborate a lot on that. We are searching for -- we do have a search underway for someone to succeed him. John will run slightly different kind of a management organization as he's onboard. In the meantime, as I mentioned, there's at least 15 or 20 people that have worked with Ed for the last decade that helped build this program where it is. So that's one of the great legacies he leaves behind, which we all hope to leave behind when we -- when it's time to leave the job, we leave it in good hands of other people. So I think it's too early to -- we're not really in a big rush. It's too early to make an announcement as to exactly how long it's going to take us. But in the meantime, rest assured that John has got his fingers on that [pulse], and it's one of the areas of John's responsibility. If he were to drop the ball, which he won't, I can pick it up and generally run [midways]. So I think we're well covered. I understand where your concern might be, but this has nothing to do with the change at the top. This is something that Ed had worked hard for a lot of years, and they have been able to accumulate the money to go with that. And he wanted to [find] time to enjoy it, and I don't blame him. I'm not following his suit, though. Not yet.

--------------------------------------------------------------------------------

Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

--------------------------------------------------------------------------------

And then just switching over to John. You've been there now 6 months. Just wondering if you can kind of compare and contrast what your expectations were before you took the job and what you've seen? What's better than you expected? What needs a little bit of work? And I guess, have you -- do you have any changes in the strategic vision or direction for the company?

--------------------------------------------------------------------------------

John Edward Adent, Neogen Corporation - President & CEO [5]

--------------------------------------------------------------------------------

For direction, not really, Kevin. I think the 4 pillars that Jim has used has really worked well, and it allows us to have a very wide funnel to look at different places that we want to acquire and things that we want to do. So I really like that strategy and want to continue that going forward. Some of the things that were different than what I expected was the complexity and then the size of the product portfolio. We have a lot of different products from a lot of different spaces that can help a lot of different customers. So while that was surprising, it was also very, very exciting because it gives us a lot of opportunity to really dive in and show value in a lot of different areas. So for me, I think one of the things that I looked at is, okay, how do we focus with all that opportunity? How do we get our manpower in focus, the teams on the area that are going to give us the greatest return? So that's really the things that I'm kind of looking at here in the first 6 months and finishing out the year. And it's good to hear you again.

--------------------------------------------------------------------------------

Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

--------------------------------------------------------------------------------

Yes. No, absolutely. And then, I guess, broadly speaking, you talked about some of the new products that you guys have, BetaStar Advanced and, I guess, the new method for detecting antibiotics in milk. Is that product -- has that been launched? And what's the reception been like?

--------------------------------------------------------------------------------

John Edward Adent, Neogen Corporation - President & CEO [7]

--------------------------------------------------------------------------------

So BetaStar is going to be launched soon. We beta tested, but we have not launched it yet. But we have really high expectations for that product mix especially here and worldwide. So we think it's a game-changer, so we're really excited about that product. And the other is our new Raptor platform that I mentioned, that really changes the way we're going to look at how we want to do testing, from one machine and one test to really a very versatile platform to do multiple tests on the same machine. That's going to be a lot more convenient for our customer base.

--------------------------------------------------------------------------------

Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [8]

--------------------------------------------------------------------------------

Got it. And then I just had a couple of quick ones for Steve. Administrative cost, SG&A was higher than we expected. I think it was a little drag on the operating margin. Was that really due to salaries and stock comp? Or was there anything else that drove that increase?

--------------------------------------------------------------------------------

Steven J. Quinlan, Neogen Corporation - VP, CFO, Principal Accounting Officer & Secretary [9]

--------------------------------------------------------------------------------

As I said on the call, some of it was due -- we've got an initiative this year, where we're making some pretty serious investments in our IT infrastructure. And a lot of that has to do with protection of our data, protection of our network, enhancements to our delivery of our data to our customers and our cybersecurity effort. So all of that stuff costs money, and so that will be ongoing, but we think well worth it. And we've had some additional incremental expenses from the acquisitions that maybe you didn't have in your models that we knew when we bought the businesses that we would be incurring them. And we always -- those expenses always lead the revenues. So that hit us a little bit this quarter.

