Neogen Corporation (NEOG) Q3 2018 Earnings Report, Transcript and Summary

Welcome to the Neogen Third Quarter Fiscal Year 2018 Earnings Results Conference Call. My name is Hilda 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. [Operator Instructions] Please note that this conference is being recorded. I’ll now turn the call over to Mr. Jim Herbert. Mr. Herbert, you may begin.

Good morning. And as Hilda announced, welcome to our regular quarterly conference call for investors and analysts. And today, we will be reporting to you the results of our third quarter of, of course 2018 fiscal year that ended on February the 28th. As normal, 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 risks and uncertainties. Actual results may differ from those that we discussed today but also your attention that the risks that are associated with our business that 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 by this live telephone conference, I’d also welcome those who joined by way of the simulcast on the worldwide web. Following comments this morning, we will entertain questions from participants who joined this live conference. And I am joined today by Steve Quinlan, Neogen’s Chief Financial Officer; and John Adent, Neogen’s Chief Executive Officer. For those of you that have been on the last couple of calls or so, you’ll remember that John joined us about nine months ago and is doing a great job of drinking from a fire hose. John is now responsible for the major operating divisions. So, he has generated up about $350 million of our revenues, and I’m continuing to help with some responsibility on acquisitions, R&D and a few couple of other areas. But earlier today, Neogen issued a press release announcing the results of our third quarter of 2018 year which ended on February the 28th, as I mentioned earlier. Announcements of the quarter once again introduced these several new factors. To hopefully clarify some of that confusion, in a next minute or two, I’ll try to take apart to those quarterly financials. There were a few unusual twists in the revenue numbers but they came in at a solid, almost $96 million for the quarter, which is up about 7.5% compared to the prior year. On a percentage basis, this worked out to more than 8% increase for the quarter. And this pushes Neogen’s year-to-date revenues to approximately $293 million, and that’s up about 12% compared to the same three quarters a year earlier. Now, the third quarter net income compared to the prior year was up a whopping 61%. The net income for the third quarter was approximately $16.6 million as compared to about 10.3 million a year earlier. There are a number of factors in play. Even though they are new occurrences, I can assure that income is real. If we adjust for 4-for-3 stock split that was effective at the end of the December, earnings per share for the current quarter, about 0.32 per share compared to $0.20 per share year ago. A lot of things worked to our benefit related to the bottom line. Of course, we did -- we benefitted from the corporate tax reform that was enacted in December. Adjustments associated with this tax reform gave us an effective tax rate of only about 4% for the quarter. And our current year-to-date income was $45.6 million and this converts to $0.88 after we adjust for the split, and that compares to $31 million the previous year or $0.61, so $0.88 compared to $0.61 in the prior year. Before I get into this any more complicated, let me along and let Steve Quinlan discuss the tax issue further a bit later in this call. However, I see a lot stability as we move into the fourth quarter. And as you’ll expect, we should come close to our annual revenues to be almost double what they were five years ago, which has been our goal. Again, thanks go to our 1,500 employees around the world. This third quarter was the 104th in the past 109 quarters that Neogen reported revenue increases as compared to the previous year. That record now spans over 27 years. Gross margin for the third quarter was 47.5% and that compares to 46.3% in the same quarter last year. We had a couple of groups including our genomics operation that had some nice cost improvements for the quarter that helped here. Expressed as a percent of sales, our operating income was 16.6% compared to last year’s 16.2%. And once again, there were some things that kept some downward pressure on the net operating profit. But, we still doggedly are sticking to the ongoing goal of 20% operating income on a normalized basis. And many of the operating groups are now achieving this goal. I’m pleased with this third quarter and I think it represents a good solid performance. I’m also pleased that within the quarter we continue to do some important integration of some of our recent acquisitions. I believe that this will not only increase revenues but it’ll also increase our bottom line. And I’ll cover a few of those when I’ll come back in my concluding comments. So, let me stop my introductory comments at this point, but not before calling to your attention the continued nice growth of assets on our balance sheet and the fact that the first three quarters of our 2018 year we’ve added 15% to shareholder equity compared to where we were at the beginning of the year. I’ll come back little later in the call and talk about Neogens’ international activities and also talk about some of those I think exciting integrations that we’re going to be doing going forward. But let me stop first and call on Steve Quinlan to add some more color to the financials, and I’ll ask you Steve to talk a little bit about our worldwide genomics operation as we’ve now made some measure moves there towards some consolidation. Then, I ask John follow up with that with the some of the color on the great operating divisions that John is involved with our Food Safety and our Animal Safety operations. And I think you’re going to hear that they’re well poised also for continued growth. These groups account for over 80% of Neogen’s total revenues. So, what’s happening there is obviously very important. Let me stop there and turn the call over to Steve.

