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Edited Transcript of NEOG earnings conference call or presentation 26-Mar-19 3:00pm GMT

Q3 2019 Neogen Corp Earnings Call

LANSING Mar 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Neogen Corp earnings conference call or presentation Tuesday, March 26, 2019 at 3:00:00pm 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

* 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

* Andrew Luten Jones

Stephens Inc., Research Division - MD

* 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

* Leonard Heller

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Presentation

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Operator [1]

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Welcome to the Neogen Q3 Fiscal Year 2019 Earnings Release 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, 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 third quarter of our 2019 fiscal year, which ended on February 28.

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 by live 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 here this morning with our Chairman, Jim Herbert, who will provide his perspective on our international business; and our Chief Financial Officer, Steve Quinlan, who will provide more detail on Neogen's financial results in the quarter.

Earlier today, Neogen issued a press release announcing the results of our third quarter. As stated in the release, our revenues for the quarter were up 3% to approximately $98 million, and our year-to-date revenues were up 5% to about $304 million. These revenue increases included minor contributions from our recent acquisitions, including Delta Genomics in January.

Our net income for the current quarter was just over $13 million or $0.25 per share compared to last year's quarter net income of $16.6 million or $0.32 per share. Year-to-date, our net income was $44.4 million or $0.85 per share compared to last year's $45.6 million or $0.88 per share. As a bit of perspective on our net income performance for the quarter, last year at this time, we reported to you a net increase of 61%. That represented a $0.12 increase over 2017, which was primarily due to benefits from U.S. corporate tax rate reform that was effective in last year's third quarter. Steve will explain this in more detail later.

Let me go through some of the challenges that we faced in the quarter to provide some additional perspective and then hit some of the highlights to give you an idea of what's driving my optimism about Neogen's future.

As we've said in previous calls, we fully understand and accept the inherent risks of seeking to grow our business internationally. As with all American companies with sizable opportunities overseas, we understand that at times, we'll be hit with currency headwinds and negatively impact our results; and at other times, we will benefit from currency tailwinds. This is a short-term risk that we accept to achieve our long-term growth goals. As we stated in our press release, on a neutral currency environment, our sales would have been $2.5 million higher in the third quarter. Also, as stated in the press release, last year at this time, we reported that we benefited from corporate tax rate reform and recorded an unusually low effective tax rate of 4%. This year, we recorded an effective tax rate of about 21%. The impact of that comparison is seen in our net income quarter-over-quarter comparison that I mentioned earlier. I'll leave it to Steve to provide more color to all of our financial results.

Independent of the difficult currency and tax comparisons for the quarter, our animal protein markets are, frankly, still struggling as we noted in previous quarters. Having spent many years in the business of distributing goods to animal protein producers, I'm very aware of the cyclical downturns in the business. Producers operate with very thin margins and scrutinize every expense, especially in the type of uncertain times that we're experiencing today. This is certainly happening now as is inventory rightsizing with some of our distribution partners. It seems as if new trade or tariff disputes are coming at an almost daily basis. We certainly empathize with our farmer and rancher end users who rely on export business with China and other international markets, but we also understand that this is a temporary downturn in their business. The long-term demand for their products always tend to trend upward.

That said, we did have some strong Animal Safety performers in the quarter. Our genomics business continued to grow nicely. Sales of our detectable needles increased 17%, sales of cleaners and disinfectants increased 18% and sales of our vaccines increased 13%. However, these increases were more than offset by weakness in our rodenticide and insecticide end markets where sales decreased.

Even though our Animal Safety business struggled, our Food Safety business had some very strong results. Global sales of our test to detect natural toxins increased 17% in the third quarter, driven by strong sales of test kits in the U.S., Brazil and France. We normally don't talk about test readers as historically we believe our competitive edge comes in our ability to produce innovative tests. The reader simply records the results produced by the test. But our new Raptor test system, including the reader, greatly simplifies the entire testing process. We believe the introduction of Raptor to the mycotoxin testing market was partly responsible for the quarter's 35% increase in sales of DON test kits. Sales of our test kits to detect histamine increased 26%, driven by a large increase in sales to producers in the Asia Pacific region and France. Histamine is a spoilage toxin that's produced when a certain species of fish, especially tuna, are stored at too high of a temperature following harvest.

Another highlight for the quarter was a 16% increase in global sales of our test kits to detect foodborne pathogens, such as Listeria and Salmonella. Sales of our Listeria Right Now test system were almost 5x more than our third quarter of last year. It now appears that food safety testers are starting to believe what we've been telling them. It is possible to accurately test for Listeria in under 1 hour from the time you take the sample to the time you receive your results. We are very excited about the future of this product line. It's easily the fastest-growing product in the industry.

Another of our core Food Safety product lines, our AccuPoint Advanced ATP test system, also had a good quarter. We increased its sales by 11%. AccuPoint serves as a strong complement to our specific tests as it can provide an almost instant analysis of the effectiveness of a sanitation process.

