Jim Herbert - CEO Steve Quinlan - VP and CFO Rick Calk - President and COO.

Garrett Phelps - Stephens Inc. Ryan Blicker - Cowen and Company Tony Brenner - ROTH Capital Partners Charles Huff - Craig Hallum Jason Rogers - Great Lakes Review Brian Kipp - Janney Capital Markets.

Welcome to the Third Quarter Fiscal Year 2015 Earnings Results Conference Call. My name is Eric and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Jim Herbert.

Jim, you may begin..

Good morning and welcome to our regular quarterly conference call for investors and analysts. Today as like I said, we'll be reporting to you the results of our third quarter which ended on February 28th.

And to start with I'd 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 and that actual results might differ from those that we discuss here today.

Further the risks that are associated with our business are covered at least in part in the Company's Form 10-K that is filed with the Securities and Exchange Commission. So in addition, to those of you who are joining us today by live telephone conference this morning, I'd also welcome those who may be joined by simulcast on the World Wide Web.

Following comments this morning, we'll entertain questions from participants who are joined with me which would include Steve Quinlan, our Chief Financial Officer; and Rick Calk, Neogen’s new President and Chief Operating Officer. Rick has been with us now for about 90 days and even in this short period of time is recording some nice successes.

When Rick came in I asked him to take over six important projects. And they’re all progressing well and one or two of them even nearing completion. So it’s good to have Rick’s leadership on the team.

Earlier today, Neogen announced in its press release that results of our third quarter that ended on February 28th and net income for that third quarter increased 13% to approximately $7.5 million compared to prior year's approximately $6.6 million. And on earnings per share basis, the quarter was $0.20 as compared to $0.18 a year ago.

Year-to-date net income for the first three quarters was 17% ahead of prior year, approximately 24 million or $0.65 a share compared to $0.56 a share in the same period last year. Revenues for the third quarter increased 10% to $68.4 million on the previous year’s third quarter of $62 million.

And we achieved this revenue growth and we’ll be talking more about it this morning. Despite top line currency adjustments for the quarter, the revenue currency adjustments were about 1.5 million as a result of currency weaknesses in essentially all of our international markets.

On a year-to-date basis, FY15 revenues increased 14% to approximately $204 million from the prior year’s $180 million. And in that, I have to say that we’re pleased with this third quarter and it’s really stronger than these final result might indicate, as a result of those current negative currency headwinds.

Revenue increases would have been closer to 13% instead of 10% if we’d been working on the same currency valuations as the prior year.

As I followed along each of our operating units during the quarter, the growth all seemed to be pretty healthy and I guess I was taken the international sales a percentage of total revenues were going to be about 39% of total revenues, which has been on track where we’ve been.

When currency translations, international sales came in at -- and with those currency translations international sales came in at 36% after taking into account the strength of the U.S. dollar against almost every other currency in the world. I think as a real world example to, look at our Neogen Europe operations.

That management was from Scotland offices were we’re here this last week and they left with heads still shaking that this is first quarter probably in more than a decade that they’ve not shown double digit revenue increases.

On a pound sterling basis when the books left Scotland, they reported an increase of 12%, which when we got them converted to U.S. dollars, that came in at 4%. So that’s a good example of what the currency translation has been. And having that said, I have to bear responsibility for part of that currency problem.

We’ve been hedging at some places but obviously not enough. Neogen does business and consolidates its various statements in pound, sterling and euro, peso and Brazilian real and Chinese yuan. All of these transitions then eventually get back to the U.S. dollars when we consolidate them into our statements.

And we going forward, I can tell you that we now have a much more proactive program to hedge and/or protect against further or help protect against further conversion losses. Having said all that above, it’s still a great story.

The third quarter marked our 92nd quarter in the past 97 that Neogen has reported revenue increases as compared to the same quarter in the previous year. This record now spans over 24 years. And by the way all consecutive quarters in the last nine years have held this nice record. All of our operating groups I think did pretty well for the quarter.

We faced a number of challenges with weather and freight issues but fortunately none of those were permanent. Revenues for our food safety segment were up 14% for the quarter compared to the prior year and a number of our product lines are doing very well.

I’ll talk a little bit more later on about some of the food priorities used are going on, some other issues that we might expect to see going forward. Third quarter revenues for the animal safety group were up about 7% and this is despite several external issues that that business faced.

Some of you may know that we make several of our products in China and we’re generally able to keep those inventories matched up to our revenues.

However the dock workers strike on the West Coast really jammed us up like they do a lot of other companies, and for our products that were coming from Asia I think at one time we had containers on over 40 ships that were laying offshore waiting to get there -- come into ports we're unloading.

And of course it’s -- that’s now opened up and at least we began to get some relief going in. Weather was probably a bigger issue, sort of a bigger issue than normal. It’s always winter time, but this was the worst winter time. This related to both transportation and the product usage.

Many animal protein production units were locked down because of the weather and again transportation just didn’t flow to move products out. The GeneSeek portion of the animal safety group, this continues to turn in and go to results.

This group reported increases in revenues of almost 29% as compared to the third quarter of last year and a portion of that undoubtedly due to our larger and upgraded facilities in our plant in Lincoln, Nebraska. The last quarter of the year is now almost a month old and is starting off with several new opportunities.

