Welcome to the Neogen’s First Quarter FY 2019 Earnings Announcement Conference Call. My name is John and I'll 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 the conference is being recorded. And I will now turn the call over to John Adent.

Thank you, John. Good morning, and welcome to our regular quarterly conference call for investors and analysts. Today, we’ll be reporting on the first quarter of our 2019 fiscal year, which ended on August 31. As usual, some of the statements made here today could be termed as forward-looking statements. These forward-looking statements, of course, are subject to risks and uncertainties. The actual results may differ from those that we discuss today. The risks 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 by live telephone conference, I also welcome those of you who are joining via the Internet. Following our prepared comments this morning, we'll entertain questions from participants who've joined this live conference. Those of you who regularly follow Neogen might notice something a little different this quarter. In keeping with our succession plan, Jim Herbert and I decided that I would take over the lead with our financial reporting starting this quarter. Jim is still here, and he’s active as ever. He’s here today with me and Steve Quinlan, our Chief Financial Officer. Jim will provide his perspective on our genomics and international operations, and Steve will provide more detail on Neogen’s financial results in the quarter. Earlier today, Neogen issued a press release announcing the results of the first quarter of our 2019 fiscal year. As stated in the release, our net income increased 28% as we again benefited from the US corporate tax reform from December 2017 and tax benefits from employee stock option exercises. On a per share basis, our earnings increased to $0.29 from last year’s $0.23, which has been restated due to our December 2017 stock split. Our revenues were…

Thanks, John. And I’d like to share with you some of the activities that I'm working on that are really quite exciting. As we've expanded our management team, this has and should continue to allow us to spend more time focusing on several areas of what I would call additional integration. First, let me take just a second to talk about the fast-growing exciting area in genomics. And one would have to look back about 10 years ago as we kind of anticipate exactly what – or think about exactly how we got to this point. But about 10 years ago, we knew that we needed genomic technologies, but at that time we knew that we needed to acquire a start versus trying to develop it internally. This led to the acquisition of GeneSeek in Lincoln, Nebraska about eight years ago and then we added acquisitions in 2012 and 2013 and also built our capabilities internally. We next took that technology to our existing labs that we had at the time and continued to operate quite successfully in Ayr, Scotland. And then, we acquired a genomics lab in Brazil, and then we expanded through the acquisition of a lab in Australia. So, you can see – refresh your memory on how that rollout happened. Within the last couple months, we’ve begun establishing a laboratory in Shanghai, China. And in this past quarter, this has meant that our animal genomics revenue increased to about $15.5 million, and that’s up 15% over what the total would have – combined was in the same quarter last year. There’s yet another chapter in the integration story that I’d like to fill you in on, and that took place during this past quarter. About three years ago, we acquired a nice Culture Media business in…

Thanks, Jim. As John indicated, we got off to a sluggish start for fiscal 2019 as our Animal Safety segment reported revenues which trailed the prior year, and the currency winds were also in our face, as the devaluation of the Brazilian real and the Mexican peso, which have declined 16% and 7% respectively compared to the same period a year ago, resulted in comparative revenues which were $1.3 million lower than the first quarter a year ago. Now, before we get into the financials, I want to spend a little time discussing the new revenue recognition accounting standard in our prior year revenue numbers. We adopted the new standard on June 1, the beginning of our fiscal year. We've historically accounted for variable considerations such as rebates, marketing support, and incentives in our contracts with certain of our customers as components of cost of sales and sales and marketing expense. As part of our work in adopting the new standard, we reclassified those prior-year expenses as contra revenues to make the numbers for last year's first quarter directly comparable to this year's first quarter. The result of these reclassifications is that our reported revenues from last year's first quarter declined by $1 million, with corresponding decreases in cost of sales and sales and marketing expenses totaling $1 million. There was no change in our previously reported operating or net income from those reclassifications just in certain line items on the income statement. Our 10-Q will have all of the details on the adoption of the new revenue recognition standard. Corporate-wide, gross margins were 46.9% for the quarter compared to last year's recast first quarter gross margins of 47.7%. Margins were impacted by mix changes resulting from strong sales growth at Lab M, Quat-Chem, and Rogama and new revenues from…

