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Edited Transcript of NEOG earnings conference call or presentation 20-Dec-18 4:00pm GMT

Q2 2019 Neogen Corp Earnings Call

LANSING Jan 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Neogen Corp earnings conference call or presentation Thursday, December 20, 2018 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James L. Herbert

Neogen Corporation - Executive Chairman

* John Edward Adent

Neogen Corporation - CEO & President

* Richard E. Calk

Neogen Corporation - Former President & COO

* 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

* Brian Gaines

Springhouse Capital Management, LP - Managing Partner

* 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

* 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 Q2 FY '19 Earnings Release Call. My name is Christine, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to John Adent, CEO. You may begin.

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

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Thank you, Christine. Good morning, and welcome to our regular quarterly conference call for investors and analysts. Today we will be reporting on the second quarter of our 2019 fiscal year, which ended on November 30. As usual, some of the statements made here today could be termed as forward-looking statements. These forward-looking 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 by live telephone conference, I also welcome those of you who are joined by way of simulcast 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 Executive Chairman, Jim Herbert, who will provide his perspective on our genomics and European operations; and our Chief Financial Officer, Steve Quinlan, who will provide more detail on Neogen's financial results for the quarter.

Earlier today, Neogen issued a press release announcing the results of our second quarter. As stated in the release, our revenues for the quarter were up 6% to slightly over $107 million. This increase included minor contributions from our recent acquisitions of Colitag in August and Livestock Genetic Services in September. As we stated in our release, our revenue results decreased approximately $2 million for the quarter after foreign currency sales were converted to U.S. dollars. Like most American companies with significant international sales, Neogen has been adversely affected by the recent strength of the dollar against most other currencies. I'll let Steve fill in the details on our currency challenges, but I will say that I firmly believe that we are where we need to be to meet the challenges and needs of the global food industry despite some of these challenges.

Our net income by just over $16 million or $0.31 per share compared to last year's quarterly net income of $17.1 million or $0.33 per share. While I'm never pleased to report a decrease in net income, we fully anticipated the possibility of this result. If you remember, last year at this time, we reported an atypical second quarter net income increase of 53% or $0.11 per share compared to our second quarter 2 years ago. Of that $0.11 increase $0.07 was attributable to an accounting change relating to the tax benefit from the exercise of employee stock options. Again, I will let Steve fill in the details, but we knew going into the quarter that we faced a difficult net income comparison.

In the quarter, we saw positive results in a number of our product lines. A real highlight was a 24% increase in global sales of our test kits to detect foodborne pathogens such as Listeria and Salmonella. As anticipated, the independent AOAC approval in August of our Listeria Right Now test system spurred significant sales in the U.S., Europe and elsewhere. Our new Listeria -- our new system for Listeria is so novel and groundbreaking that we first had to develop a new industry protocol for its use and validation, and then work with AOAC to validate the accuracy of that testing protocol. Listeria Right Now can produce accurate results in under an hour, while most other test kits take at least 24 hours. Global sales of our test to detect natural toxins increased 17% in the quarter as we did what we do best, rapidly respond to mycotoxins outbreaks and other market needs. Sales of our test kit for aflatoxin increased 17%, firstly, as a result of significant new business we won in Brazil.

Sales of our test kits to detect DON increased 25% as we responded to small pockets of outbreaks in Canada and the U.S. Sales of our natural toxin product line were also aided by the introduction of our new Raptor lateral flow test readers. The new reader greatly simplifies the process of reading, storing and analyzing mycotoxin test results, enabling testers to process up to 3 test results at the same time. When you consider just how quick and accurate test results are to the grain industry, especially during the height of the harvest season, you can understand how valuable our new Raptor reader will be to grain testers.

Another highlight for the second quarter was our sales of products used for general microbiology, which increased 20% compared to the prior year.

While test to detect spoilage microorganisms such as yeast and mold don't seem as critical as test to detect pathogen, they represent a far larger share of the testing market. Almost all producers of food and other consumer products are concerned about the adverse effects of spoilage organisms and the quality of their products. Our new 16s metagenomics products are changing the ways that food producers and processors are thinking about food safety and spoilage. These tests not only identify the exact spoilage organism, but also the areas of contamination in the plant. This gives our customers a roadmap for remediation efforts. This product line was up 47% year-to-date, and interestingly enough, there was a Wall Street Journal article about this technology just yesterday.

On our Animal side -- Animal Safety side of the business, a significant highlight for the quarter were sales increases in our global biosecurity products, including a 22% increase in sales of our Chem-Tech agricultural insecticides and a 15% increase in sales of our Preserve disinfectants. We added these biosecurity companies in the past 5 years, each with the goal of expanding our global footprint and a critical step in Food and Animal Safety, stopping the spread of dangerous diseases and conditions before they can start. We believed in the synergy of combining these companies and others under one umbrella, and we're seeing that being played out.

For the quarter, we also saw a 13% increase in sales of our Animal Care line of products and a 7% increase in sales of veterinary instruments, which include a significant increase in sales of our veterinary needles and syringes.