Thanks, Jim. Jim mentioned that our effective tax rate was 4% for the quarter. I think, it’d helpful to flush out just why that rate was so low. As you all know that tax reform was passed in the U.S. in December. The reform has a number of provisions which affect us with the most impactful in the long-term, lowering a statutory federal income tax rate from 35% to 21%. For our full 2018 fiscal year, we’re estimating a blended statutory rate of 29%. And this is simply the weighted average of the 35% rate in effect through December and the 21% rate thereafter. Using the blended rate of 29% means that during this quarter, we adjusted tax expense downward for the year-to-date by approximately $2 million compared to what we would have recorded under the old rate, based on our pretax income. We also revalued the net deferred tax balances on the balance sheet down to 21%, and this adjustment resulted in gain of $5.6 million. Going the other way, the transition tax or repatriation tax on our foreign earnings and profits, resulted in the tax charge of approximately $2.7 million during the quarter, and the net result of all these adjustments is approximately $5 million in lower tax for the quarter and a 4% effective tax rate. Now, there will continue to be noise in our tax reporting through the end of the fiscal year as a number of our estimates are refined, but we’ll be using the statutory rate of 29% as the starting point for our full year provision calculation. Effective with the first quarter of fiscal 2019, federal income taxes will be calculated off of the 21% statutory rate. Now, let me now give you some financial color and then discuss some highlights in our genomics business. Looking at the consolidated financials, Jim mentioned that our gross margins were 47.5% for the quarter, compared to 46.3% in last year’s third quarter, an improved cost position in the genomics business and favorable mix within the Animal Safety segment, resulting from increased sales of higher margin products drove the increased gross margins and more than offset the impact of lower mycotoxin kit sales in the quarter. For the year-to-date, our gross margins were 48% versus 47.6% last year. Operating expenses overall rose 12% in the third quarter and increased 14% for the year-to-date. Our sales and marketing expenses rose by 14% for both the quarter and year-to-date, with the increase primarily personnel related expenses, but also advertising expenses in advance of new product launches. General and administrative expenses rose 9% for the quarter and have increased 16% for the year-to-date. Increases in amortization expense for acquired intangible assets, IT consulting and related equipment depreciation were partially offset by reduced stock-based compensation expense, resulting from employee retirements and lower legal expenses related to acquisition activity in fiscal 2018. Our R&D expenses were 7% over the prior quarter and are up 10% for the year-to-date and the Company continues to invest in product development program in both new products and enhancements to existing products across the Company. Our operating income rose 11% to a total of $15.9 million for the quarter or 16.6% of sales and this compares to $14.4 million or 16.2% reported in the third quarter last year. Our other income was $1.4 million for both the third quarters of each 2018 and 2017. Our normalized earnings under the prior tax rate, using about a 33% effective rate, would have risen about 12% and the 8% increase in revenues. We generated $19.2 million in cash from operations during the quarter and invested about $5.9 million of that in property and equipment. For the year-to-date, we’ve generated $46.6 million from operations and spent $16.3 million in property, equipment and intangible assets. Our inventory balances have increased 7% since the beginning of the fiscal year and we continue to control growth in these balances while minimizing back orders and maintaining customer service levels. Our accounts receivable balances have grown 6% for the year. Our DSO has moved slightly from 62 to 63 days since the beginning of the year. The balance sheet continues to support our growth strategies. Now, going to the genomics business. This business continued to develop nicely with worldwide growth of 25% for the quarter. The business which originated in Lincoln Nebraska, has expanded nicely over the last few years as we’ve added laboratory capabilities in Ayr, Scotland to serve the growing European market, purchased Deoxi lab, the leading genomic laboratory in Brazil, and then moved into Australia, acquiring the genomics business from Queensland University in September of 2017. The development of these regional labs with standardized operating procedures, robotics and automation has resulted in operating efficiencies and improved our turnaround times. We continue to expand our product offerings and bioinformatics solutions to help meet our customer needs. As an example, we’ve partnered with a large poultry producer to enhance their data analytics, helping improve the quality of a good portion of the world’s chicken supply. Our commercial beef and dairy cattle business has achieved significant growth, as we’ve continued to provide customized solutions for specific market needs such as the Angus GS chip, developed specifically for the American Angus Association. Our companion animal business has also expanded nicely as new chips developed in the past year have been well-received in the market. We are thinking globally while acting locally, focusing on our customers’ needs, and the strategy is working. I’m now going to hand it over to John to discuss highlights of our Food Safety and the rest of the Animal Safety business. John?

