Welcome to the Neogen Second Quarter FY2016 Earnings Results Conference Call. My name is Kristine, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Jim Herbert. You may begin.

Well, good morning and welcome to our regular quarterly conference call. As Kristine announced, today we will be reporting to you the results of our second quarter of the 2016 year, which ended on November the 30th. As is usual, I will 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. The actual results may differ, of course 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 via live telephone conference this morning, I would also welcome those who may be joined by way of simulcast on the World Wide Web. Following comments this morning, we will entertain questions from participants who are joined in this live conference. I'm joined today by Rick Calk, Neogen's Chief Operating Officer and Steve Quinlan, Neogen's Chief Financial Officer. Earlier today, Neogen issued a press release announcing the results of our second quarter that ended on the November 31 date, our net income for that second quarter increased by 16% to $9.1 million or $0.24 per fully diluted share. That is an increase from last year's approximately $7.8 million that equated to about $0.21 a share. On a year-to-date basis net income now stands at $18.4 million. That is $0.49 a share compared to $0.45 for the same period last year. Revenues in this second quarter, also increased by 16% to $79.6 million from the previous year's second quarter of approximately $68.5 million, quarterly revenue and net income results for the quarter both, represents second quarter record for our 33-year…

Well, thank you Jim, and welcome to everyone who is listening. Jim has already reported on the overall sales and profit performance for our second quarter and our press prelease provided additional details related to our overall quarterly results. As Jim mentioned, I have concentrated my efforts on the Foods Safety segment, so I would like to provide a bit more detail on the performance of our Food Safety segment for the quarter. At the risk of sounding like a broken record, our food allergen product line continues to lead the way in revenue increases for our food safety diagnostics. The entire line was up 24% for the quarter and sales of single food allergen test increased at least 13%, except for almond and that is because our active R&D programs has largely replaced that test with our new test for multiple tree nets, which detects different tree nuts including almonds. Now, we have dominated the rapid testing market for food allergens for years and the second quarter was a continuation of that trend. Moving forward, the increasing consumer fuel demand for products that are verified to be free of gluten and other food allergen is only likely to grow the market for rapid food allergen testing. Another bright spot in the quarter was a 25% increase in our sales of our General Sanitation line of products, which includes our new AccuPoint advanced sanitation monitoring system. Our new generation system has been on the market now since June and is living up to our expectations that it would immediately become the best sanitation monitoring system available, not only to the food industry, but the food animal production facilities back inside the farm gate or any facility that needs immediate, accurate sanitation testing results. One point I want to make here…

Thanks, Rick. Let me the phone back to Steve Quinlan to talk a bit about the currencies as I promised. Steve talk some about the highlights of the Animal Safety Group. Kind of the overall financials are where we ended up for the first five years.

Thanks, Jim. 2016 [ph] looked a lot like the first as currency headwinds masked some pretty solid underlying growth, particularly in the Food Safety segment. Similar to the first quarter, all the currencies in which we operate have weakened versus dollar compared to the second quarter of last year. The euro was down 15% on average compared to last year's second quarter, the Real was down 58% for the comparative quarter, Peso was 24% lower and Pound Sterling was down 5% on average. The negative impact of the stronger dollar on our comparative revenues for the second quarter was about $2.2 million and about $0.02 on the bottom-line. In constant currency, our growth was 20% versus 16% reported and reported organic growth of 13% would have been 16%. On the Food Safety segment, the impact is even more pronounced. Their 13% growth would have been 20% and their organic growth of 6% would have been 13%. Rick has already discussed the highlights of our growth in the Food Safety business, so I am going to focus on our international operations in the Animal Safety segment. Our top-line results for our international operations, which are primarily focused on and report in through Food Safety were mixed and were negatively impacted by the strong U.S. dollar during the second quarter and first half of 2016. Neogen Europe revenues declined by 6% in local currency in the second quarter, primarily the result of difficult comparisons from strong genomic sales in last year's second quarter, which did not recur this year. As Rick mentioned lower mycotoxin revenues due to the cleaner crops in this year's growing season. Revenues declined by 10% when the Pound Sterling was converted to U.S. dollars and year-to-date reported revenues have declined by 11% in dollars with currency and genomics…