At this point, I would like to turn it over to Jim for his perspective.

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

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Thanks, John. I think you can tell from the depth of John's comment in his opening statement here that he has the feel of the direction of a rather complex business that we've developed for more than 3 decades. And in fact, John's been responsible for our 2 big operating divisions and he reported to directors -- Board of Directors for over a year now. I have kept some of the support and unique product areas that give John a chance to catch up on the big portions of the business, but we are now beginning to complete that transition. In the past quarter, John assumed responsibilities for our genomics business as well as our R&D activities. Going forward, I will continue to keep focus on Neogen Europe operations, which encompasses 28 European Union countries and over 70 other countries that are managed by our Neogen Europe organization. This group is really beginning to complete the full Neogen structure with Food Safety, Animal Safety and a genomics division. And there is some great opportunities to continue expansion there and to help our overall strategic plan in expanding our international revenues.

Looking at the current situation there, our Neogen Europe operations and its 2 subsidiary organizations had good revenue this quarter, up about 10% in local currency compared to the prior year. And we did have wind in our face on currency conversions, lost about -- I think about $300,000. Looking at the history of what's happened there, we've enjoyed consistent growth in those European Union countries, up 15% in FY '17 and 17% in FY '18, and the current year is also showing some growth.

Looking now, I'll shift a bit and talk about the quarter just behind us and our worldwide genomics business. This also showed some -- showed growth in the last quarter. When we talk about the worldwide genomics business, we're talking about genomic laboratory operations in Lincoln, Nebraska, where we started along with those in Scotland, Brazil, Australia, and now some activity in China. Because of the difficulty of getting actual tissue samples from China and to bring them over here, we have established a lab and are doing some DNA extraction there and forwarding these further refined samples to Nebraska. Even at that, we can get answers back to the largest of the Chinese there in about 2 weeks. You might remember, me bragging about a year ago about us having the largest animal genomics lab in the world, we're now running about 350,000 samples a month in the worldwide system. And this likely pushes from last year's 3 million, probably to over 4 million samples this year. Also looking at the going forward side of the business, I'll continue to be working direct with Dr. Jason Lilly in Corporate Development, which is principally our acquisition activity. On that acquisition front, as John mentioned in his opening comments, we did make small acquisition in September, Livestock Genetic Services. This acquisition is enhancing our in-house genetic capabilities and it's complementing what's now become pretty much unparalleled global network in animal genomics.

The acquisition pipeline continues to look good, and represents our strategy to add companies that are synergistic to both our products and to our markets. And looking back I had an opportunity to put together some stuff to the board recently. And looking back, I am rather proud of the 51 acquisitions that we've made over time. In fact, most of them are still having an impact on revenues and earnings. As we go forward, John has full responsibility as the company's CEO, and I will continue to serve as Chairman to the Board of Directors, and look for ways to continue to help John in the months ahead. I think with that, Steve, if you could give us a bit more color on the financials for the quarter.

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

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All right. Thanks, Jim. As Jim and John have each indicated, we have solid performance in the quarter despite the currency winds that continue to be in our phase as the devaluation of the Brazilian real and the Mexican peso, which had declined 19% and 5%, respectively, compared to the same period a year ago. And the 2% decline in the value of the pound sterling, resulted in comparative revenues $2 million lower than the second quarter a year ago. Now before we get into financials, I want to quickly remind you about the reclassification of our prior year revenue numbers. Prior to this fiscal year, we accounted for variable considerations such as rebates, marketing support and incentives in contracts with certain customers as components of cost-of-sales and sales and marketing expense. As part of our work in adopting the new revenue recognition standard on June 1, we reclassified those prior year expenses as contra revenues to make the numbers for last year directly comparable to this year.

The result of these reclassifications is that our reported revenues from last year's second quarter declined by 1.1 million with corresponding decreases in cost of sales and sales and marketing expenses totaling $1.1 million as well. There was no change in our previously reported operating or net income from these reclassifications, just in certain line items and the income statement. And our 10-Q will have all the details and the adoption of the new revenue recognition standards and the reclassifications by quarter for the prior fiscal year.

Corporate-wide, our gross margins were 46.7% for the quarter compared to last year's recast second quarter gross margins of 47.9%. Margins were impacted by mixed changes within the Animal Safety segment resulting from strong sales growth in our insecticides and cleaners and disinfectant businesses, and new revenues from our Australian genomics operation.

Each of these have gross margins, which are lower than the segment's historical average. Our diverse lineup of products has a wide range of gross margins, which will cause some fluctuations from quarter-to-quarter depending on mix. Margins were also impacted to a lesser extent by the strength of the dollar. For the year-to-date, our gross margins were 46.8% versus 47.8% last year for the same reasons I just mentioned. Our operating expenses overall increased 5% for the quarter and 6% for the year-to-date period. Sales and marketing expenses rose 10% in the second quarter and 9% for the 6-month period, primarily due to increases in salaries and other personnel-related expenses, shipping expense and higher bad debt expense caused by the reversal of reserves from the collection of receivables in the prior year.

