Neogen Corporation (NEOG) Q2 2013 Earnings Report, Transcript and Summary

Welcome to the Neogen Q2 Fiscal Year 2013 Earnings Results Conference Call. My name is Trish, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the call over to Jim Herbert. Please go ahead.

Thanks, Trish, and good morning and welcome to our regular quarterly conference call for investors and analysts. Today we'll be reporting to you on the results of our second quarter that ended on November 30. I'll remind you that some of the statements that are made here today could be termed as forward-looking statements, and these forward-looking statements, of course, are subject to certain risk 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. In addition to those of you who are joining us today via live telephone conference, I'd also welcome those who may be joined 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. And following our comments this morning, we'll entertain questions from participants who are joined by this live call. I'm joined today by Steve Quinlan, our Chief Financial Officer; and Lon Bohannon, who's normally on this call, is in Brazil today working with our management team there. So he won't be with us on the call. Earlier today, Neogen issued a press release announcing results of the second quarter of our 2013 fiscal year. Once again, we reported record numbers. Revenues for the company's second quarter were approximately $50.7 million, and that's 13% ahead of the second quarter of last year. Net income for the second quarter was slightly under $6.8 million or roughly 30% ahead of last year's net income of $5.2 million. This translates to $0.28 a share for this year's second quarter as compared to $0.22 a share for the same period last year. We can now also tally up the first half of the year. Our total revenues for the first 6 months were approximately $100.5 million or roughly 11% ahead of the first half of last year. Net income for the first 6 months was approximately $13.5 million or roughly 20% ahead of our 2012 fiscal year. This all translates to $0.56 a share for the first half of this year compared to $0.47 a share 1 year ago. We continue to be proud of the consistent growth that the company has enjoyed and always love adding an extra quarter to the tally sheet. This quarter marks the 83rd quarter in the past 88 when Neogen reported revenue increases as compared to the prior year. That's a span now of 22 years. And that you also might be interested to know this, it's been almost 8 years now since the last time we failed to better our year-earlier record. Five years ago, Neogen revenues inched over $100 million for the year. We promptly set our goal to double the revenue to $200 million in the next 5 years. The 2013 fiscal year is that fifth year, and now it's the 6-month mark, we're a little bit over halfway to the $200 million goal. Those of you who have followed our management strategy over the past several years know that an important part of our management metrics is focused on profit from operations. Due to the very nature of our business, our gross margins can move 2% to 3% in any given quarter due to product mix. In fact, gross margins for this second quarter were 53.8% as compared to 50.5% last year. We set a goal to keep our profits from operations at 20% of revenues and we monitor that on a regular monthly basis. When profit from operations get much over 20%, we use that as a signal to invest more back into the business to keep growth fueled. Obviously, when the number drops below 20%, we immediately begin to look for those reasons that need to be corrected. Profit from operations in the second quarter came in at 20.7%, bringing total profit from operations to $20.8 million in the first half of this year. And that, by the way, is 20.7% for the 6 months also. So our operations were the same for the quarter and for the first 6 months. I think it's probably good to have me to stop my introductory comments and call on Steve Quinlan, our CFO, to give you a bit more of the color on the second quarter operations and the impact that he sees as we now start to enter the third quarter. Of course you've heard Steve in these quarterly conference calls before, but I'd say from the very beginning of Steve's career here at Neogen, he's been involved in every monthly meeting of our 10 various operations and has really gotten to understand our really complex business pretty well. In addition, some of you have seen Steve along with Terry Maynard at the investor conferences and roadshows and know that he has a good grasp of not just what's happening within the company, but a good feel of what's happening in our industry. Following Steve's comments, I'll come back and talk a bit more about the nonfinancial issues that are occurring in our industry and a bit more about our exciting research and development programs, and then a little bit more about how we see the remainder of this fiscal year. Steve, take charge, would you?