Genomic revenues reported through the Food Safety segment were also strong, increasing 29% over the prior year, primarily from growth of our labs in Scotland and Brazil. When Neogen first acquired its animal genomics business, we saw the potential to leverage that capability to provide the food industry with the DNA-level results it needs to detect and eliminate potential bacterial threats in its operations. That potential is now beginning to be realized with an increasing number of food producers using our services to trace food safety problems in their plants.

At this point, I'll turn to Jim for his perspective on international operations.

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

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Well, thanks, John, and I do want to talk about what's happening in our various international businesses. But first, I'd like to talk about the quarter. As we were preparing comments for today's conference call, there was obviously not a whole lot of cheer and jubilation in the room and -- but I told the group a story of March 24, 2005, almost exactly 14 years ago. That day is probably -- will always be etched in my memory as the last quarter that the company reported revenues below the prior year. The revenue that quarter was 2% below that of the year earlier. And people were questioning, is this the end of the road of great performance? Has it come to an end? Well, obviously, that wasn't true. In 56 quarters that followed, revenues were up every quarter, and most of them up double digits. So if you're wondering about today's revenue increase of only 3%, I'm once again telling you that the performance road has not reached a dead end.

Let me assure you that Neogen still has huge opportunities. The concern for food safety around the world has never been stronger. The concern about antibiotic residues in food continues to raise more concerns. There's that continued pressure for renewable resources, and that's just going to get to be greater. Food security is really discussed around the world today as we look at a population of 9 billion people by the year 2050 and, more importantly, the big population growth of that middle-class consumer who wants to eat higher-quality food and they want to make sure it's safe.

On the other side of that same equation, our technology tools to meet these demands are growing at an astounding rate. John talked about this drive that's happening in genomics. What we're doing today in making improved animal production and food safety through the tools of genomics really just continues to be kind of mind-boggling. We can now find pathogenic Listeria organism in a processing plant in just an hour, but it once took us 3 days. You'd hear a lot of talk today about blockchain technology, and it's there and it's coming. It'll be able to tell us where food was produced -- all the way back to the farm where it was produced. So in the event that there's problem, we will know how to trace it back.

So yes, I remember on March 24, 2005, but the opportunities in the future of Neogen is fourteenfold better today than it was 14 years ago. And I can also tell you that John Adent is the right executive to lead Neogen into this new era. He asked me and 16 other Neogen employees to help him every day and make sure that this happens. Frankly, I just wish I can roll back 14 birthdays so I can be a bigger part of the exciting future ahead of us. So, so much for my personal message for the morning, but let me get along and talk about the encouraging activities within our international group.

International revenues were up about 9% for the quarter compared to the prior year, and on a year-to-date basis, up about 12%. These quarter numbers -- John mentioned something about currency conversion, but these quarter numbers were despite significant adverse currency conversion. So on a level-playing field for the quarter, if each country had -- was reporting in its local currency, the overall international revenues would have been up 15%.

Let's take a quick look at the -- around some of those operations. First of all, our Neogen Europe operations headquartered in Ayr, Scotland. A highlight of that quarter was the completion of the management transition as Dr. Steve Chambers assumed full responsibility as Managing Director succeeding Dr. Stephen Holmes, who just did a tremendous job there for the past 15 years. In fact, Dr. Holmes and Dr. Chambers started the company 21 years ago. So the transition was kind of fairly apparent, I think. Holmes continues to work on a reduced schedule and is helping with several important areas, including acquisition opportunities.

The group that we call Neogen Europe serves the 28 European Union countries as well as another handful. The businesses has 3 different divisions. Our diagnostic business, which is the Food Safety diagnostic test kit business, was up about 8% for the quarter, whereas the culture media business was up about 15%, and our cleaner and disinfectant business was likewise up 15%. Our Quat-Chem disinfectant division made its first production run of our new Neogen Viroxide, which is a wide-based disinfectant that has many claims for animal disease, including the dreaded African swine fever that continues to be a problem in many places in the world. The first shipments of that product from the plant actually went to Germany, to Egypt and to the Czech Republic. I mentioned the nice increases in our culture media business. This is led by several large orders to our vaccine manufacturing customers. These are people that use our media to manufacture primarily animal vaccines. Our genomics business in Ayr was also up about 18% for the quarter as compared to the prior year. So Europe looks good.

If we shift, take a quick look at the warmer country, revenues in Mexico and Central America were up about 19% for the quarter as compared to the prior year. And even more exciting is the strong performance of product from operations from that group. Neogen do Brasil really had a strong quarter, with revenues up almost 40% compared to the prior year. This did include some sales that was transferred from the U.S. -- had been reported in the U.S. last year, this year reported in Brazil. But we're also experiencing some strong, continued growth in our overall sales to the dairy markets in Brazil.

Revenues from Neogen China operations were up about 9% for the quarter. And revenues in India, albeit from a small base, but they were about double what they were in the prior year. Kind of rounding out the international reviews, our Neogen Australia operations that we've owned now for about 18 months, their revenue for the quarter was twice that what it was a year ago.

