Neogen Corporation (NEOG) Q3 2011 Earnings Report, Transcript and Summary

Welcome to Neogen's Third Quarter Fiscal Year 2011 Earnings Results Call. My name is Monica and I'll be your operator for today's call. [Operator Instructions] I will now turn the call over to Jim Herbert. Mr. Herbert, you may begin.

Well, good morning, and welcome to our regular quarterly conference call for investors and analysts. And as Monica reported or suggested, we'll be reporting on our third quarter which ended on February 28, as well as the results of the first nine months of the year or our first three quarters of this fiscal year. But to start with, I'd remind you that some of the statements that are made here today could be termed as forward-looking statements. These forward-looking statements, of course, are subject to certain risks and uncertainties and the actual results may differ from those that we discuss today. These risks that are associated with our business are covered in part in the company's Form 10-K as filed with the Securities and Exchange Commission. And in addition to those of you joining us today by this live telephone conference, I'd also welcome those who may be joining by way of the simulcast on the World Wide Web. These comments, along with some exhibits, will be available on the Web for approximately 90 days. Following comments this morning, we'll entertain questions from participants who are joined on this live telephone conference. And I'm joined today by Lon Bohannon, Neogen's President; Steve Quinlan, our Chief Financial Officer; and in fact, Rick Current, the former CFO who now works part time from his water residence is also with us this morning to fill in on any historical financial questions that might come up. Earlier today, Neogen issued a press release announcing results of our third quarter for the 2011 fiscal year. Once again, I'm pleased to report another record-breaking quarter and I continue to give the credit to our team of over 600 employees located in several places around the world who continue to remember that the toughest thing about success is you have to keep on being a success. Net income for the third quarter increased 27% from the previous year to approximately $4.9 million or $0.21 a share. This compares with last year's earnings per share of $0.17. Our third quarter revenues increased 25% to approximately $42.2 million, which is another record for our 28-year old company. For the first nine months, our revenues show an increase of 27% in the current fiscal year as compared to -- up to $129 million as compared to last year's approximately $101 million. The net income for the first nine months of this year is up 31% to approximately $16.9 million from $12.9 million a year ago. And putting that on a per share basis, this year's earnings are now standing at $0.71 as compared to last year's $0.56. As with the last quarter, our revenues are coming amazingly close to our budgets. Last quarter, I reported to you that our actual revenues were about 99.5% of what we’d budgeted. This quarter, they came in at 101% of budget despite the fact that we had some currency translation issues. Once again, the revenues of this quarter added to Neogen's stream of quarterly revenue increases or successes marking our 76th quarter in the past 81 in which we've shown increased revenues as compared to a year earlier. Or stated another way, we've only been five quarters, there's only been five quarters in over 20 years that we failed to beat the previous year's revenue. Frankly, this was a quarter in which everybody did their job. Those of you who have followed the company and know that operating profit is the best overall barometer for our success. Some of our businesses have less gross margin than others, but they also have lower operating expenses. Operating income for the third quarter increased by 40%. This helped push our operating income for the first nine months up to 21.1% as compared to 19.6% a year ago. I think there are several items on the balance sheet that are noteworthy this morning. As an example, even though we had a strong growth in the first nine months of this year, our inventory levels are essentially the same as they were nine months ago. Obviously, our accounts receivable would be expected to be up and they are. However, at the end of February, if I looked at things right at our accounts receivable, actual aging was better than it was at the beginning of the year. A lot of credit there goes to our manufacturing group for inventories and certainly to our administrative group in the attainment of their accomplishment as it relates to receivables. The quarter was also a good one for cash generation. We generated $4.4 million in cash from operations during the quarter, which brings our cash and securities balance now to over $47 million at the end of the quarter. I think I'll stop at this point and let Lon give you some color on the two operating divisions, then I'll come back with some quick wrap up and perhaps give you a glimpse of what we're seeing for the future. Lon?

