Welcome to Neogen's Second Quarter Earnings Results Conference Call. My name is Sylvia and I’ll be 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]. I will now turn the John Adent, CEO of the Neogen. Mr. Adent, you may begin.

Thank you, Sylvia. Good morning and welcome to our regular quarterly conference call for investors and analysts. Today, we will be reporting on the second quarter of our 2020 fiscal year, which ended on November 30th. As usual, some of the statements made here today could be termed as forward-looking statements. These statements, of course, are subject to certain 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, we also welcome those of you joining us via the Internet. Following our prepared comments this morning, we will entertain questions from participants who have joined this live conference. I am joined this morning by our Chief Financial Officer, Steve Quinlan, who will provide more detail on our results for the quarter. Earlier today, Neogen issued a press release announcing the results of our second quarter. As stated in the release, our net income for the quarter was approximately $16.3 million or $0.31 a share, up slightly from the prior year quarter, when we were reported a $0.31 per share. Our year-to-date net income is approximately $31 million or $0.59 per share, down from the same period a year ago, when we reported $0.60 a share. Our revenue for the quarter were up 1% from our prior year to about $108 million. On a year-to-date basis, our revenues improved 1% to over $209 million. We had a number of strong performances in the quarter at our international location, as our revenues from international sources grew 41% of our total revenues, up from 39% in the prior year's second quarter. However,…

Thanks, John, and welcome to everyone listening this morning. John has reported the overall sales and profit performance for the second quarter and first six months of our fiscal year. In the next few minutes I'll give you some color behind those results. As John mentioned, we continue to be negatively impacted by currency fluctuations in the countries in which we operate. Revenues would have been $1 million higher for the quarter in a neutral currency environment with the euro 4% lower than this time last year and the pound 3% lower. On a positive note, the pound was 6% higher at the end of the second quarter than at the beginning of the quarter on optimism regarding a possible Brexit solution. The Brazilian real continues to hurt our comparative results as that currency was 6% lower than a year ago and the Aussie dollar was 5% lower. About $875,000 of that comparative revenue shortfall was in the Food Safety segment, as the majority of our international businesses report in through this segment. Revenues for the Food Safety segment were $56.9 million in the second quarter of fiscal 2020, an increase of 6% compared to $53.7 million in last year’s second quarter. Our Brazilian food safety operations had a 15% increase in sales of diagnostic product, led by continued market share gains in aflatoxin sales during the country's corn harvest, and a 15% increase in dairy antibiotic test kit sales. Additionally, we recorded a $900,000 non-recurring sale of insecticides to the Nicaraguan government and two smaller sales of insecticides totaling about $300,000 to Brazilian government agencies. Now these sales are non-recurring, in that they are tenders or bids that are won for a set period of time, with no assurance that the business will be put up for bid the…

Thanks, Steve. While we didn't meet all of our performance expectations for the quarter, I'm really optimistic about where we are going from here. First and foremost, Neogen is in the right markets helping our customers improve the safety of the worldwide food supply, the dynamic and growing market. And with our products and services that reach from behind the farm gate all the way to the dinner plate, we're uniquely positioned in that market. The demand for our products are only going to increase going forward. For example, I just read a report that stated more than 650 food products were recalled last year in the United States alone and where the leading causes might just be the easiest to prevent as food allergens. According to the report, undeclared allergens are the leading cause of U.S. food recalls, accounted for about 48% of the food recalls from the FDA, and 63% of the food pounds recalled by the USDA. In the next step it becomes even more alarming when you consider that roughly 11% of adults in the U.S. have a food allergy. So we can do even more to help the global food industry to protect its consumers. We've recently signed up our first major users for Neogen Analytics product, a world class and safety and risk management system that will allow our customers to reduce their food safety risks. We believe combining Neogen Analytics with our leading food safety diagnostics, place a powerful combination that provides Neogen a distinctive competitive advantage. The success that we've had in developing and marketing food safety tests led to an almost overwhelming amount of data that our customers will sort through to protect their consumers and businesses. Our new platform will help our food safety diagnostic customers efficiently aggregate, analyze and…

Thank you. Will now begin to question-and-answer session. [Operator Instructions]. And the first question comes from Paul Knight from Janney Montgomery.

Hi, John. Could you give us some granularity on these distributors? Specifically you mentioned on vet instruments and animal care within the animal safety market. Your distributors are destocking. Can you tell us what's going on with those distributors for them to take these kind of actions?

Sure. So Paul I think when you look at some of the results as you've seen on move out and I saw Patterson results for livestock business was down 1. MWI's livestock business was down, their companion animals is up, but what matters to us is their livestock business. And what's happening is as their sales are slowing to their customers, distributor margins are very thin, they need to make sure they're controlling their operating working capital and they're forcing -- their management groups are looking at their businesses and they're tightening up their inventory days. And that's something that we've seen happen before when markets are a little soft, distributors tighten up inventory. When markets grow, they loosen up inventory. So that's what's happening on the animal safety side in the U.S. Steve also mentioned, Paul, distributor with our food safety product in Europe. And we worked with them for a long time. They're a good company. They just have not had the growth that we've seen across all of our other businesses for that same line. And we've been working with them to try to find ways to grow. And we ultimately sat down and worked out a solution. They're going to continue to be a distributor, but it's going to be on a non-exclusive basis.