And as I look at all of these operations, we're seeing a continued synergy between the Food Safety products, our biocontrol products and our Animal Safety business -- those biocontrol products for Animal Safety business and the genomics segment. In fact, we just embarked on a new laboratory program in China where genomics samples now go to China lab for DNA extraction before they ship to U.S. for completion, and this speeds up that process.

Our Deoxi genomics subsidiary in Brazil just got moved from older facilities to a new facility that we've been building out for the past 6 months. This increased capability will certainly help increase with our revenues and improve our efficiencies there. For the quarter, international sales accounted for 41% of Neogen's total revenue, and that compares to 39% last year. During these past 9 months, we sold product into 137 different countries.

Our acquisition opportunities for the international group were also favorable. As you might recall, we purchased -- in fact, I think John mentioned, we purchased Delta Genomics in Canada in January. This purchase will give us some additional capabilities for the Canadian market. Though we don't have any completed letters of intent at this point, we have 4 good acquisition candidates that are on our radar screen for international, and all of them will be bolt-ons to existing business that we have.

So maybe I better stop this morning and stop the international show and turn it over to Steve Quinlan for some color behind these numbers. Steve?

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

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All right. Thanks, Jim. As we indicated in the press release, the strength of the U.S. dollar relative to the currencies we do business in continued to negatively impact our comparative revenues in the third quarter. The Brazilian real declined 14% against the dollar and the pound sterling was 6% lower, each compared to the same period a year ago. And in a neutral currency environment, revenues would have been $2.5 million higher in this third quarter than what we reported. And for the year-to-date, that amount is $5.8 million. We do hedge a portion of our balance sheet currency exposure but do not hedge the revenues. The fourth quarter may bring more currency volatility depending on how Brexit unfolds.

Our gross margins were 45.7% for the quarter compared to last year's third quarter gross margins of 47%. Margins were adversely impacted by mix changes within the Animal Safety segment, resulting from lower sales of higher-margin rodenticides, diagnostics and Animal Care products, and strong revenue growth from our cleaners and disinfectants and our Australian genomics operation, which produced lower gross margins than the segment's historical average. Margins on the Food Safety side of the business were also negatively impacted by mix as strength in culture media and cleaners and disinfectants, relatively lower-margin items within the segment, and an increase in international sales, which were hurt by the strength of the dollar, resulted in lower-margin percentage in this segment. As I've mentioned on previous calls, our lineup of products has a wide range of gross margins, which will cause some fluctuations from quarter to quarter depending on mix. And for the year-to-date, our margins were 46.4% versus 47.5% last year.

Operating expenses overall increased 5% for both the quarter and year-to-date periods. Sales and marketing expenses were up less than 1% for the quarter as higher personnel-related costs were offset by lower advertising and promotion expenses and rose 6% for the 9-month period, primarily due to increases in salaries and other personnel-related expenses and increases in shipping expense. Our G&A expenses were up 8% for the quarter and rose 4% for the year-to-date. The increase for the quarter is due to higher stock option expense, legal and professional fees and training costs. Our R&D expenses increased 15% in the quarter, the result of outside services supporting our new product development programs. And year-to-date, R&D expense has risen 4%. Our operating expense for the quarter was $14.6 million compared to $15.9 million in last year's third quarter.

Expressed as a percentage of sales, operating income was 15% compared to 16.8% in the third quarter a year ago. And for the year-to-date, operating income was $49.4 million or 16.2% of sales compared to $50.3 million or 17.4% of sales last year. The decline in gross margin percentage is the primary driver for the decrease in operating income as a percent of revenues for each period.

Other income for the quarter was $2 million compared to other income of $1.4 million in the prior year quarter, with an $800,000 increase in interest income, the primary driver. Higher interest rates and an increase of $55 million in our cash and marketable securities balances for the respective periods are responsible for the additional interest income.

Our effective tax rate was 21.4% in the third quarter, in line with the new federal statutory rate. Now this compares to 4% in the third quarter last year. Now corporate tax reform that was enacted in December of 2017 dropped statutory rate from 35% to 21%, and we used a blended 29% in last year's third quarter. And after a number of adjustments for the repatriation tax and to revalue our net deferred tax assets, our effective rate dropped to that 4% number the last year. Our year-to-date effective tax rate is 17% compared to an effective tax rate of 14.7% in the prior year.

Company generated $10.4 million in cash from operations in the third quarter and has generated $43 million for the year-to-date. We invested $5.2 million in property, equipment and intangible assets this quarter and $11.9 million for the year-to-date, primarily on manufacturing equipment and improvements in IT infrastructure and storage.

Our inventory balances have risen 12% since our prior year-end. The higher balances are reflective of lower-than-anticipated sales levels in the quarter, but we continue to work on improvements in inventory turns with programs and goals in place at each of our operations.

Now our third quarter operating results were clearly not what we had planned. However, there is good momentum in a significant portion of the business, and I remain positive about our future.