Thank you, Jim, and welcome to our listeners on the conference call, as well as those joining by Internet access. As Jim mentioned, Neogen did issue a press earlier today reporting our operating results for the third quarter and first nine months of our 2011 fiscal year. Neogen's percentage growth in sales and net income for the three months ended February 28 was very similar to our exceptional first and second quarter results. And in what is starting to sound like a broken record, but is still very much music to my ears, our results set new third quarter highs for Neogen in terms of sales, net income and earnings per share and also continued our remarkable track record for consistent growth in sales and profitability. The April 2010, acquisition of GeneSeek continues to make a significant contribution to our overall sales growth. This agricultural genetics testing service laboratory has exceeded our internal revenue expectations for each quarter this fiscal year. Neogen also experienced another strong quarter of organic sales growth, achieving a 10% overall same-store revenue increase for the quarter. Getting double-digit organic growth in the third quarter was especially noteworthy considering Neogen faced a very tough comparison to the prior year's third quarter. I know many of you will recall that last year was helped by a significant spike in sales of mycotoxin test kits due to widespread vomitoxin or DON contamination in much of the corn crop. This year's corn crop was smaller and much cleaner resulting in far less testing for mycotoxins and more specifically for DON. So achieving our goal of double-digit organic growth this quarter was a significant achievement and a credit to the outstanding efforts of our sales force, and also to the outstanding contribution of our R&D group, which has provided Neogen with several new and improved products for the markets we serve. I would also point out the 40% increase in operating profit as another significant achievement for the quarter. This improvement in operating profit for the quarter was actually better than either of the first two quarters and helped bring our year-to-date increase in operating profit for fiscal year 2011 to 37%. Again, I have to recognize the outstanding contributions of our operations and administrative personnel who continued to work diligently on cost reduction and productivity improvements that helped drive more of each incremental sales dollar to the operating profit line. After nine months of this fiscal year, as Jim indicated, our operating profit is 21% of revenues and we do stand a good chance of reaching or even surpassing our operating profit goal of 20% for this fiscal year. Let me take just a couple of minutes to provide a few of the key accomplishments in the quarter for Animal Safety and Food Safety segments. Our Animal Safety group lead sales growth in the quarter with sales of $21,601,000 representing an increase of 53% compared to the prior year. In addition to the aforementioned strong performance of GeneSeek, Animal Safety had organic growth of 17%, bringing them to 10% same-store sales growth for the first nine months of this fiscal year. The primary drivers of this exceptional organic growth for Animal Safety in the third quarter included cleaner and disinfectant sales, which were 62% higher than last year, a strong 34% increase in sales of rodenticides in the quarter and another solid quarter of revenue increases for our life science diagnostic products, which achieved 17% growth. In addition, the Animal Safety group also had solid increases in sales of veterinary instruments and some other product lines sold primarily to distributors servicing customers involved in food animal production, a very, very strong quarter for the Animal Safety segment. The Food Safety Division also experienced a solid third quarter with sales of $20,634,000 representing overall organic growth of 5%. This division achieved strong growth in many product lines including Soleris test systems for spoilage organisms, which was up 27%; the BetaStar drug residue test for dairy antibiotics, which was up 12%; AccuPoint General Sanitation test system is up 26%. In addition, Neogen's Reveal line of test kits for specific pathogens like Salmonella and Listeria was up 23%, and the company's line of diagnostic tests for food allergens increased 16% in the third quarter. Now, a notable exception in the Food Safety quarter-to-quarter growth performance came in the area of sales for natural toxins, including sales of test kits for DON, which fell 18% below sales for the same period last year. Obviously, this decline offset much of the strong growth achieved in the different product categories I just covered. In fact, if you exclude natural toxin sales from the calculation, Food Safety same-store sales increased 12% in the quarter. And just to clarify once again, the decline in natural toxin sales was a result of the weather impact and resulting difference in crop quality primarily in corn harvest in each of the last two years. Last year, at this time, we were benefiting from a dirty corn crop that resulted in significant sales increase for our industry-leading test kits for DON. This year, there was far less contamination and testing of the corn crop. As a result, we had to overcome a big shortfall in sales of that same DON test kit. Fortunately, we were able to do just that and I think the strength of our one-stop shop marketing approach is demonstrated by the fact that Neogen was still able to achieve double-digit organic growth for the company in the third quarter. So in many ways, the third quarter was one of our best in a long time. We were able to overcome a tough comparison to last year and still report significant top line growth and an even more impressive increase in operating profit. As we look ahead to the fourth quarter and completion of our 2011 fiscal year, we do so with much enthusiasm and optimism. Our markets continue to grow. The economy is beginning to show more and more signs of recovery and we have a great lineup of products needed to address important food safety issues from inside the farm gate, all the way to the food plate. Yes, we do still have some challenges before us, including another tough quarter comparison for the Food Safety Division and recognition of GeneSeek will be more in line with our internal expectations, but our management group is excited about the future prospects for organic growth in the markets we serve and we look forward to continuing our tradition of reporting strong quarterly increases in sales and profits. That completes my comments for this conference call, so I'll turn it back over to Jim for his concluding remarks.