And this weak demand that they're facing, is it a commodity-driven event, is it the trade restrictions that they're seeing in the pork markets due to China? What do you think are those key factors?

It's -- I think it's profitability for the producer. You've got to look at it again by segmentation. I saw today exports for pork were actually up in the quarter, they're still down versus last year. But I saw a Tweet the other day that said watch out for big, big news on ag exports. So this could be something that would help those customers reopen an ag market specifically for pork. Dairy business is still interesting challenge. We continue to see smaller and smaller dairy farmers going out of business, which a number of cows are staying the same, it’s moving to larger farms, but that has an impact on how those type of entities spend money. So I think the thing to watch is really trying to understand what are the producers' profitabilities. I mean if they're making money, they tend to expand and grow. If they are losing money and it's a cash flow issue, even though they know it makes good economic sense to use our products, from a cash flow standpoint, they just tighten their belt.

Okay. And then lastly on -- my last question would be the -- your cash and investments totaling $313 million, is your pipeline getting richer due to this blockchain and IT outlook that you have or what's your view on this building cash that isn’t being deployed of note?

Paul you're talking to a guy that's just as disappointed as you about deploying cash. I mean I want to go and buy stuff. And we looked at -- in the last six months, we looked at 15 different businesses, and said no on 13. So we're shaking the trees, we're looking at opportunities, but we're still going to be judicious in what we want to buy. And I think it goes back to what Jim had talked about all along is do we understand it? Can we make it? Do we have a market for it? And those types of thing -- those questions still resonate as when we look at acquisition opportunities. So we are looking at some right now that are very exciting to us that answer yes to all three of those things and we're executing -- we are working to execute to get those deals done.

Our following question comes from Kevin Ellich from [Ace Research] [Ph].

Just wondering with the African swine fever in China, you guys saw some pretty strong growth there. How much benefit do you see from increased sales of disinfectants and cleaners with biosecurity measures?

We did see increased sales -- I know Steve is looking right now to see what that number was. So we are seeing that Kevin and I think that's going to continue as we can train the smaller customers to understand biosecurity. The larger swine guys in China understand biosecurity and that’s what we do really well with. The smaller backyard is harder, because those pigs are one common fence, touching noses and that's how that disease spreads really quickly through the backyards in China. So reaching that group is highly fragmented. You got to do a lot of dealers, it's a lot of training. So there's opportunity for that. But most of our growth has been with the large swine producer.

While Steve looks that up, can you give us an update, do you think the spread has slowed a little bit or do you think we're still on pace like we've seen in the last six months?

Kevin, I don't know. I haven't heard anything one way or the other. I mean I think we talked about this, I think it was last quarter or two quarters ago that we've seen some large guys repopulate and then get hit again, which is really devastating for them. But I haven't heard anything that's kind of changed what's happening over there. So -- and I think I would take that as a good thing, it doesn't seem like it's continuing to escalate, but it's been such a dramatic impact on losing half of their animals. You would think that losing half the animals, it would slow just from a numbers standpoint. Steve, do you have anything to add to that?

Sure. Kevin that was about a $0.5 million. Now the only caveat there is that, it may not all be directly African swine fever related, it’s really biosecurity and the importance of having a clean environment to raise your animals. It’s not all directly going into the pork production market.

And then Steve while I got you, so sales and marketing expense is actually down in terms of absolute dollar basis for the first time in a while. Just wondering what causes -- I mean should we expect it to continue to decrease? And then kind of on the other hand, you talked about going direct, I think over Europe. Wondering if you need to add any sales force or infrastructure and does that lead up to a little bit of higher cost in the second half of the year?

Yes. I guess, I would say as long as our sales on the animal safety side are sluggish or in this case declining, you would see related sales expenses would kind of follow along with that. Our goal is to stay positive. We want we want our sales and marketing expenses to grow right. That means our revenues are growing and all the related commissions and shipping, and advertising and promotional things, means the markets are growing and those are good things for us. We are -- for the distribution business in Europe, we have added staff to market those products there. I don't think it's going to have a material impact on our sales expenses in the second quarter because we're also using our existing sales force to go after that business.

Kevin, we've got existing teams in a lot of those markets, they weren't allowed to sell those because it was an exclusive relationship, and now they're going to be able to.

Okay. And then lastly, John, your veterinary instruments and other business, both disposables and animal care, pretty weak this quarter. And I know you had a tough comp on the animal care side with vaccines. Just wondering what's going on there. And do you think that's going to continue -- will that continue to decline or should we see a reversal in the second half?

I think -- got to go back and look, but I think we had pretty strong growth in those, last quarter.

You did. Well, instruments was up 9% last quarter.

