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Edited Transcript of NEOG earnings conference call or presentation 24-Sep-19 3:00pm GMT

Q1 2020 Neogen Corp Earnings Call

LANSING Oct 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Neogen Corp earnings conference call or presentation Tuesday, September 24, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Edward Adent

Neogen Corporation - CEO & President

* Steven J. Quinlan

Neogen Corporation - VP, CFO & Secretary

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Conference Call Participants

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* Andrew Frederick Brackmann

William Blair & Company L.L.C., Research Division - Associate

* David Michael Westenberg

Guggenheim Securities, LLC, Research Division - Analyst

* Jason Andrew Rodgers

Great Lakes Review - VP

* Kevin Kim Ellich

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

* Paul Richard Knight

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

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Presentation

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Operator [1]

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Welcome to the Neogen First Quarter Fiscal Year 2020 Conference Call. My name is Adrianne, and I'll be your operator for today's call. (Operator Instructions) Please note, this conference is being recorded. I'll now turn the call over to John Adent. John Adent, CEO, you may begin.

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John Edward Adent, Neogen Corporation - CEO & President [2]

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Thank you, Adrianne. Good morning, and welcome to our regular quarterly conference call for investors and analysts. Today, we will be reporting on the first quarter of our 2020 fiscal year, which ended August 31.

As usual, some of the statements made here today could be termed as forward-looking statements. These statements, of course, are subject to certain risks and uncertainties. The actual results may differ from those that we discuss today. The risks 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 live by telephone conference, I also welcome those of you joining us via the Internet. Following our prepared comments this morning, we will entertain questions from participants who have joined this live conference.

I'm joined this morning by our Chief Financial Officer, Steve Quinlan, who will provide more detail on our results for the quarter. Earlier today, Neogen issued a press release announcing the results for our first quarter. As stated in the release, our revenues were up 2% to approximately $101 million. Our net income for the first quarter was $14.7 million or $0.28 per share compared to last year's quarterly net income of $15.2 million or $0.29 per share. As a bit of perspective on our net income performance, those first quarter earnings last year represented a 28% increase over the prior year and that increase was primarily the result of higher deductions relating to employee stock option exercises, which contributed to an effective tax rate of 11% for the quarter.

In the quarter, we were once again challenged by currency headwinds. In a neutral currency environment, our sales would have been $1.2 million higher this quarter. As with other international organizations, we're committed to riding out the difficult international business climate that all U.S.-based companies now face.

While some of our businesses did well in the quarter, our overall results did not meet the performance expectations that we have for ourselves. Steve will detail some very strong performances that we had in individual market segments, including our genomics and natural toxin diagnostic test kits. He is also going to address some of the areas where we had weakness. Steve?

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Steven J. Quinlan, Neogen Corporation - VP, CFO & Secretary [3]

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Well, thanks, John, and welcome to everyone listening this morning. John has reported the overall sales and profit performance for the first quarter of our fiscal year. In the next few minutes, I will give you some color behind those results and will start by discussing the performance of the Food Safety group.

We do continue to be impacted by fluctuations in currencies in the countries we operate in. As John mentioned, revenues would have been $1.2 million higher for the quarter in a neutral currency environment with the euro down 4% and the pound down 5%, each largely the result of the Brexit uncertainty. The Chinese RMB declined 4%, due in part to the continuing trade standoff with the U.S., and the Aussie dollar declined 7% in the quarter. And about a $1 million of that shortfall is in the Food Safety segment as the majority of the international businesses report in through this segment.

Revenues overall for the Food Safety segment were $51 million in the first quarter of fiscal 2020, that's a decrease of 2% compared to $52.2 million in last year's first quarter. The currency issues impacted the segment, but there were other issues within our international businesses which also affected our results. Our Brazilian operations had a 42% increase in sales of food safety diagnostic products led by continued market share gains in aflatoxin sales during the country's corn harvest, and an 18% increase in dairy antibiotic test kit sales, but lost a large commercial lab customer testing for drugs in commercial drivers in Brazil as that customer changed to a higher throughput method for testing.