Thanks, Lon. Well, Lon talked about the fact that we had to overcome sales of the mycotoxin test kits because of weather. We also had to overcome negative currency translations for the quarter. As you may know, in addition to the U.S. dollar, we do business in Brazilian real and Mexican peso, the eurodollar and the pound sterling. And as the U.S. dollar strengthened in some of these markets during this past quarter, we did have a negative currency translation compared to last year of just a bit over $200,000. Having said that, I'd also say that as you know, sometimes the wind’s in our faces. It was this quarter and sometimes it's at our back. However, in either case, is there usually a lot of risk that's attached to the earnings. It will make some difference, but not a lot of risk. On the subject of international growth, we continue to be -- this continues to be one of our primary objectives for both our company-owned operations located internationally, as well as growth from our other 100-odd distributor partners that are located in 118 countries. For the quarter, Neogen Europe operations continued to lead the charge in terms of total revenues. They were up 16% in terms of U.S. dollars. I believe that we're continuing to take some market share gains in several of those European Union countries. Our Neogen Latino America subsidiary in Mexico recorded over an 80% growth in the quarter as compared to the prior year. And we're now beginning to gain some meaningful traction in Mexico. Also, our Mexican operations with our own employees located in Mexico City are now responsible for both Food Safety, as well as Animal Safety products. From the Animal Safety standpoint, we are seeing some nice trends develop in our cleaner and disinfectant business in Mexico, along with Central America and we expect to see that growth continue. The Animal Safety business was recently introduced into our Brazilian operations too through our company-owned Neogen do Brasil. Neogen do Brasil was already responsible for Food Safety products, but until recently, DuPont had been Neogen's distributor for cleaners and disinfectants in Brazil. But since this was a better fit for Neogen, the marketing efforts have now become the responsibility of our own employees. A similar situation occurred concerning the sale of dairy antibiotic products in Brazil. Our employees have begun an aggressive marketing program for these products that were formerly handled by an independent distributor for us in Brazil. I guess as further comment on the international front, I should say that our business should not be significantly impacted by what's happening in either Japan or the Middle East. Of course, much of the -- most of these countries, where the turmoil’s occurring in the Middle East, don't produce much of their own food, and therefore, are importers and are very -- not very large customers for either Food or Animal Safety products. Though Japan is a major food consuming country, they too are large net importers. And furthermore, the Japanese have a tendency to buy products from their own countrymen when it's at all possible. As a result, we've never had a very big share of the market for diagnostic products in Japan. On the domestic front, there is still some caution related to animal protein production because of high grain prices. This is similar to what we encountered in 2008 as ethanol producers were willing to pay prices for corn that poultry and red meat companies couldn't afford. However, this year I think is different from 2008. The animal protein producers I believe are in much stronger position. As an example, Pilgrim's Pride, which was the largest chicken producer in the U.S., is out of bankruptcy now and is controlled by a Brazilian firm and it looks like that integration has successfully taken place and their finances should be in order. Similarly, to look down the rest of the whole animal side, the balance sheet of Smithfield, the world's largest pork producer and processor, has considerably improved as they paid off about a billion dollars’ worth of debt, which I think was about 25% of their total debt. And they have now also been able to institute some changes that are apparently driving down their cost of production. Similar situation is true with Tyson Foods, one of the largest of the poultry and red meat firms, that have instituted a performance improvement and there’s $600 million that will certainly be working for them as they move in to these periods of higher grain prices. So as I look out over the next quarter and the year ahead, it appears to me that our domestic demands for our products, as well as our international demands should continue to be strong and we should be in a position to gain some more market share. On the new product front, I continue to, like Lon, feel good about our pipeline. On the diagnostic side, we'll be introducing a couple of products later in the calendar year that I think look pretty exciting. From the long-term viewpoint, I continue to feel good about our genomics business and our vision for that technology. We've been using the tools of genetic identification to help in the development of our diagnostic test kits. However, we didn't have an avenue to use those tools as a part of our intervention plans, at least not until we acquired GeneSeek last spring. Lon made comments about the nice growth that we've enjoyed during the first year that company's been a part of Neogen. Furthermore, I think that there are a lot of exciting areas that are just beginning to develop. We are already using some of those and identifying cattle with genetic disease disorders. We are a part of a team working with the U.S. Department of Agriculture to use genetics as a breeding aid in cattle to reduce the amount of E. coli that would eventually get into our ground beef. Other work is continuing in swine, dairy and poultry breeding programs. As an interesting example, it was just announced this week, scientists at Iowa State University found that certain Holstein cattle have a much greater resistance to Salmonella than others. You likely recognize Holstein cattle as those big dairy cows that are black and white. However, certain red and white Holstein cattle appear to have some genetic resistance to Salmonella. From the acquisitions front, we continue to look at several opportunities though we don't have any signed letters of intent at this point. Earlier in the month, we had hoped that we might make an acquisition of another animal genomics firm that was being sold in a bankruptcy auction. However, the creditors that were left holding the bag after that business had burned through $131 million, outbid us and bought it in as a credit bid and I assume that they'll attempt to restart that company. I guess wrapping up my comments, it was a good quarter from the standpoint of revenue growth, net operating profit growth, our earnings per share growth and I don't see anything in our future that should slow down that growth based on our three-point growth strategy. As you’ll remember, I think we have a continued opportunity to grow our share of both the Food Safety and Animal Safety markets. I believe that we have some strong new products that are coming out of the pipeline and should continue to help our growth and I also believe that we are focused in the technologies that should help us command that growth. And we certainly have adequate cash reserves for our acquisition program and in addition, have available to us a nice bank line of credit at some attractive rates. So all of us just have to continue to remember that the toughest thing about success is you have to keep on being a success. This, Monica, concludes our prepared comments for the morning, and we can now open the conference call for any questions.