General administrative expenses decreased 4% for the quarter, but were up 3% for the year-to-date. The decrease in the quarter is due to recognition of $240,000 of state economic incentive credits in the current year. None of these credits were recognized in the second quarter of the prior year.

Additional decreases result from lower amortization expense due to adjustment from acquisition valuation of intangible assets recorded in the second quarter of the prior year and outside contracted services related to IT products -- projects.

Partially offsetting these decreased expenses were increases for salaries, stock option expense and recruiting fees. Our R&D expenses increased 7% in the second quarter, led by increase in salaries and other personnel-related costs. Year-to-date R&D expense is down 1%, primarily due to the timing of outside services expenses related to research projects in the prior year.

As you can tell, we've controlled our expense growth in the first half of the year and have a number of ongoing initiatives to eliminate redundancies, improve efficiencies and focus resources on growth. We should see their impact felt in the second half of the year. Operating income for the quarter was $18.2 million, up just slightly compared to last year's second quarter operating income of $18 million. Expressed as a percent of sales, operating income was 17% compared to 17.9% in the second quarter of last year. The decline in gross margin percentage explains the decrease in operating income as a percent of revenues. Year-to-date operating income was $34.7 million or 16.8% of sales compared to $34.4 million or 17.7% of sales in the prior year.

Other income for the quarter was $1.5 million compared to income of $1.1 million in the prior year. Interest income of $1 million compares to $429,000 in the second quarter of last year as interest rates have risen and our cash and marketable securities balances are $65 million higher than a year ago. We recorded currency losses of $72,000 in other income in the second quarter compared to currency gains of $497,000 in the prior year quarter. As we've mentioned on prior conference calls, we have an ongoing hedging program to mitigate the adverse impact of currency fluctuations. Additionally, we recognized a $422,000 gain this quarter related to an adjustment of the contingent consideration payment to the former owners of Quat-Chem.

Our effective tax rate was 18.5% in the second quarter compared to 10% in the second quarter last year. Corporate tax reform enacted last December dropped the statutory rate from the 35% in effect in last year's second quarter down to 21% this quarter. However, the tax benefit related to exercise of stock options was $3.3 million higher in the prior year. The $3.3 million differential represents about $0.06 in earnings per share. If you remember on past calls, I've indicated that this tax benefit will result in fluctuations of our effective tax rate and our overall net income each quarter. Depending on the price of the company's stock and option activity in that particular quarter, earnings could be impacted by between $0.01 to $0.04 per share.

This year our tranche of stock options expired in the first quarter resulting in significant exercise activity. But in the prior year, a different tranche expired in October in our second quarter. Our year-to-date effective tax rate is 15.1% compared to an effective tax rate of 19.8% in the prior year due to the reduction in the U.S. statutory corporate tax rate and the net income of the benefit from stock option exercises.

The company generated $16.5 million in cash from operations in the second quarter, which compares favorably to our $16.1 million in net income. We invested almost $5 million in property, equipment and intangible assets this quarter. Our inventory balances rose 5% since our prior year-end, with an increase of $2 million in finished good levels. We continue to work on improvements in inventory turns with active programs in place at each of our operations. Accounts receivable balances have increased 4% compared to year-end balances, less than the rate of increase in revenues. And our average days sales outstanding were 63 at November 30, a slight improvement compared to 64 days at August 31. I'm excited about the traction we are gaining on some of our new products, and looking forward to the second half of the year.

I will now turn it back to John for some additional comments.

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

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Thanks,, Steve. Jim provided some detail about our Neogen Europe and worldwide genomics operations. And I just wanted to reinforce how committed we are to growing Neogen internationally despite some of the inherent challenges of currency. As we stated -- as we have stated repeatedly, we believe about 2/3 of Neogen's growth potential exists outside of the United States. Brazil is a great example. That country is a food production powerhouse. It's a major producer of beef, pork, chicken, soybeans, wheat and number of other food products. Brazil is where we need to be, and that was borne out in the second quarter. We grew our Neogen do Brazil business 54% in local currency in the quarter, and we gained significant market share in sales of our mycotoxin and diary antibiotic test kits. When you take that 54% increase and convert it back to dollars, it was -- it shrank to 26%, which is still great growth.

Of course, when you look at the long-term growth potential for Neogen, the 2 major countries at the top of the list are China and India. Projections of the tremendous growth of both of the country's middle-classes point to significant increase in their demand for higher-quality foods, including animal protein and dairy products. It's this demand for higher quality foods that Neogen was built to deliver. India had a great quarter, with 104% growth in local currency, which translates to 83% growth in U.S. dollars. We're focusing on long-term growth in both countries, and we are encouraged by the foundations we are building.

Internationally and within the United States, we feel really good about where we stand at the end of 2018. 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. It's this confidence, I think, that led our Board of Directors to authorize a stock buyback program at its meeting in October. And we've begun implementing this program. We believe our continued worldwide dedication of Food and Animal Safety will allow us to provide the results that our customers, our shareholders and our employees have come to rely upon.