Thank you, Jim, and welcome to everyone listening on the conference call as well as those joining us via the Internet. Jim has already reported on the overall sales of profit performance for the second quarter and the year-to-date for our 2013 fiscal year, and I'd like to echo his comments that we were very pleased overall with the results. Similar to the first quarter, we again exceeded our internal budgets for gross margin and operating margin percentages while also achieving some strong revenue growth. In the next few minutes, I'll address some of the significant highlights for the second quarter, and we'll begin by discussing the exceptional performance achieved within our Food Safety division. The Food Safety segment of the business built on the momentum generated by their strong first quarter and really delivered an outstanding second quarter with revenues up 18.1%. Almost all of that growth was organic. The sales growth was broad based across most of the market segments within the Lansing-based diagnostic business, with increases ranging from 7% to 43% in the beverage, pet food and grocery product markets. Milling and grain revenues, aided by an aflatoxin outbreak in the U.S. corn crop, more than doubled in the quarter. Our international operations were also strong in the second quarter for Food Safety. Our Neogen Europe business unit led the strong international growth with sales up more than 31% despite the tough economic conditions that persist in the EU. Neogen Europe capitalized on a DON mycotoxin outbreak in the wheat crop in Germany, recording a 69% increase in DON test kits. They achieved a 13% increase in allergen test kits and a 21% increase from resurgent sales to distributors. Neogen do Brazil continued to make inroads in penetrating the growing Brazilian market with sales up 51% in the second quarter, led by increases in sales of mycotoxin and allergen test kits, as well as increases in tests to detect drug residues in milk. Sales of our Food Safety diagnostic test kits going into Canada and countries in Asia, the Pacific Rim and Latin America, excluding Brazil and Mexico which are reported separately, were also up a solid 16% in the quarter. Many product lines contributed to Food Safety strong second quarter results. For example, our natural toxin product sales increased 62% in the quarter as the company realized strong sales of test kits, freezers and accessories used to detect aflatoxin in the domestic corn harvest and vomitoxin or DON in the European wheat and small grains. Our new Q+ quantitative lateral flow devices have been well received in the market, and these new products have resulted in market share gains. Revenues for our industry-leading product line to detect inadvertent allergen contamination, including diagnostic tests for milk, processed soy and gliadin, were up 16% in the quarter. And Neogen continues to invest significant R&D resources to improve our existing allergen test kit lineup, including the popular 3D lateral flow format, while also releasing new allergen diagnostic test kits to strengthen our position in this rapidly growing market segment. Recalls for allergen contamination are one of the largest sources of all food recalls in the U.S. Revenues from products such as ampouled media and filters, used to test and monitor water quality at beverage manufacturers, rose 46% in the quarter. Our unique test to detect the presence of histamine in harvested fish, particularly tuna, rose by 29% in the quarter. The launch of the new cancer pathogen test platform continues to make good progress with much effort this year -- this fiscal year devoted to validation and approvals. We've placed instruments with end-users in the U.S., Canada and Mexico, and have sold multiple instruments to distributors in Latin America and Asia. We have a strong pipeline of prospects and numerous evaluations underway with potential customers interested in the answer technology to test for both Salmonella and Listeria. We've received AOAC approval for ANSR Salmonella and Listeria for environmental conditions and are pursuing approval for a number of food commodities and are also seeking additional third-party approvals in Europe for this unique pathogen test platform. Revenues for our test to detect the presence of antibiotics in dairy animals declined by 18% in the quarter. And that's really due entirely to order demand -- timing of orders by our European distributor. Market demand for these products remains strong and we believe that the second half of the year, we'll see a return to high single-digit growth. Weakness in the Soleris line of optical microbial test systems used in detection of spoilage organisms, like yeast and molds, continued into the second quarter. Soleris disposable vial sales increased by 4% in the quarter. Replacement of Soleris instruments declined in the second quarter compared to the same period last year. As we've stated in previous quarterly calls, we do see fluctuations in timing of placements of Soleris instruments that can affect quarter-to-quarter comparisons. This is one of our few products which require a large capital expenditure. With the uncertainty surrounding economic conditions in the global markets, prospects have become more hesitant to make these purchases. However, the prospect pipeline remains robust and we believe that renewed focus and more certainty, we will be more successful closing orders in the second half of the year for this line. Moving over to Animal Safety segment, they achieved overall growth of 8% in the second quarter. Animal Safety's Hacco division, which produces rodenticides and disinfectants, important