--------------------------------------------------------------------------------

Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [10]

--------------------------------------------------------------------------------

Got you. So the IT infrastructure investment, can you give us more detail in terms of quantifying or how much incremental expense should that be this year?

--------------------------------------------------------------------------------

Steven J. Quinlan, Neogen Corporation - VP, CFO, Principal Accounting Officer & Secretary [11]

--------------------------------------------------------------------------------

I'm going to pass on giving you full details on the magnitude of that. I think what you saw this quarter, though, maybe we can have further discussion. But it's -- the magnitude will probably continue for the rest of this year in terms of our IT spend. And actually, even beyond that.

--------------------------------------------------------------------------------

Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [12]

--------------------------------------------------------------------------------

Okay. And then the tax rate. Obviously, we saw the benefit of the tax rate. But yes, the tax rate. I mean, should we just drop it down to 21%? Or what do you think?

--------------------------------------------------------------------------------

Steven J. Quinlan, Neogen Corporation - VP, CFO, Principal Accounting Officer & Secretary [13]

--------------------------------------------------------------------------------

No, I don't think you can -- I mean, the statutory rate will be 21%. But as we talked, we had the impact of the stock options will hit us or benefit us in the next periods. And then we have also the transition impacts of the legislation. So the rest of the year, I don't know what that number is going to be because we're still working on it, but it's going to be less than 35% for sure. But there's going to be a lot of noise in the tax number in the rest of the year.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Our next question online comes from Mr. Paul Knight from Janney Montgomery.

--------------------------------------------------------------------------------

Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Analyst [15]

--------------------------------------------------------------------------------

The organic growth rate, what was it? Was it mid-single digits? Or did you say, a point number, Steve?

--------------------------------------------------------------------------------

Steven J. Quinlan, Neogen Corporation - VP, CFO, Principal Accounting Officer & Secretary [16]

--------------------------------------------------------------------------------

We didn't give an overall organic number, but the number is -- it's about 6%.

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [17]

--------------------------------------------------------------------------------

Yes. 6% to 10%. As you know, Paul, and we've talked before, it's kind of hard to figure out what's organic and what's acquisition. We -- as a rule, we say in the first 12 months, we call them acquisition, and after that, we call them -- they get lumped into the organic market share along with new products which make up organic. But we might acquire a company that's got $5 million in revenue. But as soon as we put it into our system with our resources behind it, we can increase the revenue by 50% before the year is over. So it gets to be harder and harder to track these to know exactly what they are. But good organic growth on both sides of the business, good growth coming up with our new product development. John talked a little bit -- or we had an earlier question a little bit about when do we launch the new BetaStar for detection of drugs in -- drug residues in milk. And that's one that kind of -- that one is a bit out of our hands. So why hadn't you launched it before now? Well, it's like a number of products we have that require some approval. This one requires the approval of the interstate milk shippers as a part of the Food and Drug Administration. And it was all approved back in July, but it takes them a while to rewrite the regulations. And nothing moves fast in the wheels of government. We thought we might have that by Thanksgiving. I was sure we'd have it by Christmas. We didn't get it by New Year. But rumor last week was it ought to be pretty quick here in the next week or 2. So those are some of the new products that are going to really add to that organic growth, too.

--------------------------------------------------------------------------------

Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Analyst [18]

--------------------------------------------------------------------------------

What are the elements that would cause you to pick up the pace of acquisitions? Obviously, we have John onboard now. Is there IT infrastructure you want to build up a little more? Is it now that you've gotten global footprint bigger, you can acquire more? Are you at this point ready to pick up M&A?