Thanks, Steve. As some of the numbers show, we may have experienced some bumps in the road, but we firmly believe that we’re on the right road. The strategies that we've employed to build Neogen to where it is today continue to be very viable. Our existing portfolio of products and services and personnel groups have never been stronger than they are today. We continue to look for opportunities, as Jim would say, to bolt on to our existing operations and have them hit the ground running once under our ownership. In the past two months, we’ve made two small acquisitions that have sizable potential for us. The Colitag water testing technology is a perfect fit for us. It enables our customers to quickly test the purity of the water consumed by poultry and livestock, even in water used in food production. It complements the other food safety tests that we have available for our customers to test the quality and safety of their raw ingredients. The acquisition of Livestock Genetic Services expands a critical component of our animal genomics services. The company will help our customers translate the genomic sequences that we generate in our labs around the world to make the best decisions for their operations. We continue to have an active corporate development program and currently have several opportunities under consideration. But we will continue our traditional approach toward acquisitions. Since 2000, we have now completed 39 acquisitions that have all been successful. This success has been mostly due to our ability to integrate the acquired businesses into our existing businesses. We will continue to use three hard rules to make sure that we know what we’re going to do with the business the morning after we write the check. Our three cardinal rules are; first, we must understand the technology and its application; second, we must be able to manufacture the product ourselves; and third, we must have access to the market. I'm excited about Neogen’s direction as we move through our 2019 fiscal year. We continue to be well-positioned in our growing markets with the right people and products, and we have the organizational strength to reach anywhere in the world where need exists. Let me stop at this point and entertain any questions from those of you who have joined the call.

Thank you. [Operator Instructions]. And our first question is from Kevin Ellich from Craig-Hallum.

Good morning. Thanks for taking the questions. I guess, Steve, starting off with you, did you give the organic growth number. And if not, can you give us that?

I did not give the organic growth number. It is about 4% overall.

Okay, that's fantastic. And then, John, I guess just going back to the Animal Safety kind of pressure that you guys are seeing, you talked about pricing and supply challenges. Is it really only dairy and swine? Can you give us a little bit more color? And have the pricing and supply challenges persisted as you’ve kind of gone here – have you continued to see that?

Sure, Kevin. I think it’s across the whole animal protein sector, and it’s just because of this uncertainty. You saw that – on the pork side, you saw tariffs of 78% for China and they bumped up to almost 20% for Mexico. Now, those things are moving daily. And so, I think people are operating in a lot of different uncertainty. As you know, they always continue to buy products to make sure they are going to keep their animals safe and healthy. It just depends on when they're going to buy them. So, I think this thing is going to get better as we go on as some of that uncertainty is eliminated from the marketplace as we go forward.

So, would you say it’s more of a timing issue then? I guess, it’s just impossible to figure when we’ll see them buy products?

I would. I would. I think as soon as you start to see some of the uncertainty around the market, it’s going to change.

Okay. And then, also in the past, so as you talked about I guess some weakness in the distribution channel. Can you give us a bit more color as to what that means and exactly what you’re seeing there?

I think it’s a reflection of the general market. The distributors have to sell into an end market. And so, if the end market is a little soft, the distribution channel tends to be a little bit soft. But as that market picks up, then that channel will strengthen also.

Got you. Okay. That makes sense. And then, Steve, sorry to flip back to you. So, DSO –you called out the four-day sequential increase really due to, I guess, greater international sales. How much higher is your DSO for your international revenue? And, I guess, what should we expect going forward?

So, generally, it’s longer internationally, Kevin, just because it takes longer to get product to the end customer. It could be – it’s anywhere, call it, 10 days to two weeks kind of on average. So, the fact is our international revenues were up 18% this quarter over last year. So, I would've expected that DSO number to increase. I think it'll probably drop back a little bit. It’s a point-in-time measurement and those numbers – the calculation moves around. But if our international sales increase like they are, that number will go up a little bit.

