James L. Herbert - Chairman and Chief Executive Officer Steven J. Quinlan - Chief Financial Officer, Principal Accounting Officer, Vice President and Secretary Steven K. Snyder - President & Chief Operating Officer.

Bryan Kipp - Janney Montgomery Scott LLC, Research Division Matthew Hewitt - Craig-Hallum Capital Group LLC, Research Division Anton Brenner - Roth Capital Partners, LLC, Research Division Jason A. Rodgers - Great Lakes Review.

Welcome to the Neogen First Quarter Fiscal Year 2014 Earnings Results. My name is Trish, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the call over to Jim Herbert. Please go ahead..

Well, thanks, Trish, and good morning, and welcome to our regular quarterly conference call for investors and analysts. Today, we'll be reporting to you on the results of our first quarter that ended on August 31.

To start with, I'll remind you that some of the statements that are made here today could be termed as forward-looking statements, and these forward-looking statements, of course, are subject to certain risk and uncertainties. The actual results may differ from those that we discuss today.

And for more information, some of the risks that are associated with our business are covered in part in the company's Form 10-K, as filed with the Securities and Exchange Commission.

In addition to those of you who are joining us today by live telephone conference, I'd also welcome those who may be joined by -- with a simulcast on the World Wide Web. These comments, along with some exhibits, will be available on the web for approximately 90 days.

And following our comments this morning, we'll entertain questions from participants who are on this live call. And I'm joined today by Steve Quinlan, our Chief Financial Officer; and Steve Snyder, Neogen's President. Earlier today, Neogen issued a press release announcing results of our first quarter that ended on August 31.

Once again, revenues broke all records for the company's first quarter at approximately $58.5 million or an 18% increase compared to last year's revenues of about $49.7 million. Our first quarter net income increased 17% to approximately $7.8 million or $0.32 a share, which compared to the previous year's first quarter of $0.28 a share.

And this net income also represents a quarterly record for our 31-year old company. This first quarter marks the 86th quarter in the past 91 that Neogen has reported revenue increases as compared to the prior year. And needless to say, all of us here at the company are proud to continue that steady growth record that's now lasted for almost 23 years.

And this first quarter was a great start for the new fiscal year.

Early in the quarter, I'll admit I was a bit concerned about achieving double-digit growth since we just finished the fourth quarter of last year in such a strong fashion and understandably, there was still a lot of euphoria in the ranks since we had kept our promise and doubled revenues in 5 years to that mark that went over $200 million.

However, you could almost sense momentum building as our outstanding teams of employees, now around the world, recharged their separate business sectors. And as a result, this growth for this quarter has been pretty well balanced as we continued to see the efficient assimilation of those acquisitions that we made earlier.

And frankly, the revenues increased from those acquisitions, as a result of our larger sales and marketing organizations. Our core products in the Food Safety diagnostic area continued to show strength as a result of what I believe was market growth, as well as I suspect we took a little bit bigger share of market in some of those areas, too.

I know Steve Quinlan will be sharing some of those details with you here in a minute. Our international subsidiaries continued to show strong growth. Our Brazilian and Mexico-based companies increased revenues significantly, albeit from a smaller base.

But our revenues from Neogen's Scotland-based Neogen Europe subsidiary turned in an outstanding 54% revenue increase compared to the prior year's first quarter. And this is particularly noteworthy given the fact that their fourth quarter was up 40% over the fourth quarter in the prior year. So that growth just continues.

Neogen Europe showed a strong growth in the Food Safety diagnostic kit business area, in particular with strength in that test for the detection of mycotoxins for food allergens and for meat speciation.

Our animal genomics testing business that, in Europe, that flows through the Neogen Europe operations also continues to grow and is a big contributor to these first quarter results. For the quarter, Neogen's revenues from all of its international sources represented 42.3% of our total revenue.

Our animal genomics business, through the GeneSeek subsidiary, reported a 28% increase compared to the prior year. GeneSeek, I think, this is probably the result of some new programs that have been introduced to GeneSeek, as we continue to strive to be the largest of the animal testing genomic labs in the U.S.