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [19]

--------------------------------------------------------------------------------

Well, we are, but we've done 37 of these since 2000. I think we've probably done 40, 45 since the beginning of the company. And fortuitously, we've never lost one. We've had some that haven't been quite as good as we thought, but they all continue to be accretive at both top and bottom line. And that was the result of integration more so than the result of acquisitions. And I think I talked at the beginning of the first quarter about where we were and what we might see as acquisitions going forward. Probably the biggest -- there are opportunities out there right now. I think I didn't spill a number, but I think we've got -- I believe we've got 4 on the radar screen now. But the whole issue is integration. And we've got a team that's stretched pretty tight. So we always know when we write the check what we're going to do with them the next morning, and I think that's important. And we're spending a little bit more time with the due diligence. I'm spending a lot of time there, as I always have been. Jason Lilly, is our Vice President of Corporate Development, is extraordinarily accomplished in this area. But the good Lord was near-sighted when he only put 7 days in a week. And if we had a little more time to aid in the integration, we'd probably be moving faster. But we are not going to let the money burn a hole in our pocket. It takes -- I've had bad ones that I had to turn around and bring back, and it's a lot more fun to build them than it is to try to repair them. So that's a kind of -- that's a political answer to your question, but maybe it makes some sense to you.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

Our next question online comes from Mr. Brian Weinstein from William Blair.

--------------------------------------------------------------------------------

Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [21]

--------------------------------------------------------------------------------

A question for you. You guys talked about, John, I think in your comments and what we've heard from Jim in the past, you talked about increased market share, new products, OUS and M&A is kind of the keys here. We've really talked about, I think, most of those, but curious on market share in particular. I haven't heard you guys talk a whole lot about share updates. Are you willing to provide any market share updates on some of the key product areas? Are there areas that you are taking significant share in? Because when we see an organic growth rate that's somewhere, let's call it, the mid to high single digits, that's about what the end markets in general have been growing at per your comments that you've made in the past. So just curious about areas where you're seeing significant market share gains and just any updates that you can provide there.

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [22]

--------------------------------------------------------------------------------

It's a very good question and one that frankly, we're in the process of spending some time yesterday trying to analyze what some of these markets look like with some of our bright young staff members that are accomplished in areas like analytics. But there isn't -- in our Animal Safety side, we pretty much know where we are because there's good reports that come from several sources that you can get an idea of what our share is in any particular areas compared to competition. For instance, if we want to know what share market we've got in the veterinary instrument business, we can go to a couple of [bases] there as to what sales of veterinary instruments might have been during the past year and we can kind of calculate where we might be. Over on the food side, it's not that easy. Number one, it's more global; and number two, it's just a brand-new market that nobody has tabulated. There are some people have some suggestions. So I'd say in some places, we are clearly the market leader. We've got a spot or 2 where we have been the market leader. And I think we still maybe are the largest -- we still own the biggest share of the market, but we've got 3 or 4 new competitors who've come at us pretty hard, and we probably lost a little bit of share market compared to what we had before. We are aware of those. Our product managers are diligently looking at where -- how we can make any group of products better going forward. But we'll never underestimate how competition and what competition can do. It's good for the marketplace but it sure makes you work harder. We'd have to kind of look at product-by-product basis. I think that we may be gaining a little market in the area of detection of pathogenic organisms. But we're not the leader in that market. But I think we're gaining market share as compared to where we were. In the area of natural toxins over on the food side, we're still a leader there. At one point in time, we owned a big hunk of the market. Of course, the market was a fraction of what size it is today. So in those markets, we're holding our own with the market growth but probably not gaining any share. And a part of this is looking at our access to marketplace. We've got -- we're doing business in 114 countries. We've got our own people on the ground in just a handful of those. And the rest of the time, we're working through independent distributors. So as we look at some of those countries, and I think we've got by and large good distributors, but we've got a distributor organization that probably needs to be upgraded, too. And that will aid in the worldwide share market. So I'm not comfortable. We're not king of the roost. I want to be the leading company in -- we still are striving to be there. But John talked a little bit about his strategy of go-to-market and working on the sales side and spending our time where best opportunities are. So the bad news is that we're not the dominant leader. The good news is we're not the dominant leader. We still got a lot of opportunities to grow.