Great, great. And then, Jim, just lastly for you. Good to see some acquisition activity. You guys have certainly done a number of deals in the last 10-plus years. Cash balance continues to build. Give us a little bit of color on the pipeline. How does it look now?

It looks good. As I've said many times before, acquiring them is sometimes easier than integrating them. We’ve - looking back – since we started the company, we’ve done about 40 acquisitions. And we’ve not had any one ever go south on us. Some have prospered better than others, but – and that’s because we were able to, as John pointed out in his comments, we were able many times to bolt on. I talked about some bolt-ons, particularly with – in my prepared comments a minute about what we did with the genomics side. We had a meeting yesterday. John and I spent some time with our corporate development activities. We have half a dozen acquisitions that are clearly on the radar. Nothing that we’ve got letters of intent out on now. And we’re selectively looking at places where we can make acquisitions that we can bolt-on to strong management teams. And as John pointed out, we’ve got a few management teams that are rebuilding right now. So, we don't want to bolt something big on to them. Like my old friend [indiscernible] said, I said I was going [indiscernible] to this business [indiscernible] and he equated it to me trying to tie two concrete blocks together and thinking they’d float. And we certainly don't want to be guilty of doing that. And we’re going to be looking pretty seriously at some international opportunities. We’ve talked about – we’re on the way – I think we’re up to 40% of total revenues this quarter that came from international. I think that’s a record for us. We’ve been pushing at that number before. But that’s a record for us going forward. We’ve got some opportunities – some freestanding businesses, we’ve got some distribution businesses that might need to be [indiscernible] of the company. [Indiscernible] we’ve got to announce yet, but I can assure that in addition to having the money to make the acquisitions, we certainly have the desire and I think the right team to do them.

Sounds good. Thanks, guys.

Thank you, Kevin.

Our next question is from Brian Weinstein from William Blair.

Hi, guys. This is actually Andrew Brackmann on for Brian this morning. I wanted to go back to your comments on the disruptions in the channel. Maybe you could talk a little bit more about those in context of the overall market. And is there anything really that Neogen can specifically do to overcome these challenges in the short term? Thanks.

Sure, Andrew. Yeah. I think absolutely we can. When you think about the overall market and you think about our market share, we continue to have opportunities to grow our product portfolio within the existing customers out there. So, even if the market is a little soft, we have tremendous growth opportunities because we don't have a high penetration rate. So, some of the things we can do, specifically on the Animal Safety side I'm assuming you're talking about, is that we can continue to try to drive demand to the customers, which means getting out, working more and doing a lot of pull-through activities to help our distributors, partners pull product through their facilities and warehouses to the end-users. And those are the things that we’re working on and we’ve been starting and really focusing on to drive business through the end of the year.

Got it. Thanks, guys.

Thank you, Andrew.

Our next question is from David Westenberg from C.L. King.

Hi. Thanks for taking the question. So, a couple of questions for Steve here. Operating margins were a little bit below us. Normally, when we see Food Safety do so well and Animal Safety do a little bit more poorly, we kind of expect to see gross margins kind of improve. So, can you maybe give us a little bit of color on the mix shift there and maybe why that would have happened?

Sure, David. In my comments, I tried to point that out a little bit where the specific groups that grew probably the most on a percentage basis were some of the areas that have the lower gross margins on that food side. So, your question, you're dead on that that’s what you would have thought would have happened. But our Quat-Chem, our Rogama, Lab M businesses, although they're good, strong businesses, but their gross margins just are less than the profile on the food side. So, the fact that they grew the most on that side resulted in the gross margins not growing like you would've thought they would have.