Thanks, Steve. And welcome everybody listening. As Jim has already report and on our overall sales and profit performance, I’d like to spend this time and provide a little more detail on the performance of our Food and Animal Safety segments and highlight some of our top performing businesses. Our Food Safety segment revenues were approximately $48 million for the third quarter, an increase of 11% compared to the same period in the prior year. For the nine months period, Food Safety revenues increased 17% to nearly $144 million. Highlights for the quarter, include sales of our AccuPoint sanitation monitoring product line, which increased 18% with strong sales in both our reader equipment and consumable supply. Sales of our test kits to detect pathogens increased 22% in the quarter, led by strength in Listeria products, including our Listeria Right Now test kit that launched earlier in the fiscal year. In the quarter, we also had a strong increase in sales of equipment used for our ANSR line of test kits, to detect various foodborne pathogens including Listeria. Sales of our food allergen test kits continued their steady climb, increasing 14% in the quarter as product recalls due to contamination with one allergen or another, continue to expand the global market. In the past three months, our worldwide Lab M branded dehydrated culture media sales increased 21%. Jim will spend a little bit more time talking about this when he reports on our international business. In the quarter, we continued to see strong growth in our sales of dairy drug residue kits. Their sales increased 29% as new products continue to gain market share, particularly in international markets. This increase does not include sales of our new BetaStar Advanced product line which we officially launched in February. Our BetaStar Advanced products have been well received by customers in the U.S. and abroad, and we’re very optimistic about this new product line. We believe that the combination of our new BetaStar tests and our new Raptor incubator reader from the easiest method to test for antibiotics in milk. The new test has also already been approved by the FDA, National Milk Shippers and AOAC. We have cleared all the barriers and have the market ready products. Sales of our Animal Safety segment were approximately $48 million in the third quarter, an increase of 6% over the same period a year-ago. Revenue for the nine-month period increased 7% to a $149 million. Highlights for the quarter on our Animal Safety side included a 26% increase in sales of our animal care products compared to the prior year. The increase is due to market share gains of supplements for companion animals, vitamin injectables and also increased sales of vaccines. Sales of our veterinary instruments lines increased 6% in the quarter, primarily the result of strengthened sales of syringe and detectable needles, specifically in international markets. We also recorded an 11% increase in rodenticides sales in the quarter as we grained incremental business with several large animal protein producers. Sales of our life science products within our Animal Safety segment increased 19% on the quarter. This improvement was due in part to increased sales of forensic test kits to commercial labs in Brazil. I’m really proud of the worker our team’s done this quarter. And all of us are really looking forward to a strong finish to the fiscal year. Jim?