components of effective biosecurity programs maintained by animal protein producers, continued its strong performance into the second quarter with organic growth of 13%. Rodenticides were up a strong 23% over last year's second quarter. And the significant increase in rodenticides has resulted in improvements in Hacco's gross margins and operating margins as rodenticides carry higher margins than disinfectants. Animal Safety's Lexington division recorded revenue increases of 11% in the quarter. The division was able to capitalize on the supply disruption in the small animal supplement market, significantly increasing production of our competitive product, which treats thyroid conditions in dogs, and registered a $1.3 million increase in revenues in this product line. Additionally, revenues from the Macleod acquisition, which closed at the beginning of October, in which we acquired a market-leading veterinary antibiotic, exceeded expectations for the quarter. These increases were partially offset by lower sales of vitamin injectables due to a backorder situation caused by a shutdown at a toll manufacturer in fiscal 2011 which led to high sales in the first half of 2011 as pent-up demand was filled, resulted in a tough comparison for this year. Additionally, sluggish conditions in the animal protein market, particularly internationally, held us back -- held back growth. The strong overall revenue increases at our Hacco and Lexington Animal Safety operations was partially offset by lower sales in the second quarter at GeneSeek, our genomics-based testing and bioinformatics business. Volume of samples processed at GeneSeek actually increased during the quarter. However, lower revenue per test resulting from a changing mix within the product line toward lowered cost test, some of which we are driving in order to broaden the customer base, resulted in lower overall revenue. Additionally, samples worth about $200,000 in revenue were received too late in the quarter to be processed, and some other orders were delayed as customer wait for some new products which we'll be introducing in the third quarter. The integration of the Igenity business acquired from Merial at the end of fiscal '12, continues to make good progress. The acquisition of Igenity has greatly expanded GeneSeek's capabilities in using information derived from sample testing to help animal protein producers speed genetic improvement efforts and better manage economically-important positive and negative genetic traits in food animals. Efficiencies gained while running this increased sample volume at GeneSeek, combined with the higher margins associated with the Igenity business, have resulted in improved gross margins at GeneSeek for both the quarter and the year-to-date. Despite the lower GeneSeek revenues, as a company, we were able to achieve organic growth of 9.4% in the quarter, very close to our double-digit organic growth goal. The strong sales growth in Food Safety diagnostic test kits combined with the higher margin -- gross margins within the Animal Safety segment and incremental revenues from the Macleod and Igenity acquisitions were the primary drivers of the improvement in gross margins to 53.8% in the quarter. Our manufacturing groups in Lansing and Lexington did exceptional jobs of ramping up productions: in Lansing, for the significant aflatoxin in DON outbreaks; and in Lexington, for the thyroid tablet for dogs I mentioned earlier. They were able to accomplish this while still supporting the rest of the growing business, and were efficient in doing so as our labor and overhead percentage dropped in the quarter. Similar to the first quarter, gross margins improved by over 300 basis points compared to the prior year and was a primary reason that operating profit came in at a very strong 20.6% of total revenues for the quarter. For the year-to-date, gross margins were 53.6% compared to 50.4% last year and operating margins were 20.7%, up from last year's 19.3%. Operating expenses were up 16% in the second quarter reflecting our previously announced commitment to continue to build our sales, marketing and research organizations to take advantage of the significant opportunities in our expanding food and Animal Safety markets. The majority of the increase in sales and marketing expense results from payroll-related expense for new sales and marketing personnel, increased travel expenses and higher shipping costs. The strong organic growth in the second quarter and our internal tracking of new customers and new business which shows us generating over $1.4 million in new business for more than 500 new customers provides further evidence that our investments in this area are having success in generating organic sales growth. Our research expense was up 17% over the prior year reflecting the high level of new product activity for this group, which Jim will speak about shortly. Overall, we're very pleased with the 13% revenue growth and 29% increase in operating income in the second quarter and remain encouraged regarding our prospects to achieve double-digit organic growth this fiscal year. In fact, adjusting for the effects of currency translation, which have been a headwind this year, year-to-date organic growth would stand at 10.3%. While we are pleased with the results so far this year, we are certainly not satisfied and will continue to make investments in the business, both internally and through acquisition, which we believe will position the company to capture the significant growth opportunities we see in front of us in the coming years. At this point, I'll turn it back to Jim for his closing remarks.

