Neogen Corporation (NEOG) Q3 2012 Earnings Report, Transcript and Summary

Welcome to the Neogen Third Quarter Fiscal Year 2012 Earnings Results Conference Call. My name is Christine, and I'll be your operator for today's conference. [Operator Instructions] Please note, today's conference is being recorded. I will now turn the call over to Neogen's Chief Executive Officer, Jim Herbert. Sir, you may begin.

Good morning, and welcome to our regular quarterly conference call. Today, we'll be reporting to you as announced the results of our third quarter that ended on February 29 and also the first 9 months of Neogen's 2012 fiscal year. I'll 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 actual results may differ than 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. In addition to those of you that are joining us today by live telephone conference, I also welcome those who may be joining by way of simulcast on the world wide web. These comments, along with some exhibits, will be available on the web for approximately 90 days. Following our comments this morning, we'll entertain questions from participants who are joined by this live telephone conference. And I'm joined today by Lon Bohannon, Neogen's President; and Steve Quinlan, our Chief Financial Officer. Earlier today, Neogen issued a press release announcing the results of our third quarter for the 2012 fiscal year. We once again reported record numbers. Revenues for the company's third quarter were approximately $44.9 million. That's a little over 6% above the prior year. This brings the first 3 quarters of the year to total revenues of approximately $135.5 million. That's about $6.4 million ahead of last year. Net income for the third quarter was $5.2 million or an improvement of about 6.1% as compared to a year earlier. This equates to $0.22 a share as compared to the prior year's third quarter of $0.21 a share. On a year-to-date basis, net income stands at approximately $16.5 million as compared to $16.9 million in 2011. I think a quick look at these numbers today show that these year-to-date numbers are beginning to dig out from that troublesome second quarter that we reported. While I'm certainly not pleased with the gains of the quarter, I am pleased that we continue to remain solidly profitable. Though the quarter was not monumental, it was the 80th quarter in the past 85 quarters when Neogen reported increases compared to the prior year. That record now spans over 21 years. We told you in just before Christmas in our last call that when our revenues were up only about 2% for that second quarter that we knew where problems were and that we were going about making the necessary adjustments to get back to double-digit growth. We didn't know at that time that the worst was really yet to come and that was to happen in December. I'm a good bit more optimistic today. December was significantly below December of last year, so we started off the quarter in a hole. However, January finished up about 10% ahead of the prior year, and February finished up about 20% better than February of last year. Now I realize that 2 months don't make a trend, but this performance has actually, as I said, increased my confidence level. So given the performance of January and February and the realization that we're comparing against a third quarter last year that had an increase of 25% over the prior year, I think the company may be ready to enjoy spring. While we still have some uncertainties or certainly is still out there, and I realize that we're not totally out of the woods, what happens in Europe continues to be problematic. Those who listened to our last quarter conference call may remember me talking about how we had pushed through the financial difficulties in most of those EU countries in good shape during the first 2 years of their crisis, but we're finding it more difficult to hold our own in the last several months. Well, that trend continued into the third quarter with a revenue drop in France compared to the prior year, along with the Netherlands and other major countries such as Spain, Portugal, Italy, Ireland, Greece and Egypt. In fact, revenues outside the U.K. and Germany were down about 10% compared to last year. At the same time, we had nice increases in the U.K., along with some notable increases in Food Safety sales in Germany. When I talked to you in December, I said I was going to Europe in early January to explore the situation. And I came away feeling that we had not lost market share, but the overall markets were just in the doldrums. We began to put in place some new programs at that time, and I believe that we're beginning to see some results. However, due in large part to the 40 countries that we service through our Scotland operations, we did see a drop in the percent of international revenues as compared to our total revenues in the third quarter. Third quarter revenues from international sources were approximately 40.7% as compared to 44.7% in the third quarter of last year. For the quarter, we saw nice increases in gross margins compared to the prior years. They pushed up to 51%. However, our operating expense numbers weren't really anything to write home about. Sales and marketing expenses were up about 3% as compared to the same quarter last year, and I think Lon will probably talk more about that in his comments. G&A expenses were up to 10.3% of revenues as compared to 8.7% last year. Those of you that have followed the company for a while remember that it's always been my personal objective to keep those G&A numbers under the 10% mark. The principal reasons for the increase this quarter were -- a couple of them were 2 non-cash items, amortization and some stock option charges of about $0.25 million, and there was also a sizable legal expense on a couple of legal cases we have related to the protection of our intellectual properties. Before turning the call over to Lon this morning, let me first mention our genomics business. This is centered around our GeneSeek operation that we acquired about 2 years ago. In the first year of our operations, revenues from that business grew approximately 50%. Up against those strong comparables, the business didn't look quite as good than in the first 2 quarters, however, revenues at GeneSeek have begun to climb again with quarter revenues for this quarter, about 5% ahead of last year. And these numbers are solid coming from several genetic products and from several countries. Let me, I think, stop at this point and turn the comments over to Lon to talk to you and add a bit more color for the quarter that we just finished, his outlook for the quarters ahead due to a number of factors, including the introduction of several new products. Lon?