But last year, we had introduced one new program in -- dealing with heifer replacements, then we released -- just introduced another one at the beginning of this first quarter. Our overall Animal Safety revenue growth was aided by sales from the recently acquired SyrVet veterinary business.

That business joined Neogen, in fact, part way through the quarter and it was not -- we didn't get it done until some time about midway through the quarter. For the quarter, sales of Neogen's line of durable and disposable veterinary instruments increased 35% as compared to a year earlier.

So we're beginning to gain more and more market share in that important segment of the Animal Safety business. With this kind of general summary, let me stop at this point and ask Steve Quinlan, our Chief Financial Officer, to give you some color behind these numbers.

And following Steve's comments, I think you'd be interested to hear observations from Steve Snyder, our new President, as he's now been a part of the Neogen team for about 12 weeks. And he's very much in the harness and pulling. So Steve Quinlan, let me turn the program to you..

All right. Thanks, Jim. And welcome to everyone listening on the conference call, as well as those joining us via the Internet. Jim has already reported on the overall sales and profit performance for the first quarter of our fiscal year, and I'd like to reiterate that we are very pleased overall with the results.

Each of our segments exceeded their budgeted revenue and operating income targets during the quarter, getting the year off to a great start. For the next few minutes, I'll address some of the significant highlights for the quarter, and we'll begin by discussing the outstanding performance achieved within our Food Safety Division.

The Food Safety segment of the business delivered a strong first quarter, with revenues up 14.5%, and all of that growth was organic. As Jim discussed earlier, our Neogen Europe operations led the strong growth with sales up 54%.

This performance was led by continued high levels of sales of speciation test kits to detect the adulteration of meat products, particularly beef, a direct result of the horse meat scandal, which was discovered in January of this year; increased aflatoxin testing in Germany; and a 21% increase in test kits for allergens.

Additionally, our distributor division in Europe achieved a 63% increase in revenues, primarily the result of increased test kits and readers for mycotoxin testing, primarily aflatoxin and DON in Eastern Europe.

Neogen Europe also recorded a significant increase in genomic testing services to a number of European customers, a result of our investment in direct sales personnel based in Europe to capture business in this important market. Neogen do Brazil and Neogen Latino America each had strong quarters, up 54% and 34%, respectively.

Neogen do Brazil's increase was led by increases in sales of test kits for the detection of drug residues in milk, resulting from a focused effort on penetrating the significant dairy market there; the continuing strength in the sales of the mycotoxin and allergen test kit; and growth in the genomic testing service business in Brazil.

Neogen LA, our Mexican subsidiary, had strong increases in mycotoxin test kits and samplers for testing environmental cleanliness. Each of those -- each of these operating units continues to expand their capabilities and market presence.

Sales of Food Safety diagnostic test kits going into Canada and countries in Asia, the Pacific Rim and Latin America, excluding Brazil and Mexico, which we just talked about, were also up a solid 15% in the quarter. Many of our product lines contributed to Food Safety's strong first quarter results.

Our natural toxin product sales increased 12% in the quarter, based on small outbreaks of DON across the U.S. in the current crop, as well as elevated levels of testing for aflatoxin on the highly contaminated crop from last year, much of which is still in storage.

The revenues for our industry-leading product line to detect inadvertent allergen contamination, including diagnostic tests for milk, peanuts and processed soy among others, continues to be robust, and were up 31% in the quarter.

We've invested significant R&D resources to strengthen our allergen test kit product portfolio and we believe we're well positioned to continue capturing share in this rapidly growing market segment.

Revenue for products, such as ampouled media and filters used to test and monitor water quality at beverage manufacturers, rose 39% in the quarter, continuing their strong recent growth as we penetrate this important market. One of our unique tests to detect the presence of histamine in processed fish, particularly tuna, rose by 21% in the quarter.

Now these products are good examples of products originally developed to solve problems for our customers, which have been -- become part of our core offerings.