And I'll 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. More than anything on this call, I just want you to understand how optimistic I am about Neogen's future. We have new products ready to launch, we have acquisitions in our pipeline and we've implemented programs to address some of our short-term concerns. Our new test for coconut that we launched yesterday is another addition to our comprehensive suite of food allergen tests. Food companies can now use our market-leading tests for -- to test for 19 allergens. We're about ready to launch a portable version of our successful Raptor test system to provide even more food companies with a simple but accurate food safety testing option. Jim talked about the new disinfectant from our plant in the United Kingdom, and we believe that product has tremendous upside for us. As Jim also mentioned, we have a number of acquisition candidates on our radar screen that have the potential to drive future growth. To address the animal protein market weakness that I noted earlier, we've instituted new programs to help our distributors drive end-user purchases. And we're focused on getting closer to our distributors' customers to help them increase product move-out.

To summarize, I remain extremely optimistic about our future. I don't believe our Animal Safety markets will necessarily -- those challenges are going to necessarily be resolved in the short term because there's so much uncertainty and the U.S. trade policies really need to be cleared up before we can see material improvement. Despite the market -- that market's temporary weakness, our end markets, particularly Food Safety and international, are growing. We believe we're well positioned in these markets to continue our solid growth trajectory, and we're really excited about the future.

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 Kevin Ellich from Craig-Hallum.

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

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So John, just wanted to start off with -- talk about the puts and takes and moving parts this quarter. Clearly, there is some strength in genomics and natural toxins, but rodenticides was down 19%, and even your vet business in Animal Safety was pretty weak across the board. Just wanted to see if you could provide some color on that front.

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

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Sure, Kevin. Thanks for joining the call today. Really, when I look at the quarter, it's almost a tale of 2 businesses. I think our Food Safety and the genomics business had a really great quarter. I mean, we were pretty much up across the board and across all markets in those. And what really hurt us was that U.S. Animal Safety business. And you guys cover a lot of other companies that serve this market. And if you look at their quarters, they don't look much different than ours. So there's just a general softness there. I've learned my lesson. Last quarter, I think I said that I thought it was going to firm up, but I've decided I'm going to stop trying to predict the animal protein markets going forward. So I know it will get better because it always does because it's cyclical. I just -- I'm not sure when.

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

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Got you. No, that's helpful. And then speaking of the animal protein markets, was it softness across the board with dairy and African swine flu internationally? Or could you give a little bit more detail as to what you saw in that front?

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

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Yes. So if you're watching the African swine flu, that's hurting our customer base, but like that's one of the reasons we're excited about the new products that we just launched out of our Quat-Chem business because it has a label claim for African swine fever. I read the other day that China's depopulated 20% of its sows because of African swine fever. And now short term, that's going to hurt. But long term, there's probably some opportunities there. And we're trying to get that -- we're not trying -- we're getting that product over to China to try to help those producers with that. In the U.S. and internationally -- I mean, the U.S. dairy market is still a challenge. But again, you saw in March, swine futures were up almost 8% because of the news in China. So while we had a very challenging quarter last quarter, I think the swine guys are actually making money in March, which is the first time in quite a while. So as you know, these markets, they will always move around. And depending on what's going around the world, we'll see puts and takes. But long term, we're still excited about it.

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

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Got it. And I know you have a very diverse business. While growth has -- you still continue to grow your top line. It's decelerated pretty meaningfully the last few quarters. Now just wondering what you can do inside your control to reaccelerate growth and how long before we should see that take place.

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

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Yes. I think there's a couple of things, Kevin. One is we are working with our distributor partners today on programs to drive their end product sales. So we're going after -- even though the market may be soft, we don't have 100% share. So we're going to go after share within that market space. So we're going to -- we've launched programs with our distributor partners to do that. On the Food Safety side, we continue to take share and that market continues to grow. And then we always look for strategic acquisitions to layer on top, and we've got some nice wins in the pipeline. And so that's going to help. And like you saw with coconut, we just launched our new coconut allergen test kits. I think we've got new products coming that you'll see in this quarter that's going to help us continue to move.

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Operator [8]

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And the next question comes from Drew Jones from Stephens.

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Andrew Luten Jones, Stephens Inc., Research Division - MD [9]

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Steve, maybe I'll start with you. Could you parse out the key factors that drove the margin contraction over the year, whether it was mix, FX, option expense sequentially, kind of the key factors there? And then are any of those going to linger into fiscal 2020?