Well, thank you, Steve. I think you can tell from Steve's comments that we continued our revenue building activities throughout the second quarter, but at the same time, were able to show a very nice increase in earnings per share. Let me conclude our prepared comments this morning by giving you a view of both the food and animal safety issues around the world and what we think may lie ahead of us. Probably the biggest news in the last few months has been the big spike in U.S. Food Safety recalls in the past quarter. In this 3-month period, recalls totaled 414 separate incidents. This is an occurrence of about 4 per day or 2.5x the number of food recalls that we saw in the previous 3 months. 50 different food products were incriminated in these recalls. Peanut butter, salad ingredients and ready-to-eat meats were the foods that were most impacted. Salmonella and Listeria, 2 of the 3 most deadly food pathogens, were the most prevalent causes of the recalls. Despite the fact that we've increased our testing and we've improved diagnostic tests and we've implemented more intervention programs, these 2 pathogens are still on the rise. Fresh vegetable producers who were the first to push back against USDA and FDA programs 1 year or so ago, are now much friendlier with both of those agencies. At the end of last month, the spinach contaminated with Salmonella forced to recall in 18 states. It still hasn't been determined what farms might have actually produced the product that was eventually purchased and sold through Fresh Express, one of the nation's largest suppliers of fresh salad mixes. In an effort to reduce the meat recalls, the Food Safety and Inspection Service at USDA has now instituted a program requiring that meat lots, that are held -- that they be held for certification if they've been tested. This test and hold program is becoming more and more prevalent within companies as well as inspection agencies. We believe that this requirement will continue to push for more rapid diagnostic tests that will allow processors to complete the testing and release the inventory as much as 24 hours faster than some of the conventional methods. Our ANSR product line, along with our proprietary enrichment media, is likely the fastest such test available in the market today. In fact, we've just completed a joint study with a major food company that allows them to test for Salmonella in just 8 hours. There was recently some significant movement on Food Safety regulations in several places in the international market and what's been termed to be a rare incidence, that it was a unanimous vote of our friends from the north in Canada to put into place what they call the Safe Food for Canadians Act that was passed into law at the end of November. This, by the way, had been in process since 2009. The law provides for increased inspection and oversight of foods that are produced in, as well as those that are imported to and those that are exported from Canada. So it looks at 3 different areas of food distribution in Canada. Russia is instituting more testing requirements for milk going into that country, as well as drug residues in meat products. Though I think much of this is likely a way to establish some artificial trade barriers, it still caused company like ours to make some significant modifications in the tests that we supply to detect those drug residues. Last week, the U.S. Food and Drug Administration renewed an agreement with China in an effort to streamline food safety inspection measures for food produced in Canada that's coming to the U.S. Under this program, FDA has the ability to identify high-risk food products and inspect the facilities in China that produce and process food that's headed for the U.S. The FDA has now opened offices in 3 Chinese cities in an effort to work closer with the Chinese regulatory agencies. Just yesterday, McDonald's and Kentucky Fried Chicken instituted major informational programs in China to assure the Chinese people that their foods were safe. This came after China Central Television reported that these 2 companies may have sold chicken with residues of antibiotics and growth hormones. And their supplier, by the way, of this chicken happened -- that's been incriminated is China's largest chicken producer and processor. And another, by the way, is that China accounted for 44% of Yum! Brands revenue last year. Of course, Yum! Brands owns Kentucky Fried Chicken and Pizza Hut. On the animal safety side, after a number of months, we have a report of a new animal that's suffering from mad cow disease this time in Brazil. To complicate matters, the Brazilian officials had known of this instance for a number of months before they reported it. It's difficult to determine how this may impact meat exports. In fact, yesterday Korea became the sixth country to suspend any imports of beef from Brazil. They joined China, Japan and Saudi Arabia and Egypt in this action. I believe that all of these new reports are just an indication of the pressure that food security is placing on food safety. As we've been discussing with you for the past several quarters, pressures to produce more high-quality food to meet the needs of the world's rapidly evolving middle classes is requiring faster processing plant speeds and more animals on the same land space. As you would expect, there's a lot of uncertainty in many of these international markets. In fact, in our second quarter that we just completed, Neogen's percent of revenues coming from outside of the U.S. actually dropped from 42% to 37% and this is despite the fact that as Steve reported, Neogen Europe is up over 30% for the second quarter, Brazil's up approximately 50% and several of our Latin -- other Latin American countries are up. However, the uncertainties are in a number of countries, not just in the EU, and they're making growth a bit more difficult. Several weeks ago, we traveled to 5 European countries in reviewing those overall markets, as well as looking at some potential acquisition opportunities. And the general tone in each of those countries was one of uncertainty. I think it was clear, that's clear that Germany and France cannot continue to support the weaker EU countries such as Spain and Greece. We believe that in the months ahead, the EU is not likely going to fall apart, but I think we'll see more disparities between the haves and have-nots and that the major countries will begin to take more prominent positions much like they did before there was the effort for a unified Europe. This is important to us because we have significant interest in all of those EU countries, particularly with our Food Safety products. The same kind of end decision that we see internationally seems to be plaguing also many of our markets here in the U.S. as U.S. producers and processors are also sitting on their hands. As an example, beef producers and processors are perplexed about their future, as they're paying over $1.60 a pound for feeder calves and feeding them with $7-bushel corn. Those of you that are not close to those economics, this is about twice the expenses that we've seen on average from the last 5 years. As we move into Neogen's third quarter, we hope that this uncertainty, at least in the U.S., may begin to subside as U.S. food processors have a better understanding of the changes in the tax laws and an understanding of the new medical care costs. A lot could come from Washington to help, not just on these 2 issues, but finally getting some regulations in place for the Food Safety Modernization Act over FDA that the president signed into law 2 years ago in January. We also need to get a farm bill passed. Many believe that we have a good farm bill that's been put together by the Senate Ag committee and reported through the Senate under the leadership -- bipartisan leadership, really, of Republican Senator, Pat Robertson of Canada; and Democratic Senator, Debbie Stabenow of Michigan. However, politics has stopped any action toward getting this completed. Even though there's confusion with the economy, with taxes and politics that may have an impact on market growth, it's really not standing in the way of some great opportunities that we have here at Neogen. Back on the acquisition front, we acquired the Macleod Pharmaceuticals in early October. This product gives us a broad-level antibiotic to be used in animal health for both respiratory and intestinal infections. And in the first 2 months, it has been noticeably accretive at both the top line and the bottom line. We believe that we'll see continued growth as new versions of this product are introduced. In fact, the first new one was introduced into Canada just a few weeks ago. These are the kind of drugs that we need in animal protein production. They're too expensive to be used prophylactically at continuous levels in the feed. But they're very effective and inexpensive when they're used therapeutically to fight off specific infections. There are more acquisitions on our radar, though nothing that I can announce to you this morning. I can say that we'll be looking at the same kind of successful additions as the 22 acquisitions that we've done in the past 12 years. Growth will come from new products that are in the R&D pipeline. Steve made some mention of that. That's particularly true for our Food Safety area. We began the fiscal year, like 7 months ago now, with 20 products under development and in the pipeline. I felt at that time, we might be able to get as many as 17 of those into the market before the year end. We've now gotten 12 of them introduced into the market, some have just recently introduced, and I think we should at least be able to achieve my earlier prediction. Our balance sheet continues to strengthen as our current assets have grown by almost $9 million since the beginning of the year, and we continue to have no bank borrowing. Shareholder equity has grown by 9% since our year began on June 1. This concludes our prepared comments for the morning, other than to say -- for me to say a big thank you to the 750 Neogen employees that, once again, made this a record quarter. Thank you for your continued understanding. That's the toughest thing about success is that we have to keep on succeeding. At the same time, all of the 750 employees would once again say a big thank you to our shareholders and to the financial community for your support as we strive to make Neogen an even bigger and better world-class company. At this point, let's open the telephone lines, if we could, moderator, for any questions from participants.