And as we noted in last year's first quarter, we had a nonrecurring about $1 million insecticide sale to a government agency in that quarter. These 2 items offset the gains I discussed and the result was a decline -- a 16% decline in sales in Brazil overall in the current quarter. The lost forensic sales will impact the second and third quarters by approximately $800,000 each quarter and a lesser amount in the fourth quarter.

Our European operations had sluggish results for the quarter, with revenues up 1% in local currency, primarily on the strength of a 6% increase in our England-based cleaner disinfectant business. Genomics revenues, which grew at a double-digit pace throughout 2019 and 24% in last year's first quarter, rose 4% in the first quarter of this year. These increases were partially offset by declines in culture media revenues, lower sales of our products to detect spoilage organisms due to a large equipment sale in the first quarter of the prior year and relatively clean crops after a mild DON outbreak last year in France. After converting to US dollars, revenues for the European operations declined by 4% for the quarter.

Neogen Latinoamerica, our business based in Mexico City, had strong 36% growth in sales of our Food Safety products led by mycotoxin kit sales due to an aflatoxin outbreak in corn in Mexico. Sales rose broadly across all of the diagnostic product lines. Sales of cleaners, disinfectants and rodenticides however dropped 32%, due in large part to lower demand and delayed orders from larger customers and distributors and this resulted in an overall increase in revenues of 5% for the quarter for this group.

Our operations in China were negatively impacted by the African swine fever outbreak in that country, which resulted in lower genomic testing for pork in the quarter and contributed to an 18% decline in revenue in China. Our domestic Food Safety business only grew by 5% for the quarter, but there were some nice areas of growth within the business. Revenues for our industry-leading product line to detect inadvertent allergen contamination, which includes diagnostic test to determine the presence of milk, peanuts and processed soy among others were up 11% domestically in the quarter. Tree nuts and gliadin test kit sales were particularly strong, up 45% and 17%, respectively, for the period. We've continued to strengthen our allergen test kit portfolio and recently added new tests for contaminants, such as coconut.

Our AccuPoint line, which is used to detect general sanitation and cleanliness in food processing environment had a strong 12% increase in disposable sampler revenues during the quarter. Our domestic natural toxin product lines -- product sales decreased 3% compared to last year's first quarter, due in part to the late planting of corn and other grains this spring caused by the severe weather, which has delayed the harvest of these crops. We believe that as the crops mature, we will see an uptick in these sales in the second and third quarters. Revenues for our test to detect the presence of antibiotics in milk declined by 8% in the quarter, due primarily to lower demand from a large European distributor. Our domestic culture media business declined 13% in the quarter. The number of our larger customers, particularly those in animal vaccine production, have pushed their orders for these products to the second quarter and second half of the year due to weakness in their markets.

Finally, we were unable to ship a number of readers for our product line to detect spoilage organisms, such as yeast and mold due to backorders of a key part with one of our equipment suppliers. This resulted in an approximately $400,000 shortfall in reader sales for the quarter. These readers are expected to ship in the second quarter.

The Animal Safety segment continues to be adversely impacted by the ongoing trade impasse between the U.S. and China, which has disrupted our markets. However, it recorded revenues of $50.4 million for the quarter, up 6% over the $47.4 million achieved in last year's first quarter. This growth was driven by a 24% increase in service revenue at our domestic genomics testing and bioinformatics business located in Lincoln, Nebraska, with continued strength in the commercial beef and dairy cattle markets and market share gains in the companion animal parentage and wellness testing markets. Worldwide, genomics revenues rose 17% with additional growth in Brazil, Australia and Canada offset by lower sales in China.