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

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It's a good question, Drew. I would say that the margin -- what appears to be margin deterioration is mostly a mix story. So margins were 47.5% compared to 47% last year. You can probably say that the mix between -- within Animal Safety and Food Safety is probably half of that, and then the currency issue is probably the other half. I think the currency issue is going to stay with us for a little bit. And as we said, we don't know what's going to happen with currencies, with Brexit, but we know where the currencies are today versus if we're talking about fourth quarter -- where they were last year in the fourth quarter. So we'll probably still have some currency headwinds. And then I think the product -- as John said, we can't get into trying to forecast when the Animal Safety markets will improve. But I'll tell you that I'm -- to kind of emphasize John's point, the Food Safety markets were very strong. I mean, with -- if we take our 8% growth in Food Safety and if we put that currency impact on it, you're getting closer to 13%. And then if -- we actually had a government tender in one of our Brazilian businesses that did not repeat this year, and that would have been another 3%, let's say. So that business is strong. I just want to make sure we understand that, that business is doing very well. The genomics business is strong, and we just have to get the Animal Safety markets more robust, and then I think you'll see some nice growth there.

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Andrew Luten Jones, Stephens Inc., Research Division - MD [11]

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Great. And then maybe just for John and Jim, a little more color on the acquisition pipeline. Am I misreading the comments? Is everything in the pipeline international? And then the second part of the question, any acquisition you would do that's in the pipeline, would it be accretive? Is that a correct assumption?

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James L. Herbert, Neogen Corporation - Executive Chairman [12]

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Let me comment on that. Right now, I mentioned I think in my comments that we had 4 acquisitions in the pipeline that were all international. I can't go much further than that. We don't have letters of intent on those. But 2 -- one of those would be on the genomics side and one of them -- or actually 2 of them would be overall on the biosecurity side. They're all bolt-ons. And none of them are big, Drew, but they're very strategic as to where we're going. I think we'll -- I think you'll continue to see -- at least it's John's plan, to continue to see more acquisitions even on the international side as we reach back to strengthen our distribution. We've got strong distribution in the countries that I talked about. And we've got some good independent distributors in some other countries that those countries may have grown to the front now that we need to bring them inside like we were able to do back a few years ago with Dr. Chambers and Holmes when we brought that business in that grew into Neogen Europe. We are out on a major search domestically or, I guess, I should say corporate-wide, looking at some big opportunities or looking for some big opportunities might be the most appropriate way to say it. Don't have anything to report to you at this point, but we've got some significant activity going there now. So we do think that -- the acquisition market has been crazy. There's so much equity capital out there, and valuations don't mean anything to them. Their big job is to get rid of the cash that they've got every morning. So we haven't missed any good ones that I think any of us are concerned about. But I believe that that's -- we're going to begin to settle down a little bit, and we're going to see some more acquisition opportunities. So it's -- and John's made some changes in our management part of our international group to strengthen our management force. And I think some new faces coming in, all of this is going to be important going forward because we've never had one, Drew, that's gone south. We bought them and integrated them, and most of them are still around. And so it's pretty important that as we bring in these acquisitions that we can integrate them, and that's probably held us back just a little bit here in the course of the past years and do anything big because we wanted to make sure that we have the mother ship ready to take on some additional load. So that was a long, political answer to a simple question but yes.

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

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And Drew, to add on to Jim's point, if you guys have been looking at the website, you see that we're interviewing -- we're strengthening our business development team. So we're bringing in more resources to help us do this faster.

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Operator [14]

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And our next question comes from Paul Knight from Janney Montgomery.

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

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Could you frame up, on the portion of your revenues, how much is in the animal side, meaning pork, cattle? And then the second part of my question is as I look at these commodity prices over the last year, there has been a tremendous volatility to the downside in particular. But recently, it looks like things are up flat year-over-year. Don't get me wrong. We had a lot of downside during the year. So with commodity prices now kind of back to prior year ago levels, what's the typical lag time that you would expect those better commodity prices to help out? Is it, in your experience, 3 months, 6 months? Or does that matter, I guess? So a, exposure; and b, the cycle where you think you are in it.

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

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Sure. So on the exposure side, when you think about our products, if you look at the difference between livestock versus companion, the majority of our products are in the livestock product segment. So it's a big portion. That's why it's important for us. Regarding the commodities and what that means for pricing for the protein producers and how that's going to affect the profitability going forward, like I said, I did a bad job last quarter. So I'm not sure. I mean, I think the things to watch or the things that we watch normally is, for example, in the dairy, it's not just the inputs. It's what's the output is worth. So you have to look at the milk-to-feed ratio. So even though the inputs are coming down, when you've got $14 milk, it may not be coming down fast enough to offset the poor price of the end product. So those are some of the things to look at when you're thinking about how those markets are going to turn and when they can possibly turn. So it's comparing their input versus their output.

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Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [17]

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And then specifically on the genomics side, could you frame up what U.S. did in terms of growth and then what ex U.S. growth was on genomics again for us?

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

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Yes. I'm going to kick that to Steve. He's got it right in front of him.

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Steven J. Quinlan, Neogen Corporation - VP, CFO & Secretary [19]

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So Paul, the U.S. business was up about 6%. And worldwide, we're up 15%.

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John Edward Adent, Neogen Corporation - CEO & President [20]

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And some of the challenge with that, Paul, is as we grow and we add Delta Genomics and we add other things, we try to make sure that we are being the most efficient for the customer and getting close to the customer. So there's a lot of things that are moving back and forth. So it -- we tend to look at it as our global growth because it's not a fair representation to say, well, if you just look at that, you say, "Well, international is really outgrowing the U.S." It's a little more complicated because the way we're moving things around to -- with regards to capabilities at the lab and trying to get turnaround time and be close to customers.