Thank you, Jim, and welcome to everyone listening on the conference call as well as those joining us via the Internet. Jim has already provided some details on Neogen's 2012 fiscal third quarter and year-to-date performance. While the third quarter numbers did not totally meet management's expectations, we are encouraged by positive trends that were established in the quarter. During this call, I'll elaborate on a number of the positive trends that developed during our third quarter and provide additional information pertaining to various operating divisions within Neogen. Let me first begin by providing a few more details on the third quarter results. As Jim indicated third quarter sales for Neogen were $44.9 million, representing overall growth of 6.3% compared to the third quarter of last year. But as Jim also pointed out, sales in December actually fell well below the prior year, which certainly masks the excellent organic growth performance in January and February. There were a number of highlights in the quarter for both diagnostic products and intervention products across many market segments. I think many of you are aware that Neogen sales and marketing efforts are organized according to industry market segments, and we returned to double-digit organic growth in many of these industry segments in our third quarter. Our second largest operating division, Lansing Diagnostics, achieved outstanding organic growth of over 15% in the third quarter. The sales increase was broad based, with organic growth of 13% to 55% achieved in numerous market segments, including grocery products, pet food, milling and grain, labs, seafood, nutraceuticals and beverage, as well as within our international group. Product line growth within these industry segments was especially strong in the areas of diagnostic tests for mycotoxins, including strong sales of our new quantitative lateral flow test for aflatoxin, vomitoxin and [indiscernible]. And we also experienced solid double-digit organic growth for sales of allergen test kits, and an area that we've been focusing on, the area of technical support service revenue also experienced double-digit growth in the quarter. Now in spite of ongoing challenges referred to by Jim in his opening remarks, our Neogen Europe operations actually experienced a good third quarter, with double-digit organic sales growth. A portion of this growth was a direct result of expanding our sales staff in the EU in the current fiscal year, which started to pay dividends in the form of increased sales for the third quarter. Another division that experienced strong organic growth in the third quarter was our Neogen do Brazil operation. This division, sales were up 89% in the quarter as we continued to see growth across a number of product lines, including increased test kit sales for drug residue sold to the dairy industry, higher mycotoxin test kit revenue in several market segments and strong growth of sales of allergen test kits. This division is another operation that benefited from our 2012 fiscal year plan to add sales and marketing staff take advantage of identified growth opportunities within Brazil. Neogen's largest operating division, our Lexington group, that markets both diagnostic products and intervention products to a number of industry segments, including producers of animal protein, also experienced an exceptional third quarter, with organic growth exceeding 25%. Strong sales increases were achieved in a number of product lines, including a doubling of sales of diagnostic reagents sold to China and used for the detection of ractopamine and a more than 20% growth on sales of our patented detectable needles as a result of strong marketing programs. Other product lines experiencing strong organic growth in excess of 20% within the Lexington division include disposable gloves, sold primarily to dairy producers; small animal supplements, including the company's care line of products used to treat pancreatic, thyroid and urinary tract conditions in dogs and cats; and vitamin injectables, sold to veterinarians and used in treating various conditions in both food and companion animals. Now obviously, with all of this outstanding growth that I just outlined, there had to be a couple of divisions that did not fare as well in the third quarter. Our Hacco division that manufactures and sells rodenticides, cleaners and disinfectants fell 10% below the same quarter last year. Due to the EPA risk mitigation rule that went into effect at the big very beginning of this fiscal year, customers serving the retail consumer market are required to change different packaging and bait formulations, which has negatively affected rodenticide sales this fiscal year during the transition. In addition, Hacco did have a significant disinfectant stocking order that shipped in last year's third quarter that was not repeated this year. The third quarter also saw a December reduction in stocking orders from the company's largest distributor of dairy antibiotic tests as that customer sought to reduce inventory levels. Orders for this distributor returned to normal levels in January and February. Sales by our Acumedia division to customers in the pharmaceutical industry were more than 20% below third quarter last year. As stated in previous quarters, this shortfall in noncore business is primarily the result of the lost sales volume with 2 major customers, one of which closed a plant facility and another who had been on credit hold for most of this year. I am pleased to report that Neogen was able to work out satisfactory payment terms with the large customer that had been on credit hold for all fiscal year 2012. This arrangement cleared the way for a shipment of media in February and is expected to result in a return to normal sales volume as we move into fiscal year 2013. So while challenges remain in certain operating areas, our 2 largest operating groups experienced exceptionally strong organic growth in the third quarter. This performance is encouraging and leads me to believe that we are on track to return the kind of organic growth management expects on a quarter-to-quarter basis. I do want to make -- take a few minutes for a couple of comments pertaining to operating margins, and I'm sure that our listeners noticed that our third quarter was particularly strong for gross margins. The 230 basis point improvement in gross margin is certainly reflective of a stronger mix of diagnostic products in the quarter. However, I also need to recognize the ongoing cost-reduction efforts of our operations groups throughout the company. We continue to have multiple teams focused on reducing cost and improving productivity that are yielding positive contributions to the gross margin line. Cost reduction will remain an important part of Neogen's operating culture going forward. Now I'm sure all saw that our listeners noticed the 320 basis point increase in sales and marketing expense in the third quarter. This increase is part of Neogen's planned investment to build a stronger team of sales and marketing professionals to take advantage of what we believe are rapidly growing worldwide food safety and food security markets for our diagnostic and intervention products. As of the end of February, Neogen had added 43 positions focused on sales and marketing this fiscal year, with many of these positions added in the last 2 quarters. This represents more than 60% of our headcount increase in FY '12. Obviously, this kind of increase in staffing levels has resulted in a significant increase in salaries along with associated fringe and travel-related expense. This overall increase in cost, while still leading sales at this point, is already contributing to sales growth. Earlier in my comments, I mentioned the growth in Neogen Europe sales and the continued strength in sales growth at Neogen do Brazil, both of which are a direct result of increases in sales personnel. Our Neogen Latino America division has achieved sales growth of 27% this fiscal year, again largely due to expanding and strengthening our sales team in that operation. Adding sales staff and implementing new marketing campaigns this fiscal year has certainly contributed to sales growth of 25% and 20% respectively for our third quarter and on a year-to-date basis in our Lexington division. And an example of a positive effect of investing in sales and marketing within our Lansing diagnostic division is reflected in more than $700,000 of incremental new revenue in the third quarter from new customers and existing customers purchasing new products. Management believes additional organic growth will be realized in future quarters as our recent hires receive more training on Neogen products, build stronger relationships with our customer base and as we continue to introduce new innovative products and solutions for the food safety and food security markets. And the mention of new products provides a convenient segue for me to cover one last area before I turn the call back to Jim for his closing remarks. Management continues to be encouraged by the pipeline of new products being developed by our research and development team. New products that have been released in the last 2 quarters have been thoroughly tested for efficacy and robustness, and as a result, these new products have been well received by new customers. As mentioned earlier, our Q+ quantitative lateral flows for aflatoxin, vomitoxin and zearalenone have achieved strong introductory sales. Two other examples of successful new product launches include our new EJAC 6 veterinary instrument has sold out within 2 weeks of introduction and our new Data Manager 3.0 software that customers are finding a perfect match for Neogen's highly successful AccuPoint ATP test system used to monitor General Sanitation. We are equally excited about additional new product introductions planned for the next 90 days. We are eagerly anticipating the launch of what we continue to believe is the next generation of molecular-based diagnostic test for food-borne pathogens like Salmonella, Listeria and E. coli. Marketed under the trade name Answer, this new test system will provide users with a faster, easier-to-use test platform to detect specific pathogens with the added benefit of a minimal investment in start-up equipment. Neogen has a number of other projects in the research pipeline that are also expected to be released in the near future, including a unique genotyping product for dairy and beef cattle, additional quantitative lateral flow devices for other important mycotoxins, new test to detect additional drug residues of concern and new-and-improved diagnostics for Neogen's industry-leading product line of allergen test kits. These new products, along with our investments in sales and marketing, are expected to help drive our returns to the double-digit organic growth rates our shareholders and management have come to expect. That concludes my formal comments for today. And at this point, I will turn the call back to Jim for his concluding remarks.