The launch of our new ANSR pathogen test platform, testing for both Salmonella and Listeria, continues to make progress, although slower than we would like, following an initial year of validation and approvals in both the U.S. and Europe. During the first quarter, we placed a number of instruments for evaluation and sale to end users.

Revenues for our test to detect the presence of antibiotic in milk declined by 3% overall in the quarter, and that is really due entirely to order timing and inventory levels at a large European distributor. Market demand for these products remains strong, and we believe that the remainder of the year will see a return to growth.

We did have growth in the Soleris line of optical microbial test systems, which are used to detect spoilage organisms like yeast and molds. Both disposable vial and instrument sales rose in this product line, with an overall increase of 9% for the quarter.

Our prospect pipeline remains very strong, and we're encouraged by the 17% increase in instrument sales for the quarter.

The Animal Safety segment achieved outstanding growth of 21% in the first quarter, aided by revenues from the recent acquisitions of the SyrVet veterinary instruments and supplies business acquired at the beginning of July, and Macleod Pharmaceuticals, which we acquired in October of 2012. Organic growth for the segment was 10%.

Animal Safety's Lexington division recorded revenue increases, almost 29% for the quarter. The division was able to seamlessly integrate the SyrVet acquisition, which provided almost $1.3 million in revenue for the quarter.

And our operations group did an outstanding job of keeping our customers supplied with product, while preparing to relocate the business from Iowa to our Kentucky operations. Additionally, revenues from the Uniprim veterinary antibiotic line exceeded $1.1 million for the quarter.

Our lines of supplements and injectables increased 23%, as we retained a large portion of the canine thyroid replacement supplement business won last year, and had significant increases in wound dressings and joint care products.

Animal Safety's Hacco division, which is located in Randolph, Wisconsin and produces rodenticides and cleaners and disinfectants, which are important pieces of effective biosecurity programs maintained by animal protein producers, recorded an overall sales increase of 6% for the quarter.

GeneSeek, our genomics-based testing and bioinformatics business located in Lincoln, Nebraska, also had an outstanding quarter with a revenue increase of 28%, as a number of custom programs developed to aid beef and dairy cattle producers have been well received in the market.

The integration of the Scidera business, acquired in January of this year, continued in the quarter as the business was relocated from Davis, California to our Lincoln operation. The significant increase in volume and the resultant need for more employees to process the increase in samples has caused us to outgrow our current facility in Lincoln.

So during the quarter, we purchased a 26,000 square foot building, also located in Lincoln, for about $550,000, and we'll spend the next 6 months building it out to accommodate the current needs and projected future growth of this business. Once we move to this building, projected to be early next year, we plan to exit our current leased space.

Our gross margins for the quarter were 51.9%, compared to 53.3% in last year's first quarter. The change reflects a shift in product mix toward lower-margin products and the impact of incremental indirect expenses related to recent acquisitions. Our overall operating expenses were up 11% in the quarter, compared to last year's first quarter.

Sales and marketing expenses increased 6%, with the increases primarily from higher salary expenses due to increased headcount and higher commissions reflecting the increase in revenues for the quarter.

Our general and administrative expenses rose 23% for the quarter due to higher compensation-related expenses, increased stock option expense and increase in our amortization expenses primarily from our acquisitions.

R&D expenses increased 8% over the prior year, reflecting the continued elevated levels of new product development activity for this group.

So with the 18% increase in revenue, our solid gross margins of 51.9% and moderate growth in our operating expenses, we were able to generate operating income of $12.4 million for the quarter, an increase of 20.2% or $2.1 million over last year. Expressed as a percent of revenues, operating income was 21.2%, compared to 20.8% last year.

So overall, a great start to the year. Now we did recognize approximately $600,000 in foreign currency translation losses in the quarter, and that number was recorded in other income and expense, as a number of currencies in countries we operate in devalued against the U.S. dollars during the quarter.

We are currently taking steps to attempt to mitigate the impact of future adverse currency movement. On the balance sheet, our receivable and inventory balance each increased on a percentage basis, by less than the rate of increase in revenues.