Animal Care products sold out of our Lexington, Kentucky-based manufacturing and distribution center, such as small animal supplements, wound care and antibiotics were up 10%. And vet instruments, such as disposable syringes and marketing products rose 9% for the quarter. Now these gains were partially offset by lower sales of life science products, the result of lower forensic kit sales to commercial labs and higher promotional rebates. Rodenticide sales declined 8% in the quarter, due primarily to lower rodent pressure in certain areas of the country. And domestic, cleaner and disinfectant sales were essentially flat and insecticides rose 6% in the quarter.

Gross margins were 47.5% for the quarter compared to 46.9% in last year's first quarter. The improvement here is due to increased margins at our domestic genomics operations in the Animal Safety segment and a shift in product mix in the Food Safety segment toward products which have higher gross margins, and lower sales of lower margin product, such as culture media and biosecurity products.

Overall, our operating expenses rose 6% on the quarter compared to last year's first quarter. Sales and marketing expenses increased 2% in line with revenue growth for the quarter.

General and administrative expenses rose 5% for the quarter due primarily to higher depreciation expenses, resulting from our continuing investments in information technology infrastructure, stock-based compensation and increased legal fees.

Research and development expenses increased $869,000 or 31% over the prior year as we continue development spending on a number of new products, which are scheduled to be launched in late fiscal 2020 and early fiscal 2021. The $3.8 million we spent this quarter is similar to the $3.6 million we spent in the last quarter of 2019 and we expect this run rate to continue throughout fiscal 2020.

Operating income for the first quarter was $16.3 million compared to $16.5 million in last year's first quarter. When expressed as a percent of revenues, operating income was 16% exactly compared to 16.5% last year with the decline in the results of a higher R&D spending level. We recorded $1.5 million in interest income for the quarter compared to $930,000 last year and this reflects our higher cash and marketable securities balances and higher interest rates on those balances.

Foreign currency losses totaling $117,000 in the first quarter compares to $386,000 in losses in the same period last year. Our pretax profit was $17.7 million compared to $17.1 million in last year's first quarter and our effective tax rate for the first quarter were 17% compared to 11.1% in last year's first quarter. Last year's effective rate was unusually low due to $2.3 million of tax benefits recognized from the exercise of stock option. This year, the comparable number was $769,000. As I've mentioned on previous calls, the volume of option exercises can result in large fluctuations in the effective tax rate for the comparative periods.

On the balance sheet, our net receivables balance declined by 4% compared to year-end and our collection period was 64 days for the first quarter. Inventory increased by $1.7 million or 2%. We're focusing a significant effort this year on improving our inventory turns and have objectives and programs in place at each operation to make that happen. We generated $23.7 million in cash from operations during the quarter, invested $4 million of that in property, plant and equipment and additional amounts to license technology.

I'll stop here to say that we realize that we need to accelerate the organic growth performances of our business. There were a number of areas in the business which performed well in the quarter, which were obscured by onetime factors and other market noise. We continue to be excited about the remainder of the year and I appreciate your support.

And at this point, I'll turn it back to John for further comments.

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John Edward Adent, Neogen Corporation - CEO & President [4]

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Thanks, Steve. Although we didn't reach all the financial goals we have set for ourselves in the quarter, we were able to solidify some partnerships that we believe will help drive our future performance. Earlier this year, FDA Deputy Commissioner, Frank Yiannas, spoke about a New Era of smarter food safety. He said that this New Era would be an enhancement of FSMA and focus on utilizing new and emerging technologies to make our food supply safer.

The blueprint for the New Era would address several areas, including traceability, digital technologies and evolving food safety platforms. I believe in this vision. And at Neogen, we're leading the way in several areas. First, we signed a partnership with Corvium, the leading producer of food safety and risk management software. The success that we've had developing and marketing food safety tests has led to an almost overwhelming amount of data that our customers must sort through to protect their customers and businesses. This platform will help our food safety diagnostic customers aggregate, analyze and act on that data. The combination of world-class testing products with a world class food safety and risk management system will allow our customers to reduce their food safety risk.