Thanks, Lon, for that update. I think at this point, it might be helpful to give you an update on how we see the markets for our products are developing here in the near-term, as well as looking out a bit further. About 14 months ago, President Obama used 15 pens to sign into law the Food Safety Modernization Act. When completed, this will bring about the most dramatic changes in regulations regarding our food industry in more than 70 years. In total, the act calls for 50 new regulations or industry advisories. At this point, FDA is significantly behind, and none of these have yet been put into place. It does appear that 4 or these could be in place before the end of spring. The last report I had from Washington, 2 of these were now waiting Office of Management and Budget review. These 2 will establish how the food industry and the animal feed industries, in 2 separate regulations, would go about hazard identification and establishing preventative controls. These could call for more widespread testing, which would obviously benefit us. FDA and USDA are both clearly under pressure to improve the food safety situation, with reported food poisoning still exceeding 48 million annually and at least 3,000 deaths. A portion of these are coming from food imported to the U.S. Tariff controls over food imports is a major emphasis of the FDA Food Safety Act. According to FDA's own records, the amount of food that's imported to the U.S. has nearly doubled in the past decade from approximately 5.6 million shipments in 2000 to 10.7 million shipments. According to USDA records, nearly 16% of the food that's consumed by Americans now comes from abroad. USDA, as the other major food regulator other than FDA, has a regulation now that's pending that will significantly increase the pressure to keep certain E. coli organisms away from meat products. You'll likely remember that E. coli 0157:H7 was the first microorganism to ever be declared an adulterant in food. Neogen, in fact, had the first rapid diagnostic test for the detection of this organism. In recent years, it became more evident that it was not just E. coli 0157 that was dangerous, but that this organism had 6 ugly sisters that were scattered around the world. As these additional organisms begin to be more and more incriminated in food illness outbreaks, the USDA announced that it would include the other 6 in the mandatory regulation. This regulation was originally scheduled to take place earlier this year, but the deadline has now been extended until June. One of the big issues in the extension has been the fact that there's not a good rapid diagnostic test to properly identify the other 6 E. colis. Neogen is in the hunt for the new rapid -- new test for the -- new rapid test that will be required. But in the meanwhile, through our genomics experts at GeneSeek, we've been able to identify on a molecular basis how to distinguish among the 7 organisms and provide bona fide results back to the industry. We expect that this service will be important to the industry, particularly here in the near term. The concern for food-borne allergens continues to increase. Official numbers now show that one in every 13 children has a serious food allergy. The Center for Disease Control estimates that there's been about an 18% increase in the past 10 years in the incidence of food allergies. Neogen now has rapid diagnostic tests for the detection of peanuts, milk, eggs, gluten and 9 other important food-borne allergens. Our R&D teams in the U.S. and in Scotland have 3 additional tests that are under development that should be released here in the next couple of months. All of these are important as we look over the short-term horizon. However, we believe that even more important is the concern about food safety as it stands in the way of food security. I attended the White House conference early this month with approximately 50 food companies and government officials to focus on how we can produce 70% more food in the next 35 years by when the world population is expected to double. And it's not only a concern about producing enough food, but it's also the quality that will be demanded. As the world's middle-class population increases from about 1.8 billion to 4.9 billion, these consumers are not going to be content to eat the staples of rice and corn cakes as they might have in the past. Some of them will have had the opportunity to eat meat for the first time. Failure to meet these demands, we believe, carries with it serious socioeconomic impacts. Let me wrap up my comments by saying that the market growth for our products, both on intervention side as well as on the diagnostic side, are very bright in the coming quarters, and certainly throughout the remainder of this decade. The things that we did to build up our resource base during the quarters should put us in a good position to take advantage of this market growth that we've discussed. And the new products that are being developed will both fill market voids as well as make us more competitive. We do appreciate your continued interest and support of Neogen as we continue to grow. At this point, I'll conclude our formal comments, and we'll open the conference call to any questions for Lon, Steve Quinlan or myself.