But before I go further let me stop at this point and ask Steve Quinlan to give you more of the color by and general comments and then I’ll come back and talk a bit more about what’s beginning to shape up as we look towards the end of the year.

Steve?.

Thanks Jim. As Jim indicated, the quarter overall was solid even, after considering the currency issues which affected both top and bottom line results. In the next few minutes I’ll take you through some of the highlights for the quarter and address some of our significant balance sheet changes.

Our food safety segment achieved revenues of $32 million for the quarter, an increase of 14% over last year. Revenues for our industry leading product line to detect inadvertent allergen contamination which include diagnostic test for milk, peanuts, gluten and processed soy amongst others continue to be very strong and were up 15% in the quarter.

Tests to detect the presence of peanuts were especially strong, rising 39%, the result of peanut shell residue being discovered in spices such as cumin during the quarter. We believe that testing for contaminants in spices will increase significantly in the near term as more companies become aware of the potential adulteration in these products.

Milk test kit sales were also robust, up 18% in the quarter. Sales of our mycotoxin test kits rose 6% in the quarter, the result of DON outbreaks in Eastern Europe and to a lesser extent in Canada. Our test to detect the presence of histamine, a toxin found in fish also rose 13% during the quarter.

These increases offset slightly lower sales of aflotoxin kits, and with the clean corn crop in the U.S. last year there has been less downstream testing for this toxin this year.

Our line of general micro products rose by 47% for the quarter, significantly aided by the Biolumix acquisition, which closed in October of 2014 and which generated $1.4 million in revenue this quarter, significantly exceeding our internal budgets.

As we mentioned on last quarter’s call, this acquisition brings complementary technology to our Soleris line of optical microbial test systems which are used to detect spoilage organisms like yeast and molds in foods. We spent these first five months of ownership ensuring the manufacturability of the Biolumix products in our operations.

Disposable vial sales rose 11% in the quarter in the existing Soleris product line while the instrument sales were down compared to last year’s strong quarter. Revenues from other micro products such as our ampouled media and filters used to test and monitor water quality at beverage manufacturers continued their steady growth, up 10% in the quarter.

Revenues for our test to detect the presence of antibiotics in raw fluid milk declined by 8% in the quarter, primarily due to currency issues related to the strengthening of the dollar as we sell this product in euros and to a lesser extent lower volumes due to the delays in the launch of a new product in Eastern Europe.

Each of our international operations were adversely impacted by the strong U.S. dollar. Jim already mentioned the impact at Neogen Europe in his earlier comments. Neogen do Brazil located near Sao Paulo, Brazil, recorded a 16% increase in revenues in the real. However this increase was reduced to 2% when converted into U.S. dollars.

And Neogen Latinoamérica, our subsidiary based in Mexico has taken over account responsibility for a number of customers in Mexico and Central America, which were formally served by the Lexington group in order to more directly serve those customers and had significant growth even after the peso devalue of 7% in the quarter.

After adjusting for the revenues transferred into Neogen LA and the Biolumix revenue, our overall food safety organic growth was 4% for the quarter, while I think it's important to note that the growth was actually 9% before adjusting for current effects. Our Animal Safety segment recorded revenues of $36.4 million for the quarter.

That 7% over last year’s third quarter, led by the 29% increase in revenues from GeneSeek, our genomics testing and bio-informatics business located in Lincoln, Nebraska.

This group continues to offer new iterations of its custom chip and service offerings, primarily developed to aid beef and dairy cattle producers and they continue to perform well in their markets.

The larger lab facility we moved to in May of 2014 has enabled this business to absorb the significant increase in volume and improve our operating efficiencies.

Our bio-security product offerings of cleansers, disinfectants, rodenticides and insecticides which are produced by the companies Hacco and Chem-Tech operations recorded an overall sales increase of 30% for the quarter, helped by revenue from Chem-Tech the insecticide manufacturer we acquired a year ago.

Chem-Tech’s revenues had exceeded our internal budgets in its full year under our ownership which has resulted in additional contingent consideration related to the acquisition. A whole [ph] infestation in the western portion of the U.S. and incremental business from a large customer were a factors in our rodenticide sales increasing 40%.

Our diagnostics line, which includes our horse racing and forensics kits rose 11% and strengthened and sales to international testing labs. Sales of veterinary instruments and disposables declined 7% in the quarter, due impart to back order product resulting from the port slowdowns on the West Coast.

Our patented line of detectible needles was up 17%, continuing its strong recent trends.

Animal care products declined 13% in the quarter, as a distributed antibiotic discontinued by the manufacturer in late fiscal 2014 resulted in no sales for that product in the current year and a wound care product with strong sales in the prior year due to a supply disruption declined as the supplier came back into the market in 2015.

Adjusted organic growth for the segment was 9%, after accounting for the Chem-Tech revenues and the transfer of some product sales to Neogen LA. Gross margins on our $68.4 million in revenues for the quarter were 49.3%, compared to 49.5% and the $62 million in revenues in the February 2014 quarter.

On a year-to-date basis, gross margins were at 49.9%, compared to 50.3% in the prior fiscal year. The slight decline in gross margin on the year-to-date basis is due to mix shifts within each segment and the currency impact.

On the operating expense side, our sales and marketing expenses were $12.7 million for the quarter, an increase of 6% over last year’s third quarter and as a percent of sales were 18.5% compared to 19.3% last year. Increased headcount and expenses related to the increased sales to over this growth.