[Operator Instructions] Our first question comes from Steven Crowley of Craig-Hallum.

Given we have some time this morning to mull over the numbers you've put out, I was looking at the real strong performance you had on the Animal Safety side of your business, even taking out the $5 million or so from GeneSeek and it looks like that business, relative to historical norm, maybe dropped about a million dollars less than has been the case historically over the last handful of years. And I'm wondering if was there anything anomalous that helped that business be stronger in Q3 and, like the rodenticide program that you had, did that maybe move some business earlier in the year or is there anything strange about the seasonality in Q3?

I guess I didn't quite get your question.

If I look at the last four years, Jim, it looks like even adjusting for -- taking GeneSeek out of the picture, the Animal Safety business dropped about a million dollars less from Q2 to Q3 than it typically has. And typically, we've seen a strong balance from Q3 to Q4. So I'm wondering if some of that strength that usually takes place in the back half of your fiscal year, we just experienced in Q3 because of timing issues in some of your programs or just the strength of the market or something strange.

Well, and I'll let Lon and Steve fill in, but a part of it is, is we continue to diversify. The cleaner and disinfectant side of the business is not as seasonal. We place and clean out hog houses and chicken houses 12 months out of the year. That helped as that portion of our business got stronger. We’re contra-seasonal with Brazil and what's happening in that part of the world. So they're going in to the fall and harvest season down there if you think six months back. So the seasonality influence of some of the Animal Safety stuff, as we work both the southern and our normal northern hemispheres has been of some help to us. Those are kind of general observations. I think maybe Steve or Lon can get maybe a little more specific.

Well, Steve, I think that it's really been, as it usually is, a combination of factors. We have focused very much on sales and marketing programs and efforts to increase organic growth in the Animal Safety segment. We have added some new technicals that has made our rodenticide line more attractive, particularly in the food animal production areas. You've heard us talk about our focus on biosecurity products and both cleaners and disinfectants and rodenticides are a big part of that strategy and it's starting to pay off for us. We do believe that we have gained some market share. The only thing that I would say that could be a little bit of timing could be the orders that came in very strong for the quarter for cleaners and disinfectants going to international markets. Sometimes, those can fall in different quarters depending on what time the orders come in, but I think the more important thing is that overall now, Animal Safety is up 10% organic growth on a year-to-date basis, which is what we thought we had an opportunity to get to and I congratulate our sales force down there for getting that number.