--------------------------------------------------------------------------------

Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [23]

--------------------------------------------------------------------------------

And the second question. You talked a lot about the revenue growth that you've been seeing OUS. Can you talk about the profitability that you're seeing from some of those geographies you have? And any kind of investments that you think you might need to make in those areas? And where that profitability kind of long-term target is? Is it above or below kind of your corporate rate or your corporate margins that we typically see?

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [24]

--------------------------------------------------------------------------------

Yes. And I don't know how deep we want to go to answer that question. I'll turn that back to Steve. But we're profitable. We are not profitable in India, but we're not losing a lot of money either. It's just we've planned in India, and frankly, I thought we've probably be profitable by now. But it's a strategic positioning for us. And when we look at what's happening in the world of middle class development, you just have to be in India when you see what's developing there. I think people have been surprised about India. People thought this would be the year that maybe India is the third-largest Asian economy, that it would kind of overshadow what's happening in China. But I mean, I think India's GDP is up 6% or 7%, which is not to be sneezed at but it is less than what maybe some of the economists thought earlier. They're going through, just keeping up with what's happening there, they're going through some momental political turmoil as they try to get repositioned. But we think we're in the right place. Brazil is -- Steve, you can speak to the profitability of the rest of the locations.

--------------------------------------------------------------------------------

Steven J. Quinlan, Neogen Corporation - VP, CFO, Principal Accounting Officer & Secretary [25]

--------------------------------------------------------------------------------

Well, we've made some significant investments, as we talked in prior conference calls, in both Brazil and Mexico to put money into the infrastructure development there in the last few years. And both Brazil and Mexico are very strongly profitable. And we think that they'll continue to be so going forward. And other biggest piece of our international operation is Europe, which has done really well as we've talked a lot on our calls. And we've added genomic capabilities to Europe in the last couple of years, and they're doing very well, and their profitability is it right about the corporate average.

--------------------------------------------------------------------------------

John Edward Adent, Neogen Corporation - President & CEO [26]

--------------------------------------------------------------------------------

And Brian, this is John. I think what's interesting is if we look at how we do that go to the market, we're -- first, we'll go through distribution. And then as we grow that business, we put in physical assets. And as we get in physical assets, that reduces our cost from having to manufacture and transport. So we do see the profit profile similar to what we have in the U.S. So it's a progression of how we grow these businesses to build those bottom lines and make them profitable and grow around the world.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

Our next question online comes from Mr. David Westenberg from CL King.

--------------------------------------------------------------------------------

David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [28]

--------------------------------------------------------------------------------

I guess, to start, have we anniversaried ThyroKare and some of your OEM distribution deals? And if so, I mean, what are we looking at in terms of organic growth rates in those businesses?

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [29]

--------------------------------------------------------------------------------

Have we annualized the bad news? Is that your question?

--------------------------------------------------------------------------------

David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [30]

--------------------------------------------------------------------------------

That is the ThyroKare and OEM distribution, yes.

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [31]

--------------------------------------------------------------------------------

Okay. John? Okay, I forget the dates. I think the answer is yes...

--------------------------------------------------------------------------------

John Edward Adent, Neogen Corporation - President & CEO [32]

--------------------------------------------------------------------------------

ThyroKare, yes. But not on that distribution agreement that I've mentioned.

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [33]

--------------------------------------------------------------------------------

I think this quarter -- I think we'll still have the revenue [stated] around the third quarter.

--------------------------------------------------------------------------------

Steven J. Quinlan, Neogen Corporation - VP, CFO, Principal Accounting Officer & Secretary [34]

--------------------------------------------------------------------------------

Correct. And that distribution agreement, that was about 1.8 million hit to the top line this quarter, so it's significant.

--------------------------------------------------------------------------------

David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [35]

--------------------------------------------------------------------------------

All right. That's very helpful. And then on the administration expense. I know you called out the IT part of it. Is there also maybe double -- maybe double executives? And is there may be some executive expenses that are coming out off the books as well or maybe some [one-off] costs in Q3 and Q4?