I'm excited about our future and I really looking forward to a strong finish to our fiscal year.

Let me stop at this point to entertain any questions from those who have joined the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Kevin Ellich of Craig-Hallum.

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

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John, I guess, just wanted to start off with a question for Steve. Can you give us the organic growth rate this quarter, Steve? And also what are your expectations for tax rate for the full year, given now some of the fluctuations we have seen?

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

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The organic rate, Kevin, was 6%. And then as far as an effective tax rate going forward, as I indicated on my comment, it -- that will depend on the option exercises. I think you almost have to take a -- just an average view there. I think maybe a 18% to 19% effective rate is probably going to be a good rate for the rest of the year.

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

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Okay. That's helpful. And then, okay, John, going back to some of your prepared remarks and clearly there is some question about the gross margins and the mix shift that you're seeing I think part of that has to do with the, I guess, underlying markets in the past we've talked about the sluggish animal protein markets. What are you guys seeing out there? And how long do you think that will last?

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

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It's a good question, Kevin. I'm not sure. I think the market is going to start firming up. I mean, when you look at across the space, it's still a tough -- it's still tough for producers. I think you see mixed results on processors today. You've got some good, some not so good. But as we know in this business, it never stays bad forever. And so I think you are going to see firmness coming in for us -- at least for us in the back half of the year.

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

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Okay. And then, I mean, are you just seeing mix shift from some of the producers and buyers of your products to just lower cost products, given we're seeing dairies closing in Wisconsin. I mean, is that affecting the business and then did you see any impacts from the store rooms in North Carolina on your swine business?

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

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No, I don't think the mix shift is within segments. When Steve is talking about mix shift, he is talking about it on a macro scale within the whole company. So you see different mix shifts within what the company looked like previously and how those sales are being put together. So I'm not -- no, I don't see that we're seeing mixes within a space or channel.

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

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Okay. Okay. That's helpful. And then you talked about China and India, obviously, given their population sizes being huge opportunities globally, which makes a lot of sense and significant growth out of India. But how long before that materializes? And will it just be a continued slow build? Or do you think we could see material growth for the next several years out of both markets?

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John Edward Adent, Neogen Corporation - CEO & President [9]

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Well, I think you are going to see some growth. I mean, we saw that with India this quarter, again, that's on a small number, but it's nice. And Steve you can tell me if I'm right or not, but I think in local currency, India made money this quarter.

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Steven J. Quinlan, Neogen Corporation - VP, CFO & Secretary [10]

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You were right there, you were right there.

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

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Which is something that we have talked about for a long time, so that's really nice to see that group kind of turn the corner. And then, we do expect longer term. Now when that happens, Kevin, I'm not sure. Some of that will be depending on food regulations, what the people require, what people are asking. But we just know those populations, we need to be there. It's like when we looked at Brazil years and years ago, we knew we needed to be there and now it's playing out. I think you're going to see the exact same thing with these 2 countries.

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

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Got you. And then last one for Steve. You talked about the $240,000 state incentive that was a driver for G&A, I believe. Could you give us a little bit more detail what that was for? And is it safe to assume that was a one-time item?

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

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No, those are actually recurring, Kevin, and they're economic incentives that we received in the State of Nebraska for our genomics operation. And it's -- I think, it's a 5-year grant agreement with the state. And so we'll -- we do record those every year. Some of it is the timing of the recording of the incentive.

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Operator [14]

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Our next question is from Brian Weinstein of William Blair.

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Andrew Frederick Brackmann, William Blair & Company L.L.C., Research Division - Associate [15]

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This is actually Andrew Brackmann on for Brian. I wanted to piggy back off of Kevin's questions on the animal side and John your commentary on -- your expectation that is going to firm up. Maybe, in the past, when you've seen market swings like this, could you maybe point to some leading indicators that you have -- make you as confident in saying that you think it's going to firm up?

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

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I mean, what we try to look at is producer profitabilities. You got to look at your customer base. And what's nice is we have a broad customer base because when you look at processors, they are generally doing a little bit better. We sell our food safety products to them. When I was talking about Animal Safety, I was specifically talking about producers -- dairy producers, swine producers, beef and poultry. And generally those markets are not all poor at the same time. And we had some -- this year has been a little bit challenging for them. But really you're starting to see some of that turn the corner. And Jim you can help me here because I know you know this a lot better on eggs. But I think the egg guys are actually doing a little bit better than last year.

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

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That -- yes. No, it's -- the broiler guys are probably -- so when you look at producers and processors, they are almost one and the same with the big integrated companies. A producer of eggs is also a processor of eggs. There are very few independent egg producers anymore, so we are talking about integrators there. Their numbers are up probably it's per dozen. I don't remember exactly what the report was this month, but Steve's report was out yesterday I think, but their numbers are up and pretty healthy. On the pork side, interestingly enough, pork processors or their revenues are -- on a per animal basis are up some. So whereas, they might be hurting a bit in the feed lot on pigs that all ends up being in one pocket before it's over with. And the guy that owns the pigs, owns the feed and owns the meat that coming off of them. So I think John is right. I think it's -- there is a lot of noise out there. It's kind of hard to decide for some of that noise. I know you hear noise what was going to happen soybean farmers, and though we feel for soybean farmers, it didn't really impact us really much here. We got a few little tests go over to the soybean side, but nothing is going to impact us very much. I think stability, I don't see any real potholes in the road going forward.