Thank you very much. And then, just on the new revenue recognition or the new contra revenue, I know you don't give guidance, but just kind of – should we think about this quarter and you saw $1 million roughly in less revenue than you would have seen under your prior accounting recognition standards. So, is this quarter representative of what we should see in maybe, say, Q2, Q3 and Q4 or is this atypical?

No, that's exactly what you'll see. It'll be about $1 million. And that's not really giving guidance. It’s really telling you what we’re going to adjust our future prior quarters by. So, it’s about $1 million a quarter, yes.

Yeah. On a go-forward basis. All right. No, thank you very much. That helps with the modeling. And then maybe just a question on Neogen Brazil. 40% growth was very, very strong, but is that something that’s going to purely be seasonal and we should that kind of trail off or is there something you saw there where there’s reason to be optimistic to say we can see this kind of growth for a prolonged period of time?

I think it’s a bit of both, David. We’ve picked up some really good customers on multiple sides of the business. We’ve picked up some big customers in our toxin business, which has a little bit of seasonality, but that's big customers that will continue to work with us going forward. And then, we've also picked up some business in other segments in Brazil. So, we’re really happy with the Brazilian team and the Mexican team’s growth. Both o of them had great quarters.

That is very helpful. And then just one last question for me. You talked about some of the disruption related to tariffs on the Animal Safety side and, obviously, milk is something else that you called out. But can you maybe walk us through disruptions in the US versus outside the US, so we can kind of – just kind of understand how the dynamics would work with maybe, say, tariffs or weakness in the animal protein and your exposure there. Thank you.

Okay. Jim, you can help me with this one too on the poultry. I think on the pork side, what’s interesting is we have more hogs – I saw the stat the other day. We have more hogs today than they've ever had since they were keeping records since 1964. So, we’ve got a big supply of meat. And then, we’ve got – the American consumer continues to eat more meat which is great, but we produce more than we can eat here, so we need the export market. So, I know there’s a little bit of that going on, but Jim can talk a lot about the poultry. So, Jim, can you help me?

One if the things is we don't really know what – impact of [birds] [ph] going forward either. I was on the phone with them. Again, it’s been on regular contact as late as last night. And remember this, [indiscernible] you’ve got the headquarters of the world's largest pork producer, you've got the headquarters of Butterball Turkey and you've got the production area of four of the major broiler producers. And that's going to have some immediate impact. What the long-term impact is would depend on how many pullets we drowned and how many sows we killed. The numbers are quite sizeable there now on the poultry side. North Carolina alone produces something like 10% of the United States’ total chicken. So, the fact that they are headquartered in that part of the world is important. The numbers look like that we drowned about 4 million birds. Now, how many of those would be layers or are going to be breeder flocks who are going to produce hatching eggs, I don't think we know yet. During the few days prior to that, I think they shuttered 10 to 12 meat processing plants. So, those birds are still backed up out there somewhere, those that are still alive. So, that's going to be important going forward. As John has talked about, the hog side, about 12% of the total hogs in the United States are produced in North Carolina. So, we’re talking there about some pretty heavy production. And again – no, how many did we? How many of those sows did we kill? One of the bigger issue is what we did to all those lagoons that we’re holding back all the manure coming from that to chicken products operations, but mostly from the hog operations and what that’s done…

Actually, I broke my promise. I actually now have one more question because of you, Jim. I wasn't thinking about maybe [Florence][ph] enough as I should have. Is there any kind of maybe – I don't think guidance isn't the right word, but what should we, in our models, kind of anticipate this August or quarter-ending November in terms of impact from [Florence][ph]?

I really don't know. It depends on how fast they recover. We’ll probably never know how many animals were drowned and we probably don't want to know. The general public don't want to know because there’s not much you can do about it. It just depends on how long it takes them to recover, how long – we’ve got a lot of business – there’s a dozen plants that got shuttered. Some significant portion of those plants are our customers I am sure. I don't think we’re going to be hurt that bad for the quarter because our world operates -- Europe looks good. Everything we’re seeing there, I think John says Mexico and Brazil looks good. So, we’re big enough now that we’re over that $400 million mark that we don't have to – we’re not too cluttered by one part of North America. So, I think we’ll probably get hurt a little bit for the first few weeks in here, but I don't think it's going be – from my viewpoint, it’s not going to be critical companywide.