--------------------------------------------------------------------------------

Steven J. Quinlan, Neogen Corporation - VP, CFO, Principal Accounting Officer & Secretary [36]

--------------------------------------------------------------------------------

Yes. Certainly, John was sitting next to me so I chose to not bring that up on the call.

--------------------------------------------------------------------------------

John Edward Adent, Neogen Corporation - President & CEO [37]

--------------------------------------------------------------------------------

You said the new CEO was really expensive.

--------------------------------------------------------------------------------

Steven J. Quinlan, Neogen Corporation - VP, CFO, Principal Accounting Officer & Secretary [38]

--------------------------------------------------------------------------------

There were some duplicate expenses in the third quarter for sure -- I'm sorry, in the second quarter.

--------------------------------------------------------------------------------

David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [39]

--------------------------------------------------------------------------------

And those will be kind of rolling off slowly? Or how should we look at that rolling off in that administrative bucket?

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [40]

--------------------------------------------------------------------------------

Well, they will be higher because we got more people there. We've got more people in the IT area. As we've grown, we just -- I think we do awfully well as far as we break down. When we look at that, we look at sales and marketing, we look at R&D and we look at accounting, and we look at G&A and our general and administrative. And I think we've done pretty well. We've done very well, I think, in holding down the accounting and the general expenses. But we've gotten to a point that we just had to have a bigger bench there. So we're adding more people in the accounting area that we didn't have before. We're not going to spend a lot of money. In fact, one of the things we look at as one of the 10 objectives of the company is we're continuing to look at how do we increase sales per employee. We track that on a regular basis, just tracked it like last night. And where we were at the end of the first half of the year, what's our revenue per employee. So I think all of that's [saying that] trying to make sure that we don't let the G&A expenses outrun the growth of the company. And that's just not been the tradition here. But we have needed to add some people. We have needed to add some expense in IT, and we still do. We're probably buying now where we need to be. We're now probably buying -- we're buying where I'd like us to be in IT. And the only way to get there is you've got spend some money on people to do it.

--------------------------------------------------------------------------------

David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [41]

--------------------------------------------------------------------------------

I don't mean to keep belaboring the IT expense point, but how should we think about, in terms of growth of revenue of the business and where that IT expense is going to be ending up, I mean, and also in addition to staffing, I mean, should we be looking at this kind of growing and then flatlining as the business grows? Or is this kind of stuff that as the revenue grows, you're going to need more IT infrastructure that staffing is going to increase?

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [42]

--------------------------------------------------------------------------------

Well, you've got to -- you'll hear it from (inaudible) in IT in the management team. But we're getting to a point that we don't really know yet. We're still working on that. How much do we need to spend? Where are we? And how much do we need to source on the outside? Which way are we going? I think that yes, we've been, as a percent of revenues, IT expenses have been growing because they were pretty damn low to start with. So any growth at all has been shown some growth. I think we should be nearing the point that as a percent of revenue, we shouldn't see those, that cost continue to increase. Can we stabilize it where it is now based on a share of revenue? I would think so. Can we reduce that cost going forward? I don't know what's going to happen as the latest cyber problem or who's going to hack in later, and we know we've had -- we haven't lost anything but we've had our share of threats, too, enough to make us believers that you've got to have those things in place whether you like them or not. They're not productive. They don't add a thing to shareholder value. But you dare not forsake them. So I wish I had all the answers to your questions. And we will have them, but we don't have them today.

--------------------------------------------------------------------------------

David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [43]

--------------------------------------------------------------------------------

All right. No problem. We appreciate you keeping your data safe. Anyway, on valuations, I mean, you are a disciplined buyer. Are you seeing any changes in terms of what your particular acquisitions are asking for in price? And is that affecting pulling the trigger? I know you guys made so many acquisitions. There are so many good acquisitions. We get kind of antsy.