The new Neogen analytics platform will help our customers make quicker data-driven decisions. For example, let's say, a tester receives a positive result using our Listeria Right Now test. What caused that result? Was it a onetime event that resulted from a transient problem that can be solved by a single repeated sanitation effort? Or is it a systemic problem that the company must address through permanent operational changes? The software will help our customers determine the extent of the problem and provide a digital record for the remediation and mitigation efforts.

We continue to investigate new and novel block chain, artificial intelligence and machine learning solutions to enhance our Neogen analytics platform and help our customers identify and eliminate food safety issues. We feel that providing products and services in an integrated and easy-to-use platform will continue to drive Neogen's market-leading status. Additionally, last week, we announced a collaboration with international genetic solutions to make our market-leading Igenity Beef profile even better. Beef cattle producers use the product to select the best animals for their breeding programs. That selection is now absolutely critical as replacement heifers represent an investment of about $2,000 per head in the cost of development and the lost sale opportunity. As part of this partnership, Neogen will benefit from access to information that will improve the Igenity Beef profile and IGS will endorse and promote the use of the product, an important seal of approval from one of the largest genetic evaluation services in the world.

We believe that we've only just begun to realize the tremendous potential that our genomics technology can offer the livestock and companion animal industries as well as food processors. We've continued our genomics laboratory expansions in China, Brazil and Canada and have just broken ground on an expansion at our flagship operation in Lincoln, Nebraska. We're doing all that we can to satisfy the accelerating demand for our genomic services.

As Steve mentioned, while our overall performance for the quarter did not meet our goals, we feel good about where we're going from here. We continue to be well positioned in our growing markets with the right people and products and with the organizational strength to reach anywhere in the world where need exists. We believe our continued worldwide dedication to food and animal safety will allow us to provide the results that our customers, shareholders and employees have come to rely upon. I'm excited about our future and look forward to stronger performances going forward.

Let me stop at this point, and entertain any questions from those of you who have joined the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Brian Weinstein from William Blair.

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Andrew Frederick Brackmann, William Blair & Company L.L.C., Research Division - Associate [2]

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This is actually Andrew Brackmann on for Brian. Maybe we could just first start off on the Food Safety side. It seems like there were several moving pieces there. Maybe -- I appreciate the commentary on one of these -- some of these being sort of one-offs, but what gives you the confidence that there is not really an underlying structural demand issue there?

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

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Yes, I think, Andrew, it's because we had -- we can quantify exactly what were those issues on a one-off basis. So we -- as Steve talked about in Brazil, it was a change of a customer moving to a high throughput solution that we don't offer and our Rogama tender to a government agency a year ago, we talked about that. I know Steve's got the details of exactly how that walk-up looks, so let him tell you a little bit, Andrew, on how that walk-up looks to get to a number where we feel it's more normalized.

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

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Sure, John. So Andrew, that Rogama tender was about $1 million. And if we just stay on the Food Safety side of the business that would have been about a 2% improvement in results on that side. We talked about the currency being about $1 million on that side, which, again, is about 2%. That forensic business that the customer switched out, that's about an $800,000 impact for the quarter, about 1.5%, 1.6%. And then we had, what I would characterize as equipment and distributor issues that were about $1.4 million that would have been another 2.5%. So when you look at those, that's about an 8% differential from the Food Safety results that we reported and that gets you to about 6%. And then I would tell you that there were just other results that I would characterize as being somewhat sluggish this quarter, but not systemic and didn't indicate a problem in the business. So that's why, I think, John and I are both excited about the future of the business and that we aren't -- I mean, disappointed in the quarter, yes, but not -- but still excited about the prospects going forward.

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Andrew Frederick Brackmann, William Blair & Company L.L.C., Research Division - Associate [5]

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Okay. That's very helpful. And I don't want to put words in your mouth. I know you guys don't guide on a segment level detail, but the expectation should be as we move into the second quarter and sort of through the end of the year that growth rate on the organic and reported basis should improve more to that mid- to high single digit?