We finished the quarter with $84.4 million in cash and marketable securities, compared to the $85.4 million we had at the end of May. And that's after spending $10 million on the SyrVet acquisition. So while we're pleased with the results for our first quarter, we recognize that this is a marathon and not a sprint.

And we'll continue to implement our strategy of executing our operating plan, integrating our recent acquisitions and investing in the business, both internally and through acquisition. We continue to believe that the company is well positioned to capture the significant growth opportunities we see in the company -- in the coming years.

So I thank you for your attention. And at this point, I'll turn it over to Steve Snyder for his thoughts..

Thank you, Steve, for that encouraging recap of performance this quarter. Very positive news for the company and for my first comments on a Neogen earnings call. I'll keep my points brief today since we've already covered most of the important highlights, and since I've been heavily in the learning mode during my first months with the company.

I would start off by saying that while I can't take much credit for these results, it's really a great way to kick off the fiscal 2014 year. As I mentioned, I spent most of my time the last couple of months learning about the company's operations from the team here.

And through these discussions, I continued to be impressed by the depth and the breadth of the Food and Animal Safety product lines here at Neogen. Truly, a solid portfolio with many options for growth. I think it's particularly exciting to see the impressive growth of the international segment, now over 42% of Neogen total sales.

Growth outside of North America will, no doubt, continue to be a source of future growth. In fact, I think our addressable market opportunity outside the U.S. could be as much as double the U.S. opportunity. This is driven in part from the shift to more Western diets in developing regions, which includes consumption of more animal-based protein.

We believe this bodes well for Neogen's future growth, as we continue to invest in talent, distribution and products internationally. Another observation worth mentioning is the balanced revenue growth across all of our business areas that contributed to the overall success for the quarter.

Specifically, diagnostics and testing in the Food Safety business showed solid growth to over 14%, while the Animal Safety business delivered an impressive quarterly revenue increase of over 21%, with the animal genomics business, GeneSeek, providing a 28% revenue growth within the Animal Safety segment.

For me, this is further evidence of the robustness of Neogen's overall strategy to address Food and Animal Safety across a broad set of products, markets and geographies.

So in summary, over my first couple of months, I've spent time in each of the business areas and have been struck by the talent of the teams that have welcomed me, their can-do attitude and their impressive track record of achievement.

The broad base of success that I saw when I joined the company continues to prove out with the strong results like those achieved this quarter. Taken together, this lays the groundwork for continued growth. I'm excited to be part of the team here and plan to continue learning and supporting the execution of our growth plans in the coming months.

And with that, Jim, I'll turn it back to you for wrap up and discussion..

Yes, well, thanks to the 2 Steves for their updates and outlooks. Now that we're already part way into the second quarter, you'll, perhaps, be interested to know some of the developments that are ahead. As Steve Quinlan advised, our operating income for the first quarter was -- went over 21%.

Our model, as some of you will remember hearing, has been to use this metric to aid in directing our resources. Now this says that when we go over 20%, we should step up resources aimed at increasing revenues in the future quarters. So as an example, in this first quarter, we increased our expenses in sales and marketing by over $0.5 million.

However, as a percent of revenues, expenses dropped from 20% to 18% for the quarter. Well, you guessed it right now, all of our sales and marketing units across both divisions have some empty saddles that they're seeking to fill in the sales and marketing areas.

As we look at our marketplace, I think you might be interested in several things that have occurred, or are occurring presently, that are related to food recalls. The Food and Drug Administration reported that, just recently, that 60% of all these recalls in the second quarter were the result of undeclared allergens.

Over at USDA, 65% of their recalls during that same period of time, were due to undeclared allergens. As these government agencies step up surveillance on allergens, we're also seeing food processors step up their testing protocols in order to solve the problem. The FDA documented total food recalls in that second quarter of 292 actual recalls.

USDA's number was smaller, but probably more troublesome, since many of those recalls had a high probability of causing serious health consequences had those products been consumed.

We -- shifting gears just a bit, we still have the challenge of food security as we look ahead and are more and more convinced that Neogen's products will help solve that challenge.