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Andrew Frederick Brackmann, William Blair & Company L.L.C., Research Division - Associate [18]

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Great. And then maybe we could talk about food for a minute. In the past, I think you've had some commentary on some -- may be increased competition from 3M there. Maybe you could talk about what you're seeing with respect to competition on that side of the business?

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John Edward Adent, Neogen Corporation - CEO & President [19]

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Sure, Andrew. We've got good competitors in that segment, but we think that we have the product portfolio and the team members that allow us to continue to grow share. And so, while we respect our competitors and we know that they're going to be out challenging, we're ready and willing to face them. And I think that you're going to see that we'll continue to win in that segment.

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Operator [20]

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Our next question is from Paul Knight of Janney Capital Markets.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [21]

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Can you hear me now?

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John Edward Adent, Neogen Corporation - CEO & President [22]

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Yes, we can hear you, Paul.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [23]

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Okay. Sorry -- we've had some phone issues in Midtown Manhattan. The question I -- commentary around your -- the management transitioned Jim as Chairman and you as a CEO, could you repeat what you had said about that transition occurring, John?

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John Edward Adent, Neogen Corporation - CEO & President [24]

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Sure. So when I joined, we had a -- laid out a very well thought out transition plan, as to the businesses that were going to report to me and the ones that Jim was going to continue to lead, as I learned about the business and came on board. And we are following that plan. So just this last quarter, I have taken over responsibilities for the genomics side of the business and R&D. Jim is going to continue to lead Neogen Europe. He knows that business, does a great job. He is also going to continue to be working with Jason on all the acquisition pieces. And it's interesting because it's not like Jim does one thing and I do the other. We were laughing about it the other day, we probably agree since I've gotten here 2,000 times, and we disagreed probably 4. But the 4 disagreements, I think, we've come to a better solution because we sat and we talked about them. So...

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James L. Herbert, Neogen Corporation - Executive Chairman [25]

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John was wrong all 4 times though, but...

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

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All right, now it's 5. Only 5 disagreements. Now we've 5 disagreements. I'll mark that down. But that's kind of how we're doing going forward. And Jim is going to continue as Chairman of the Board, and continue to help me run the company going forward.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [27]

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Okay. And on the genomics side, it looks like the U.S. had great growth, good growth again in the quarter, a slower growth in Europe or was that vice versa? And then generally could you talk to genomics. It's been a great driver for Neogen. What are -- what's your current expansion situation in the New Zealand, Australian markets, so could we get an update on the genomics businesses, both U.S. and non-U. S.?

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John Edward Adent, Neogen Corporation - CEO & President [28]

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Yes. I may have to watch myself because I can talk the rest of the day on the exciting stuff that's happening on genomics. But no, we are -- and -- we're moving a lot of things around, which is helpful. This has really truly become a worldwide business. Our Neogen Europe revenues for the quarter were probably the lead of the -- of all the labs because of the different things that we're bringing in there. We are -- when you look at the Animal side, we are the -- we do the genomics for the leading broiler breeder in the world, which is a significant piece of business. We do the work for -- exclusively for, I think, 13 of the beef breed associations. We have one where we're not exclusive, and that's the Angus business. And this time a year ago, we had probably 30% of that business, and now we probably got close to 70%, 80% of that business. I've just tipped off my competition. But nevertheless that business continues to grow strong. John mentioned what we've done with 16s, and we've been a player there. There's -- we got a lot of confidentiality with people, so I can't really talk about who the customers were. But some of the trace backs that you've heard on salmonella and E. coli, we played a role in those. We played a role in helping these people -- you say this is a regulatory, got you. But it's really -- it's everybody working together trying to trace back where these problems are occurring. And in 2 or 3 of these outbreaks, we were able to take the organism to our labs, actually do the genomics on it, figure out not whether it was a salmonella or not whether it was 1 of 300 salmonella, but what -- exactly what the -- what that organism looked like. We were able to trace that back and say, okay, this production came out of Central California as an example. So those are going to have huge opportunities going forward. And we're expanding -- and that piece of the business is picking up along with animal genomics. The Australian business is going good. Dr. Lily is -- that's been his pet project for -- I think, he speaks Aussie some days. It's been his pet project now for the past several months. That's probably the world's the center in wool. Pine head, merino wool is coming from there. That's the wool that you can wear next to your skin. And that business is going good, but at the same time, we're expanding our dairy business there. So anywhere you look, I think, genomics is good. I think we've covered the world as far as where we need to be for space, for geography. The China thing is going to be helpful. We can now get refined DNA coming out of China, coming directly and not try to worry about whether we can get regulations to bring in tissue cultures of different kinds. So I'm extremely excited about where we are going there and just think like that there's all kinds of opportunities.