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John Edward Adent, Neogen Corporation - CEO & President [6]

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Yes, I mean, we -- like I said, I'm looking forward to stronger quarters. I want to get this one behind us and get going.

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Andrew Frederick Brackmann, William Blair & Company L.L.C., Research Division - Associate [7]

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Okay. And then just last question from me. I know we've talked in the past a little bit about the M&A strategy, but any update there on the pipeline or what you're thinking about in terms of size of deal or timing?

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John Edward Adent, Neogen Corporation - CEO & President [8]

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Size of deal, we're looking at a wide range from tuck-ins to a bit more chunky, which we said we wanted to do. From a timing standpoint, on the tuck-ins, I would have liked to had those done already this quarter, but it's hard to push some sellers, so those -- we know that those are in the queue and we are working actively on those and we continue to work the channel. The pipeline looks good. It's just getting some deals closed.

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Operator [9]

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And our next question comes from Paul Knight from Janney.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [10]

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John, could you go over the genomics business a bit? You had mentioned various expansions, if you could recap that? And what are customers buying? I know that you do a microarray-based testing, but are you offering database inquiries, et cetera? So if you could kind of go over the bricks-and-mortar. And then, secondly, what the product offering encompasses today.

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John Edward Adent, Neogen Corporation - CEO & President [11]

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Sure, Paul. So on an expansion standpoint, I mean, I think the biggest one is expanding our facility in Lincoln, Nebraska. We've run out of room there and we've got a building next door that we're building out. So we're going to increase capacity there. We're moving into a brand-new facility in Canada that is already lab equipped. So when we bought the Canadian business, we knew we were going to have to expand it, so we did that. We've increased in Brazil. We've moved that facility, I think, that was probably about 2 quarters ago, but really getting that up and ramped and rolling. And then, increased in China. So on a physical standpoint, we're really increasing the square footage and the amount of tests we can run and we need to because we've got to keep up with the demand from the customers.

On the product portfolio side, we continue to grow in our Beef Igenity profile product, which allows commercial producer to choose the right animals for their system. I think what's exciting about the announcement with IGS is that that's a pretty progressive group. It's made up of 12 breed associations. They've got over 16 million animal records and they add about 400,000 new animals annually. So think about that using that data for us to improve the predictiveness and the effectiveness of our products. We're really excited to continue that type of relationship. We're seeing growth in market share on the dairy side and picking the dairy heifers. And then, we've seen a nice growth in companion, whether it's -- on both our wellness testing and our parentage testing. So it's been a really nice growth story and it's continued to be a nice growth story and this quarter was no exception to that.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [12]

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And then lastly, John, what would be your goal on an operating margin?

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John Edward Adent, Neogen Corporation - CEO & President [13]

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You want me to channel Jim. So I channel Jim, follow-up for this, I think, if Jim's listening, I know he's smiling right now. I think you got to have a goal of 20 or more. I mean I think our business can do that. It's something that we continue to strive for. But I think what we really want to focus on is, continuing to incrementally expand operating margin. And not so much say, if I hit 20, that's the goal, because it's not the goal. I think it's -- we want to continue to expand operating margins and do it in a way that balances our growth so we don't stifle growth, we don't stifle innovation, but we continue to improve that financial metric for our shareholders.

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Operator [14]

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And the next question comes from Jason Rodgers with Great Lakes Review.

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Jason Andrew Rodgers, Great Lakes Review - VP [15]

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Yes, just wanted to follow up on the loss of the Brazil lab customer. I wonder if you can provide any more detail as far as why they changed solutions? And is there any other lab customers you have in Brazil at risk there?