[Operator Instructions] Our first question comes from Paul Knight from CLSA. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division: I was calling on the GeneSeek. And can you talk about, I guess, revenue down a little bit, year-over-year what are the plans for that business, dynamics going forward?

We're really well pleased with that business. When we bought it, I think some of you -- you probably heard the story that it was -- we thought that at that time that probably the strongest genomics company, certainly in the U.S. and probably in the world in animal genomic testing. We also wanted to add more proprietary bioinformatics to that product line. The acquisition of the Igenity group from Merial brought in some of that. And we're continuing to add other bioinformatics that's more proprietary to what we're doing. So I think it's going good. We started off and there's terms that I don't -- I'm not good enough to make you an animal geneticists, so I won't try. But we start -- we were doing a lot of 50,000 SNP tests as we've worked through, trying to be able to separate what the traits were that made an animal improve, make an animal grow faster or make the steak go more marbled. As we've gotten further down the road, we've learned that we don't have to use 50,000 SNPs anymore. We can do it with a few thousand because we've identified the good ones from the bad ones, and we want to expand that business. I think we're the largest -- I'd kind of bet on being the largest, but we think we can gain more dominance there, and one of the ways to do that is expand it from the seed stock guys or the pedigree beef producers, as an example, down to the commercial guys that are -- commercial cow/calf guys that are producing calves to go to the feed lot. And to do that, we had to drive price down from $50 to $70 a test, down to $25 a test because we were looking for a lot of fewer traits. I think that's what we're seeing happen. As Steve reported, I believe our total numbers were -- of tests were up, even though our revenues were down some. But there's lots of opportunities, there's a lot of tests coming. We're ready to embark on a yet new platform in that area that's going to, I think, give us even increased credibility as we look into what would be our fourth platform. So I feel good about where we are, and maybe that gives you a little idea as to why the dollars might be down. I'm not at all disturbed about that at this point.

The next question comes from Steven Crowley from Craig-Hallum.

Just maybe following up on GeneSeek, the nature of that business that you've advertised to us is that it's project oriented often and it's lumpy, and we've had periods with good lumps and bad lumps. And I'm wondering in terms of the project backlog, how does that look for the back half of the year? And should we think about the business as having a decent chance at growing year-over-year because it hit kind of a low point here in Q2.