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Operator [29]

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Our next question is from Gerry Sweeney of Roth Capital.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [30]

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Actually, I did -- I want to follow-up on the comments about the China genomics with Mr. Herbert. I just want to see how much of an opportunity this sort of pre-work within China is in terms of the market opportunity and growth in China? Is this more of a just de-bottlenecking process? Or is this something more substantial and can open up the market to a greater degree?

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

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It's kind of hard to say. I think first of all, any time you talk about technology in China, you say how much longer before they own it than we give it away. And that's probably I'm being not politically correct and you were. But at what point do the Chinese take over and do it themselves? They can do all the extraction, they can do all the work, but what's the secret there is -- and I mentioned there, I mean, I think in my comments. The secret there is that we got the bioinformatics. It says which cows you ought to keep. We've got this sniff content, and all that's not in common usage. So they can get the genetic code unlocked and laid out, but at this point they don't know which is the right genetic code. So for instance, we can tell you whether ours is going to be to get a half a breed or what kind of milk production we're going to see or what kind of feed conversion. And they are not -- they don't yet have all that. Now going forward, we will be partners with them, and we will operate our lab over there, so we won't have to compete. But right now, we're bringing those samples back here because we've got the genomics to bag the bioinformatics to back up those genomics. But we're in China, we're in Shanghai and we're in Beijing and we're doing work in inner Mongolia, where all those big dairies are. We're doing some work in down south in [Sango]. And when we're in China, we are Chinese. So I think we'll be partners with them there.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [32]

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Okay. And then, I just want -- we talked quite a bit actually about the Animal protein market. But just for my own edification I am just curious, how much of this weakness is tariff-related versus maybe just some oversupply in the market? And do we need tariffs to go away? Or do -- does that market sort of naturally redistribute itself? Any thoughts on that front?

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

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Well, I think the answer is yes, Gerry. You've got, I think, uncertainty around tariffs that are causing groups to delay decisions or make decisions. We do have some oversupply in the market, especially on pork. And if you can't export, then it really hurts because where are you going to put all that meat. So I think it is a combination of both. But like I said before, these markets have always been cyclical. The groups know what to do. They have done it before. They watch where they are and they adjust accordingly. So that's why we're confident that we're going to see some firming because we always have.

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James L. Herbert, Neogen Corporation - Executive Chairman [34]

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And to hitchhike -- to hitchhike on John's comment. Don't wrap us in stars and stripes. We've got some other flags around us, too. We are a major player in Brazil. Brazil is going -- we lose a little market, Brazil picks it up. So that's certainly what's happening in the dairy business. So we've got the Brazilian market to fall back on. Brazil is going to be a big supplier. And I think we will participate from that. So it's important that -- what was our -- 38% revenue came from outside of the U.S. this quarter, I think, Steve. So...

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Steven J. Quinlan, Neogen Corporation - VP, CFO & Secretary [35]

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39%.

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James L. Herbert, Neogen Corporation - Executive Chairman [36]

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39%. So that's up a little bit from last quarter, I think. So those are -- all those bode well for us. And we are not just -- we're in both northern and southern hemispheres, and that helps, too.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [37]

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Yes. That's what I thought, I mean, at some point some of this market starts to redistribute itself and global...

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James L. Herbert, Neogen Corporation - Executive Chairman [38]

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Yes, that's right, Gerry.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [39]

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case it should benefit from the eventual once it evens out. And then just finally, acquisitions, always part of the story. I think Mr. Herbert mentioned 51 acquisitions through Neogen's history. But markets are a little bit rougher, things, at least the public markets are -- is -- are things looking more opportunistic, cheaper or maybe with some of the drivers on maybe taking the pipeline from the potential acquisition pipeline to execution?

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John Edward Adent, Neogen Corporation - CEO & President [40]

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We've got ourselves circled around, I guess, probably 4 right now that fit, and synergistic as to our markets and synergistic to our product. We don't have a deal on any one of them. None of them are going to be huge, but all of them are going to be very additive to what we're doing. The big competition has been outside capital. And we bid on a couple, we lost them. We didn't really get too excited about losing them. They were, in my opinion, kind of marginal. And we've got outbid. I think -- I don't know where that money goes. I think that money is probably still out there. So that money is buying up stuff to put things together. So we'll continue to be on lookout. Maybe these guys will scale up. Two or three, put them together and we will have an opportunity to make a bigger acquisition. But I think we're pretty well tuned, and we've got plenty of capital to work with. And in fact, I'll pass it to myself on having a lazy balance sheet. I never thought I'd have a balance sheet that looks like this, anything I had responsibility for. But we got opportunities to -- certainly opportunities to grow, and I think the organization to grab home.

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Operator [41]

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Our next question is from David Westerberg of CL King.

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David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [42]

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Do you have any thoughts on Merck's recent acquisition. I think it's -- the name is Antitell or Antelliq (inaudible). Just in terms of product overlap and where they kind of -- where Merck might see the market going? And how you might see the market going? And just broadly speaking, what do you kind of think of that acquisition?