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John Edward Adent, Neogen Corporation - CEO & President [16]

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So when that business started, that was really a great opportunistic solution that our team provided to a marketplace. We had a test that really could meet the needs there, but it really wasn't our business, we didn't know those customers very well. And what happened was that Brazilian hair market grew so quickly that the customer needed and it was the largest in that market, needed a higher throughput solution, and we just didn't offer it. So we continue to sell our test kits to other labs within that market, but just don't have that same level of throughput. And I'm not as concerned because that equipment is extremely costly from a capital layout, from a capital standpoint and only the largest can really afford to do that type of solution, so I am not as concerned. I think what the risk there going forward is if the new President decides to eliminate that regulation and he ran on that from a campaign promise. Now he hasn't changed anything yet, but that could be something looking forward that if he stops requiring the test, then high throughput of ours doesn't matter, they are just not going to test for it.

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Jason Andrew Rodgers, Great Lakes Review - VP [17]

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All right. And then, looking at the genomics market, you talked about some good growth in that whole companion animal business. How large is that now as a percent of your total genomics business? And how fast do you expect that to grow? And how large of a market could that be?

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John Edward Adent, Neogen Corporation - CEO & President [18]

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I don't know if we've ever -- Steve is going to have to look. I don't know if we've ever split that out, but let me talk, Jason, a little bit about how big it could be. I mean think about kind of the tremendous growth that on the human side, you had on ancestry.com or some of those other parentage types. I mean their growth has been just phenomenal, and I think that always -- those type of trends always seem to trickle down to the companion segment as pets are part of the family and people want to know the history of where my dog came from and what its traits are. Did it have a champion in its pedigree in the background? So I think those things are very important and it's going to continue to grow.

The other piece we're really excited about is the wellness piece. And that we're just getting started with and working on is looking at can we help pet owners and veterinarians make better decisions around treatments if we could predict that this -- your puppy perhaps has a tendency for hip dysplasia or for some other disease that we could find a market for. That would then help you customize a diet or a training program or an exercise program that is going to help mitigate that to give that -- to give your pet a much better quality of life. So I think those are big markets and we are just scratching the surface on them.

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Jason Andrew Rodgers, Great Lakes Review - VP [19]

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Okay. Thanks for the detail there. And just one final one. Given all the increases that are underway in genomics, I wondered if you have a updated CapEx estimate for fiscal '20?

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Steven J. Quinlan, Neogen Corporation - VP, CFO & Secretary [20]

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The biggest item for CapEx in the genomics business was going to be the expansion of the Lincoln facility that John mentioned, that's probably going to ultimately be about a $2.5 million renovation or build-out. And then, there will be some equipment that will follow behind it that may move into fiscal 2021, but it will be about $2.5 million of spending in this year.

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Jason Andrew Rodgers, Great Lakes Review - VP [21]

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So where would that put CapEx overall in company-wide for fiscal '20?

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Steven J. Quinlan, Neogen Corporation - VP, CFO & Secretary [22]

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CapEx, it's going to be -- I'd put it somewhere in the $15 million to $18 million range depending on timing of spend, somewhere in that.

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Operator [23]

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And the next question comes from Kevin Ellich from Craig-Hallum.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [24]

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I guess let's start off with the African swine fever. You guys did call out the 18% decline in revenue in China. Just wondering what the outlook is now? And do you expect this pressure to continue? And, I guess, for how long?

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John Edward Adent, Neogen Corporation - CEO & President [25]

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Yes, that's a good question, Kevin. I think the pressure will continue on the genomics side a little longer because they just are unclear how they're going to go forward. And the nice thing about the diversity of our businesses is the puts and takes. Because while we had that decline there, I mean, we had increased sales of cleaners and disinfectants in China for the exact same reason, right? So it's a negative on one side of the business, it's an opportunity on the other. And I just don't know whether China's got a good handle on how they're going to manage this disease. And not just China, I mean, everybody else, to be quite honest.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [26]

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Right. And have you seen the impact of African swine fever spread to some of the other markets that you're in John?