[Operator Instructions] The first question comes from Stephen Crowley from Craig-Hallum Capital.

A couple of questions here. You gave us some really nice granularity on the trending within the quarter. And I'm wondering if you could give us a little bit of a flavor for how things have continued in March. I know we should never place too much emphasis on the first month of a quarter, but we probably should place some emphasis on it, and I'm wondering what you can tell us about it.

I'll -- I don't give advice, so I'll have to refer that to Lon.

Steve, we're -- I mean, as you know, Neogen does not maintain a backlog of orders. It's not like we sell on contracts or anything like that, so our sales are really -- our orders are shipped generally within 24 hours of when they're received, and a lot of times, same day. Management has high expectations. I mean -- and always have had. And I wouldn't want to change our expectations from anything we've had historically, and that means that we're focused and the sales and marketing teams are focused on getting double-digit growth. And we made -- we had a tough start to the last quarter because December fell so far below, and then we were able to achieve that in January and February. And so we're looking forward to the same kind of effort in the fourth quarter, so we can, hopefully when we meet on July, be able to report positive results to you.

What's-- is the recent business environment kind of more supportive of at least encouraging trends? I'm not asking for a number, but I'm hoping for some indication that you're just not dealing with another crater like you dealt with in December.

Yes, let me speak to the international side. Though we were down 10% in those important EU countries, and I think both Lon and I said that even though those big countries were down, we did see some positive impact from where we have more traction of our own in Germany and in the U.K. Germany and the U.K. were up. They were up stronger than they've been in the past, so we think that, that's beginning to see some recovery there. We talked about doing some things, when I was over in January, with a dozen of our key distributors that are in some of those EU countries that have been hardest hit by the financial situation, and we've put in place some programs there. There's lack of available capital, borrowing, bank borrowing, in some of those countries, so though we don't have a lot of big capital-intensive products that we sell, we do have products that you need in order to be able to buy the disposable or the reusable diagnostic tests you need to read them with. And those are -- some of those are anywhere from $8,000 to $15,000, $25,000. Where there wasn't any money available, we worked out some programs, so that we can provide some extended credit to some of those to be able to take advantage of that. I think I'm beginning to see some positive movement from that, particularly in Spain and Italy and probably Belgium. So they can't sit on their fist and lean back on their thumb forever. Things have got to be done, and they're tightening up on the imports that are coming in. It's not just testing the food at home, but those countries all have a high reliance on food coming from other places. It's kind of helpful us that some of that food, significant pieces of it now are coming from Brazil. So that gives us an opportunity to test the food on both ends of the ship. So I think that we're about to shed some of the doldrums situation in the EU. And as we know, it hasn't made the financial headlines recently, so maybe that's going to be helpful.

Yes, that's helpful. Now one of the businesses that jumped nicely off prior run rate was GeneSeek. And I know you've been telegraphing to us that there were better days ahead after a little bit of an air pocket. What kind of visibility do you have for the strength in that business continuing, and what's driving it?