By now, I think that almost everyone knows the scenario of having 9 billion more people by the year 2050, and the fact that the world's farmers, ranchers and food processors will need to boost food production by approximately 70% over the next 40 years.

Someone -- I thought interesting numbers, someone calculated recently that the world reached 200,000 new people every day. This would be the equivalent of creating a population the size of Great Britain every year.

You may remember that in Neogen's discussion about food security that we think that we were -- are in a position and will help the industry produce the quantity of food that's necessary for the future.

But also, that we have a strong focus on the quality that will be demanded by the increased middle classes that are developing in a number of countries. In fact, we already see the impact of that demand for quality food supply to those developing middle classes, and it's happening very rapidly. As an example, for years, the U.S.

had been the world's largest beef importer, I say importer now, mainly due to the need for fast food grinding beef. They needed that to blend with our domestically produced beef product. However, we've seen a major shift. China moved from the #4 beef importer to the #1 beef importer, and all this happened in about 3 months.

So China is now importing more beef for use than the U.S. And it's got sort of widespread ramifications. That extra beef comes from the same places that -- the China beef -- is coming from the same places that U.S. uses. That's Australia. For the U.S., this will probably mean tighter supply and higher prices for that particular product.

It seems likely that the strong demand for grass-fed lean Australian beef will limit the U.S. beef imports in 2014. And this will mean a higher price for quality cows in this country that are coming from American ranches. This continued pressure will probably hold down the size of the U.S.

beef breeding herds, as we see marginal cows now going to slaughter, rather than try to maintain them as calf producers. Another front, Neogen team had just returned from about 4 weeks in India, as we contemplated establishing our own direct representation there. They noted that the development of that middle class in India is already apparent.

In closing, our strategy, I think, remains solid and our market opportunities remain good. Obviously, we have competition, and we'll need additional manpower to preserve our strong customer services. At the same time, we continue to see more good acquisition opportunities.

So I think the future of -- the state of your company is good and the future is still even better. In closing, let me remind you that the company's upcoming annual meeting of shareholders, it's -- if your schedule allows, we'd sure love to have you join us for that meeting here in Lansing at 10:00 a.m. on Thursday morning, October 3.

If you need more details, contact Terry Maynard in our investor relations group. And if you've not voted your proxies, we'd sure appreciate it if you could get that done in the next few days. Let me stop at this point and invite any questions from our telephone audience..

[Operator Instructions] Our first question comes from Paul Knight from Janney Capital Markets..

This is actually Bryan Kipp on behalf of Paul. Questions start on GeneSeek. It's great to see it making strides, again, seeing that 28% top line growth. You guys mentioned the addition of tests kind of driving that business.

Is there anything else going on, cheaper sequencing, customer awareness? Is there any other things driving that growth?.

Yes, all of the above.

No, I do think that the 2 products that we have that probably have the greatest total overall opportunity is our heifer replacement programs, as people become more comfortable that they can -- you can actually pull a few hair out of the tail of a day-old heifer calf and decide what kind of mama cow she might make if she's grown into a beef herd, or what kind of milk she might give as a producing milk cow.

And we get a little bit better at that every day as we have -- I say we, that the industry as a whole, gets better. As we compare more genotypic information with phenotypic information, so that we further qualify the genotypes that are going to be available.

We've got a program that's out, that's been out that was part of last year's program for beef heifer replacement programs that allows people to pull samples of heifer calves somewhere in their growing cycle and determine which ones they might want to save versus send to feed lots for replacement heifers.

That's the same program that we introduced this quarter for dairy heifer replacement programs. And that one, we think, has got great opportunities. It's already getting good records out there.

We picked up, as a part of the Scidera acquisition, I think we already talked about it but to remind you, we picked up probably the last of the animal genomics laboratories that were direct competitors. We got 3 or 4 competitors out there now. But this was one of the first companies that ever got started and didn't quite make it.

But that added a couple of breed, beef breeds to our system. And I think we're now up to, I think, we've got the 11 top beef cattle breeding associations that, in some fashion or another, use our product. So those are all growing. We see aquaculture coming in.