Yes, I don't think there's any -- I don't have any concern about year-over-year growth as we look at the last half of the year. And it is a little lumpy. I think Steve said we had $200,000, $300,000 in tests that we probably, from the same customer did last year, we didn't do this year. They just arrived a little late. And those, by the way, came from New Zealand. It's still a short plane ride, but when you're just trying to put together samples of dairy cows in New Zealand we tested, it's a little bit different than doing it in Wisconsin. But it's -- it is lumpy, but we got a lot of things that are going in the right direction. One of the things I'm looking forward to is we do a little -- a few things outside of the food animal area. We do the work with Mars for their Wisdom Panel on dog pedigrees, dog parentage. That's always a big business for Mars and for us in the Christmas time period for those people who already have everything that you want, well, you say, "What do I give them?" Well, I'd give them a test so that they can see whether their poodle is really a poodle. And so we do -- Mars does good business and we do good business in December. That business -- I talked to the guys yesterday and they're very, very busy. So I think it's -- we're going to be all right for the year and it'll smooth out over time. But right now as we're adding new customers, we just picked up 2 new customers that had been over at a competitor's shop in the beef cattle business, and they'll take a little while to move from one shop to the other. But those are all positive signs, no negative signs, no business that we've lost, no changes, real changes in the marketplace. Those of you who see some of the New York publications, yesterday, I think there was a nice article, I haven't read it yet, on what -- on what genetic testing has meant to the dairy business. And it's meant a tremendous amount to the dairy business as being able to improve production per animal. That's probably -- the Holstein cattle business is probably the furthest ahead. We see a lot of opportunities coming, there's places like China. China is bringing in all the dairy cows they can find anywhere in order to build the dairy business there. We see farms going in with 10,000 to 15,000 cows on one farm, and they're going to need to make sure that they've got the right cows. They're going to need to start sorting genetics there. So we haven't even seen that side of the market yet. Though we have, I believe, got -- they're either in the shop or will be in the shop, 3,000 samples from dairy cows coming out of China, which is a first ever, that we're doing the genomics on I believe probably in December. So that's a long-winded politician's answer. But I can assure you there's no cliff in sight.

Well, that's great. Now in terms of a business that did really well in the quarter. Obviously, the natural toxins business, the aflatoxin testing business, what can you tell us about how big a problem you've dealt with so far, what kind of tail there might be to the testing bolus? And how much of a revenue boost versus normalcy we're seeing right now so that we can keep seeing about normal periods in the future?

That's an interesting question and I don't know what normal is. I think normal is a continued problem somewhere in the world. We were talking just before we went on the air today about what's happening here and there. Somewhere in the world, it's always hot and dry, and somewhere in the world it's always cold and wet, and there are different natural toxins that come in, in each place. Some would tell you that if we are truly seeing global warming occur, that we may see more hot and dry weather, and that may give a rise in certain places. Certainly, we're not seeing the aflatoxin being a problem in Germany before this year. So it's difficult to say. Ed Bradley, he heads up our Food Safety group, tells me that he thinks that this corn testing in the U.S. has probably got a long tail on it. I don't know exactly how much that is going to mean as we go forward except for the fact that we had spots in the country where aflatoxin was extremely bad. The corn was almost not fit for any kind of consumption, but you could go across the county line 50 miles and you could find corn that was perfectly natural. So when you get a situation like that, you got co-mingled corn, it's going to require that the testing continue more than it might if it was just one state and you could write it off and forget it. So I think we'll probably see some of that as this corn is now in the elevators and it's going to begin to -- is beginning to come out or is coming out. I think that we're seeing some issues now. Grain is going down -- of course downriver is a problem because the river is a problem right now with the low water levels and difficulty in getting barge traffic all the way out. But I think we'll continue to see a tail on the mycotoxin problem in corn for aflatoxin. I'm not so up to speed as to what we're going to see in Germany and in that area for vomitoxin out of the wheat crop. I've got a feeling that it was probably more centralized and that crop has probably been segregated a little better than the corn crop, but I don't know that.

Our next question comes from Scott Gleason from Stephens.

I guess just to start off with, you guys mentioned you had this $1.3 million benefit in the Animal Safety segment from an animal supplement that was where your competitor had a supply disruption. How should we kind of think about that going forward? Was that kind of more of a one-time event or were you guys able to capture some incremental market share where, on a go-forward basis, that would continue to be there?

Well, I think we'll get some continued -- we'll keep some of that. The competitor -- we have a high regard for the competitor who was out of the marketplace and I think is probably beginning to come back into the marketplace now. Been a longtime player in the market, has treated his customers very well. They've been a good company, and we got business because of the fact that they had no product to supply. Having said that, I suspect that we'll keep some of it. We won't go back to where we were. One of the issues that affects the thyroxine in dogs, in fact, frankly just like in people. Once you get an animal on a regime that works and get the right dosage from the right product, veterinarians are reluctant to change brands to another product. And so I think we've been in that market long enough now that I think we've got some conversions that go all the way back to the pet owners. So I expect that we'll keep some of that. Will we keep it all? Probably not, but we got other things coming along that will certainly fill -- backfill behind it. So that new FDA or that new plant in Lexington that we moved is now complete. And if you remember, that is an FDA-approved plant. We've got some new product to go through there as soon as we get the FDA approvals completed. So where we might lose some of the advantage that we got last quarter for T4 tablets for dogs I think will make up in other areas as we move out through the rest of the year.