Yes. And so that’s the one that stuck out at me Kevin, is I'm wondering if there's a little bit of -- if you average the two, you're going to see it a little bit as a normalized to what those market is and it's -- it was kind of a little bit of timing and we are up one quarter, down on the other. I don't think there's anything fundamentally different going on other than it's a tough animal safety market.

[Operator Instructions]. And the next question comes from David Westenberg from Guggenheim Securities.

So I'm glad to see that pick up in R&D, I think you guys can develop some good products. So, how should we expect on those new products to hit the market, is at fiscal year '21? I guess you said that we expect the spending to continue. And how bigger these -- the products that might be coming out in 2020 and should we expect a growth lift in our models to come then?

Sure, David. We're excited about the R&D, that's why we're doing it. I mean, you saw the ergot testing. That's the only one available for rapid testing today worldwide, we are the only one that has it. We're trying to stay ahead of some of the regulations. We think that's the position that we want to be in. That was driven by our European team. Our R&D group out of Europe did a fantastic job of taking that and driving that with the help of the group here in Lansing. And we're excited. We've got some new products coming on the second half of the year. Now, again, I’d love for all of them to be blockbuster. But we've got some new things from a technology standpoint that's coming and from a product offering that’s coming in the second half of the year, and then into next year. I don't know what -- I don't think we've ever talked about what we’ve forecasted for those other than that has always been a key piece of our growth. And we know that it needs to be and that's why we invest in it. And it’s something that we're focusing on to continue to drive growth in the second half of the year and next year. Steve, you want to …?

So there’s essentially some product growth there. Okay. So then in terms of the alternative meat, I know stock price wise, they've been hit. Are you seeing an increase in demand from these producers of alternative meat? How do you see that business playing out as kind of a -- in terms of food producers as kind of a market let's just say?

Yes. David, I think it's just like any other segmentation. I mean if you remember one organics came on the market and everyone said that's niche and that's grown into a nice market. I think that plant-based proteins is going to continue to be a nice market. I think it's got consumers who want it. And as long as consumers want it, it’s going to continue to drive and grow. And what's interesting to me is, they have the same issues, whether they're making plant-based hamburger patties or meat-based hamburger patties. You still have to check for allergens. You still have to check for E. coli. You still have to check for Listeria. You still have to check for everything. So, whether it’s plant-based or meat-based, we sell the same products into those types of customers. And so, it's really around food production and anything around food production, that's where we're there to help those producers make the safest product they can for their consumers.

And then I know there is not a much you can say in terms of M&A here, but can you maybe talk about some of the priorities, whether it’s a technology or maybe a product, or is IT something of interest? And then maybe you can talk about what's more interesting, animal safety versus food safety. I get that you can't be specific, so any sort of generalities might be helpful here?

Yes, I mean I think you've seen kind of what we've done on the technology side with Neogen Analytics and blockchain, right? This is something where we heard about it and we heard loud and clear from our customers that they're still keeping -- a lot of our customers still keep paper records for when the FDA comes in to do an audit to provide paper record keeping, which you just kind of shake your head and you think we ought to be able to help. So we got working with different outside groups and vetted, what we felt was the best plant mapping software and risk management software available, and partnered with them to develop Neogen Analytics. Same type of thing for blockchain, right, is I just read about this, I think it was, well, about six months ago McDonald's said that, in the future, and that was the timeline they gave, that half of their meat, beef was going to be antibiotic-free. Well, how are they going to be able to prove that without a blockchain solution? And really we're on the forefront. We're leading that today to be able to provide that type of transparency for customers and consumers. So the IT side continues to drive, I think you have to, it's -- if you just do tests and you don't give the customers ways to capture and analyze and then act on data, it's kind of a waste. So we're really pushing that. The other areas we look out to and you mentioned it properly is, where is a technology that we have a hold in the portfolio? So where should we be looking? Where is the market going? What are those types of technologies and we have a Scientific Advisory Council where we are constantly vetting new technologies and what's coming down the pipeline that we can -- it's either being done in another market on the human side that we can bring into our segmentation or it’s brand new. And we try to find those types of things and say, okay, how is this going to change the future or the way we do business. And then lastly, we look at geographic markets, where are we underrepresented? I think that kind of led this discussion, even with our European distributor was -- they did a good job for us, but they weren't growing at the rate that we wanted. They weren't happy with the growth rate, we weren't happy with the growth rate, and we came up with a solution that we think is going to help both parties grow because we were under-represented in specific markets. So where are we underrepresented and what are the things we can do to accelerate those growth rates? And that could be geographically, it could be by a product, it could be in a product segmentation. That's how we look at it.

At this time we have no further questions, I'd like to turn the call back over to Mr. Adent for closing remark.

Thanks Sylvia. I just want to thank all of you for your time today and I wish everyone on the call and listening a happy holidays and a prosperous New Year. Thank you very much everyone.

Thank you ladies and gentlemen. This concludes conference. Thank you participating. You may now disconnect.