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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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And then lastly, on the international growth rate that was high, what are your initiatives gaining momentum? Are you adding distributors? Are you adding people? Is that something -- and what are you doing there to keep that growth rate moving at that level?

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

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Sure. So it really is -- it depends by country. So we have -- we continue to grow in Brazil because we're adding new products within our dairy testing, and we have a very strong growth. And we picked up -- and we took a lot of share from -- on the mycotoxin side from competitors because we've strengthened our team there. So the Brazilians -- it's a multipronged strategy, same thing in Mexico. We see opportunities with them for growth not only within the Animal Safety but the Food Safety segment and the genomics. We think that what we're doing in the U.S. around heifer replacement, we absolutely can do in Mexico. Jim's working with the Europeans. So Jim, do you want to tell him some of the things that you're doing over there with those guys?

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James L. Herbert, Neogen Corporation - Executive Chairman [23]

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That's a timely question. I had breakfast this morning with 2 of our key managers from Eastern Europe. There are 6 of them in town this week, and we're continuing to finalize not just a strong 5-year plan, but looking at where we are with budgets as we go into the new year. The transition over there was awfully important as Dr. Holmes stepped back and Dr. Chambers stepped up. The whole group volume was able to step up one rank, and we're just moving forward without a pause. And so that's important to the textbooks. We're doing some new things in Animal Safety business over there, bringing in some new products that -- we're just really beginning to build the Animal Safety business. So there is some product stuff over there that's going to continue to grow. I think that as we look at probably all of our international operations, we have an opportunity to grow at the same kind of levels we've been seeing this quarter. So there's lots of opportunity in India, a lot of opportunity in China. Dr. Lilly, who's been with me on corporate development, is going to be spending more time with India and China and -- as we grow those operations. So I think we're very encouraged about -- and to what John said, some of our growth is -- Brazil was up big time this past quarter. And some of that Brazilian growth was at the mercy of some product that had been recorded in our Lexington operations a year ago, but it made more sense to move it down and make the possibility to go to Brazil. So we're a worldwide company, and I think we have to continue to look at that. But I'm very encouraged about where we are internationally.

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Operator [24]

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

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Jason Andrew Rodgers, Great Lakes Review - VP [25]

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Yes. You mentioned earlier some initiatives to gain share in Animal Safety. Thus far, are you at least maintaining share in that segment overall? And what product areas might you be losing or gaining share? And why?

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

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So some of the things we're doing are really focused on helping to train and move out programs for our distributor partners in the U.S. We don't think we're losing share. There's reporting that we have. It's this -- if you take a look kind of across the pharma business -- I looked the other day. You had other big pharma companies and everyone that serves this market, I think 4 of the 5 are all down. And one of them was up, was up less than 2%. So it's not like someone is gaining share at the expense of others. It's just I think this market is where -- and on an earlier question, it was talked about how the prices are relatively stable versus the year, but what happens is when these producers are losing money and losing equity for a year, even though it hasn't improved, they're not making money. They're still losing. So as they lose equity, they just tighten their belts. So they're not going to stop spending, but they're saying, "Listen, at this point, I know I ought to put rat bait in that house every week, but I'm going to do it every 10 days from a cash flow perspective." So we're focusing on trying to drive end-user promotions to pull product through our distributor partners, to take share from competition and continue to grow the market.

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Jason Andrew Rodgers, Great Lakes Review - VP [27]

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And John, based on what you've seen from the cyclical downturns and upturns in the market, when it finally does turn, would you expect there to be some pent-up demand for these products?

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

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It's not really pent-up demand. What you'll see is they will go back to their normalized buying patterns. So they don't -- there's not a compensatory effect, but they go back to their normalized buying patterns. So you'll see times when -- and it depends by market. If the number of animals being produced grows, then we tend to grow with it and you get back to the normal buying patterns. So you see over long-term period mid-single-digit growth, but I've seen some years that have been double-digit up and other years that have been 7 to 8 down. But over the long term, you'll watch it that it's mid-single-digit growth on the market.

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Jason Andrew Rodgers, Great Lakes Review - VP [29]

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That's helpful. And if I could squeeze one in -- more in for Steve. What tax rate should we be looking at for the fourth quarter? And any early thoughts on fiscal '20?

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Steven J. Quinlan, Neogen Corporation - VP, CFO & Secretary [30]

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I'd probably use -- we were at 21% this quarter, Jason. And I'd probably use 21% or so for fourth quarter and probably even into fiscal '20 if you're modeling that. We've talked before about the -- this impact from stock option exercises that could have a small benefit in any given quarter depending on the number of exercises. It was a nominal impact this quarter. And so I think 21% is probably as good a number as any to use.

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Operator [31]

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And our next question comes from Brian Weinstein from William Blair.