Yes. I like your "air pocket" term. I think that's kind of what it was. That business was up 50% in FY '11 compared to FY '10, so we were up against quite a comparable there. So -- but we were up -- if you look at where we are right now, we're up about 5% for the quarter. If you look at revenues in GeneSeek sources, that didn't include any of the work that we think will come in on laboratory test work on the E. coli product line. We think that will make some contribution. Probably not huge, but it's going to make some contribution initially. We think that the parts of the world that have not been severely infected -- affected by the financial crisis, principally Australia and New Zealand, we do a good bit of business down there as it relates to the dairy industry. Those dairy industries are doing well, and we think that we'll see more in the quarter. It looks like in the quarter coming up, we're going to have an increase in testing on genomics for the dairy animals for the dairy industry in particularly in New Zealand. There's a continued move in a lot of places on animal genomics. Though we don't put a lot of emphasis on goats in this country, there are parts of the world that depend on goats as a principal source of meat. There's work being done there. We're doing work -- expanding some work in Brazil on the Nelore cattle down there that's a different kind of cattle than what we see in most of the rest of the world. That's going to have an impact because if you remember, Brazil is a major exporter of beef. So I think our GeneSeek business is -- has not been a disappointment. It's every bit of what we thought it was going to be when we made that acquisition almost 2 years ago, Steve.

Great. You have just given me a nice little segue there. You've also had an uncharacteristic dry spell on that acquisition front. It seems like there were some hopeful verbiage in the press release that you were moving some things along. Can you tell us a little bit about your pipeline?

I have to look back. I didn't know we telegraphed anything in the press release, but it was unintentional. We are active. We are not in a position to be able to report any acquisition at this point, but things have opened up here over the course of the past few months with some opportunities that best fit our overall strategy of -- they've got to be synergistic to our current business, and we've got to be comfortable in how we can integrate them, and we're seeing some of those opportunities. Probably inappropriate for me to say much more.

The next question comes from Reggie Miller from CLSA. Reggie Miller - Credit Agricole Securities (USA) Inc., Research Division: I was just wondering if you could maybe shed some more light on the marketing programs that you have in place, what can we expect from them going forward and some -- just some color around where you'd like to see those trending as maybe a percentage of revenues. Because it seems like they're pretty successful and going to be a very important part of your business to continue increasing investment in that section.

Let me make just a quick comment and then turn it over to Lon for the real color. I think one of the things is we put a lot more emphasis behind marketing. As we've gotten bigger, we've been able to be a little bit more sophisticated, and so we're looking at marketing more and a lot of traditional methods. And I think just the internal emphasis has been helpful. Lon can perhaps bore down and be a little more specific on some of those.

Yes, I think what -- one of the things that we wanted to do as part of this investment in our sales and marketing area was to separate out more formally our marketing team that would be focused on more traditional marketing kinds of programs. On the Food Safety side, we're really just starting to get underway with the new marketing director that came onboard January 1. So we are going to be putting some specific programs in place. We're going to be establishing -- I think I saw a list that was identified for the next 6 months or so that identified like 6 or 7 different marketing campaigns that we’re in the process of building tactics around there. They're predicated and aligned around areas of strength for the company, including a number of the product lines that this -- that listeners on this call know very well. Probably in terms of this fiscal year, when you're talking about specifically marketing and you're talking about the third quarter particularly, I think the -- some of the campaigns that we had on the intervention product side that came out of our Lexington operations that had that strong goals were probably more successful and farther ahead than where we're at on some of the diagnostic products at this point, strictly on the basis of who we had in place and what we had from a resource standpoint in terms of manpower to do them. And so I mentioned the veterinary instruments and particularly the detectable needles. That was a specific targeted marketing program that we have done. We've got some programs that are aligned around the intervention products going back inside the farm gate from rodenticides to cleaners and disinfectants, focusing on the large integrators that are serving in the animal protein production markets, and we're having some success there. So we're pretty excited about some of the things we've got going on. And I'll be perfectly honest with you, in the area of the diagnostic products that are associated mostly with what our Food Safety kinds of things, we're really just getting started on those.

The next question comes from Steve O'Neil from Hilliard Lyons.

Just one quick follow-up. In G&A, you mentioned some higher legal expenses. Looks like overall, G&A is up about $1 million. Do you know -- was the legal expense a significant factor in that increase? Or -- can I get some detail on that, please?

Steve, something over $200,000 in the quarter in legal expenses that were at least that much above where we were last year. We've got -- we always got a case or 2 around that deal with intellectual properties. That's about the only legal expenses we usually ever have. And these are both dealing with intellectual properties. One's been around a while. It's getting heated up, I think, toward the, perhaps, some final results. There's another one that probably I shouldn't comment too much about, but it's -- we've got a situation with somebody on the other side that's a pretty frivolous kind of a deal, and -- but intellectual properties are pretty important to us, and -- so we've always been very aggressive in defending where we are. And we've spent money through the years, but we've gotten some very significant results as a result of being aggressive, so.

Moving on to some of the product areas. Lon referred to double-digit growth in mycotoxins and food allergens, but that area was only up in the single digits, and I'm just wondering whether there were some areas that were lagging in that segment.

You thinking of the food side, Steve? Diagnostic side?

Yes.

Well, I mentioned the -- in the area of drug residues, which is the category, I mentioned the large distributor that we have that sells the drug residue test for dairy antibiotics, especially in Eastern Europe have done a good job for us over the years and on a year-to-date basis is up a good number this year. But they did have an inventory adjustment month there in December where they didn't order much at all, and -- but came back in January and February, so. But that group was down, not much, just overall drug residue was just 2% below the previous year. But that was a result of that -- those orders being not there in the month of December for that distributor.