We're doing a little work, already, for catfish coming through some Southern sites as that's really genotypes. Genetic calibration on fish has never been really done very seriously and got to offer huge opportunities, I suspect.

We're doing a little bit of salmon work on caged salmon -- for a caged salmon company off -- it's actually a Norwegian company but they operate off the western coast of Scotland. So I think it's just kind of -- it's just the right place to be at the right time..

Would you still classify it as in the infancy, saying like 10% to 20%, 30% utilization? Or you think in the U.S., we're expanding toward that midrange and, possibly, full utilization?.

Oh, yes, no, we're not anywhere near 20%, and probably not anywhere near 10%. We might be getting closer on the dairy program. But most of the early work was done from seed stock producers and, in the dairy business, artificial insemination companies, where it was only the bull, the male side of the genetics that was controlled.

Now, we're talking about more widespread female genotyping. So we're able to look at both sides. But no, huge opportunities still we're -- gosh -- and we're beginning to get -- we got some samples coming, dairy samples from China.

As China starts to build their dairy programs, putting in farms that have -- I can't, I'm afraid to say how big I think that big one is, but somewhere in the range of 10,000 to 20,000 cows on 1 farm, 1 farming operation. And they're buying those cattle coming from everywhere around the world.

So that's a fresh new opportunity, as they begin to put in place their genotyping programs to do the proper selection, as this is, again, what we've talked about of feeding animal protein to these developing middle classes. Chinese mothers don't want to feed their babies rice milk anymore.

It's a great opportunity, I think, not just for improved production but also to get around a number of disease problems. And I think we've already decided that there are some cattle that shed more E. coli bacteria than others. And if those cattle are not shedding E.

coli bacteria, then our challenge is, once we get to the processing plant and on through to the supermarket, are much less because we've got fewer organisms to have to deal with, so huge opportunities..

And just a quick -- sneaking another quick one in here, more on the operating side. The product mix you guys mentioned, obviously resulting in the 140 bps decline or partial there, do you expect similar dynamics going forward? And I guess just a follow-up to that as well, that offset of the 200 basis points from S&M as a percentage of sales.

You mentioned ramping your investments up there a little bit.

Do you expect to kind of go back to that normalized level? Or maybe more of a 100 to 100 bps -- 100 to 150 bps expansion?.

Well I'm not sure I comprehend all of what you just asked me. But the -- over time, we've said that we, as management, judge our progress based on our operating profit. Because we've got some pieces of the business that have low gross margins, but don't have much of operating expenses to go with them.

And we've got others that are just contrary to that. So we've always looked at that 20% as being the right bogey at 20% operating profit. And we can look back a couple of years ago and we got carried away with that, and I think we got up to probably in excess of 22%.

And all of a sudden, we looked around the next year and we said, "By golly, we ate some seed corn last year that we ought to have been planting." So there's some of that business that some of those dollars that we should have been investing in - we wished we had invested in sales and marketing activities to keep that top line growing.

And so I think that's what I was -- the point I was trying to get across. Will they grow above, yes, you can let it go 22%, 23%. But I think to get the right balance, we need to make sure that we're putting those -- that operating profit back into -- to the growth areas.

And that would be not administrative but it would be in our research and development, in our sales and marketing aspects..

Our next question comes from Steve Crowley from Craig-Hallum..

It's actually Matt Hewitt in for Steve Crowley. Just quick, wanted to follow up on the natural toxins business and what you're seeing out there in the marketplace.

I mean, you commented that you're seeing a little bit -- some pockets of DON, but how is the outlook for that business and this year's crop looking at this point?.

I would say the U.S. crop is clean. It appears to be clean now. I think Ed Bradley's got -- is sitting here beside me, has his finger on that pulse on a daily basis. But we got moisture at the right times.

I think if you look at the small grains, the spring planted stuff, wheat and oats and barley, there might have been some spots there where we had some DON, it's helped us a bit.

The big problem with aflatoxin, we're seeing pockets of aflatoxin, but I think it's probably pretty clean most places - we've got across the central corn belt, there will be some counties that are dry. But not the kind of situation we had last year. So -- but having said that, we operate in the Northern Hemisphere, as well as the Southern.