But you're right, I mean, the quarter was up like 17%. So it was a little boost in the quarter.

Well, that’s real helpful comment. Now your comments, Lon, about GeneSeek, looking forward, potentially being more in line with internal expectations, are you just laying out that possibility or do you see something in the pipeline or in their forecast that make it less the $5 million business it was this quarter. Should we think about that $5 million as a run rate versus kind of the $4 million level we were talking about not too long ago?

Well, we're still learning with that business. Remember, the year before we bought it, it did $12.5 million. And we've done some things that's enhanced the business, but it's kind of difficult right now. I was with the leading guy for breakfast this morning from Washington from USDA who has been responsible for the major hosting of the major dairy programs in the U.S. and we were both scratching our heads as to -- trying to figure out what impact it was going to have when you've got farmers or people who are dependent upon what's happening in the grain crops and what's happening in the animal economics, whether they're going to be willing to spend $50 a bull to get bulls tested in the next three months or whether they're going to be trying to conserve cash. I think there's still a lot of metrics there that, frankly, we don't totally understand. I'm not sure that -- I'm not sure they are understandable yet. So I think Lon's right to be a little bit conservative, but it's still a damn good business.

Yes, we like the business. We think there's great opportunities going forward. I'm just trying to keep the enthusiasm from being too overheated.

As it relates to BetaStar and the successes you’re having there, is that still largely an international success story or are you beginning to see some traction in the U.S. and North America?

It's still largely international.

And any prospects for things to crank up here domestically or is there a key new feature or approval you're still waiting on for that to happen in the U.S.?

I think the floodgates are about to open, but I've been saying that for over a year or so.

Our next question comes from Scott Gleason of Stephens.

I guess, Lon and Jim, just to put Steve’s question a little bit different, organic growth for Animal Safety was quite a bit above the norm that we’ve come to expect here, 17%. Is there anything there on a run rate basis when we start looking forward to kind of fourth quarter and first quarter of next fiscal year that could cause that rate to kind of come down as we look at the next two quarters?

Well, we have maintained that if that group could do organic growth in the 9% to 11% range given the markets that they're in, we would feel very good about that part of the business. And I think they've done a great job getting to that point this year and I think the next couple of quarters look like it's going to be in that range and I think that's a good way to look at it.

We just don't know what to think about what's happening in the economics, the grain pricing out there. This time a year ago, we were looking at corn prices of about $3.50. We're looking at corn prices of about $6.50 today. We're seeing wheat prices almost double. Now, on the other hand, we're seeing the highest prices in my life we've ever seen and that goes back a year or two in cattle prices. We're looking at that cattle prices that are setting new highs. We're looking at the sale of feeder calves that have got to go to the feedlots in the $1.50 a pound range. And I can remember selling a hell of a lot of feeder calves at less than $0.50. So there's profit in $1.50 feeder calves. And now we're moving in to Lenten season. You know what's going to happen in Lent season. Are we going to see pork and beef prices -- consumption fall back? Don't know. We've got the smallest population of brute cows out there in the beef herds that we've had in some time. That bodes well. So there's bright spots and dark spots as we look at animal agriculture and that, of course, has a big influence on where our Animal Safety group is doing. So...

Great. And I guess if we look at the quarter, cost control was pretty strong. Last year, second quarter and third quarter, operating expenses were up and this quarter they're down about $300,000 or so. I guess one good thing about expense control, you get to talk about making some investments in terms of your sales and marketing programs. Was there anything kind of anomalous or one time in nature there?

Nothing that would have been -- even registered in the percentages for the operating expenses for this quarter. We are focused on some initiatives to help increase the organic growth. We think there are good opportunities in those markets. We have looked at a number of programs on both the Food Safety and Animal Safety segments and we have approved a number of those and we started the process in the third quarter, but there was very little impact on either revenues or expenses in that quarter. But all of them look like – the ones that have been approved look like very good opportunities, and we're actually looking forward to what they're going to bring in terms of revenues for us, more so, in fiscal year '12 than this fiscal year but there's some good opportunities out there that we're going to take advantage of.