I can't -- who's your distributor in Europe? I can't remember the name.

It's Chris Hansen [ph].

I knew it wasn't [indiscernible].

Only for that product line, Steve.

Yes, just as it relates to dairy antibiotics.

Charm Sciences is your competitor in that area. Is that...

That would be correct.

And then how about dairy antibiotic business in the U.S.?

The business in the U.S. has been slow to develop. I will say we've had a lot of evaluations that have been done out there. The good news that comes back from that is every single potential prospect and customer that tests the product says, yes, it works great. I think there's a couple of things that are going on there. I think that we've discovered that workflow is particularly important to these customers, and so we're working on some sample handling and reader improvements that will have minimum disruption and actually work with them in terms of workflows, so that won't -- they won't have to change there. And then the other thing that's happening that's really going to be to our benefit, I think going forward, is they're expanding their interest beyond beta-lactams and starting to take a look at additional drugs of concern, including tetracyclines and sulfas. And in addition to that, things like Clonixin and even an issue that starts out as a mycotoxin that turns into M1. And I mentioned M1 because we actually are seeing and had a major order that came through for shipment of M1 diagnostic kits going to China that was for the dairy industry. And you've heard us talk about China in terms of dairy industry before. We've had great success over there this year, particularly with our testing of general microorganisms using the Soleris technology in that country. So we're going to be expanding our offering to give us a better opportunity to penetrate the U.S. market. And they're also doing some things from a sample handling standpoint, so we can have the kind of workflows those prospects want to see because we know from their own test that the product itself, the BetaStar Plus test that we came out with, works very well and gives extremely accurate results and is rock solid. So I continue to believe -- I'm not going to say we're happy with the results so far, but it's a market opportunity we're going to continue to go after because we think we can penetrate and achieve some sales growth there as we move forward.

And I want to make sure I heard this correctly. I think you said -- did you say that culture media declined 20% in the quarter because of your problems with 2 customers?

We -- yes. The dehydrated culture media sold to what we call the traditional market primarily, which are pharmaceutical companies -- it's part of the business that we acquired, and we've supported it. It's not a core portion of growth -- was down 20%. Most of that, again, was in 2 customers, one of whom had closed a facility. They were manufacturing Ford plates and did not transfer that to another location. In fact, they sold the customer list to other media manufacturers who were basic in selling to the pharmaceutical industry, which we were not -- wouldn't even have been a candidate for acquiring those lists. So that was -- that's been hurting us all year, and then the other one was a credit issue with a customer that we refused to sell until we worked out a satisfactory program that we got done in the third quarter. Now I want to separate out that there's another part of that business, a big chunk of that Acumedia business or dehydrated culture media, is used in food safety applications. That was the primary reason that we acquired the business originally. And it supports our pathogen testing business, and that has been growing in double digits for a number of years. It was actually up 14% in the third quarter. Those sales are reflected in the Lansing Diagnostic offering division and recorded as intercompany sale by Acumedia. So Acumedia doesn't get the benefit of that, but that portion of the business is doing very well.

That was my question because it looked like an overall increase, so okay. And actually, you mentioned -- you just mentioned it, but I didn't really hear much discussion of Acumedia and Soleris in your remarks, Lon.

Well, Soleris technology continues to do well. The disposables, vials that are part of that business were up like 16% for the quarter. So I mean, I just expect double-digit growth when it comes to the Soleris technology and particularly in the area of the disposables. And we're in the process of introducing and working on some additional vials. I didn't talk about that in terms of new products, but we've got some other opportunities there that we're continuing to work on. The thing about Soleris that will vary from quarter-to-quarter is the instrument-based sales. We've had individual quarters when the comparisons there have been -- have affected the overall growth, but the -- as long as we continue on a yearly basis to place instruments, the disposable vials, which is really what we're interested, continues to grow very nicely.

Yes, you -- in the Acumedia and Soleris are contained in your bacteria and General Sanitation segment, are they not?

The Soleris is part of the general micro area. I'm not sure about Acumedia -- is also part of general micro. I guess if you're looking at in terms of the SEC...

In terms of what you report in your 10-Q.

Yes, they would be in that general micro area.

Okay. Because that -- was there an area that was down in the quarter then? Was microorganism testing down in the quarter? Dairy didn't seem like it did as well as past quarters.

I think that it would be more on the Acumedia side. Acumedia would be the -- affecting that. I mean, the general micro area I know was up for the quarter.

And that's mostly, as Lon said, in that nontraditional side, which was good business, and we continue to maintain it. It helps overall program. That was -- of course, Acumedia was one of those 19 acquisitions that we've made since 2000. So it continues just to do great for us. It continues to be synergistic, top and bottom line, for the reasons that we bought it.

And actually, I think I confused myself. You were referring to the 2 customers, those were Acumedia customers, not...

That's correct.

Okay. That explains it now. I'm fine with that now. But is this a seasonally slower period for both mycotoxin testing and bacterial testing in terms of looking sequentially across your year?