So we -- right now, Europe looks like it's okay. But Europe is always suspect for small grain problems. The Southern Hemisphere, I don't have a -- they're 6 months contrary to us so we really don't know what's going to happen down there. Their crop is going in the ground as ours is coming out of the field.

So there's always -- what's going to happen in some of those areas, particularly Brazil, which has become a bigger and bigger producer for the world markets. So it's -- we probably won't have the impact we did in FY '13, and we didn't budget to do that. So -- but there'll still be some opportunities for us..

Right.

Can you give us a picture of your -- some of the progress that you made with ANSR and some of your plans around that product?.

The -- it's part of our overall pathogen program, and we -- I guess, we probably didn't talk a lot about pathogens as much as we should have. Both continue to be the big problems. Salmonella is a big problem worldwide. It's almost ubiquitous. If it's food, it's exposed to Salmonella. Our technology, we got a lot of competition.

We're making a lot of progress. But we're not -- I don't think there's anybody that's anywhere near dominant -- can claim to be anywhere near a dominant situation there. So I'd say we are encouraged, but we still got a long ways to go..

[Operator Instructions] Our next question comes from Tony Brenner from Roth Capital..

Brazil, Mexico, Europe. I wonder if you could tell us what total sales in international markets were up, compared to U.S.

sales increase?.

I see Mr. Quinlan pushing his calculator to see if we can hand you that. The ones I mentioned, by the way, I mentioned Brazil, and Mexico and Neogen Europe because those are company owned -- those are company stores there, so we operate those with our own sales organization.

The -- I think our Latin American distributor business was up, I think, maybe Steve can give us that answer.

And I know that our distributor business in the European EU countries, where we don't have boots on the ground, we've got boots on the ground in the U.K., Ireland, France, and Germany and The Netherlands, but the rest of the EU is served by -- is served out of Neogen Europe but it's independent distributors that fit in those areas.

Did I give a soft shoe long enough for you to come up with answer?.

You did, thank you. Tony, the overall international sales were $24 million -- $28 million this year versus last year, $20.8 million, and that's about a 19% increase..

Great.

Can I get back to that gross margin question? I know last quarter, the fourth quarter, there was close to a 300-basis-point-sequential decline in gross margin and it was attributed, at the time, to a short-term contract, a low-margin contract with GeneSeek, which should have been expired at the end of the quarter, as well as declining rodenticide sales.

Rodenticide sales, now, are up, but there wasn't much of a change in gross margins in the quarter. It doesn't look like that SyrVet acquisition was primarily responsible for higher gross margins.

But you're talking about product mix, and I wonder what exactly has changed and whether that is a short-term dynamic or whether we can expect to continue to see gross margins at about this level for the balance of the year?.

Well, maybe I can explain a little bit of the phenomenon. Though our revenues, we've worked it so that our revenues have taken out most of the seasonal impact. But there's still seasonal activity within those revenues.

The -- we're beginning to get into -- in the fall, well, the rats and the mice start coming in and finding a warmer place to stay, our rodenticide business begins to pick up.

During the hot summer months when we're dealing with -- especially microorganism load, our diagnostic tests for the pathogens pick up, and at the same time, our cleaner and disinfectant business is stronger when we're fighting the hot weather.

So it's, I guess, Steve, maybe, can put his finger on it a little bit more, but that's the reason we look at operating profits versus gross margins. I do think that the SyrVet activity has been good. Tony, it's put us in a much -- they were probably -- SyrVet was the next strongest supplier of veterinary instruments in the U.S.

And we call them veterinary instruments, but the majority of those products go to farmers and ranchers, in that they do their own veterinary service versus veterinarians. Now, we service veterinarians too, but the big bulk of that is syringes and needles and products that are going out to keep animals -- keep food animals healthy.

And there's some seasonality to that too. People -- it tends to be spring work and fall work. And we're beginning to get heifers in off the pastures now and get them ready to go somewhere, so we can normally see the second quarter pick up as it relates to activities with -- particularly beef cattle handling.