Great. And then, Jim and Lon, I guess we've annualized the BioKits acquisition now. We’re going to be starting to annualize GeneSeek coming up here next quarter. Just when we're thinking about our models and building out a kind of growth from acquisitions for fiscal year '12, I guess would it be you guys’ expectation that there likely be something kind of completed by the end of the year here or how should we kind of think about that?

You're thinking about a new acquisition completed by the end of the year, is that your question?

I guess when we're looking at modeling growth from acquisitions in fiscal year '12. Some analysts put in estimates there, some don't. I guess just in terms of is it yours’ [ph] perception that there likely be something that would be completed by the end of the year?

We're looking at some stuff that looks pretty good. We only have a couple of months left in the year. So we're getting down pretty close to it. You’re setting a pretty close deadline on us. Whether we get anything completed in the next 60 days is hard to say, but there will be some ongoing continued growth coming from acquisitions. I don't know that we have – that we’ll layer those on top of quarter after quarter. I think that's maybe what you're thinking about. So whether we'll be with or without an acquisition to layer on the first quarter of next fiscal year is kind of early to tell now. I will say this though, we did close the books and looked back at where we were on our Tepnel acquisition and that worked out -- we're talking about GeneSeek would have been a good acquisition and actually coming in better than our expectations. Same thing happened to Tepnel. We ended up on an after-tax basis, buying that business for about 5x earnings. So if we can continue to do that, well, you'll continue to be proud of us, I think.

Our next question comes from Greg Halter of Great Lakes Review.

Relative to the GeneSeek, was there any additional payout for this quarter?

Yes, Steve can answer that question. Some accruals that were put in.

Yes, there were no actual payouts, but we did accrue an incremental $218,000 in the quarter.

Okay. And I think that's been, what, three quarters in a row where they've done better than you've anticipated where there's been additional accruals?

That's correct.

Okay. And are you seeing any sort of price pressures on a competitive standpoint or pressures from any kind of input costs at this point?

Well, we're pretty much challenged with that in both of our businesses every quarter. I mean, we've got competitors on both the Food Safety and Animal Safety side. In a number of markets, we're the leader or have strong relationships. And many times those competitors find the only way they can get the attention of our customers is to try to offer a cheaper price. So we continue to try to be the price leader and by that, I mean the most expensive price in the market because we think we provide the quality and service that can command that kind of pricing strategy and we're going to continue to do that. However, we work with customers and fortunately because of our broad product lines, sometimes we can do some bundling things or come up with some promotions that makes sense for both sides so that we can retain business that we might otherwise lose because of price. On the cost side, we just have a culture here at Neogen that we want to be, without sacrificing quality, the low-cost producer. And so we continue to work on ways to reduce our costs, increase productivity. And I mentioned in my comments, I think our employees at Neogen have bought into that and do a great job of looking for ways to reduce costs. So I feel pretty good about continuing to find opportunities to be competitive on the cost side. And I think the way we’re positioned in our markets gives us also a good positioning from a pricing strategy standpoint.

What were international sales as a percentage of the total in the quarter?

I think they were, Steve, about, what, 45% for the quarter and still stand about 43% for the first nine months.

That's correct.

And you mentioned the negative foreign currency of about $200,000 on the top line. What was the impact on operating income?

It's about the same, I think, weren’t it, Steve?

Yes, it was $228,000.

On operating income?

Correct.

Okay. And capital spending in the quarter was what? And I guess, I'm wondering what you would plan to spend for the full year or maybe year-to-date, if you have that.

CapEx for the quarter was $2 million. We’re at about $5.4 million for the year-to-date period and probably looking at $7-ish million.

It's hard to tell for the quarter and I'll tell you why. We're getting into the budget period now and sometimes people are so busy working on budgets for next fiscal year that some of these CapEx items get put off until the next fiscal year. We have some things that we just need to do so we're pushing ahead with those and I think Steve's estimates are pretty good for looking at the fourth quarter. I'll just also add. I really hadn't looked at this because we've been doing so well in terms of the results we've been reporting. But on a year-to-date basis now, that currency effect has brought down revenues by $1.3 million and brought down operating income at $1.1 million. So our year-to-date basis has had an impact, but fortunately we've had some strong results. We don't really -- haven't had to worry about that too much.