General and administrative cost for the first nine months were $6.5 million, up about 3% due to increased amortization of certain intangible assets from our recent acquisitions and higher compensation and stock option expenses, somewhat offset by reduced legal expenses.

Our R&D expenses were about $2.4 million, an increase of 12% over last year’s third quarter, primarily due to numerous product development and improvement projects. So operating profit for the quarter was $12.2 million, an increase of 18% compared to the same period a year ago.

Our operating margin increased from 16.6% in the February quarter -- February 2014 quarter to 17.8% in this year’s third quarter. On a year-to-date basis, operating margin was 18.8%, compared to 18% in the same period of the prior year.

For both the quarter and year-to-date, the improvement in operating margin percentage was due to the increase in revenues and controlled expense growth. Now the dollar strengthened during the quarter resulted in currency translation losses of about $470,000 recorded in other income and expense.

Also included in other expense during the quarter was an $84,000 charge for increased contingent consideration and related to our Chem-Tech acquisition. Last year’s third quarter had minimal currency losses. As Jim mentioned, we’ve taken steps to hedge more of our exposure in the currencies we operate.

As Jim mentioned at the beginning of the call, we achieved net income of 7.5 million for the quarter, $0.20 per share compared to $6.6 million or $0.18 a share in last year’s third quarter.

The top-line currency impact of 1.5 million, combined with the currency conversion losses running through other expense wound up cost in the company about $0.02 a share for the quarter. For the year-to-date, we’ve earned a total profit of $24.1 million or $0.65 a share, compared to $20.6 million or $0.56 per share last year.

This is a 16% increase on a per share basis.

The Company generated about 10 million in cash from operations during the quarter and has generated about $33.5 million for the first nine months of the year, almost double the $17.1 million achieved in the first nine months of last fiscal year, with improved profitability and better utilization of working capital the primary drivers.

Our receivable balance is up about 2% since year end primarily due to the revenue increase. We're paying very close attention to our receivables as the dollar strength and sluggish economies puts pressure on our international customers.

We are also helping customers in countries and markets which have been negatively affected by the local currency devaluation. Our inventory levels are up 8% over year end levels and have increased about 1.6 million over second quarter levels as we made some calendar year end purchases to fulfill our commitments and secure favorable costs.

We're continuing our focus on improvement of inventory turns and are seeing some improvements in this area. That concludes my prepared comments and at this point I'll turn it back to Jim for his further comments..

Thanks Steve. Before I move on to the closing comments, let me call on Rick Current for some – Rick Calk excuse me. There's a Rick Current in our past some of you may remember. A different Rick.

Rick Calk, for some comments, though he is up to his elbows and has some great operational experience, I can tell you that the Rick is all about being a good understanding of our strategic direction at the same time Rick..

Well thanks Jim, and again thank you very much for the opportunity here at Neogen. From the outside looking in, I really believe Neogen was a real once in a lifetime opportunity for both myself and my family and would give me an exceptional capstone on my business career.

And now that I've had a chance to come in and experience Neogen from the inside and really take time to meet the key company personnel, my belief has only been strengthened. I'd like to think that at this point I'm beginning to lose a little bit of that new car smell.

I believe I've been able to start making a real contribution on some very important projects in my first 90 days while really increasing my knowledge of the synergies between both our food and our animal safety business segments, as well as our domestic and international operations.

I've been very fortunate in that I've been able to utilize a hands on approach in many of these cases to better understand Neogen's operations at all levels of the organization, as well as to better understand who purchases Neogen's products and services and probably most importantly who should be purchasing what Neogen has to offer.

So Jim, I really look forward to continuing this process and I really look forward to meeting many of the people that are on the phone and hope that we'll have a great year together as we finish 2015..

Thanks Rick and Thomas I'll do a better job of getting your name right next time. Let me see if I can give you a better color here and share with you some of the enthusiasm for the months ahead. I think it was Charles Dickens that wrote it was the best of times and it was the worst of times.

So I think go back and look it up, did he say it was the worst of times and the best of times, but whatever, this is probably a pretty good way to lead into my next comments. I think -- let me start up by giving you a quick view of what's happening in the animal protein side.

In influenza contagious disease of chickens and turkeys affecting wildlife hit the Pacific Northwest in late fall. Because of the potential communicable disease concerns, this gave the Japanese the opportunity to ban the import of any poultry from anywhere in the U.S. beginning in January.

And this disease found its way into the Southern Missouri and Northwest Arkansas in early March and it still has all of us holding our breath since this area is probably one of the two most densely populated poultry regions, probably anywhere in the world.

According to my information we've not had a new farm break since March 12 which means that we've been able to control -- the industry has been able to control the spread for the last three weeks, which certainly bodes well. This has brought about tight security on almost all poultry farms, regardless of the geography.

Farms with disease will be depopulated and undergo strong cleaning and disinfecting program and fortunately Neogen has the cleaner and disinfected products that are probably best in the market to be used for the most efficient control of highly contagious poultry diseases.

Though there's been some market undertone for the past certainly at least past several months, the concept of antibiotic free meat really began to gain momentum really this month.

Many restaurants and food service providers including McDonalds, Chick-fil-A, Chipotle and I think now has menus of a dozen more have announced that they will not be purchasing chicken after certain dates unless it's raised antibiotic free. Many companies have made similar announcements concerning the purchase of antibiotic free beef and pork.