Steve, you got something else you can add to?.

No, I think just the overall revenue swung a little bit more toward Animal Safety products for the quarter, partly due to the SyrVet acquisition.

So any time that happens, as you go through our 10-K, I think can see our operating margins on the Animal Safety side are a little bit lower than -- the gross margins, I should say, a little bit lower than the Food Safety side. So when that shift swings, that results -- that has the result that we've got this quarter.

Now 51.9% is a pretty solid gross margin number for us. Last year, those 53% numbers that we had were somewhat anomalous because we had some good guys in there that we talked about each quarter. 51.9%, it's 52%, that's historically a pretty good gross margin number for us..

Right. And it just doesn't look good when you compare it to the 40 -- around 53%, 54% numbers from last quarter..

Yes, understood..

Okay. Last question, you indicated you're going to mitigate currency moves.

Could you explain a little, Steve, what strategies you're employing?.

Yes, we're going to -- I mean, we got to know -- we're talking about hedging, Tony, some of the exposure that we have down in Brazil and Mexico. And in some of these things that we're working on, we'd already started talking about- because as the base of assets grows in Brazil and Mexico as the business grows, the exposure grows.

So we've been talking about that. And then this quarter, almost for no apparent reason, both the peso and the real started moving against us pretty rapidly. Now that's died down after the end of the quarter, but we are looking at potential hedging. We're looking at paying off some of the intercompany receivable numbers.

And there's some other things that I really can't talk much about right now because they're -- they haven't been announced internally. But those are just kind of the things we're doing. And we recognize it as a risk area for us and we're actually all over it..

So Tony, with Neogen Europe sales in denominations of -- they still sell stuff in dollars. They sell it in pound sterling. They sell it in euro. And convert everything back to pound sterling, and then we're bringing it over here and converting it back to dollars. So there's some days I get lost in the maze as to what's moved in which direction.

But I think we're, right now, I'm sure some of you on this call are more up-to-date on what's happening in currencies than I am. But we see that the pound sterling has strengthened a bit. There's still the problem with the euro, what to do with, particularly for us with Spain and Italy and where that's going.

So it's -- you just kind of play the hand that's dealt you every month, and Steve says we're working to try and take out some of the risk. We're probably can't ever take it all out. There are those good months in which it's at our back instead of in our face, too. So....

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

What was the impact, currency impact on the sales for the quarter?.

It was about $54,000 pickup..

All right.

And how about the cash flow from operations for the quarter?.

That was $5.5 million from operations..

Our next question comes from Steve Crowley from Craig-Hallum..

It's Matt again. Just wondering, can you give us a little bit of color. You used to break out vaccines in the Animal Safety segment.

Do you have any sense for what, maybe, that business contributed in the quarter?.

Yes, Matt, we stopped showing that just because it became such an insignificant part of the overall Animal Safety revenues. We took that big slug of what used to be called vet instruments, and broke it out to call for vet instruments and then have another line item called animal care.

And the vaccines are inside of animal care and we think that gives a little more transparency to our overall revenues in the Animal Safety side. Vaccines -- about $0.5 million worth of business in the quarter..

That's just been kind of a standard. We've got 2 products there that fit into several areas in -- it's a nice moneymaker, high-gross margins, but doesn't have a lot of growth opportunities. And we've been careful, as you know, to try to stay out of the front addressed by Pfizer and Merial and Merck and others.

They fight it out pretty heavily with vaccines. And we look at vaccines in unique positions that are probably smaller markets that are not of occasion to them, but we don't have to worry about them beating our brains out, either..

We have no further questions at this time. I'll now turn the call back over to Jim Herbert for closing remarks..

Well, good. Thank you so much for those of you joining us this morning. Thank you for your continued support. And again, I'll remind you that the meeting of shareholders is coming up, by the way, and if you hadn't voted your proxies, we'd sure appreciate it.

And we'll look forward to talking to you, unless you're at the annual meeting, we'll look forward to talking to you after we finish what's starting off to be a great second quarter. Good day..

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