Yes, we've -- you've followed us for a while, Stephen. We've taken a lot of seasonality out of -- because of various products and various markets that we cover, but there's still more testing for mycotoxins during the harvest months, and of course, we've got harvest in northern and southern hemisphere, and that tended to knock a lot of that out, too. But still, because of our dominance in parts of the North American grain market, those -- this quarter is a little less or the coming quarters, especially, is a little less testing because that grain's been moved around and maybe tested once or twice. But at the same time, we've got the southern hemisphere that starts to come in, so our presence in Brazil is going to be more and more important down there. From the standpoint of microorganism, just do better in -- when we got heat. And one of the big problems of, particularly in -- on anything on the food side where it's subjected to -- when we got E. coli 0157 coming out of animals, that come out of the feed lot in the middle of the summertime, they can't do the process and plant more organisms hanging on the hair and the coat of the animals than they would any other time during the year. So there is -- based on what we do in the food side, there is more testing probably in the hot weather than otherwise. But again, we're in 113 countries, so we're beginning to more and more normalize, I suppose, some of those revenues.

Then last product question. You addressed the rodenticide question, but I had to note, did your customers build inventory ahead of the CPA change, now they're working it off? Or has the change to packaging been a disruption of their sales just in the current quarter?

No. There was some stockpiling of the old product prior to the implementation of the risk mitigation rule. Most of those inventories are starting to work off. We have had a couple of customers that are in that retail. We call them retail box stores, but are in that retail segment, have to address past packaging or trying to determine how they're going to move forward and the kind of shelf space that they will allocate to this. So it's been a combination of the packaging and working off inventories that have affected rodenticide sales this year.

The next question comes from Brad Hoover from Sidoti & Company. Brad Hoover - Sidoti & Company, LLC: Wanted to ask about the new quantitative mycotoxin test that you guys recently launched. It sounds like they're going well. I was curious as to what the mix kind of looks like between existing customers, switching out their Neogen qualitative tests versus you winning new customers. Secondly, kind of what the potential is. I mean, are customers asking for quantitative tests? Are you having doing to sell them on them and just kind of what the outlook is for these tests?

It's a good question. I think it is too early to tell exactly what that breakdown is. And I don't know that we have that information. I mentioned in my comments -- I'll give you some flavor just in terms of overall. For the quarter, I mentioned that $700,000 of new business, actually, there were -- I think there was as many as 700 new customers that -- well, let me restate that. There were approximately -- and I don't remember the exact breakdown, but about 350 new customers that purchased products from Neogen for the first time in that quarter and another 350 that purchased -- that were already customers of Neogen but purchased a new product from us. So one of the things that we are trying to do is, we call it mine the database of customers that we have here and prospects and stuff and take advantage of the fact that we have this one-stop shop of products, and where customers are not buying as many products from us as they should, make sure our sales and marketing staff are working on promoting the entire line to them. But obviously, in terms of new customers, that's part of the benefit of having an increase in sales and marketing staff and, partially, the benefit of having new products out there. We'll be monitoring that as we go forward. It's just too early to tell on these mycotoxins because it is past the harvest season. It's -- I know aflatoxin was strong, I know DON was strong, and I know that we've already had valuations with new customers, so they have gone well and have purchased product. I just don't know the specific numbers of new customers for those 2 -- for that specific product line.

[Operator Instructions] The next question comes from Jason Rodgers from Great Lakes Review.

It's actually Greg Halter on the line as well here with Jason. First question, do you have your cash flow from operations figure for the quarter?

We do.

Yes, Steve, can give you that.

Cash from operations was $7 million, even.

And that's for the quarter, correct?

Correct. $13.2 million for the year-to-date.

$13.2 million, great. And your capital spending for the third quarter and what your plans are for the full year fiscal '12?

It was $1.9 million, and it's probably going to come in somewhere around $12 million for the full year. And if you remember, included in that $12 million is the $5 million purchase of the Lexington warehouse that we did at -- in August.

All right. And I noticed that both your -- on a year-over-year basis, both your receivables and inventory are up about 16%. Both those numbers outpace the year-over-year sales growth. And I'm just wondering if you could provide some comments on each of those.

Sure. Receivables are still in very good shape. We're 91% current, 96% are current to 30 days, which is right in our traditional aging pattern. Really, what you have here is a little bit of an anomaly. The last 2 months of our fiscal '11, April and May of 2011, sales were $30.4 million. And then the last 2 months of this quarter, January was $13 million and February was $21 million, so our sales were $34.7 million. So we really had -- our DSO's about a 60-day collection period where we have $4 million in that -- those 2 comparative periods. So that explains the bulk of that $5.5 million increase. And then DSO, we generally operate in a 57- to 63-day collection period, and we're right at 61. At the start of the year, we were at 57. So that 4 days really explains the rest of the difference.

Okay. And then on inventory?

Yes, inventory, we're up about $4.4 million, and we have 3 kind of distinct pieces there. GeneSeek, we buy in large -- buy basically in bulk our chips that we use in our lab, and that gives us best pricing. And that is up about $1.7 million year-to-date. And that's down actually $0.5 million from the November balance. Animal Safety, we're in the middle right now of moving production from a rented facility to the new warehouse that we recently bought. And that's about $800,000 of the -- about $1.5 million of incremental inventory there. And then they also bought some inventory ahead of some of the seasonal programs that they're offering here in the spring. And then the Food Safety is up due to inventory build for some of these new products that we're introducing, and that's about $1 million.