Thanks, John. It’s been called to my attention that I twisted my tongue up in the very beginning on some comments here. I’d like to make sure that I get it right on revenues. Revenues for the quarter were about $96 million and that’s up $7.5 million compared to the prior year, which is I don’t know, 8.3%, 8.4% increase compared to the year earlier. So, I must have turned one or two of those around. Nevertheless, I still -- I like them either way. As John said, let me now take a minute and cover what’s happening in our international markets. In this third quarter, revenues from international sources increased to 39% of total revenues as compared to 36% of total revenues in the same quarter last year. Growth of our international sales were up 17% for the quarter compared to the same quarter a year ago and that’s in absolute U.S. dollars. So, our international business has grown at a faster clip than the overall corporate, which is what we expected. It’s a part of what our projections are. Neogen Europe operations based in Ayr, Scotland, once again had a nice quarter with revenues up about 16% compared to a year ago. Not included in those Neogen Europe numbers though are revenues from our Lab M operations, which though they are part of the Neogen Europe group, they report separately for now. Their revenues were up almost 20% compared to the same quarter last year. So, both of these operating groups show a nice strength through the first nine months and just for the quarter. And I think they are well-poised and that operation and that management team is well-poised to expand on our existing operations and take on some potential other business over there that perhaps might come through acquisitions. We’ve got about 260 people in Scotland and England operations today. And I got the opportunity to spend last week, most all of all week with that group of managers here in Lansing. And I can tell you that St. Patrick’s Day party that we had on Saturday night was a fitting celebration as we look at increased growth for the new opportunities for the new 2019 year that we’re already beginning to plan. Our Mexico-based Latino America sales increased 19% for the quarter as compared to last year. This includes our Food Safety and Animal Safety business in Mexico and eight Central American countries. We continue to view Mexico as a significant world food producer over the next couple of decades. The other region is likely going to be a bigger and bigger world food supplier of course is Brazil. We actually have three different operations in Brazil now under the same management team but three different operations. These revenues for this group for the quarter were up almost 80% compared to the prior year. Now, there are some acquisition dollars that went into part of those numbers. But nevertheless, when we look at total revenues compared to prior year, that’s pretty impressive number. The Neogen China operations were up 28% for the quarter as compared to the year earlier. And China’s been strong all year. I think, the first nine months, revenues for China were up about 21%. And as Steve mentioned a bit earlier, the baby of the group is our new Australian operations, they have been on board just for a short-term and have revenues built up now of about $1 million. We are looking to those operations as a beachhead for some strong revenue growth in Australia and New Zealand as we move forward. I know that somebody is going to ask about India. So, I might as well pace up to start with. As predicted, it’s requiring some patience and [indiscernible] suspect we will not be profitable for the year. However as we look into the strategic positioning over the next decade, being in India with that rapidly growing middle-class I think is important. The need for safer food and the desire for our quality food says that we have the right products and we won’t lose our patience. I spoke in my opening comments about consolidation and integration of some of our businesses. Those that we have underway right now will give us a better opportunity for revenue growth and at the same time help in reducing costs. Steve Quinlan talked a bit about our worldwide genomics business. This worldwide reach is helping not only with economics, but it’s also helping us to service large customers that have multinational locations. We’re well along in the worldwide harmonization of our culture media business. This is going to give us some worldwide advantage of being able to offer the exact formulations to customers, regardless of their geographic location. This includes our Lab M operations in England, I just spoke of, and our Acumedia operations here in U.S. I think we’ll see all of this bundled together under what we’ll probably call, Neogen culture media banner probably by the end of the fiscal year. And we’ve got some similar opportunities in a number of other product lines. As an example, we’re currently producing cleaners and disinfectants for our Animal Safety biosecurity business in five different locations. Integrations here will allow Neogen to better serve the needs of the worldwide animal protein producer market, and it’s exciting. The strategies that have driven our solid growth over the past number of years and they continue to be very viable. As we look into next quarter and going forward, we’ll continue to make certain that we’re picking the right growth markets that fit in our mission. And at the same time and I think you’ll hear more and more from John about this, we’re going to be continually striving to gain a bigger share of those markets. As a second strategy, we’ll continue our strong R&D activities to provide new products for those same markets. Today, we have approximately 80 scientists in total research locations around the world. The third leg, of our continued push is that international growth that I just spoke of. And I’m not sure what percent of October revenues could eventually be from international sources. But, I’m guessing we could increase that by another 20% or greater from where we are now. The fourth important piece of our growth strategy continues to be through acquisitions. We didn’t actually make a new acquisition in this third quarter. We have acquired 37 companies since the year 2000 and they all continue to be accretive in both the top and the bottom lines. Though today we don’t have any accepted letters of intent from anyone, we do have several nice businesses, similar to those o the 37 as we’re looking at and nurturing, and I suspect some of those may mature scale [ph] in our growth. Our team grows every day. And this is obviously pretty critical. I checked with our HR department last week and founded, just in the U.S. we have hired 146 employees in the last six months. However, at the same time, we have almost 40 employees that have been with the company for more than 20 years. So, our management team is transitioning with this growth, which is really healthy. As I mentioned at beginning of the call, John has been getting -- been with us now for almost nine months and he’s I think getting more and more comfortable with the various businesses and the strong management team that we have in place. So, we’ve started the fourth quarter and looking forward to continue in the same feisty manner that we’ve been in. Let me stop at this point and entertain any questions from those of you who might be joined by this call. Hilda?

Thank you. [Operator instructions] We have a question from Kevin Ellich from Craig-Hallum Capital Group.

Good morning. Just a couple of questions, guys. I guess, first off, Steve, could give us what -- did you mention what the organic growth was for the quarter?

I did not mention the overall organic growth. So, our total sales growth was 8.5% and overall organic was about 7%.

Wow! That’s pretty good. And then, I guess, just thinking about the tax rate and all the color that you provided was great for this quarter. When we think about those moving pieces that affected this quarter, how do you think that will play out in Q4?

Well, we kind of -- in this quarter, we got caught up with the new blended rate. So, we’ll start at the 29% in the fourth quarter. But as I said, there are going to be a number of adjustments. We didn’t estimate of our deferreds in this quarter but we’ll square up with those kind of the sharpen the pencil as we go through year-end. It’s going to be -- I can’t give you a great estimate there for the fourth quarter, except if we start at 29, we’re going to be somewhere I would say in the low to mid-20s. But, I have no real clarity there.

And then, lastly, looking at your sales and marketing expense, I think, you made a comment about some personnel and increased advertising ahead of new launches. Can you give us little bit more color? I mean, should we be modeling increased sales and marketing, and which products specifically should we be thinking about with that?

Let me start and then turn it back to John. John’s got 13 years of running the biggest sales organizations in this industry, among other things, but the expense department is down there. As we’ve got new products coming out to shoot, you guys -- John talked about our data business as an example. You have to lead that product into the marketplace, you don’t want to push that into the lab benches and expect sales are going to be [indiscernible] to go write orders that day. So, we’ve got bigger and got more sophisticated, I think we do look at leading the market. And that was the part of it. And we’ve been pretty steady; [ph] we used our ways, try to increase headcounts just a little bit ahead where we need them because the first data sale person or marketing person is on board, they are not productive. So that’s a part of that in anticipation. John?