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John Edward Adent, Neogen Corporation - CEO & President [43]

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So there's really not hardly any overlap of those. That's the renamed Allflex business, which is a tag business. A large part of that business is visual and electronic ID. They are trying to build out that electronic ID platform a little bit, but it's mainly around companion. So I understand how that can fit with animal health company with Merck, but it really doesn't impact us much at all.

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Richard E. Calk, Neogen Corporation - Former President & COO [44]

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We buy products from them. It's -- and we got a good relationship with Allflex through the years. We looked at tag businesses 2 or 3 times in -- just didn't particularly fit us because of the manufacturing side of the process. But they make probably the leading tissue culture sample. So we use and resell a lot of tags to take your samples out of calves ears or wherever that might -- tissue sample might come from.

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

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Then just on the genomics side, you're continuing to get really good volume. Can you talk about maybe what the pricing is on there? And kind of what the pricing versus volume dynamics you see over the next couple of years in terms of pressure and opportunities?

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James L. Herbert, Neogen Corporation - Executive Chairman [46]

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Yes. There is a lot of pressure being put on prices. And we've got a lot of competition in various places. Probably, nobody quite -- we've got maybe 1 competitor, 2 competitors that are of similar size. But nobody with quite the breadth we've got. We on the companion animal side. We're strong there. We're strong on the identification of -- with Mars, that's not a secret I don't think with the wisdom panel and identifying a bridge. We're strong with American Kennel. But then you turnaround at the same time, and I talked about how we were strong with Angus Association, with the leading Angus, with the leading beef breed. Interestingly, there's a certified Angus beef advertising for them. 17% of the beef that we eat this country certified Angus beef. And we're right in the middle of that process of helping them to determine tenderness and marbling and taste, so all of those things are, I think, really important going forward. And put us in good shape competitor-wise. Now at the same time when you got competitors that don't have quite that background, they're leading sales pitch is,, so we can do it cheaper. And we like to make them to say and faster and better, but there is pressure out there on pricing. We've been able to reduce our cost a good bit, really a lot since we first started with that first operation in Nebraska. We've got robots in now that I'm amazed at. We can load some of these tissues samples up that I've talked about coming from Allflex, and it will go through and it will extract them, it'll put them in tubes. So we've got a lot of things where we did have a hand labor that now we have automated. And what we're doing and what we're able to do with it IT-wise, we can pull a lot of this stuff together to do trace-backs with better computer sciences is a big help. So yes, I think and I should be able to give you the answer on some of this, but I think there is some cases where we can see that where the business was up on x dollars and revenue, the sample size was up double that amount as we faced the pressures of prices out there. But we knew that starting with -- we knew it's -- we knew as the technology got better, the competition got stronger, we got better at the same time though.

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John Edward Adent, Neogen Corporation - CEO & President [47]

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And I think, Dave, to Jim's point, some of the things that we've done that continue to look at mitigating that is the things we're doing around services for our customers. I mean, that's one of the reasons when we bought Livestock Genetic Services is taking --if someone wants to say, well, I'll just do it cheaper and make it commoditized, that doesn't work. You have to be able to interpret the results and then implement. Then those are those type of things that we have a data management, with our dairy dashboards, with the new things that we're adding that I think are really going to differentiate us, and it won't be a pure price play.

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David Michael Westenberg, CL King & Associates, Inc., Research Division - Senior VP & Senior Equity Analyst [48]

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Got it. Now that's very helpful. And then just -- thank you for the color in terms of the 4 acquisitions and this is kind of follow-up to the last few questions that were asked and that on acquisition. So you've said you've talked about your 4 acquisitions, but we've also kind of been looking at currency and just kind of how much do you think the strength of the U.S. dollar might play a role as you have cheap acquisitions available to you overseas?

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James L. Herbert, Neogen Corporation - Executive Chairman [49]

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I'm not sure -- it's got -- certainly going to be helpful. We've got some that are focused on the euro. I'm sure you'd have to know that if we're looking at that part of the world. And then you've got to look at the pound sterling going to the euro. And then that's about the time I need to get the crystal ball out. But the -- we certainly should be advantaged as far as being able to buy international businesses with U.S. dollars. I'm not sure it's going to be a big game changer though.

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John Edward Adent, Neogen Corporation - CEO & President [50]

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Yes, I agree with Jim. It doesn't change our perspective, we're moving them up. We appreciate that there's an advantage, but we've got, as Jim said, we've got softer on -- soft minder on around 4. We've got 6 others that we're looking at. We've got others in the pipeline. So while we think we have recognized that maybe it's on sale compared to the U.S. currency, we just keep putting it through the process.

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Operator [51]

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(Operator Instructions) Our next question is from David Stratton of Great Lakes Review.

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David Michael Stratton, Great Lakes Review - Research Analyst [52]

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Really quick I would like to touch on the lettuce recall that was in late November and get a sense of if that hit in November or hit in this quarter? And if you would remind us on kind of the cadence of the products that you benefit from when recalls like that occur?