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [44]

--------------------------------------------------------------------------------

Yes. And frankly, I'm getting kind of antsy too. I've got 2 right now that I worked on -- Jason and I worked on at the beginning of the month and I'd like to start moving a little faster on. I think by and large, we've lost 2 that we got outbid on, greatly outbid on. It was -- in both cases, it was equity capital that was big piles of money on the home. And they'll compete with us and we'll see who's best at competing, I guess, over the next year. But there were a fit for us but not at the price. We're looking at, let's see, one now that's not on auction. We're looking at a second one that's not on auction. We're looking at a third one that's not on auction. So these are all companies -- in fact, all 3 of these acquisitions are companies that we've known for a while. And one case is a company that we ran after an offer on back a few years ago and they weren't quite ready to sell. So we see when you get into the Dutch auctions, they attract big piles of money, then their valuations get up. Where we're playing now, and unfortunately, we don't have any big ones, but where we're playing now, they're still fairly priced.

--------------------------------------------------------------------------------

David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [45]

--------------------------------------------------------------------------------

Got it. And then just one last real quick one for Steve. And just in our models, we do have to try to incorporate this new tax reform on the book. So is it a good way to start, maybe looking at what your percent of U.S. revenue is and maybe reduce proportionately, like from 35% to 21%, now it's 40% lower rate, is that kind of the -- what we should may be can do to start on our models and then maybe tinker as we get more information from you?

--------------------------------------------------------------------------------

Steven J. Quinlan, Neogen Corporation - VP, CFO, Principal Accounting Officer & Secretary [46]

--------------------------------------------------------------------------------

Yes, that's probably a fair way to go. Just I mean, if you think about right now, the statutory or prior to this, the statutory rate was 35% and we ran at about 33%. So if it's going to 21%, we're going to be somewhere in the 19%, 20%, 21% area, absent any of the other kind of noise. But I think your approach is right.

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [47]

--------------------------------------------------------------------------------

My concern there, and again, trying to keep up with it, just thinking about my own personal standpoint. What's exemptions today may not be exemptions tomorrow. In fact, they won't be tomorrow. So what kind of tax credits are we going to get? I don't know if the whole rule is going to change. So if it's just -- I don't think we're just looking at a flat 35% to 21%, and I'm not the one that will be talking about taxes, but it's too early for me to want to try to drive a stake in the ground. I think that we'd better understand what's going to happen. And I know that John and Steve have gotten our auditing group heavily involved and quizzing them on getting some tax advice. They're going to do our tax work for us. They ought to be giving us some tax advice, which I think they are, but we still don't know exactly where we are yet. It will be -- we'll be in a position to better answer that question come the end of Q3.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

Our next question online comes from Gerry Sweeney from Roth Capital.

--------------------------------------------------------------------------------

Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [49]

--------------------------------------------------------------------------------

Just one question. I know this call has been going a little bit longer, but it's a higher level one. It's a little bit of different tack. I mean, there's been some talk about administrative costs, et cetera. And then a question was posed to John as to his view of the company 6 months in. I was curious, as Neogen gets larger, there's a lot of products out there. Is there an opportunity to even maybe reduce some of the product line and refocus on some of the higher margin? I'm not necessarily saying anything is going to go or anything like that, but just a slightly different view on cost, expenses and focus on opportunity, complexity, things like that.

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [50]

--------------------------------------------------------------------------------

Did you raid my office last night?

--------------------------------------------------------------------------------

John Edward Adent, Neogen Corporation - President & CEO [51]

--------------------------------------------------------------------------------

That's something we've talked a lot about, and it's really trying to understand what markets do we want to be in, whether it's an existing line we have and that profitability and understanding where we are at a customer, what are we selling them and how can we expand that pipeline to the customer.