Yes. I think, Kevin, it’s good to talk to you. That bump up was because we had three big launches that came right here recently with Listeria Right Now, our BetaStar Advanced and Raptor. And what’s exciting about all three of these is these are game-changing technologies. So, we didn’t want to under fund what we think is going to be a growth -- a great growth strategy for us going forward. So, great markets, really big market potential. So, we’re going to put the funds to make sure they are successful.

The next question comes from Jason Rodgers from Great Lakes Review.

Just a follow-up on the organic growth. Do you have the total organic growth in genomics for the quarter and if you could break that out between food and safety and Animal Safety as well?

I’m going to jump in the middle of that and tell you that on genomics, that’s moving so fast. What is -- first of all, you got to find what is organic growth. And I think maybe you’ve heard me tell the story. We’ve got operation in Brazil and let’s say that it was running at just, pick a number, it was running at rate of 1 million. So, then, we’ve put all of our sales force behind it. We started bringing in product from everywhere else. We grew that business. I would say, a big growth in that business was from growth of our current business, not something that was added by acquisition. So, I really -- I guess, it doesn’t matter to me where we get the money. If it’s good solid profits and good solid revenues, I told you, we didn’t buy anything new this quarter. So, we’re not growing the business based on the acquisitions but it’s pretty hard to start separating what is actually organic growth and what is growth based on adding extra resources, extra salespeople. We’ve got a worldwide reach. Our Australian -- as an example, our Australian operations are new. So, you’d say, well, is that -- that must be acquisition growth. No, a big part of that is the merino fine and wool sheep product is now we’re running in Australia. At this time last year, we had the same business and it was in Lincoln, Nebraska, we brought a sample into there. So, it’s -- anything I tell you about the genomics, I think it’d be misleading other than say to you we do have a worldwide strategy. Every piece of the stuff that we’re buying really adds to organic. We’re not out buying far worse or something that’s totally unrelated to the business. So, I don’t mean to be facetious there. But, I just don’t know. I think I want to make sure people don’t assess too much as to whether they’re buying the business or growing the business, because we’re doing both. Does that help?

Sure. But, I did want to ask about the mycotoxin test kit sales. What was the number there for the quarter versus a year ago.

Right. Good question.

So, the deal and outbreak that we had last year that didn’t recur this year that resulted in about a $1.4 million reduction in sales in the third quarter.

And then, you talked about lower sales there and lower sales in the cleaners and disinfectants. Were there any other areas beyond those two that performed less than expected or were weaker in the quarter?

No, I don’t think so. I mean, when we look at it, we had two big headwinds. One was the DON and the other was the Lanxess contract and that was about a $1.5 million.

Yes. So, those have been watching, the Lanxess, which went back to the old DuPont product line, we said this thing is -- we’re a distributor for them and it’s in this way, [ph] and they are developing new products like we hope so. We just compared our own book, we bought Preserve. And Preserve ended things [ph] -- Preserve is a lot bigger than what the whole Lanxess business is, it’s ours’ and we’re growing it.

I mean, other than what Jim talked about with India, we’re pushing hard, we know it’s a great market, we’re pushing hard but that one’s not really where we wanted to be. We fest up to that one early.

I’m feeling even better about China now. [indiscernible] they tell me in Mandarin Chinese. He talks to some of our Chinese people and they all been like they know what each other saying, so assume they do. And that’s -- I think that’s added to our knowledge, not just the business but knowledge of the culture there. So, as we see that -- if you look at the two fast growing populations, one is India and one is China, and China is China. And it’s centrally controlled what’s happening to that economy, whereas India is trying to operate under democracy that was invented by the English. So, it’s going to be a lot slower.

And if I could just squeeze one more in. Last quarter you talked about some changes in the competitive landscape and taking some actions there. Wonder if you can give us an update on that.

I’m not sure, what I told you. [Multiple speakers]

You said competitors were gaining share. So, you are looking to change maybe some strategy…

Yes. I don’t know that I’m willing to give up them gaining share. They’ve been more competitive. We had a couple of big -- couple of players who decided to get out of the business. DuPont was there, diagnostic test for the detection of pathogenic organisms decided to sell that business and it was -- it was a strong competitor, good product. It was inside the gates at DuPont. So, you had to get it outside and go manufacture at someplace else and equity capital got attracted to it. They got the price and ran with it. We said we probably don’t need it anyway, we liked it, [ph] we have been on table. But, we got out there. So that one is yet to be determined. There was another company, a little company, a decent sized company in California that is a competitor in just one smaller market on the food side. But, they’ve got some nice share there, it was also a part of equity capital. So, they’ll be kind of fun to watch these new guys, they got the pockets. But it will be kind of fun to watch them come to the table I think over the next year. We’ve got a place or two where we need to bolster up on allergens, as John talked about allergens. We’ve got one or two spots there, where we need additional products. Certainly at least for halo effect, we don’t have a diagnostic test now, probably what it needs to be to detect the take the presence of fish. [Ph] So, we’ve got the competitors that have that out there; it’d be nice to have that one. John talked about -- I think we’re making a big gain on the milk side. John talked a little bit about that. We do have the best, easiest to use test to detect the presence of antibodies in milk anywhere in the world today, and have spent [ph] on that one. And we are already a big player, we’re a big player in most of the world, not in the U.S. but this is going to give us a chance to be a bigger player in the U.S.