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John Edward Adent, Neogen Corporation - CEO & President [27]

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Yes. I mean, you saw South Korea just announced last week that they have confirmed cases that came from North Korea who hasn't announced, but I was shocked that North Korea hasn't announced anything. I think now it's in 13 countries and it's -- and the challenge now is, I think -- Philippines was the other one, Kevin, and that one was a little concerning because now it's not just land-based. So you could see how it goes from China to the Korean Peninsula through land, but now this thing. When you got to the Philippines, they had to go on a boat or a plane. So it's going to be a little interesting.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [28]

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Well, hopefully that will be good for your cleaners and disinfectants business...

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John Edward Adent, Neogen Corporation - CEO & President [29]

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That's exactly right.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [30]

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Right. Right. So as per the -- it's interesting on the companion animal genetic testing, really appreciate those comments. I see you guys have your own tests, but are you doing any private-label work? I mean, clearly, there is a lot of genetic test brands out there now, like, Wisdom Panel, Embark. Are you doing any private-label or have you thought about doing any of that?

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John Edward Adent, Neogen Corporation - CEO & President [31]

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We do. I mean we do help out and do that. We're the back office for some of the larger ones in the industry.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [32]

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Okay. That's kind of what I was thinking. And then, lastly, you talked about accelerating organic growth. And clearly, appreciate the comments on the food safety side. But what other things are you putting in place to drive organic growth? And I guess, over what time frame do you think it will take before we see that benefit?

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John Edward Adent, Neogen Corporation - CEO & President [33]

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Yes, well, we've got new products and technology coming in the second half of the year that we're pretty excited about. That -- it's going to help us long term with the -- in the back half of the year. I can't say that I'm counting on it to be a big driver for this fiscal year. We're adding sales people. We continue to add sales teams in the right markets to continue to try to grow and find that -- find the marketplace. We're constantly evaluating our distributors. I think what was interesting was, we had some programs that were pretty successful in the Animal Safety side that got distributors interested in the U.S., which helped that growth. I don't think the market got any better, but I think some of the things that we offered had a positive influence on those distributors.

But as Steve mentioned, I got a distributor in Europe that we've been working with for a while, and we've had declining sales for 2 to 3 years, and we've got to address things like that. And so those are some of the things that we've got to do to continue to drive organic growth is to continue to put more people in the field to help drive our direct sales, work with our distributor partners to help them reach the end customer and influence the end consumer to pull product through their warehouses so we can drive sales that way also.

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Operator [34]

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(Operator Instructions) And your next question comes from Kevin Ellich from Craig-Hallum.

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John Edward Adent, Neogen Corporation - CEO & President [35]

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We just did Kevin.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [36]

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No. I actually queued back up. I don't know if anyone else is in, John. But...

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Steven J. Quinlan, Neogen Corporation - VP, CFO & Secretary [37]

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Oh, go ahead, Kevin. You're back on, all right. Nice to hear from you, Kevin.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [38]

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You talked a little bit about the wet summer that we've had in the Midwest, and I think you said you expect sales to improve here in the next couple of quarters with the corn crop coming in. Just wondering how much that affected growth this quarter if or if it had any impact?

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John Edward Adent, Neogen Corporation - CEO & President [39]

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I mean there was probably a little bit of timing, Kevin, but it really -- I can't say that much. I mean, I know the harvest is delayed because of such a wet spring and everything is delayed. But maybe some early crop corn last year would have been in the first quarter and now, it's in the second. But I don't think it's that big of an impact. Most of that corn harvest is always in the second quarter anyway.

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Operator [40]

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And our next question comes from David Westenberg from Guggenheim.

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David Michael Westenberg, Guggenheim Securities, LLC, Research Division - Analyst [41]

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So you've talked about your long-term growth rate around high single digits, 8%-ish, with Animal Safety being 6% to 8% and Food Safety being 8% to 10%. So just wondering, do you still see that as the long-term growth rates of the business? And how confident are you that you can grow back to that rate? And do you think there might be any market share dynamics over the last few quarters that might have been affecting those growth rates?