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [52]

--------------------------------------------------------------------------------

And we won't be -- and Gerry, we're not going to be throwing a bunch of products out. We're not going to be selling our product lines. Where we are, we belong. But where we need to be is streamlining those. And we're honestly working on those right now. And in fact, a week after next or next week, whenever it is, I'm going back to Europe and we're going to do some more work on rationalizing our product lines between the Lab M -- our culture media business is located there -- and our product line here that's been operating under another name. Then we all -- there'll be one product, one name, one label, rationalized and available around the world. They'll get the big Neogen name on the front with the flask beside it, and we'll do more to take care of our brand names. We've got a lot of brand names that we inherited with the companies, and they serve their purpose to a point. But it's time now to look to the sides who we really are. So we'll be exiting some brands. We've got products today that when I say, "Why are we still making that product?" Well, we've got this one customer and he won't make a change. And if we change and he won't like it, he might leave us. And the answer is, if you can't sell him on the new product that's better than the old one, then maybe he ought to leave us. So we've got some of that activity that's going on. But you're dead on. It's the time and you'll see more of it and hear more of it over the course of the next year.

--------------------------------------------------------------------------------

Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [53]

--------------------------------------------------------------------------------

Okay, great. I appreciate it. So again, there's an opportunity to tweak some products?

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [54]

--------------------------------------------------------------------------------

Absolutely, yes.

--------------------------------------------------------------------------------

Operator [55]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question online comes from Mr. Kurt Kemper from Hilliard Lyons.

--------------------------------------------------------------------------------

Kurt Anthony Kemper, Hilliard Lyons, Research Division - Analyst for Healthcare and Pharmaceutical Industries [56]

--------------------------------------------------------------------------------

That was a great review of kind of the Neogen's history in animal genomics. Can you kind of give a more condensed like 2017 review in terms of the pricing and volume and the competition?

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [57]

--------------------------------------------------------------------------------

You're talking about animal genomics, specifically?

--------------------------------------------------------------------------------

Kurt Anthony Kemper, Hilliard Lyons, Research Division - Analyst for Healthcare and Pharmaceutical Industries [58]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [59]

--------------------------------------------------------------------------------

That's a place where I think we are dominant in the marketplace. We've got one competitor of consequence that's of our size. That's Zoetis, a spin out of the former Pfizer animal health business. They're a good competitor. When I say they're good, they take business away from us. They're not good but they play fair. There's no pricing fights in the marketplace to speak of. But they play, for instance, they play really in about our 2 market areas. Where we're across-the-board. We do all of the genomics work for every beef breed in America, and we're exclusive on every one of those beef breeds expect for Angus. We share that with Zoetis. And I think we've probably got a bigger share of that market than Zoetis does. We compete with each other in the dairy heifer replacement program. They may be ahead of us there, but we're running hard at them. And those are both very important. That's like, for $25, you can run a day-old dairy calf through the system and tell what kind of mama cow she'd going to be 2 years from now and what kind of milk she's going to give and right now whether she's going to have a problem rebreeding, et cetera. So it's very economic in these industries to begin to realize that. There are a few smaller companies around. We've made some acquisitions in the genomics side. We bought Deoxi in Brazil because they're close to that Nelore cattle breed down there. And pretty importantly, they dominated that market, so we still do. In China today, we're sorting out the China market. There's a piece of the China market in the dairy side that's very good. We're doing some hog work in China. We're doing some swine work, and we've got business with all of the majors there. We have business with the largest of the broiler breeder companies. They own probably half of the worldwide broiler breeder [package] business. So that side of the business continues to grow. We've been able to pull our costs down. We had a little bit of concern from outside on our operating profit percentage. I think, Steve, we were, this time a year ago, we were probably in the 13%, 14% range, and we're now up over 20%. So we were able to get to that one. We knew we could. We just had to have a little bit of time to get there. We run that on a worldwide basis, so every month, I get it -- and we all get a copy of the statement on what does the genomics business look like worldwide because we may have some product that we run in the labs in Ayr, Scotland and it goes via cloud overnight to Lincoln, Nebraska. And they run it through the bioinformatics model and send it back to Scotland before daylight. So it has become a worldwide business, with the recent acquisition in Australia being an example of that. I guess, we can say the sun never sets on Neogen's genomic business now as we're scattered around the world. So it's an important part of our business. We talk about animals, and your question was animals. But what's happening there in the 16s side is also very exciting. We're using that over on the food side. We've got several customers that send us samples, just say, "We've got a spoilage problem. We don't know what it is. Can you figure it out?" We figure it out. We tell them and they can trace it back, and oftentimes -- or to this point always, been able to solve that spoilage problem. So genomics is not just confined to animals. But I think -- and we always did think it was going to play an important part as we looked at the food system. I don't know whether that answers your question or not. But...