The next question comes from Paul Knight from Janney.

Hi, Jim and John. Could you address where you think you want the international mix should be? It’s 60%, 61% U.S. now. Do you want it to be in a five-year horizon, a third Asia, third Europe? Where do you want to be? And do you get there via distributors, or you’re doing this via direct sales build out?

Let me talk a little bit and then I’ll let John add to that if he likes. But, I don’t know where that number came from. We’ve been saying it for so long, I think it’s become gospel. But, way back early somebody asked a question like that. And I said I think about two thirds of our total market potential lies outside the U.S. and there must have been some basis for saying that. But, we can’t find the source now. But, any rate, if we’re at 30% now and two thirds could come from outside the U.S. And you’d [ph] probably never get the share of market in one part of the world if you got here at home. But, that would I think I mentioned in my comments, we probably could add another 20% to that. And if we’re 30% [ph] now and you could add another 20%, that would be pushing towards that two thirds. It’s kind of -- it’s picking where we go. I think, we’ll make some big gains in Australia and New Zealand because we hadn’t been there. So, it’s picking up part of that market; I think that will be big. We’ve been in the 38 countries in the EU for a while. We’re going to continue to grow there. But, we’ve already picked the low-hanging fruit. So, it’d be a little bit more difficult to grow it on a percentage basis there. I don’t know, John, you’ve been around the world and looked at these markets. What are your thoughts there?

Paul, I think the way we look at that is what is the market potential in different parts of the region. Right? So, if you look at market potential by EU, U.S. and Asia, then we go out and say where can we compete, how do our products fit, where can we sell solutions for customers and then we set our expectations based on that. And as you know, while the markets are big, sometimes the technology is ahead of the market, like in Asia. While the population is big and there is a great opportunity there, they are not as sophisticated in the way that they look at kind of food safety as some of the more developed countries. So, we try to track that along. The other thing you mentioned was how do we do go with market. And I really think Neogen has done a great job of this under Jim for long time is, first, we start export. So, we work with distributors and local, international countries. As we start to develop and we get bigger share and we start developing significant revenues, then the team should go on and look at either acquiring or working with the distributor or setting up our own shop. Once we have a sales office that continue to grow, then we look at, okay, is it big enough to support some type of manufacturing, like we did in Brazil, some of the other countries. So, I really like that strategy of grow it, fund it, move into a sales office, fund it, move into manufacturing as it makes sense. So, I like that strategy and it’s something I want to continue with.

Okay. And then, genomics specifically, could you talk to the growth rate of Scotland? What was the overall -- genomics growth rate overall I think was 25%. How quickly did the European genomics business grow, specifically Scotland? And then, how quickly do you want to move into our add technology and people into Brazil and Australia?

Well, we’ve already got -- we’ve got the genomics in Australia. What’s been so great about this is we’ve got the same model. We’ve bought an existing business in Australia and they were using pretty much the same techniques that we were. I mentioned earlier that in fact some of the samples that were coming from Australia were actually going to Lincoln, Nebraska to tell them how to make selection for a fine haired merino sheep. And now they are doing -- we’re doing it in our own lab in Australia, instead of shipping them around the world. But, it’s a model and we send a team and they -- if it’s an already existing operation, they kind of need an asset [ph] and we are all working out to the same things. In the case of the Scotland, Steve just pushed a note to me, the genomics business in Scotland for this quarter was up 38% compared to last year. And when, I say that I also say some percent of that was probably product that we ran in Lincoln, Nebraska the same time last year and now we were running in Scotland. I really don’t care. I mean, we’re going to do it where it’s most efficient. Turnaround time is exceedingly important. And we are dealing in days. We’ve got some contracts that we get a 120% of published rate, if we could provide them the results that quicker than what they specify. So, turnaround time is awfully important. So, as an example, the gestation period of a cow is still nine months. But, if you don’t get answers back [ph] that may not be that important. But if you look at chickens, it takes 21 days to hatch an egg. So, the turnaround time is pretty important to know what to say. So, this opportunity of shortening our turnaround time, using the same models around the world, we in fact run inter-lab analyses to make sure that all our labs are operating like we swap samples once a month, take a sample and send to every lab and we record results and make sure that they come back with the same answers. So, that’s a long politicians answer to what was probably a short question. But we’re growing -- even Lincoln is growing but Lincoln’s growth is as Dr. Bauck would say, he’s been in -- he’s given that to the [indiscernible]. So, he’s not keeping all of it for himself right now.