For some time there's been a concern that the use of antibiotics and animal production in reduction in animal feed has led to residues in meat products and then the development of bacteria that cannot be controlled with normal human antibiotic medications.

I was a part of the group of industry leaders in January that estimated perhaps 4% to 6% of the U.S. chicken meat today is produced in a truly antibiotic free manner. Based on consumer demands and some of those buyers that I just mentioned, there is some people who believe that that could grow as high as 30% in the next 12 months.

Well, frankly this is a lot more doable in chicken than would be any other meats since we only need to keep the chicken healthy for a bit over six weeks from the date it’s hatched until it's processed.

Again good news for Neogen, our bio-security programs and our products along with our sanitation monitoring and our pathogen detection diagnostics are likely to play I think an increasing role in helping to industry achieve this race without antibiotics program.

Whether it’s the best at times or the worse of the times, there is also some interesting developments that are happening over on the food safety side. The latest interesting problem occurred when people started to find peanut protein in the spice cumin.

People with peanut allergens began to actually get sick from even things like Chilli & Hummus chips. It was quickly learned that this of course was an economic adulteration, more food products [ph]. It’s interesting how much ground peanut holds look like cumin once they’re all mixed together.

It’s hard to say how big this program really is going to be before it’s all over with. We don’t know how much of this adulterated cumin spices there may be tucked away in warehouses somewhere the around world.

USDA, I think last week announced that it's already been estimated at least 350,000 pounds of seasoned beef, pork and chicken have been pulled off the market.

Companies Whole Foods have recalled hundreds of products from its shelves because of actual findings or suspicions, and fortunately Neogen has a test kit that detects peanut contamination and the largest offering of diagnostic test in the industry. We can detect I think 13 of the potentially allergenic foods today.

In the late fall people began to get sick from caramel apples. Five people died and a number or many more were hospitalized in 10 states after eating these apples. The problem was traced to the bacteria Listeria.

Eventually it was discovered that the bacteria was harbored in the stayman of apples that were stored in controlled atmosphere for its storage in California icefall [ph]. Even though they were stored under refrigeration Listeria will still grow.

We immediately contacted the all of the large apple storage companies in the country and I think our quick diagnostic test for the detection of Listeria will help these food storage companies by making sure that part of these apples don’t get into the fresh clean fruit -- the fresh market and the fruit chain.

Even though we don’t have any final enforcement action from Food Safety Modernization Act at FDA, and remember it was signed into law four years ago now, I can give you an update and say it appears closer at hand. There were several distinct pieces of the Act. In fact there was seven amendments in total.

After writes and rewrite, the first rule of the first two of these is set to be published on August 30th. And really what this means is this, did this tell the industry what rule they’ll have to comply with 12 to 24 months later, but at least there is some movement.

These two pertain to the prevention and control of human foods and other prevention and control of problems in foods fed to animals or what we called the animal feed industry. In either case companies that will be required to write a plan on how they expect to keep hazardous contents out of their products.

For instance anyone who is making animal feed or human food that’s using grains must have a plan to make sure that they can detect and prevent mycotoxins from getting in that final product. Even though testing itself won’t be required, it will be impossible to monitor without testing. The same is true for drug residues or for pathogens.

Allergens are included in human foods but not for the animal feeds of course. The next implementation of act is scheduled to occur on Halloween. At that point rules for three more of seven regulations are to be published.

One of these is to establish new rules governing fresh fruits and vegetables that's aimed to time the to solve the problems that have been associated with numerous outbreaks of fresh spinach have killed and sickened hundreds of people over the last couple of years.

Perhaps one of the most noteworthy problems was the cantaloupe episode that resulted from dirty rinse quarter and a cantaloupe packing plant in Colorado.

It’s kind of ironic as I move from one side of our campus to another this morning with the radio on, it was -- the first item on the news was to announce that the day was National Spinach Day and then along later in the broadcast it said if you have frozen spinach of either one of these two brands, destroy it because it is expected to be contaminated with Listeria.

So it wasn’t such a good National Spinach Day I'm afraid. The fourth set of rules is also scheduled to be published on Halloween, and this would establish import responsibilities for food coming into the U.S. and imported food in the last two and are scheduled to be published in March and May of 2016.

So looking what’s going on, there's a lot of activities on both the food and animal safety side that match up pretty well to Neogen's product catalogs. Fortunately not only did we have the products and the opportunities but I think the structure to continue our strong growth. We’ll use the same strategies to continue -- that worked for us in the past.

As we go forward we’ll strengthen our position as a one stop shop in both food and animal safety. We’ll continue to grow the company through the development of new products for both food safety and animal safety.

Despite the current difficulties with currency conversions we’ll continue to make greater investments in worldwide international markets, both through independent distributors as well as expanding our own company owned distribution group. And of course the fourth leg we'll continue to work with will be for synergistic acquisitions.

Let me stop at this point and thank you for being here with us. And Eric open the lines for anyone that has questions..

Thank you. We will now begin the question-and-answer session (Operator Instructions). And our first question comes from Drew Jones from Stephens Inc. Drew, you may begin..

This is Garrett Phelps on for Drew Jones.