Is there any chance you could give us maybe a little bit more granularity on what's going on in terms of the molecular side? What your current installed base of systems out in the field is? And I guess maybe when a customer gets fully up and running with the ANSR platform, kind of what's your expectation of kind of dollars per system per year might look like?

Yes, I don't have those numbers right in hand. I know that we've got faster traction in some markets than others. As an example, I think the Salmonella product testing with the ANSR system has gone into pet food very rapidly. Of course we almost have a dominant position there in natural toxins and I think that's been a part of it. It's not quite been quite as fast in some of the other areas, but it's again this situation of people sitting on their hands. I've talked to customers in the last few weeks and said, "This is a better deal. Why aren't you looking at it?" And they said, "Well, what we're doing, it's not that bad and we just don't want to do much of anything unless we have to. If it's not broken, we're not trying to fix it." And I think we're seeing a little bit of that out there. That's got to give. It's got to give way, but it's coming a little slower than it might. Steve was showing me, it was Steve or Ed [ph], one was showing me numbers yesterday or sometime this week of a number of new customers, which was impressive. Steve, what'd we -- the tally you had, that was over 500 new customers. It's something like 500-and-some-odd new customers that bought from us in this past quarter that had not bought from us in like the last 18 or 24 months. So that's -- I'd categorize that as a new customer. If we hadn't had their business in the last 1.5 years, I think that's new. And you may remember the line reported to you last quarter, we had numbers of about the same size. So we're continuing to pick up a lot of new customers. And that's got to be mostly coming in as market share increase, because most anybody out there that's got much concern today is already using some kind of product, so we're gaining some market share somewhere.

Great. And I guess just last question, I'm sorry if you guys already said it on the call, I didn't pick it out. Could you give out the growth rates for the business, both U.S. and O U.S.?

Yes. You have that...

The growth rate for the business overall was 9.4% -- I'm sorry, 13% overall. 9.4% was what we call organic growth. We don't break out -- we didn't break out the international piece of the growth. International as a percent of our overall sales was 37.4% in the quarter and almost 40% year-to-date.

Okay. I guess can we take from that, that maybe international was a little bit softer this quarter?

Yes. There's no question about that. I don't think softer. It did not grow as fast as the domestic business group, I think is a safer way to say on it.

Our next question comes from Tony Brenner from Roth Capital.

Two questions. First, I wonder if currency translation affected your revenue comparison in the quarter.

It did. Steve, I think you got those numbers.

It was a pretty small number, Tony. It was $215,000 decline -- hit to revenue for the quarter. Remember the first quarter was about $1.2 million headwind. So we're at $1.4 million for the year-to-date.

Okay. And my second question is in the previous quarter, you entered a water testing distribution agreement with CPI. And that's -- water testing is a pretty huge area that Neogen hasn't been much involved with in the past. And I'm curious whether this is an area that's become now a focus of your R&D efforts or of your search for acquisitions or was that agreement just a one-off special situation?

We've actually been distributing that product to special customers for a while. Water is clearly an area that's got good opportunities. We have not -- we're not there yet. We need to be there. We want to be there. We will be there. We are in a few places with customers like the 2 major bottlers on a worldwide basis. We supply them with product that they use to test incoming water that's going into make actual product, that's going into carbonated and still beverages. So we play around the edges, but the big market there, I think, Tony, is not in industrial water. And you got both sides of it. You've got the affluent as well as the -- where there's a lot more pressure that's coming to bear, as well as the safety of the water that's going into products being used. But it's in municipal areas and in water for municipal water supplies, which is a market area where we don't have any touch right now. We'd like to be there. We need to be there. We're looking at opportunities. And we may just do it ourselves without aid of somebody to help carry us in. But it's not anything that I've got on my drawing board for the rest of this year. So now I can't tell you that one of our guys might have a brainstorm and already be well ahead, because I don't know about it. But I don't believe we will probably -- I don't see us moving into the water market for the next 6 months.

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

I just wanted to ask about the competitive landscape generally. And obviously, with Pfizer spinning off their unit, if you anticipate any changes from that or competition generally?