Our next question comes from Brad Hoover of Sidoti & Company. Brad Hoover - Sidoti & Company, LLC: Last quarter, there were some signs that some customers, I guess, were more willing to make CapEx decisions that had previously been delayed. You said Soleris was up 27% this quarter and if my notes are right, I had it up 36% in the February quarter last year. So I was wondering if you could just talk about kind of your sense of kind of what CapEx was like in the quarter for some of these customers and kind of your expectation going forward as maybe that's kind of boosting and the Soleris can continue to drive the revenue growth that you're seeing.

Well, those of you that have been on a number of calls have heard me say before that I continue to believe that Soleris technology represent excellent growth opportunity for Neogen going forward. The pipeline there is very, very strong both in terms of numbers of customers, as well as potential for a number of instruments. We're also seeing some nice opportunities internationally for that product line. So I feel very good about the long-term prospects. The thing that has always been frustrating to me is those instruments sales are a little different animal and the time frame sometimes it takes to get all of the approvals necessary to get them done takes longer than I would like. I'm not very patient when it comes to that, as our sales people will tell you. But I feel good that we're going to continue to see nice placements of instruments to that product line. We've got some nice new products there and some additional vials in the R&D pipeline that we're working on that can add to that overall portfolio and help the future growth. So it continues to be a key driver for Neogen Corporation as we look ahead to fiscal year '12 and beyond. Brad Hoover - Sidoti & Company, LLC: I caught all but one of your revenue increases. You said rodenticides were up how much in the quarter?

Well let me go back and refer because those numbers for both cleaners and disinfectants which was up 62%, but there was a 34% increase in rodenticides. Brad Hoover - Sidoti & Company, LLC: 34. Okay, great. And then just one last question. Going back to GeneSeek, I know I think a lot of the success has come internationally. I was wondering if there was any specific countries that have stood out more recently than others. And then secondly, Jim, I think you mentioned some specific kind of U.S. DNA examples and maybe what your expectation is for revenue in the U.S. for GeneSeek maybe in the coming year or couple of years.

Well, I think it depends on the segment. We're doing a lot of -- I can't tell you exactly what the numbers would have been for GeneSeek, U.S. versus domestic -- U.S. versus international. Our business is strong. I know we had a good bit of business in from Denmark in the swine business in the last quarter, which probably pushed those numbers up a bit. Our Dairy business in Ireland, as well as what we're doing in New Zealand, continues to be strong. It's kind of hard for me to, I guess, I haven't trained my mind to capture those yet to say how much of that GeneSeek business is domestic versus international. I talked about the single recessive gene diagnosis of animal diseases is there and it continues to grow. I think we'll find more of those. I think the examples that I used of what they found with a red and white Holstein and the program that we're working with at their place out in Kansas with USDA on shedding of E. coli are going to be -- we'll get some revenue from that as we do a lot of testing, but I think we're probably a couple of years away before we get any real breakthrough so that we can say to cattle feeders be careful about feeding these cattle, handle them different in the feedlot, et cetera. Those things are all coming and they're exciting, but they won't begin to manifest themselves in income next quarter, certainly.

Just to elaborate on the GeneSeek question, international sales year-to-date, about 47% of the total sales.

I think Jim is right. I think the sales have been particularly strong in Europe, Canada and New Zealand, I know are areas where we've had some nice sales growth.

The next question comes from Tony Brenner of Roth Capital.

Will mycotoxin sales again have a difficult comparison in the fourth quarter?

That's a very good question, Tony, and yes, they will. Two years ago, that crop was late coming out of the field and it had a pretty good tail on it that carried it all through the fiscal year and so we'll be faced with another tough comparison next quarter or this quarter and it will be mostly because of the natural toxins. And that used to be -- I can remember years when we had something like this, we'd be sitting here reporting declining sales by quarter-to-quarter comparisons. But fortunately, now we've got so many nice opportunities both domestically and internationally with the breadth of product lines that we can overcome that. So it's going to be a challenge for us for another quarter, but we feel good about the other opportunities that are out there and still expect to report solid growth.

Okay. My other question has to do with the fact that the distinction between animal products and Food Safety products is becoming more and more blurred. And I'm wondering if the methods of distribution are also becoming less distinct. For example, as you've broadened the product lines in Animal Safety, are some of those products being sold directly to customers rather than food distributors?