First, just wanted to ask about the FX impact on demand -- you spoke little bit on the top line but on demand and kind of durability to compete on price in those markets due to the strong dollar?.

Fortunately or unfortunately it is -- I would say it's not our first rodeo. We’ve been through these evaluation situations before. We have to keep our customers in business.

So there are places where we need to reduce prices in order to make sure that we’re competitive in the local market, especially those places where we overlap on third party distribution for our products we’ve got to make sure that we can help these guys stay in business until things do get corrected.

I think one of the great things that helps us is that we’ve got the flexibility and the strength of our own manufacturing. Almost -- the big portion of the stuff that we sell we make ourselves. So it’s not like we’re locked into a price from a third party supplier. Now obviously we’re locked into some raw material prices.

But being your own manufacturer in times like this is certainly helpful. I don’t know that -- there has been and Steve can probably speak more to that. I think there has been some impact in this third quarter where we’ve reduced or made some kind of special arrangement that help on pricing but there's probably still some of that left ahead of us.

If you can tell me how long the dollar is going to be strong comparing to other currencies, well I guess we could do most things we wanted to do this morning. But [indiscernible] times back around. .

Thanks for the color on that.

And then also could you give us an update on how the Contropest [ph] application is going with EPA and the timeline that you’re looking for on that?.

Well, first of all, I don’t have a timeline. Secondly I can tell you that they have not filed their final application with EPA.

I think maybe that the Contropest [ph] product is probably more intriguing to some than to others but I can’t say at the same time we’ve got some very interesting ongoing research on rodenticides in our own research laboratories.

We've got a special laboratory in Wisconsin in which -- in our plant there where we’re continually working on new rodenticides, new bates and so on. So there is some equally exciting things. We don’t own it. It [indiscernible] don’t know the background by this question, it’s a license that we own and it’s a license for part of the world.

We don’t own the technology and nor can we do anything really to help in the filing of the EPA application. So we’d love to have the product but until there is some application filed I think it’s pretty difficult to determine what kind of time line we’re looking at..

And our next question comes from Shaun Rodriguez from Cowen and Company. Shaun please go ahead..

This is Ryan Blicker in for Shaun. So you mentioned a few outbreaks including the peanut shell contamination, spices, the poultry market troubles, et cetera.

How should we be thinking about the tail winds for this in Q4 for Neogen?.

I am not sure I understood your question..

You had mentioned a couple of outbreaks and also that you expect some increase tussles [ph] from the peanut shell contamination and spices.

How should we be thinking about how these things may impact Q4 revenue?.

I don’t know. I wished I knew too. The outbreaks, yes we would -- it's the best of times, worst of times and if there's an outbreak we’re going to sell a lot more peanut. If the outbreak in diseases gets worse, we’re going to sell a lot more cleaners and disinfectants. And particularly the disinfectants that they go into the market are nice margins.

From the best of times I hope -- certainly we don’t get that to continue, because we make a whole lot of money out of healthy chickens than we do out of sick chickens. So -- and we get them into the processing plant, [indiscernible]. It's hard to say I don’t mean to be -- it's just hard to say what’s going to happen.

60 days ago we have never predicted it that disease. Influence to find its way from portions in state Northwest Arkansas. So it's kind of hard to say. As it relates to economic fraud, we’re going to continue to see that. It's just the opportunities. We’ve seen -- heard a lot of it out of China. There's still a lot's of it going on.

And who would have ever thought that you need to worry about cumin spices. Now there is some concerns about paprika somewhere. Somebody told me the other day that the one was cilantro. I don’t know what -- I think cilantro is bringing when it's get process. So I don’t know how you contaminate that.

But nevertheless, I think it's a big important area, the whole food fraud area, not just spice contaminations but -- they say that probably 30% of the fish we sell in this country that they are not what’s on the label. We sell [indiscernible]. So we’re going to continue to see those opportunities and I think we’re in a good position. It's kind of nice.

When a problem occurred we had some [indiscernible] we can send it out. I think you just look at this is either way good times or bad times, we ought to be properly positioned..

And then Brazil returned to some better growth in the quarter following a little bit of slower growth last quarter and you had potentially mentioned some increased infrastructure investments.

Can you talk a little bit about what drove the better performance in Brazil this quarter?.

Yes, they had some strength in their antibiotic testing. That’s the primary driver. That’s one of their biggest pieces of business on the food safety side..

Brazil is kind of is not kind of -- it's a very interesting to our Brazilians in town. So between broken English and broken Portuguese last night, I got a good catch up on where we are. Let's just hope that the economic and political stability stays there. It's kind of scary.

Last night they were telling me about approvals had to be on -- we got 39 ministers in the federal government. So I don’t know how you can develop 39 ministries, but we're there, we're a player. It's important to be in the country. We are now manufacturing cleaners that are going into that market.

That market is -- you kept up with what’s happening with the two major animal protein producers. They're doing nothing but getting bigger, I don’t know where they find any money. But they certainly are and there is announcement I guess out to what part goes and what happens. They some interest in what’s going to happen if has come back way after.

So there's all kinds of resilient opportunities to develop as Brazil -- we’ve been saying for some time lines itself up as being one of if not the major exporter of animal -- higher quality animal protein foods as we move into the next decade.