Well, the Pfizer spinoff will have -- we don't cross sabers with Pfizer in very many places. We've got some 1 or 2 antibiotic products that are in common, and Pfizer is a player in the genomics area, I don't think very big. This time 1 year ago, we were doing Pfizer's actual genomic testing for them. We did their testing in the lab and fed them raw materials back that they went to customers with. So I don't see that, that's going to -- that the Pfizer deal is very big or will have a very big impact on us. The market in general, there's more competitors out there than the market -- than deserve to be. We got some folks that have got more business than they really ought to have and ought to be ours. And it's like many new technologies. You see a lot of new companies that enter and then you see a concentration of those. And I think we're kind of heading in that direction of concentration. You're see some acquisitions of some bigger companies buying smaller companies, and I think we'll see that. But there's a lot of technology out there. There's enough that certainly keeps us on our toes. We don't have a competitor that covers all areas of the markets like we do, Food and Animal Safety. Or even in the Food Safety side that covers really all the areas from pathogens to allergens to natural toxins. We've got some pretty formidable competitors in one segment or another. So I think we're, as I said in a case or 2, I think we must be gaining a little market, but it's not easy.

And Steve, you talked about the foreign exchange on sales. Any impact on operating income?

It was in that same range. And I will tell you, it was about $165,000 hit to operating income.

And can you provide the cash flow from operations for the quarter or 6 months?

Sure. For the quarter it was -- from cash flow from operations was $6.9 million.

That's for the quarter, okay.

The year-to-date?

No, that's okay, I can calculate the year-to-date. The capital spending plans for the company for the year, have those changed at all?

No. No, we're at about $3.4 million year-to-date and we're tracking towards -- our number is overall $6 million, $6.5 million. So no change there.

All right. And one last one. I didn't hear specifically the geographic breakdown on how Europe did in the quarter in terms of revenue.

Neogen Europe, if we're talking about that portion of our operation, is up nicely for the quarter, up about 25%, if I remember.

30%.

30%, yes. 30% and almost 50% at the bottom line. Now I told them they should've made a few more sales to push that on up so it would round up to 50%. But a good quarter in Europe despite the fact -- in Neogen Europe, despite the fact that Spain and Greece and Italy are still problematic. They're still buying and they're still paying their bills. But the amount of the purchases has declined from where it was.

All right. That's very helpful. The international piece, I think, Steve you mentioned 34.4% of total sales which is obviously down from the 6 months...

Yes, Greg, that was 37.4%. And the 2 biggest pieces there are, Greg -- Chr. Hansen, our largest European distributor, that's the dairy antibiotic sales which we talked about a little bit, that's down for the quarter. That's really timing of orders just [indiscernible] puts in various orders at any given time and that should come back in the second half of the year. And a smaller impact but our cleaners and disinfectants to some of the bigger distributors into Europe was a little bit soft. That was probably about a $300,000 shortfall. And that, again, it's order timing. These distributors order large quantities at any given time so...

Yes, as I remember, we had a big order last year, Steve, of Soleris instruments that went to China in the second quarter which were repeated this year.

[Operator Instructions] Our next question comes from Steven Crowley.

Just a quick follow-up. You probably gave us the components, Steve, but you referenced an organic growth rate for the 6 months that included the impact of FX at 10.3%. The 9.4% organic growth rate that you've referenced for Q2, does that include the impact of FX or exclude that impact?

That excludes it. Those are actual results.

Okay. So if we were to go apples-to-apples with the 10.3% for the year, I guess, we'd just add the $200,000 back, but I'm getting lazy.

No, the year-to-date organic growth, Steve, is 8.8%. And then to that number, you would add the FX hit, which was about $1.4 million, and that gets you to your 10.3%.

Okay. But for the quarter you gave us 9.4% which relates to the 8.8%. So I'm wondering what the FX adjusted organic growth rate for the quarter is.

Oh, okay. That would actually be 9.9%. Let's call it 10%.

That's very helpful. And then in terms of bacterial and general sanitation, we talked about Soleris and the fact that there's some opportunities there. Is there anything to note about AccuPoint in new applications or where there's an opportunity set for you in the pipeline with AccuPoint?

That probably continues to grow. We are doing some things, some substantial things in the pipeline. Since my competitors always listen to our call, I'd probably -- I don't want to say much more than that.

Okay, that's helpful. And then on the acquisition front, given some of the tax law changes that we're all staring at, it looks like that, that was probably a driver for one of the opportunities that you capitalized on. We're running out of time to buy and close something before the end of the year for the benefit of the sellers. Or are there some things in the hopper that, that deadline might work for you?

I guess I'll let you speculate on that.

We have no further questions and I'll turn it back to Jim Herbert for final remark.

Okay. Well, thank you so much and thank you all for your participation this morning. We want to make sure and wish you happy holidays. And to each of us, I guess, we want to wish ourselves a prosperous 2013. So we'll look forward to talking with you next year. And we're off.

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