They certainly are, Tony. And as an example -- there are places in which we can't do a very good job of selling direct to because it requires warehouses and big trucks. In those cases, well, distributors will always be important. However, there's a lot of places where there's just not room for the distributor. He can't make a margin there and he's not interested, but it’s very much products that are very much needed. So I talked about the fact that we're moving our products through company operations in Mexico, our company operations in Brazil. We are our own distributor for those products in those two countries. So the margins that would normally might have gone to a distributor are going into the company coffers. We do have warehouses. We do have capability for trucks. So as I've said before, those lines are continuing to be more blurred. I lay that always back at Rick Current's doorstep when he was in here as an auditor for the company back in the early days and everybody was saying, if you're going to be big, you got to report segments and I said I want to report segments. Well, that was the thing to do. So in his wisdom, Rick decided that we ought to have Food Safety and Animal Safety reports separately. And we've been doing that ever since and I always continue to give him credit for it. So...

Does that mean, I mean, Food Safety gross margins will always be higher, but does this mean that the two gross margins are going to get closer and closer together?

Yes, well, again, I have problems with gross margins because I'm trying to look at operating. I look at operating margins. I think GeneSeek is a good example. I hate to keep bringing them up as example this morning, but our gross margins at GeneSeek are not very good. But by the same token, our operating costs are pretty small, too. So they end up, I don't know, Steve did -- operating margins at GeneSeek, are probably running 23%, 24% right now compared to the overall company at 20%, 21%. So...

Yes, I mean, that's close enough.

[Operator Instructions] Our next question comes from Larry Southam of My Broker LLC. [ph]

You talked about Reveal and I notice a lot of USDA talk about E. coli testing in beef in the slaughterhouse, et cetera, and I'm seeing some other companies talking about faster E. coli detection and other things. One recent announcement out of DuPont, as I recall, and something out of Agilent and something out of Beacon Food Safety. I'm sure you're tracking all of these, but could you give us some insight into what's happening on the ground there?

It's an R&D question, I think. First of all, I'm sure you know when it comes to technical material, you shouldn't believe everything you read. Having said that, we are continuing to work on better, faster diagnostic tests for pathogens. I've never been -- though I might be a little embarrassed, I've never been reluctant to say that's one place where we are competitive. But we don't have a strong competitive edge and I like to have a strong competitive edge when it comes to detection of pathogens. We do, in other areas of micro, other than the pathogens. I think that E. coli, as people tend to want to talk a lot about E. coli, it's much smaller than the total testing market. It's much smaller than the testing market for the Salmonella or Listeria. Salmonella, of course, is the big one. If you had all the Salmonella business, you'd throw away your E. coli business. We do have a new series of lateral flow devices that are in the marketplace that are better, faster than their predecessors were. We always are working toward that. We call it our Reveal 2.0 line. Salmonella and the E. coli both are now not only out in the marketplace and gaining traction, but they also have AOAC-approvals. Our Listeria product, we have a very good product that's in the marketplace now, a new one that's out there that's a little bit better, and I think we're probably 30 days away from having AOAC-approval on that product. So we're competitive in a lot of pro-antibody area. We also are competitive, as I referred to earlier, the use of detection with DNA. I think we're competitive there. We're going to get a lot more competitive there as we're looking at what's coming down the road over the next several months. So it's strong. Lon was showing me numbers that he had picked up here for the quarter, our E. coli product is -- Reveal E. coli is up 16% and our test kit’s for Salmonella’s up 28% and our Listeria is up 23%. So if I had given you those numbers, I could have saved a lot of that other political jumble that I gave you. That should fortify what I said.

Our next question comes from Joseph Hartman of Wells Fargo.

Number one, is there a cash flow statement available?

There will be on the issuance of the 10-Q.

Okay. I tried to foot into a cash flow number and I don't know, I came up with $6.3 million net of taxes. Is that close?

No. For the quarter?

Yes.

No, our cash is up $3.2 million for the quarter.

We have no further questions in queue. Would you like to make any closing remarks?

No, other than say, thank you all for your participation in this call and your continuing support and it's still exciting. We're part way through the last quarter of the year and we're already setting budgets for what 2012 looks like. So it should be continuing to be onward and upward. Thanks, and that concludes our comments for the day.

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