So we’ve got -- we'll be spending next several days to suddenly talking about what to do to grow faster that’s toward number one item on the management teams agenda is what do I need to do to grow faster and Mr. Quinlan has promised to me he has got a little extra cash laying around to help get that done.

So Brazil I think is going to be lot more important going forward maybe than it has been even in the past..

And just quickly on GeneSeek, you mentioned 29% revenue growth.

Can you quantify what volume growth was in the quarter?.

I don’t know. We average 100,000, 200,000 samples a month maybe..

Volume growth was somewhat north of 29. It's probably in the 35-ish percent growth I would think..

We did a million samples there last year and I don’t know, we must be in track to do at least -- maybe as much as 30% increase above that this year. So it sure is nice to have that new facility. .

And our next question comes from Brian Weinstein from William Blair. Brian, please go ahead..

This is Matt Lerew [ph] in. I just want to follow up first with the previous gentlemen's GeneSeek question. Obviously some really nice growth there.

Just wondering if there are any large orders or single customer product driving that or is that really just a result of having the new facility up and going now and continued product development? Just how should we think about growth there going forward?.

I think both – we've got some big customers that highly depend on us, that bring in big numbers. Some months they may shift. We do work for a major portion of the genomic work for those people as a primary breeders for broiler type chickens on a worldwide market and those are quick turnaround tests.

They are into us and back out to the poultry breeders within seven days. You stop and think about it, you have to turn at that pace, whereas general interval in a cow is over 12 months, generation interval in a chicken is 21 days. So that side of our business works awfully well.

We're a major supplier of some things that are happening down under in Australia and New Zealand as it relates to the sheep business. Overall in this side of the country we are a major supplier to 11 of the -- I think 11 of the 12 probably registered beef cattle registries. We have exclusive business of 10 of those 11 I think.

So all of that's coming in. Those are coming in, in large numbers, coming in together as a large customer and I guess what you're asking. Well at the same time our Dairy Heifer replacement program that's in the market and our beef heifer replacement program are both doing well.

These are where ranchers or farmers are sending in samples for [indiscernible] of young female calves to decide which ones to save to go back into their breeding herds a year and half later. So that side of the business is doing well. The economics that are effecting the beef industry certainly are on our side.

We still see good 500 pound new calves [ph] that are going at $2 a pound price. So that means that those ranchers can't afford and want to make sure that they're saving the right heifers because this market won't last forever. So we want to make sure that they can now afford to save the right heifers for the best calves going forward.

It's just hard to find any problem out there..

And then Steve thinking about this sort of this roadmap to this 20% flagpole, that's always been sitting out as a operating margin target and given the mix shift that's occurring if I look back kind of '12 and '13 about a 50-50 split animal and food safety, and now it certainly shifted more towards animal safety or some of the recent acquisitions.

What are the things that need to happen in a more animal safety weighted environment to get back to that 20% range?.

Well I think this quarter we probably would have been fairly close, but for the currency impact and then we have so many different product lines that affect that gross margin number both within the food and the animal safety group..

I think you paint animal -- I'm sounding defensive and I guess maybe I am but I think you're painting animal -- white washing animal safety with a pretty broad brush. We've got 70% gross margins on those products there. So just because it's animal safety doesn’t mean its low operating profit. One of our best units is running at over 20%.

So [indiscernible] safety side. Go ahead Steve..

No, no, I was just going to say that the product mix is such a big driver of our overall gross margin. So I guess to piggyback on Jim's comment, the proportion of food to animal does drive that a little bit. We see the growth going forward, it's more weighted toward the food safety side.

So you should start to see some expansion of gross margins but the currency impact really kind of shrouded that this quarter. So depending on what happens there, if you believe that the food side is growing a little bit faster than the animal, over time you should see the gross margins grow a little bit.

But I don’t know what's going to happen in the next few quarters..

And you're going to see more and more -- that line is -- that farm gate is a pretty broad and stays open a lot. It's not like you might envision it.

One of the thing's that is going on, and they're using -- the animal safety guys are on the phone with our research people here this week, two or three different occasions looking at -- asking for help on how to interpret certain products that we in the past have always sold into the food safety side that monitors what's going on in the hatchery.

We talk about sanitation and the fact the fact that the processors want to check their lines to make sure they’re clean, same thing as going using the same sanitation products to make sure that the eggs that go in the hatchers that are going to hatch baby chicks 21 days from now are clean and not going to have infections.

So there is a lot of this going on that we'd cross over. There's -- one of our products is being used.

We think we’ve discussed some pretty big opportunities that we normally might be used in -- overall is being used on the boot size, being used at the dairy barn to determine whether the cow’s got mastitis or not and if so what's the best way to treat for that.

So don’t -- it’s going to be more and more difficult for me to be able to put a brand on it. We won't. We want to make that synergy work..

Yes, I understand I appreciate you’re explaining the nuance there..

And I don’t mean to be so defensive. So..

No, no, of course, the final one here and it for Jim, mentioned quarter several potential acquisitions on the radar and just wondering how you’re feeling about the acquisition landscape right now. Just wanted an update there and that’s my final one? And again I appreciate the detail..

Good, well, we’re not ready to announce anything. I'd like to do something, we figure out what’s way currencies are going to go and how they’re going to get stable or unstable. We’d like to do some things internationally. We’ve got ourselves circled around several opportunities that would expand our footprint for the home people.