Thanks, Steve. I do not want to belabor the currency translation. Steve has already mentioned, but they continue to be troublesome. Our international sales for the second quarter were approximate $28.7 million, which equated to about 36% of total revenues. On a year-to-date basis, international sales stand at about 34% in total. Some of you may remember that at one point the past they were as high 42%. International sales continue to increase, but just not as much as the Company's overall sales and this is important to us, because big piece of our total market that we know lies outside of the U.S. Neogen does business in 100 countries. Most of these are through independent distributors. However, we have our own offices in operations for direct service to 16 different countries. The biggest of these groups is our Neogen Europe operations, where we have the direct sales representation to what we believe to be the five most important E.U. countries. Plus, we also service all of our distributors in the European Union through that office. Neogen Europe sells products in Euro and Pound Sterling, and in some cases U.S. dollars. All of this gets converted to Pound Sterling for their consolidated statements and that gets shipped back to the U.S. then we convert it back to U.S. dollars. In the first six months of last year, we were converting the Pound Sterling at approximate $1.65 to the U.S. dollar and for the same period this year has been $1.54. Now, not only do we suffer the conversion, but it also puts us in a more difficult competitive situation from pricing standpoint. This is especially true for our Food Safety group, where major competition comes from companies that are based in Europe. This past quarter was the first in I…

Thank you. [Operator Instructions] Our first question is from Paul Knight of Janney Montgomery Scott. Please go ahead.

Hi guys. This is actually Bill March on behalf of Paul Knight. How are you guys doing?

Good.

I was just hoping we could maybe talk a little bit about underlying strength we saw out of GeneSeek in the quarter. How much of that came from the July Illumina partnership. Is this higher growth rate sustainable? Then maybe are there any new markets or countries that you are penetrating?

Good question. Unfortunately, not a lot came from the Illumina partnership. We still are strong. We still feel good about that, but if you look at the revenues that we got from the Illumina coach partnership as compared to the chips that we sold outside of that partnership during the same period last year, I think that that revenue would actually be down, so none of that came through Illumina. Though, as I said they are reaching out to some companies around the world that we couldn't reach that was the intent start with. They will slow and get things together, so none of the increase was due to that. Secondly, yes. We are doing some penetration outside. We are now up and running with the full Illumina system in our laboratories Ayr, Scotland. Before we brought European product to through the Ayr location, where we in many cases extracted the DNA and sent that to Lincoln for the final work, but now we are actually doing complete work in Ayr, though we work with the bioinformatics through the cloud back to what is going on in Lincoln, but that has taken some pressure off of Lincoln and it has also given us faster turnaround, so where we had competitor to in Europe that was starting local service we now can tap local service and we are doing well there. We picked up some new business in Mexico. I think, we got working with beef breed association now in Mexico along with sort of a pseudo arm of the Mexican government as they strive toward trying to pick cattle particularly, I think, SARs to start with that that what they can do to improve the beef cattle genomics in Mexico. Brazilian operations, I think, where Genomics are probably up a tad this month, and I think it is pretty widespread. That is a long way to get that answer, but I think our genomic business is pretty widespread.

That is helpful. Then maybe if you guys could just provide the M&A accretion from Sterling House and Lab M, and then just in terms of kind of bigger picture on M&A front. As you are looking at targets, are you looking more at food or animal safety or are there any areas that that look more attractive than others?

You wanted to know first amortization cost is at?

No. I think he wanted revenue.

Revenue?

Yes. Revenue.

I do not have the numbers before me now. Steve will have to get back to you probably later on it or whenever.

That is fine. Thank you.