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John Edward Adent, Neogen Corporation - CEO & President [42]

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So David, I think -- yes, I think, there's been some market dynamic, especially, on the Animal Safety side, and we beat that up pretty good. I mean that's a cyclical market, and we're kind of in a trough with that one and that's just a -- that's a tougher one to squeeze out those type of rates. Food Safety, I feel very confident. I mean there was just a -- there was a report that came out the other day from I think it was the Swiss Federal Institute of Technology. And what was interesting about that, they talked about that meat consumption has risen by more than half in Africa and up by 2/3 in Asia and Latin America. So our long-term prospects, whether it's on the farm side helping those producers produce clean, healthy animals or even on the Food Safety side is going to continue to grow. So I think we've got really good opportunities. And then, when we start getting some acquisitions and layering them on top, then I'm really excited.

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David Michael Westenberg, Guggenheim Securities, LLC, Research Division - Analyst [43]

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All right. And then on the acquisition front, so how would you categorize private equity right now? Do you still feel like the valuations do seem a little bit higher than they are historically? And do you see any pickup in terms of competition for acquisitions?

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John Edward Adent, Neogen Corporation - CEO & President [44]

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It depends, David, how far your history goes back and looks. I mean if you want to -- if you go back -- this has been a pretty -- there's been a lot of money in the market for the last couple of years. And yes, if you go back and say, you want to look over 10 years, then yes, the rates are probably higher than the 10-year average. But over the last couple of years, there's still a lot of money on the sideline, trying to get put to use. And so maybe we've done too good a story of telling how great a market this is because now everybody wants to come in it -- but, come on in, I'm ready to go. I mean we battle everybody every day, right? So we really believe in the team. We believe in our products. We believe in the people we have, and we're ready to compete.

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David Michael Westenberg, Guggenheim Securities, LLC, Research Division - Analyst [45]

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Got it. All right. No -- just one last question. I know you already got into it with Kevin's question, but just want to get further kind of conceptualize what the long-term opportunity around ASF. So can you maybe give maybe some feedback from customers in Asia or some way for us to think about all the opportunities? Because I mean, obviously -- I mean cleaners and disinfectants business picked up, but could this be some sort of 10-year drive of multiproducts? I mean this really would help us think about the upside of what that could be.

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John Edward Adent, Neogen Corporation - CEO & President [46]

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Yes. I mean if you think conceptually, right? And you would say, with this type of issue, strong efficacious products encompassed with a biosecurity program would be a benefit to Neogen in the long term with this. But you can't have one without the other. You have to have a program in which you are doing things properly to stop the spread of the disease. So I think, long term C&D, absolutely. I also think, if you think longer term, on the genomic side, when they have to repopulate all those animals, it's going to be in their best interest to try to pick the best breeding stock to repopulate all those animals, whether it's in China or Romania or South Korea or Philippines, and we work with all those companies today. So I think we have opportunities here, but it's a put-and-take. I mean you're going to have some negatives because if they're just depopulating 30%, 40%, you're not going to process those animals. If you're not going to process the animals, you may not use our pathogen testing. So there are upsides to this and there are downsides, but either way, Neogen can help customers find the right solutions.

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Operator [47]

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And this concludes our question-and-answer session. I will turn the call back over to John Adent for final remarks.

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John Edward Adent, Neogen Corporation - CEO & President [48]

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Great, Adrianne. Thank you. Thanks, all of you, for joining the call today. And if you haven't already, please be sure to return your proxy votes via the mail. And whether you vote via mail or not, you are all welcome to attend our Annual Meeting on October 3 in Lansing, and if you have any questions about that, please contact Rod Poland. So thanks, everybody. We appreciate it.

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Operator [49]

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