I don’t know that we’re getting anything done between now and end of the year. The end of the year is drawing pretty close. But those are probably the closest things. Unfortunately nothing big. I keep looking for something. We’ve got $5 to $25 million deals and more 5s and 25s but it would be nice to the patent one three or four times.

But at same time we’ve done pretty well and figuring out how to take these smaller ones and integrate them and bolt them on and make them work. so maybe I don’t have to be worried about.

But there is some opportunity and we obviously got cash and I’d hope that we might get at least one done between now and year end but I can’t give you any assurance of that..

And our next question comes from Tony Brenner from ROTH Capital Partners. Tony please go ahead..

Jim, I wonder if regarding your last comment whether it’s acquisition in India is actually closest too or is that going to take how much longer time?.

We’ve spent a lot of time in India. I think today if you were sitting in India, you might be sitting at the pout of where this adulterated food might be coming from. I'd say that not this way, the Indian government -- I can’t, but simply because they’re big part of the spices and world supply come out of that part of world. We’d like to be there.

We think we've got right strategy to be there for a lot of reasons. It’s certainly Tony as you know, you and I have talked about the two parts of the world that where we’re going to see better place development grow strongly in the next decade and that’s both of those two Asian countries, India and China.

And we’re in China we’re growing in China and feeling good about where we are there. I'm going back over -- and meanwhile I am going back over with Chuck Wood and like I said I think next months in again looking forward to watching our channel step grow. And it would be kind of nice to I said other day. We get the India effect on to China.

They actually touch those two continents. We don’t touch, we just bounce back and forth and actually that those two continents were pretty big. They're bouncing back and forth probably more than I thought. We'd just had to move from Mumbai on one side to Shanghai on the other.

But we sound like a politician talking but we are strongly looking in and think that India is important to us..

So I missed the answer to how imminent that acquisition was?.

We haven’t announced -- we don’t anything that we can publically announce on with this point..

Okay and as long as you brought China up, Jim, having acquired a couple of distributors in China, and with multinational companies increasingly but playing important in production there, can you give any indication is to how that’s effected your growth in that market?.

I think it may be a little bit premature to -- the strategy is there, the growth is there. It’s not been just but fortune [ph] yet. So I think we’ve got -- the largest meat producer in the world is producing over $2 million broilers a week in China and the largest family home corporation in the world is producing a million chickens per week in China.

There's just a lot of meat, animal protein going on large diaries. We’ve got the largest two dairies representatives, senior guys from the largest two Chinese dairies in China here in our offices within the last six to eight months. I'm excited about it.

I still say don’t buy Neogen stock right now in China but I know one of these days maybe somebody is going to say maybe we ought to buy Neogen based on China. So, I feel good about where we are, but we’re not there year and we’ve still got some work to do but I think we’re positioned in the right place..

And our next question comes from Charles Huff from Craig Hallum. Charles, please go ahead..

Most of my questions have been answered. But you guys put in the press release that a large part of your growth potential for Neogen exists outside the United States and obviously you have a lot of domestic revenues today and you’ve given a lot of detail here on India and China.

But I'm wondering if there is anything else that -- you have in Brazil as well. But I'm wondering if there is anything else that you haven’t touched on that caused you to put in that very pointed [ph] statement in the press release? Thanks..

Charles, that’s not new for us. In fact we publicly said that for some time that we felt though two thirds of our market potential lies outside the U.S. And we at one point were at 42% in total revenues came I think that may have been the highest peak we’ve got to but 42% came from outside the U.S.

One of the reasons why we’re looking at international acquisitions is to help have carry our product in the certain areas. Mexico, we haven’t talked much about Mexico.

Mexico, I think Steve said in his comments, our Mexican operations, the one we built, the we actually formed that we called it Neogen Latinoamérica, not Neogen Americo, we probably said we’re going to use that as our organization for the Central American countries along with Mexico. We are now moving there.

That operation we'll be working with either direct or through distributors whatever the case might be in all of those Central American countries as we finish out this year and move into next year all the way down to the canal.

So that we think Mexico has the opportunity to not to probably be as large -- obviously be large as Brazil, but an opportunity to help speed that middle class that we’ve been talking about. There's already the product going out the West Coast to Mexico headed for the Asian market now and that’s an easy touch to get there.

I think we'll probably see more of that going forward.

And it’s -- our standard countries -- our Neogen Europe operations, they're going to keep growing, don’t know [indiscernible] got their budgets finalized for the new year, but I’d be surprised -- like currency that we won’t be seeing another 12% to 15% growth opportunity there And that’s not just -- that’s where we have our own people on the ground in UK, France and Germany and Holland, but it’s also distributors in that whole EU countries over there to report through our office.

What's happening in the Eurozone is problematic. There the euro dollar is I think the weakest it’s been since somebody told me nine or 10 years I guess now. So that right now gives us some temporary heart burn as to our people can afford to buy our product as it's been sold in U.S. dollars. But those countries are going to grow.

We got to figure out what to do. I think I've figured out what to do about Greece but the food demand in places like Italy and Spain are going to continue to be strong as well as the more developed countries where we’ve got our people on the ground.

Asia, there is in addition to the two big guys, our guys are doing pretty well in Thailand in some of those countries there. I think we’re going to see continue to see that growth going forward and it’s kind of all feeds on. It’s -- I think we may never get two thirds of our revenue from outside the U.S.

but that potential I think exists Charles and I appreciate your question..