The Sterling House, I think we told you at the beginning that those of you are not familiar with that term, that is our Indian operations and it has come on board. It is like I have learned about India - in that group. Though it is moving fast enough that I can say it is going forward. At least it is measurable progress and we feel real good about it. We are now part of that Food Safety community and we are doing a lot of lab testing. It is a big spot where spices come through that both, ports and through our labs to go throughout the world, so we feel good about that one. Lab M, it is going to be really good. It is just now beginning to get it legs under it. Steve talked a little bit about acquisitions and what their gross margins are. We always know the next morning after we write a check what we are going to do with the an acquisition, but sometimes it takes few months in order to get them land out and running efficiently and Lab M, we probably had some changes there that we needed to make that might have had some impact as I remember it, but they have been on board like past 90 days now. We are feeling really good about where they are going and where they are going to go. We have not integrated them back to the U.S. side of the business yet. We of course have Accumedia, which is a big sister to Lab M. It serves the big part of the world, but there is some really great integration between those two locations. We will start to look at probably at the beginning of the fourth quarter. In the meantime, they are doing well, so those are not sure - whether I answered all of your questions there or not, but if not we will come back to me.

Yes. The only other thing is maybe just on the target front, what food or animal safety or any specific areas you see as attractive for acquisitions?

We don't go out with a different gun dependent upon you know what we are hunting for. I mean, we look for opportunities as they become available. Often times we have our nose to the ground we have an idea what is going to become available, but we are not particularly shopping in one area or another, because we think they are both important to us. We have never worried about whether we kept one exactly the same percent of revenues as the other as long as they make sense. Today there is so much synergy between the two products, what happens back inside the farm gate as a big influence on what happens in the food safety program. We continue to look at acquisitions and some of you probably heard before. It is really not that difficult if you stick to focused. We look at acquisitions at first ball, - where we know and understand the technology that is embodied there. Secondly, we want to be able to manufacture the product if we want to. The number three do we have access to the marketplace. As long as we have answered those three and a positive fashion, we have done, so the things that we are looking at going forward that would fit there and you know in a lot of cases to we can bring of product and where we already have manufacturing capability and do not need to add the manufacturing. We bring them in and a lot of times where we already have access to the market we have on any salespeople in the field are already calling on the right customers and we do not need to integrate the one or two people that came from the acquisition. I think, [ph], but as I look at what we have got going forward there I am kind of anxious to get Christmas behind us, so we can get started with one or two that look good going forward.

Got you. Thanks for your time. Have a Merry Christmas guys.

Same to you.

Thank you. Our next question is from Tony Brenner of Roth Capital. Please go ahead.

Thank you. Good morning.

Good morning, Tony.

Jim, talking about the Food Safety Modernization Act, you mentioned that the burden would be on the importer, not the exporter. First of all, does that mean that the incremental business which show up in domestic sales not international sales. Secondly, I know it will take a while before these rules are actually effective, but I wonder if you are at this early date seeing a pickup in that related business.

Thank you, Tony. I do not know that we are seeing any dollars going to cashiers, but we are hearing a lot of conversations. I mentioned the Mexico situation. We kind of had been there before. One of our good customers on both sides of the California border is in the end avocado business and guacamole. They do a lot of test over on the Mexican side, the Mexican company and then when because they want to make certainly when it gets of the U.S. side, they are not going to - make people see. I think it works both ways. I talked a little bit about India. That is one of the things that we focused on India and where we are located there that we thought was going to be important. It is such a large number of spices come from that part of the world and you got American companies with American names that are operating in India, so they have kind of always been there. Those companies have like McCormick. McCormick is obviously a major producer of spices around the world and they produced a lot of spices because of the climates and other things in - and a lot of those spices comes to come to the U.S. as well as other places, so it gives us a chance to test on both of the border, so yes I think it depends on which company gives credit for the sale, but I think the fact that we do have hands across board kind of relationship is important to us going forward. Within last few weeks have helped the U.S. guys said, guys, I am glad to know you have got a location and service for instance for China, so we can make sure that the product that we are bringing then is being tested and looked at properly on that side. I think it is a year away from enforcement for the big companies. I guess three years away for the little - meaning, saying they probably do not in spices, it is going to come I don't think we will see a flood gate, but I do think that we will start to see more money come into the cash register. We are ready to see - hearing more conversation.

My other question has to do with operating margin, sequentially, compared to the first quarter there was 150-basis point decline in the in margins in the quarter. It appears that a good portion of the foreign-currency, it was below the operating line, so I am wondering what else accounted for that sharp decline in operating margins and what the outlook for that might be for the balance of the year. Thank you.