Yeah. I’d agree with Jim. I think if you think about, David, there’s puts and takes on that, right? Or maybe some opportunity where we’re going to sell products because we’ve got to go back and then reclaim and do those things, but there may be some things where we had some customers that are shut down for a little bit. So, I agree with Jim. I think it could have a nominal impact, but I don't see it as a huge impact.

Just shipping products. Okay. All right. Thank you very much. And have a good day, guys.

Thank you.

[Operator Instructions]. And our next question is from Brian Gaines from Springhouse Cap.

Hi, guys. How much of the revenue softness was kind of the pull forward you talked about earlier in the call versus issues with the protein market?

Thanks, Brian. I'm not sure exactly how much is pull through. I know that we were really excited to double our revenues again in five years. And I think it had a little bit of an impact. I think if you look at the two quarters combined for animal safety, you can kind of see that, but I don't know what the – Steve, you want to tell them?

I would say, if you ask me a number, I’d maybe say $2 million to $3 million. But it’s a guess just based on softness with some of the larger distributors.

The $2 million to $3 million is what was kind of a pull-forward effect?

Yeah.

Yeah, it could be. We haven't looked at it like that, but –

Right, okay. Do you see any change? Have the markets gotten a little softer in the proteins? Do you see any change in competitive pressure from any of your competitors?

Not really. We’ve got good competitors out there who are continuing to push their message, but we haven't seen much. And the nice thing about our portfolios is we’re so broad that we don't have someone that stacks up right on top of us that could have a big impact if they decided to really try to make a change. So, it's pretty much been the way we’ve been operating. We’ve got to get our message out and show our value proposition to our customer base and that’s we’re doing. And we’re going to continue to grow share doing that.

In the animal area, who are your biggest competitors in kind of the market that's soft? The protein market.

Jim?

If you looked at the biosecurity side, we got a couple of players in rodenticides. I don't think we've got much competitive pressure there. Particularly, not in North America. We’ve got the same pressure we’ve had. I don't see that increasing any. We, however, had to put out a lot of rodenticides in some of that troubled area in the Southeast Coast, three or four states, because the rats and mice are all looking for a better place to live now. And so, that’s -- the cleaning and disinfectant side, we have two or three competitors there and nobody that’s – the DuPont organization that we once distributed, that’s changed hands a couple of times. They're formidable, but no increase. I don't think anybody is going to be giving product away. It's in strong hands. And there’s not a lot to say about what’s happening on security side. I think – I don't know John can talk more about it, but on the – with one or two minor exceptions, what we’re facing on the diagnostic side, on the food safety, they're in strong hands. They're in the hands of folks like 3M and bioMerieux. They don't play pricing games. I'm sure that our guys in China probably – though I don't talk to them on a regular basis – you've got some Chinese guys over there that will sell whatever they can get in the marketplace, that are locally produced stuff, but that’s not where our market is in China anyway. So, I don't know. I don't think that we’re going to see a lot of competitive pressure.

I agree with Jim. We like strong, rational competitors. And to Jim's point, they're out there trying to make money and we’re trying to make money and we’re going to go compete against value. And I think that's pretty much the landscape it’s been.

Probably the biggest thing – you’ll have to remind me what the numbers are, but that’s currency fluctuation. We do have a competitor too in Europe where we’ve got – it depends on what the advantage is against the euro and the pound sterling, particularly the euro. They're producing it under cost structure for the euro. And we’re selling it in under the cost structure of the dollar. They might get a little bit of advantage, but I don't think it would enough to – I don't think we’re going to see any – I don't anticipate – probably John will have to comment more on this, but I don't anticipate – I'm not hearing anybody talking about reducing prices. In fact, I'm hearing lots of noise about we need to be thinking about where our price increases are going to be, moving out here into the new calendar year or something.