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John Edward Adent, Neogen Corporation - CEO & President [53]

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So we can speak in general because as Jim talked about earlier, we have CDAs with a lot of companies regarding -- and you can imagine these are sensitive topics for them. But in general, we have a number of platforms regarding pathogens, whether it's our ANSR platform, our Reveal platform or our 16s platform. So we have a lot of different ways in which we can help customers identify specific pathogens, pinpoint where in their facilities they are to help them develop a remediation program. So there's -- Jim, we looked at it the other day -- double amount of recalls than there were last year. They continue to be up. I think this was in a Wall Street Journal, I recall. It's not that the food is unsafe, it's just that we're getting better at detection. And so there probably will continue to be more recalls because people are now being able to detect actually what's going on faster and they're able to link -- the CDC is able to link a specific illness to a specific strain, where they couldn't in the past. So we think we're well positioned to continue to have customers. We have a program that we've developed, which is a recall program that helps customers that if they have never been through this before, we can help them on, these are the steps you need to take to help manage your recall process.

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David Michael Stratton, Great Lakes Review - Research Analyst [54]

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And then do you have residual benefits on the back end with your cleaners and disinfectants? And then can you help me understand when a recall or that initial detection is made, is there a ramp up and test to kind of flesh out the scope of it? Or is it testing as usual and really there is not that blip then after the fact?

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John Edward Adent, Neogen Corporation - CEO & President [55]

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No, they definitely would ramp up to try to find out where it is, where the contamination is, where in the supply chain it's located, where in the facility it's located. And in general, after that, they will modify their protocols to make sure that the testing procedures, just from a maintenance standpoint, are robust, right, because no one likes to go through something like this. And from a cleaner and disinfectant, that's more on our Animal Safety side of the business and not in our food safety. I don't think, Jim, you can help me here. I don't...

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James L. Herbert, Neogen Corporation - Executive Chairman [56]

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We don't really have anything -- nothing that fits specifically there. But no, we're very strong over on the -- on the bovine security side with our cleaners and disinfectants there. And right square in the middle, there is a lot of stuff going on. Now we've got an outbreak first time in a long time. We found a flock, commercial flock, chickens in, I think, California with avian influenza. And you know that's one of those things that we want to watch. That means it hopefully -- right square in the middle -- there's a lot of stuff going on, we've got an outbreak, first time in a long time we found a flock, a commercial flock of chickens and I think California with avian influenza -- and that's one of those things that we want to watch. That means that hopefully all these guys that are running poultry complexes already had foot pads and they are washing truck tires and but if they weren't they stepped-up that procedure. So anytime you see some of those things come along, it increases -- make you -- it reminds you what it was you knew you're supposed to be doing anyway. So -- but that probably doesn't move a needle a lot anymore. I think we're -- nobody likes to make their customer sick.

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David Michael Stratton, Great Lakes Review - Research Analyst [57]

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Got you. That's helpful. And then I guess one follow-up. You mentioned that the second half should be -- should benefit more from your cost initiatives. And I was wondering if you could or if you would like to quantify that at all as far as you already said that the second half should benefit on the more robust sales side. And how should we think of that then with also the cost benefits taking hold?

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John Edward Adent, Neogen Corporation - CEO & President [58]

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Yes, I don't know, Dave, we're going to follow up by what. What we're doing though is, we look at the business and to Steve's point, we said, okay -- and this something we always do is where can we become more efficient. One of the things we're going to do to expand operating margin percentages and what are the things we're going to do to drive the business. So -- but we've taken specific action to try to do that and make sure that we continue to drive the business forward for the second half of the year.

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Operator [59]

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Our next question is from Brian Gaines of Springhouse Capital.

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Brian Gaines, Springhouse Capital Management, LP - Managing Partner [60]

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Does the 6% organic growth, does that back out currency or would it be fine?

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Steven J. Quinlan, Neogen Corporation - VP, CFO & Secretary [61]

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Yes, that's net of currency. So if you add back the -- compared to the $2 million comparative revenue, that would have been more like an 8% organic growth.

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Brian Gaines, Springhouse Capital Management, LP - Managing Partner [62]

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Okay. And can you say -- how many shares did you buy back in the quarter?

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James L. Herbert, Neogen Corporation - Executive Chairman [63]

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We are not disclosing that at this point.

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Brian Gaines, Springhouse Capital Management, LP - Managing Partner [64]

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Okay. And then what is the absolute level of revenues from India and revenues from China?

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John Edward Adent, Neogen Corporation - CEO & President [65]

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Yes, we historically have not disclosed. I would tell you that they are each below $10 million. But we don't give specific country revenue figures for those.

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Operator [66]

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I will now turn the call back over to John Adent for closing remarks.

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John Edward Adent, Neogen Corporation - CEO & President [67]

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Thank you, Christine. We appreciate all of your support. We know that the things that we're doing are going to continue to drive the business forward. We are looking forward to a really -- to a good second half of the year. We hope that all of you have a happy holidays and a great New Year going forward. So thank you very much.

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Operator [68]

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