The next question comes from Brian Weinstein from William Blair.

Hi, guys, good afternoon. This is actually Andrew Brackmann on for Brian. I wanted to start actually on the genomics as well. You talked about some growth drivers through partnerships and through introducing new products. But, could you talk about any other things that driving the business there, is it greater awareness, adding more content or increasing sales force? Thanks.

Thank you. Did we rehears this question? I’m glad you asked it. As I think one of the key things, we probably don’t spend that [ph] much time on [indiscernible] to is what’s happening to genomics on the Food Safety side. And way back early when we first acquired that business, I said to a super group of scientists in an R&D meeting when they asked that we do such a good job of running the genomics up on the on a [indiscernible], Jersey cow, what could you do -- could you do the same thing with salmonella and I said sure, we could. So, we started saying yes, we’re going to start doing that. And we got some significant pieces of business now that’s going into genomics has to do with looking for spoilage organisms in food. I don’t whether I’ve used the story on that, but it’s good enough, I could tell it twice. We had a customer, a good genomics customer that is one of the world largest worldwide breeders of hogs [ph] and one of the large producers came to us one day and says, we’ve got a problem with spoilage in our fresh pork and we can’t find the organisms causing it, can you help? We said, yes, we would sure try, we probably could. So, in a few days they got a package of rotten meat in Lincoln, Nebraska and started trying to sort through it. And it was only a few days, they came back and said we need to talk to this guy and got him on phone, [ph] and said we’ve identified the organism that’s causing your spoilage in these fresh pork chops, but we don’t quite understand it because the organism that we’ve identified is normally found in marine conditions, and there was a brief silence. And the guy said, I guess, I forgot to tell you that we use sea salt as a part of our curing process. So, there’s an example how genomics can -- and that’s just a little one, I can give you several more like that. So, as we expand the use of genomics beyond just package or carcass freights [ph] or whatever we might be looking on breeding for animals is going to be a lot -- I think a lot more of food-based genomics.

That’s interesting. Thanks. And then, is there any update on hiring a new Head of Food Safety? Thanks.

Yes. We continue to go through that process and we’ve got some great candidates. We’ve had a number of interviews and hopefully shortly you’ll be able to hear something.

In the meantime, John is drinking out of two cups. So, he does a pretty good job at it.

The next question comes from Kurt Kemper from Hilliard Lyons.

Thanks for taking the questions. I have a couple on the home the Raptor platform. First of all, with the milk opportunity, how are you all thinking about that in terms of price increases versus cannibalization and possible taking market share as well?

So, thanks Kurt. I think, there’s a couple of things. One, in the U.S., this is about growth for us, because we’re not involved in that market. So, this is the opportunity for us to take share. And externally, in the international markets, it’s allowing us to really solve customer needs and speed up the amount of time that it takes them to analyze these samples, because we can run up to nine samples on this reader. It allows them to skip the incubation process, because we do it with our reader. And so, what we think is we’re going to grow share there, but also it’s going to simplify the -- really our customers’ challenge around this on an international side. And from a margin perspective, our current products, we will launch something that we thought it was going to be dilutive to our current margin structure.

And I think, John, priced pretty much in the same slot as our other [ph] tests are today.

Okay. And a follow-up for the Retro platform. It seems like a very, very convenient option for your customer base. I think you all have said in the past that you’re thinking about moving that technology to some other platforms, whether it’s allergens or pathogens. Can you kind of talk about what that process looks like and maybe the R&D timeframe that’s necessary for that?

We’re not going to tell you too much because I know we’ve got a couple of competitors that may be listening, even recording this call. So, [indiscernible], I’ll let John talk something about it. But, I think, John you are already nearly there with several of the mycotoxin tests.

We are. And Kurt that’s right, I mean, the thought is to help the customer, so he doesn’t have to have multiple readers to run different types of tests across different spectrum. So, we’re extremely close on mycotoxins. And yes, the thought is to have the flexibility to run multiple types of tests on a common reader, and that’s what we’re working towards.

Okay. And then, my last one. I guess, this is a little bit longer timeframe because it doesn’t appear to affect you all immediately. But I thought it was interesting to see Church & Dwight, their ARM & HAMMER division via passport food safety solutions. To my knowledge, one of the very few that are now positioned both inside the farm gate and the food on the plate, like you all. So, I was just interested to hear your thoughts on that news.

Yes. And that’s a group that came out of a Elenco [ph] with some technology and we knew that. We actually looked at a little bit of that business. It’s kind of a different space because it’s more of a treatment on a carcass wash. So, while it’s ancillary to us, it’s really not around detection. I believe it’s more around treatment. Jim do you want to...