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Andrew Frederick Brackmann, William Blair & Company L.L.C., Research Division - Associate [32]

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This is actually Andrew Brackmann up for Brian. John, I just wanted to go back to your comment you made a moment ago about the mid-single-digit growth there. Could you just maybe clarify for a minute, was that your expectation for the longer-term growth of the entire Animal Safety segment or just one portion of that?

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

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No, that's generally what Animal Safety has been doing over a longer period of time. And I'm talking about domestically now.

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Andrew Frederick Brackmann, William Blair & Company L.L.C., Research Division - Associate [34]

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Got it. But overall, you think that, that business, I guess, longer term, can maybe grow higher single digits to lower double digits when you layer on the international opportunity?

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

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Yes. I mean...

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

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New products...

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

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Really -- and Jim's right. What got us to the higher single digits is when we added new products. So when you have things like we do with our new disinfectant or some of the things we're doing with water, that's when you're going to get the bump. The market generally doesn't grow like that, but that doesn't mean we can't grow like that.

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Andrew Frederick Brackmann, William Blair & Company L.L.C., Research Division - Associate [38]

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Got it. Okay. And then maybe just as a follow-up. I know you guys have been touching on M&A a little bit, but with the FDA letter last week calling for that increased investment in some more advanced technologies with next-gen sequencing and blockchain, and I think Mr. Herbert, you were talking about this in some of your comments, but how should we think about Neogen moving more into those areas that were outlined in the FDA? And is this going to be kind of a focal part of your M&A strategy moving forward?

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

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It's going to be a focal point of our business moving forward. And whether that's -- we do it by M&A or whether we do that on our own, those are the types of solutions we have to provide for our customers. And we are actively working on those today to make sure that we can provide the solutions that the customers need. And you think about customer, it's a wide customer base. Whether the customer is a retail restaurant like McDonald's or the customer is a food processor like Nestlé or the customer is a producer that we work with, cattle, swine or poultry, that need the ability to be able to see where those inputs are all the way through the chain, that's something that we absolutely got the team working. And it's -- to Jim's point, this is not something that we just came along with the FDA proposal last week. This is stuff we've been working on for quite a while.

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Andrew Frederick Brackmann, William Blair & Company L.L.C., Research Division - Associate [40]

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Certainly. And then just last one from me. I think you said inventory rightsizing was one of the drivers of the Animal Safety number this quarter. Would you say that's behind you now? Or will that be -- continue to be a little bit of a headwind moving forward?

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John Edward Adent, Neogen Corporation - CEO & President [41]

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I think that's -- Andy, that's the function of the market, right? So if the market is not pulling product through, the distributor normalized run rate, the days on hand go higher. So I don't think they change their buying pattern. I think it's a function of the market, which is why we're focusing on helping our partners pull through our products through their warehouse.

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Operator [42]

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(Operator Instructions) Your 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 [43]

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Just a couple of quick follow-ups. First off, John, as you guys know, we've had a lot of snow in the Midwest this year. Wondering if you have any comments or color as to potential flooding in the Midwest and what sort of impact that could have on your business here in March and April.

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

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Yes. I mean, our thoughts and prayers are with the people in Nebraska. I saw an initial report the other day that they thought the flooding in Nebraska could have an economic impact of up to $700 million on agriculture for that state. Now I don't know what that was between livestock and crop, but it -- Kevin, I think you've got to think about it like when we had the flooding in the East Coast last year. What we lost in certain sales to customer bases, we gained in others, whether it was they had to clean more or something other. We didn't see a significant -- or I don't know, Steve, I don't think we ever -- we didn't see a significant impact, positive or negative. It's kind of a put and take wash for that.

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Steven J. Quinlan, Neogen Corporation - VP, CFO & Secretary [45]

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It was.

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

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It would be kind of interesting to see what happens to insecticides.

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

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Right. Yes, I mean, because to Jim's point, if it's weather, you could have a bigger insecticide season. So...

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James L. Herbert, Neogen Corporation - Executive Chairman [48]

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We maybe killed a bunch of them in winter, and we did.

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John Edward Adent, Neogen Corporation - CEO & President [49]

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Right. So it's hard for me, Kevin, to say it's going to have a direct impact. I just don't know. I mean, what we'll do is whatever the opportunity presents to us, we'll take advantage of it to help our customers kind of whatever happens to them.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [50]

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Got it. No, that makes sense, especially with the snowy winter leads to more mosquitoes in the Midwest. As for -- just one quick data, wondering if you could remind us. Last fiscal Q4, Animal Safety organic revenue growth was really strong, almost 10%. And can you remind us what drove that strength? And now that FX is going against you, what do you plan to do to kind of help mitigate that tough comp?

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

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The same things we're doing now, Kevin. It will be a tough comp, but what we're going to do is we're going to drive end-user promotions in the U.S. We're going to continue to launch new products, like we've done in the U.K., that we think we can now export to a lot of our countries around the world. We're going to continue to drive the businesses where we see the opportunity. I think while it will be a challenging comp, we've already got plans in place, and we started in the third quarter to make sure that we are doing everything we can to continue to push move-out for fourth quarter.