Got it. I know you don't give guidance, but is this current organic growth rate kind of a good feel for – unless the situation changes with tariffs and things like that? Is this kind of a good run rate?

Look, we’re disappointed in this rate too. We’re not happy about it. This is not what we generally do. And we think we had a couple of things that worked against us, but this is not indicative of who we are.

Great, okay. Thank you.

Thanks, Brian.

Our next question is from Casey Woodring from Janney Montgomery.

Hi. I'm actually on for Paul Knight. My question is for Steve. It’s about the tax rate. Do you anticipate getting any more tax benefits moving forward or is it safe to assume that for our model we can assume this tax rate from this quarter? Thanks.

No, I would say, Casey, that it all depends on the exercises of options in a particular quarter. So, it's really difficult for me to give you anything there. It all depends on when people exercise options and that depends on the availability of options that are vested in the quarter and the company stock price in that quarter. I would tell you that a $500,000 benefit is about a penny or about – I think that's about a 3% impact on our effective rate. And this quarter was about $2.3 million. I don't know what to tell you to put in your model, but I estimated that it could be $0.01 per share in a quarter to $0.04 depending on the option activity. That helped?

Yeah, perfect. Thank you.

Our next question is from David Stratton from Great Lakes Review.

Good morning. Thanks for taking the question. When we look at the Listeria Right Now product contributing to growth in that particular segment, is that something that is really being driven by the new product? Are you seeing a lot of underlying growth in that area?

Yeah. I think most of that is probably the new product because if you think about – there’s been Listeria testing solutions out there for a long time. But what’s so different is our ability to do that in an hour rather than an enrichment waiting 24 hours. So, it really is kind of a revolutionary new platform. And that’s what got us and our customers so excited about it, is that they're able to use it in ways that they hadn't used in the past.

Got you. And then, is that also then increasing new customer business? So, is there going to be an anniversary of the new product or are you seeing organic growth coming in behind it as people switch to this faster system?

We see organic growth coming in behind it. We’ll pick up new customers. And then, as customers learn where they can use it to best utilize within their own process, that’s where we’re going to see a big uptake.

All right. And then, one final one, I was wondering if you could give an update on the ThyroKare and where that’s setting. I think it’s something we talk about every quarter, just looking for an update.

Jim’s got the history. I’ll let Jim take this one.

Thank you, John. We have completed – I don't have the exact number of dogs, but I think it’s – the last 100th dog has now gone 100 days or whatever that amounts to and it's all been a little bit preposterous. We were the market leader in that market for a long time. Fed that to virtually millions of dogs without ever any problem and saved a lot of dogs because of it. We have a competitor out there that really got ahead of us and filed and got an approval when we really didn't – we had all been making it under permission from the FDA. But once somebody got approved product, well, that pushed the rest of us out of the market. I don't believe we’re going to get there with – all our stuff has been submitted to the FDA for their review. They can take anywhere from 30 minutes through that review or up to six months. And they've never been known to do it in 30 days – 30 minutes, but it just depends on how fast they move. And we, obviously are talking to them on a regular basis and trying to help them with their reading skills. So, we might have a product to get back in the marketplace at the beginning – before the end of this fiscal year. There’s still a good market out there. We still got a lot of people out there that would – I think we can switch back to our product because we’re doing some other things with them. I'm sure that my competitor listens to this recording. He probably would agree. But we’re doing everything we can.

All right. Well, thank you for that update.

Thanks, David.

I would now like to turn the call back over to John Adent for closing remarks. Thank you, John. I appreciate it. Thank you all for being on the call today. We appreciate you taking the time. A quick reminder. I want to remind all of you, we’re having our annual shareholder meeting October 4 here in Lansing. So, we’d love to see you if you have an opportunity to come out and join us for that. We’re excited about the future. We’re excited about where the company's going and we really look forward to having a nice call with you in about three months. Thank you very much, John.

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