I will let Steve talk about that.

Yes. Tony, there actually is a pretty significant piece that is above the line, because when those revenues get converted back, it also compresses the gross margin so you see there's two pieces of the currency impact. There is some that is down below the line down in other income expense, but to the extent that our revenues are impacted, our gross margins are also impacted and that I would have been the biggest piece of the - what perceive deterioration. Then as Jim was saying, there is the same new acquisition revenues that have come on to the extent that those margins than the mix that was in place. In the first quarter, you would have seen some change their and then it is really just product. The rest of that is product mix on both sides of the business. Then finally there is just as the shift in business you know between food and animal safety and in those are that's a smaller piece, but when you add all those pieces those kind of get you there.

Tony, that is the reason you have heard say over and over, we do not really like to be measured solely on gross margin. It is just one of the increments of net operating and I have got…

I was not asking about gross margin. I was asking about operating margins.

Okay. I am sorry.

My explanation is still holds?

Yes. Right, so the outlook then given that many of these factors place remain in place for the next quarter or two, it does not look like or we should assume a short rebound in operating margins? Is that fair?

I think it is fair.

I think it is probably fair.

Okay. Very good. Thank you.

Thank you our next question is from Jason Rogers of Great Lakes Review. Please go ahead.

Good morning.

Good morning.

Just wanted to follow-up on the margin question, looking at the gross margin, do you have what the year-over-year impact from currency was on the gross margin for the quarter?

I do not have an exact number, but it is somewhere in the - we calculated at eight-tenth of a. Yes. It is about percent of the two percent change.

Were there any one-time costs or one-time hits to the gross margin from the acquisition area or are these cost expected to be pretty much similar in the third quarter? Just lower margins or there is any one-time cost in the acquisition?

Well, that is kind of hard to measure sometimes. You bring inventory on and you put evaluation on it and you value it as best as appropriate for the use of the of the funds and you might put raw material on at a higher cost than what might be deserved, so therefore that could drive it down. Obviously, the other thing is you bought raw material on at lower than its replacement value, so if this kind of takes about you know a quarter or two to get these acquisitions leveled out if they have got full inventory in the raw material - and finished goods and they going to marketplace that our price has again stabilized. We do well and we do not show any losses anywhere, but it is kind of difficult to start trying to pick them apart for the first several months.

All right, and just looking at the growth rate, obviously, very strong organically on the animal safety side, would consider any of these factors to be more one-time in nature or would you expect the rodenticide growth and so forth to continue at a similar rate for the remainder of the fiscal year.

No. I think, I am thinking back on where we are with those products. There are seasonal impacts on some of them. For instance, we showed good increases this quarter for insecticides, but this is not a good insect quarter normally. Cold weather comes along, the plants get killed, so you know the fact that we are up this quarter I think bodes well for where we are going to be in the next quarter or two. Overall in the rodenticide side, all our rats and mice are now trying to find warm place for the winter, so that business is going continue to be good looking forward to at least of course the next three or so months. We did not see this year the impact of animal diseases like we saw in avian influenza. Thank goodness a year ago when the migratory birds infected the big part of the laying hen flock in the United States, but our cleaner side of that business looks good. The disinfectant side is standard and those are going to be, I think, we will see sort of a trickle-down effect. They are going to be more important as we look at raised without antibiotics. If we are going to keep animals healthy, we are going to have better biosecurity systems. Those cleaners and disinfectants are going to play a major role there. The organic guys, there is a limit to number of products that they can use and still maintain their organic status, so cleanup in advance is going to be more important. I guess I feel good that we did not see anything that had any kind of a positive impact. I do not know, Rick, did you see anything there?

I do not know. I cannot think of anything of the top that I would want to point out directly other than the issues you have stated already year-over-year.

Has there been any supplier capacity constraints in rodenticide and Uniprim or anywhere else in the business?