Yes. We tried to figure out what to do with the technology; it was all confusing. There should be a way to -- if you spray a dirty old 1,500 pounds [indiscernible] that’s coming into the holding lines before he is going upstairs to the slaughter floor and two to three hours you spray him, but something has got to kill the bacteria, hopefully the E coli and the [indiscernible] patches or whatever that’s on animal and it reduces the load going in. As John pointed out, it’s an intervention. I don’t want to make lies of it but it’s an intervention process, not a diagnostic to do.

[Operator Instructions] The next question comes from Gerry Sweeney from ROTH Capital Partners.

Just a quick -- two questions really. I wanted to talk about, in the commentary you talked about consolidation and efficiency improvements. And I think we talked a little bit about this on the last call. I think you are looking at some SKU pruning. But it sounds so there is some opportunities just across the board to make improvement. How do we look at this longer term. Is this an opportunity to drive margins or is this more just standard blocking, tackling, offsetting some increasing costs et cetera.

I think it’s maybe probably first and foremost we’ve talked about the harmonization and what’s happening around the world. And what we are doing with -- we are manufacturing culture media at an operation here in Lansing that we bought some years ago from [indiscernible]. It was stuck out in New Jersey; we brought in here. And three years later we found and brought a company that was making media. We tried to buy it on a couple of occasions. And we got the opportunity to buy what we call Lab M. Between them -- and they are both making product and shipping it around the world and it is for used for part of diagnostic tests, also big piece of that market culture media that goes into production of vaccines and things like that. And we started -- we knew in the beginning that we wanted to try to harmonize that so that -- a big vaccine company as an example, they want to produce product in the U.S. and they want to produce the same product in Europe, but they like them to be able to have the same media to go with it. I think, when our team started, they had something like 450 products, different SKUs when you combine the number of products offered between both of the companies. We now have got that pruned down. And I think the number is like 205. And even more importantly, those all won’t be made in Manchester, England and Lansing, Michigan. Some of them will be made both places if buyer is big enough. But, in other places, we may make them here in the U.S. and transship and they may make others over there and ship. And today, we’ve got containers, we’ve got it with a container or two coming. Some of them are coming from the different parts of the world. But, you can move stuff around on a container pretty easily. And open then whole harmonization. So, I think first of all, it’s harmonization. Yes, it does get rid of lot of redundant products. It was -- it’s crazy. You start looking at that list and you say, gosh, we did all of this and we only sold $3,500 last year. Yes, but that one customer really does want it. And so, you can start those things out. But, it’s working and -- but it was part of our original plan. We said all along that we wanted to be recognized as a worldwide leader in a number of places. And any place you went, if you were looking for a product and it had the Neogen flask beside it, you could feel [ph] good.

That’s helpful. And then, on the tax side, obviously -- I mean these are real changes, positive impact to the cash flow. And as you look at operations, there’s always a balance. But with this increase in cash flow, does it change your view on going and reinvesting in R&D, driving organic growth or does this money just sort of continue to build on the balance sheet? And then as a follow-up to that, are you seeing any increases in some of your customer spends because of the tax increase, sorry, tax decrease.

I don’t know that -- John, I’ll let you niggle that last question. I’m not close enough to -- I mean they’re buying the product now not because they can afford it, because they have to have it, I think primarily. But, maybe I’m missing something. As it relates to where we’re going, we’re continuing to look for aggressive opportunities to use that money. Some of it is as we talk about automation, we had meeting, not long ago, there were couple of different projects that were roaming around now in excess of $1 million just for a piece of equipment, each of them. We’re looking at what we might do in consolidation of where we’ve got an operation in one part of the Midwest and another one somewhere else and we’re not real proud of the facility. We’re putting that into some expansion into bricks and mortar which we have done long ago. So, I think we’re going to continue to find use of the capital.

Hey, Gerry, what I see from a customer base is that our products are not priced that is prohibited that they can’t afford it, it’s where we can get it. They’re doing same thing, we are and saying okay this gives us an opportunity to invest in capital and more people and grow the business, then their usage of our product is going to go up. So, that’s what we’re seeing.

Okay, that’s what I assume but wanted to ask. Thank you very much. I appreciate your time.

Thank you.

We have no further questions at this time. I would like to turn the call over to Mr. Herbert for concluding remarks.

Well, thank you so much for your continued support and a great set of questions this morning. I always love these because I know what our investors are thinking based on what questions you’re asking. And it’s awfully helpful as we make sure that we’re doing the right thing. So, we’re off and running for the fourth quarter. And it’ll take us a little longer to announced the end of the fourth quarter. But we’re always available. And of course you know that anybody discuss specific questions on the analyst side, Steve’s available and Terry still -- his phone still rings. So, don’t forget message around. And we’ll look forward to talking to -- see you next time. We’re off and have a good spring.

Thank you. Ladies and gentlemen, this concludes today’s conference. We thank you for participating. You may now disconnect.