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Operator [52]

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And your next question comes from Leonard Heller, a private investor.

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Leonard Heller, [53]

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I just have -- I want to drill down a little bit on the Animal Safety program. Before I do that, I want to kind of ask you to review your Facebook thing on sales of products because I think your February for Food Safety may not reconcile your total. So just check that out.

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John Edward Adent, Neogen Corporation - CEO & President [54]

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Okay.

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Leonard Heller, [55]

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So there are a couple of things here that also need some clarification. We have rodenticide sales and insecticides in both Animal and Food Safety. Differentiate for me what the difference is between the 2 sales focus there.

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John Edward Adent, Neogen Corporation - CEO & President [56]

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They're the same products. It's just the international piece is under Food Safety, and the domestic piece is under Animal Safety.

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Leonard Heller, [57]

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Okay. Next question I have is I've listened to the discussions, and there's a lot of discussion about mergers and acquisitions. I want to focus on organic growth for a while and specifically in the U.S. My first question is, are we not doing a good job of marketing our products in the U.S.? Because you say international is growing. U.S. is kind of stable. Why is U.S. stable? Why are we not getting the organic growth that we would expect in this market? I know there's a lot of factors, but I'd like a simple answer to that question.

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

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Sure. Well, I think the simplest answer, and Jim brought it up earlier, is -- so for example, in Europe, we're just starting out in the Animal Safety market. So your percent growth can look very good on a small base. And that's like India. I mean, India, we've doubled the business from last year to this year. So 100% growth looks fantastic, but it's really a much smaller base. And our core, our biggest piece of the Animal Safety market is in the United States. So it is inherently harder to grow that because even a dollar size, you've got to grow it much more to get that percentage increase. I think that's the easiest answer.

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

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And Len, thinking about where we are, and I'd say I'm in because Dr. Heller has been a brand adviser for 30 years or better, was responsible for starting of what we've got in Lexington today. So I don't want to let that pass by. But those are -- we think about 2/3 of our total market opportunity -- and you can probably remember this, Len. We said about 2/3 of our total potential lies outside the U.S. So we'd never get there probably. But when you look at 42% of revenue this past quarter came from outside of the U.S. sources, we've got a lot of room to grow there. And so we ought to be growing faster there.

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John Edward Adent, Neogen Corporation - CEO & President [60]

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Yes.

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Leonard Heller, [61]

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I agree with that totally. I guess, the last question, and then I'll stop is, how is Animal Safety or the animal side of our company structured? How are we inserting more aggressive marketing activities? Because I know we always have new products and we have new acquisitions. And some of our old products may be getting a little tired. I don't know that because I don't drill down like I used to. But I'm just trying to understand how are we structured in the animal division. What is our marketing activity in animal division focused on the U.S.? That's my final question.

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John Edward Adent, Neogen Corporation - CEO & President [62]

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Sure. Well, that's a good question. And it -- I talked about a little bit in my prepared comments is we are focusing to get much closer to our distributor customers and really focus on the products and the promotions to drive that change at the customer level, so helping to develop products that's going to pull product through our distributor partners because if you think about it today, our distribution model on that in the U.S. is 95% of that goes through distribution. So we're really -- go ahead.

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Leonard Heller, [63]

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I guess, my question is who inside of Neogen looking at the entire animal division is responsible for the marketing activities, for looking at products that are potential and good versus those that are old and we don't do much about that? Where in the organizational structure is this occurring?

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

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We have a Head of Marketing at the Animal Safety division and reports into our General Manager of Animal Safety. And then we also have an Animal Safety advisory council that allows us to look at new technology and new products to address new market segments, and those meet on a quarterly basis.

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Leonard Heller, [65]

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Yes. That's always been a good part of Neogen, and I appreciate it. I've always enjoyed that. So I'm just focused on the Animal Safety side, that division, what we're doing organically, where our marketing efforts are going. I don't want to talk about -- I didn't want to talk about new products and new acquisitions. I want to talk about just basic activities. And so I think you've answered most of those questions.

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John Edward Adent, Neogen Corporation - CEO & President [66]

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Great. Well, thank you for your questions today.

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

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Thanks for the continued support, Len.

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Leonard Heller, [68]

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I'm always there for you.

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Operator [69]

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And this concludes the question-and-answer session. I'll now turn the call back over to the speakers for final remarks.

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John Edward Adent, Neogen Corporation - CEO & President [70]

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Well, thank you very much. We really appreciate everyone's support. Again, we are excited about the future of the business going forward. We see this as an opportunity for us to continue to do what we do well, which is bringing new products, new solutions and new opportunities for our customer base. So thank you very much for your support, and have a great day.

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Operator [71]

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Thank you, ladies and gentlemen. This concludes the question-and-answer session and webinar. Thank you for participating. You may now disconnect.