We have. Yes. We are keeping up, but not by much. We have got a couple of spots where we fighting, where we are fighting back orders. The Uniprim product line as we move that from and we made that acquisition it was a Colorado-based company. We moved it and incorporated in our FDA pharmaceutical plant in Kentucky and it is competing for mix or space with a couple of other very big pharmaceutical products, so that is the plant that up to. I guess we are running 24x5 five now not 24x7, but we are putting in some new capacity. We are putting in a new wax that we ought to have finish by the end of this month that our Hacco operations in Wisconsin as we got two wax box or those weather-resistant blocks of rodenticide that they can use inside, outside whatever. They do not deteriorate in the weather and we have been running kind of hand to mouth at Hacco, because in addition to our own products we make rodenticides on a private-label basis for two of the larger - actually competitor rodenticide companies in the U.S. They actually sell into other marketplaces, so we are producing our products as well as some others there. In both cases, we are coming out, so I noticed in my building, Lansing campus, I was pleased to say that we did not have any cars in that parking lot on Saturday or Sunday. We have been running the part of that operation some as much as 24x7 to keep caught up on our bio production for some of the spoilage organisms that we have not. We have got that caught up now, so we continue to add to new space, new equipment, we are just moving into a new, I guess, 20,000 square-foot. I saw in this morning the last [ph] lab was being loaded up to go to a 20,000 square-foot facility here in Lansing that has expanded lab space for our R&D group, so it has been touchy, but we are getting on top of it.

Thanks a lot.

Thank you. [Operator Instructions] Our next question is from Kurt Kemper of Hilliard Lyons. Please go ahead.

Hey, guys. Thanks for taking my question. Just to get a little more narrow on that last question. Do you care to provide some more commentary around the animal care and other product lines, and especially going forward?

We run a couple of different product lines there. We have got some companion animal products that you know are sort of legacy products been around a while. We are sitting right the middle horse country and the horse business is and always has been important to us. A part of that business is horse business. It goes along with the companion animals and a couple of good products that go into the canine area or is the big part of it is still the food safety back inside the farm gate kind of thing. Both of those businesses go well, we have got I guess one of the horse products. We have had a couple competitors in that field. One of them announced that they were going to discontinue a particular product line. We sorted that was the Uniprim product. We sort of I think have been leader in that business and held good shares of market anyway. I do not think we sell them. As far as I know, they are selling our product. They just announced that we are going out. We should pick up that little bit of business. One of the important areas that goes through there is what we are doing with the dairy market, diary is important to us. It is a part of the overall food and animal safety business. It is a major emphasis on what we are doing with the GeneSeek with genomics and our diary heifer replacement program or we help in dairymen around the world, even including China, pick the best female calves to save for the replacement as it is going back into the milk [ph]. We did make a good license I suppose, distribution agreement a much better word, with the called Geya [ph]. They are one of the world's largest manufacturers of milking equipment that are used for milking farmers [ph] around the world. They had a group of distributors here in the U.S. and we are not - in fact in Mexico and in Canada, where it was a little too far reach for them and they were interested in somebody else coming in and picking up supply of those and we worked out an arrangement, where we are picking up that side of the business. We were already there. We did not have to add any extra people and it is going to be nice additional business. It is some business that some of the things that they were distributing to those dealers, we already had and in others they fit well, so I guess that is probably one of the real highlights of what has happened this quarter as far as that animal business down there is our continued expansion into the dairy market.

Okay. That was very helpful. My other questions have been answered, so thank you and happy holidays.

Thank you and welcome to the team.

Thanks, Jim.

Thank you. Our next question is from Charles Huff of Craig-Hallum. Please go ahead.

Hi, guys. Congratulations on good progress this quarter. I had some questions for Rick here on the Food Safety side. It seems like you have, so many things going in your favor. Now that we have the FSMA regulation starting to get some teeth to them, it seems like that that organic growth should be accelerating maybe in the back half of this year and in going into next year. Just wondering if you could give us some more color on that, Rick. I know it might be a little bit early, but just trying to understand how material you know the changes could be to your business.

Thank you for the question, Charles. I think it is an excellent question and I think the important thing to note is where have I been spending my attention and why and that is why I highlighted that and what talking to all of you about, because I think it is so important that we are on top of that opportunity in the organic growth that we see coming. Just in the World Health Organization this week, they talked about the fact that every year there is over 600 million people who are getting ill from eating contaminated food and it's important that we are on top of that. Of that 420,000 people year die, so we understand the importance of it, we are focusing our attention on that organic growth opportunity and we are going to be there.