--------------------------------------------------------------------------------

Kurt Anthony Kemper, Hilliard Lyons, Research Division - Analyst for Healthcare and Pharmaceutical Industries [60]

--------------------------------------------------------------------------------

Yes. Yes, that was very helpful. And veterinary instrument's strength, your fiscal year-to-date. Has that been more market strength or you're all taking market share there?

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [61]

--------------------------------------------------------------------------------

I think we're probably taking market share. We've evolved to be the only real veterinary instrument manufacturer in America. Our biggest competitor produces products offshore, in New Zealand, and it's not quite the same product line, while we still got the preponderance of metal-based products. I'm still using the syringe that my granddaddy used. I don't know whether that's good or bad, but we're still playing in that game. And our distribution is good. We're almost everywhere. We're spreading that internationally. One of the things, of course, that John Adent brought to the table was a clear understanding of distribution, and those products all have to go through distributors. He's played that game for 13 years, and he's been a huge benefit as our guys are looking at not just the U.S. but around the world. We're seeing the same thing developed now in Europe as we -- as our distribution over there. So I think we'll -- that overall market is probably not growing that fast. But I think we're going -- we'll make up for the lack of fast market growth by taking probably a little more market share.

--------------------------------------------------------------------------------

Operator [62]

--------------------------------------------------------------------------------

And our final question online comes from Mr. David Stratton from Great Lakes Review.

--------------------------------------------------------------------------------

David Michael Stratton, Great Lakes Review - Research Analyst [63]

--------------------------------------------------------------------------------

And [a minor] a follow-up to your tax rate questions. Essentially, even though you can't break down where you see the tax rate going right now, what are your plans for the tax savings that you are expecting to realize as you drop from 35-around percent to the low 20s? And does that change the way you view your capital structure specifically around the thought of dividends or debt now that you'll have some more cash freed up?

--------------------------------------------------------------------------------

John Edward Adent, Neogen Corporation - President & CEO [64]

--------------------------------------------------------------------------------

I think, David, part of that is the way we look at our cash today. It's just going to be an increase in our cash flow that we have today and the way that we invest the cash today is going to not change. To Jim's point, we're going to be strategic around acquisitions. We're going to continue to hire great people that are going to allow us to grow faster than the marketplace and continue to reinvest in the business. So I view it as an opportunity for us to take a larger cash flow and put it back to work for our shareholders.

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [65]

--------------------------------------------------------------------------------

We'll give you better answers at the end of the next quarter or at the end of the current quarter.

--------------------------------------------------------------------------------

Operator [66]

--------------------------------------------------------------------------------

Thank you. We have no further questions at this time. And Mr. Herbert, I'll turn it over to you for any concluding remarks.

--------------------------------------------------------------------------------

James L. Herbert, Neogen Corporation - Executive Chairman [67]

--------------------------------------------------------------------------------

Yes, thanks, Richard. Our concluding remarks is we're halfway through -- a little more than halfway through our fiscal year and all the way through year 2017. I think it will have been good. And we really are appreciative of the calls and the interest that you have here today. I always leave this being saying, "By golly, I want to be able to better answer that question next time." And I think that makes for better management. So we appreciate your probing questions. And we also obviously appreciate your continued coverage. So thanks a lot, and we will see you in a couple of months. Have a happy new year, and thank you.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

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