Okay, great. That's very helpful. I know you made a foray into the seafood business about a year ago, I guess it's been now. I'm just wondering if you could provide some comments on what you're seeing in that area so far.

Yes, we haven't been able to progress that as much as we -- still is our ambition. We had a good acquisition in our sights and thought we'd get something done on that, that would provide us with access to an important piece of the market. We couldn't come to terms with the seller as related to value price. But in the meantime, we did make an acquisition of a seafood testing lab in Oban, Scotland, which we moved down to our operations in Ayr. It's been a good addition. And we have continued to work on expansion of our diagnostic test for the detection of shellfish concerns. We have 2 of those important diagnostic tests that are coming into the market, and a third one that's -- it's probably still, I'm going to say, 4 to 6 months away from introduction, paralytic shellfish poisoning. Some of you may have heard recently, there's been some comments about red tide and the problems of red tide. Red tide really ties back to the shellfish issue. It's the algae that grows in the water is ingested into the shellfish, which would be scallops -- principally scallops, clams and oysters. And we're moving there. But -- and then we're doing more and more synergies. That Oban operation that we moved to Scotland is just doing some really nice work both in helping us develop these rapid tests as well as doing laboratory work. But it is still in our sights. We still think that there's good opportunities in aquaculture mariculture area. A big part of what I talked earlier about what percent of our food has come from abroad here in the U.S., we import over 70% of the seafood that we eat, and they come from -- some of those come from countries that have some questionable sanitation practices. So we think that the aquaculture mariculture thing. Still obviously some opportunity. We are still diligently looking but haven't been able to play out our hand there yet.

Okay. And 2 more for you. The first one is what's the swing in your other income versus expense? I think it's about $800,000 on a year-over-year basis.

You're talking specifically for the quarter, right?

Correct.

Yes, we had...

[indiscernible] versus 222.

Right. In this year's third quarter, we reversed -- we have an earn out with the GeneSeek business. And every year, at any point during the year, we have to evaluate how much do we think we're going to be paying out on that earn out. In the third quarter this year, we reversed out about $220,000, basically took to income $220,000 because we aren't going to be paying out to the former owners of GeneSeek as much as we had set up at the beginning of the year. Last year's third quarter, we actually took a charge for $218,000, and it's just the exact opposite. They were doing -- they were so far outperforming the budgets that we have set for them last year that we had to recognize some incremental expense last year. The other biggest pieces within there are -- we recognized some royalty income this year, about $165,000. And last year, that was a much smaller number. It was about $30,000. The remainder is currency swings. On comparative, this third quarter was about $150,000 of currency pickup. Last year's third quarter was somewhere around the $60,000 charge.

Okay, great. That's very helpful. And then last question relates to Tractor Supply and your relationship there. I think they've got around 1,085 stores. And first, I'd like to ask how many of those stores you're in and what your plans are as they plan to go to 2,100 stores over the next number of years?

Well, thanks for that question. We haven't mentioned Tractor Supply in quite a long time. We continue to have a very good relationship there, and we are in every one of those stores. And not just veterinary instruments. We have some other product SKUs that we've been able to add over the years there. And whenever they do a line review, we are always requested to participate if it's in a product segment or category that we can supply, and it's because we do have a good relationship and have had a good relationship with them over the years. In fact, it was just about -- it was just over a year ago where they had a line review, and we were able to obtain some additional business and expand our presence in those stores. So they're a very large customer for us. We continue to participate as they open new stores, and we continue to work very hard at getting additional products SKUs in there, and we'll continue to do that as we go forward.

The next question comes from Steve O'Neil from Hilliard Lyons.

One quick follow-up. Just wondering about the reason for the lower tax rate and possibly what tax rate we should model for the full year?

The primary reasons for the lower tax rate is we were able to take some larger deductions and some income tax credits this year more so than last year. And last year, through the third quarter, we were actually accruing at a higher rate. We were at 37% last year, in the third quarter. And because in the fourth quarter, if you remember last year, we actually adjusted that effective rate down to -- the fourth quarter was a very low rate, but I think we ended up for the year somewhere in the 35.2% range. So we're accruing at a lower rate this year, obviously, which reflects what we actually did last year and the fact that we are going to be entitled to some higher deductions and credits this year. So in terms of modeling, the 35.6% for the quarter is our best estimate at this time. If you wanted to -- somewhere in the 35% to 35.5% is probably a good range.

That concludes the question-and-answer portion of today's call. Please go ahead with any final remarks.

Well, thank you all so much for your continued support and your participation this morning. We look forward to talking with you in the next of these calls. And unfortunately, that's going to be a while. It will be after the conclusion of our current fiscal year. So again, once again, thanks for your continued support and good day.

Thank you for participating in Neogen's Third Quarter Fiscal Year 2012 Earnings Results Conference Call. This concludes the conference for today. You may all disconnect at this time.