Okay. That is the one thing. I am just a little bit confused by is the organic growth coming in about 6%, but you know allergen test up at least 13% across the board. I realize mycotoxin was down a little bit and the answer did really, really well. It seems just intuitively like you should have had a little bit stronger organic growth, so I am just trying to understand what is kind of pulling down that number and if that is just going to kind of be a function of tough comps and we should see a reacceleration there.

Yes. Charles, the biggest piece there is currency. In my presentation, I talked about the fact that food safety had 6% reported organic, but without the currency impact they were up a nice 13%, so.

I got you. Okay. I missed that.

Okay.

Okay. Thank you. Then can you remind me, Steve, how much of the GeneSeek business is in the Food Safety side? I know you break it up into different parts.

Give me a second, I will find that number.

Okay. Thank you.

Little bit of [ph] in Europe, it goes through Neogen - Our European operations gets reported on that side, I guess a little bit - they have been a little bit this time in Mexico, not a whole lot.

Yes. Charles that number is about $1.5 million for the quarter.

Okay. Thanks very much.

…primarily Mexico, Brazil and China.

Okay. Great. You did not talk about China too much on this one. On this call, I know there has been some challenges over there on the macro side, the distributors that you purchased and have been working with for quite some time, but purchased recently is just getting up and running, but just wondering Jim if you can give us an update on China, is there anything that we should be thinking about over the next few quarters going on there? I realize it is still relatively small in the scope of your overall business?

It is still small, but it's important and get more important and we really are doing well. I mean, the acquisition that we did there, we put two distributing organizations together, but that goes back, Charles most of you now think and making good progress - am on the phone with them at least once a month. Chuck Bird, our guy here that has got 25 years of international experience with the company and built a lot of these markets. He does not live there, but he is on the phone with them expecting to show up talking and [ph] any day now, but really close to what is going on there and some really solid growth. Mostly food safety at this point, a little bit of animal safety stuff, a little bit of genomic stuff, I guess we will probably do - I do not know Steve will do $1 million dollars in genomics over there this year, maybe. You know that is pretty important as we work with that big dairy industry. There are three super large dairy companies that are Chinese companies in China that control a big piece of the milk business, the overall diary business and we are in doing business with all three of them. All three of them had people here in Lansing, so that piece just continues to grow. China is Okay.

Okay. Great. Then Jim on the rodenticide I saw that SenesTech complete their filing for ContraPest and just wondering if there is any progress or anything that us going on your end or are you guys just kind of waiting for the EPA process to go through or anything you can start to work on the manufacturing side? Any color there would be helpful.

No. They actually completed that filing I do not know several months ago, but it is in the hands of EPA now, so we have a license to whatever they get as far as the approval process, but no real way to be able to predict what is going to happen to - it will happen. In the meantime, we are continuing to do some very exciting things in rodenticide. As you may know Charles, we have got our own - or we call or own rat lab our rodenticide that lab in Hacco, which is a freestanding building we are running experiments all the time on new and better products to use. Big part of it is its palatability. You can get a rodent to eat, then we have got a lot of products that we will send them to the happy hunting ground if we can just get them to eat it, so we continue to work on new more palatable products, because the rodenticide is not their only choice of something to eat. They got all kinds of goodies around that are more palatable, more interesting than some kind of an anticoagulant would be, but we are doing that and I am really excited about some of the stuff we are doing there and it is too early to say anything about what is happening in SenesTech other than - in fact they filed for registration and we hope they are successful.

Yes. 69% growth in rodenticide is nothing to shake a stick at. Well, thanks a lot guys. Appreciate it.

You bet.

Thanks, Charles.

Thank you. I will now turn the call back over Jim Herbert for closing remarks.

Thanks, Kristine, and thank you all for your continued interest and support as we draw another calendar year to a close. I know a lot of you have who have certainly benefited from the advice along the way and appreciate your questions and your support. I wish everybody a happy holiday season and prosperous new year and we will look forward to talking to you again in 2016. Good day.

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