And then Steve I may have missed this but I didn’t catch the specific numbers for Neogen LA. I heard Neogen Brazil.

But did you provide those constant currency revenue growth rates for Neogen LA or reported revenue?.

I didn’t report it Charles because we transferred some revenues there from our Lexington group. And so the revenue growth was pretty significant. On an organic basis it was I think it was somewhere in the 10% range..

And then regarding Neogen in Europe you mentioned some price compression to maintain your distributors and your customers' profit.

If and when the dollar weakens in the future, do you have mechanisms in place where you would be able to raise prices more than you normally would normal market prices or would those price concessions be kind of permanent?.

Well they are not -- price concessions, yes, they are. But it's not -- we're not changing the price of this. So it's not that we’ve gone in and dropped the prices down there. We think about 10%. It's been down country-by-country individual basis. We still sell a lot of product in Europe in U.S. dollars. We sell a lot of product in Europe in pound sterling.

And of course pound sterling hadn’t been crimpled like euro. And we sell a lot of product in euro. So it's a special circumstance situation where we’re able to work with people. Sometimes it's working with them in and bundling some other products.

I thought your question is very good, but we haven’t gone in and said okay, we just take the machete and slice everything by bringing the prices down 15% to take into effect, what’s happening.

We’re looking that it on a month-by-month basis, as we look at our hedges and our movement of dollars to protect the value of the dollar with the [indiscernible] we look at April and May, but it's not going to go the opposite direction. The dollar is going to be where it is now or maybe even stronger against some currency.

So in way in the past that have been unable to do it. We’re not big enough to go to the Board and think out a contract.

So we have to work through bankers to get these kind of things done and you go look at -- we can hedge the pound with that almost any fees, but just trying to hedge -- when you hedge the Brazilian real, that these come little more dear. So it's a country-by-country, currency-by-currency, month-by-month situation in -- and we’re not new to that.

I just let it get away from them. I don’t expect everything to go that fast. So we’re just back, Steve and I got in our attention now..

Well, you're not alone in the surprise with the situation. It's been stunning. My last question is on the Indian distributor or Indian acquisition that you talked about in the last quarter. I think you mentioned previously that you're getting close to a letter of intent, maybe the next two to three months or so.

But it sounds like you're a little less definitive on this call.

Has anything changed there or anything that we should be thinking about?.

No less optimistic. It's -- that country was built -- it required the patients [indiscernible] and everything is going great. Just before I left office to come over here well my admin handed me a new card which would appear to be my Indian driver's license with picture.

We do have our own Company in India and we’re operating there and we have bank account. So we have the right mechanism now with both things are. So it's particularly interesting for somebody like me as I noted for patients..

And our next question comes from Jason Rogers from Great Lakes Review. Jason, please go ahead..

Looking at the gross margin, would you be able to flesh out the impact foreign currency had on the gross margin for the quarter?.

That’s a really difficult question. It affected our -- on the food safety side of our business, it affected us by about 2%. So that’s about maybe $600,000 impact..

And that’s on the gross margin correct?.

Correct..

And where are you now on the process of hiring sales people? Is that still ongoing or is it coming more to an end? Were you looking at just focusing on making those additions more productive?.

No, we’re convenient. We’re always hiring sales people. We in generally -- where they are, it takes a year for them to be productive depending on which side they were working on, what products they were working on. We've got good operating margin. So it's a -- we’re not then dealing with 3 % and 5% those kind of thing.

So, we have the money to be able to do that. I think our sales and marketing expenses as a percent of revenue were down a little bit. They were up, but they were down little bit as a percent of revenues.

I wouldn’t be afraid to -- I think -- where are we Steve? 18% there about? We probably ought to be looking at spending a little more than that as we’re going forward because the opportunities for growing that top line are there. It's that same old case of trying to balance top line and bottom line and we work net down but it's easier to add people.

I don’t know how many -- Ed Bradley happens to be in the room and he's got the biggest sales organization. Between sales and marketing combined you got about 75 people on the food side, is it? I mean you got -- remember -- and I hope you know exactly how many openings you got. .

We have about 10 openings in SoHo. Some of those are back fields..

Some of those would be, back fields and some of them are new..

And then finally what percent as a corporate revenue is genomics?.

Give us a second. That's got to be bigger number in my head now. While they're doing that, part of the genomics thing is kind of interesting too is the genomics work that we do for the food safety side of our business, I was going to make the point earlier that farm gate is pretty wide and stays open.

We've got for instance, Uruguay is a major importer and a major exporter of beef but they're concerned about E. coli O157 and what I call our six ugly sisters.

They're all [indiscernible] organisms and as a consequence before they start shipping beef in some cases -- in many cases there's a U.S person and actual beef samples come and go to our operations in Lincoln where we're able to run the genomics on the E.

coli group of bacteria to give them some idea of what's there which is even better than what they might be able to do with the standard test.

We're doing work now on Salmonella, expect there's some concern about which Salmonella are going to be considered to be the most pathogenic and we're doing work there with Salmonella both outside lab services where people bring product in as well as helping us get directed is to improve have better faster more specific diagnostic test kits to be able to detect Salmonella.

Have I talked long enough for you to have an interest?.

Overall genomics is about 13.5% of total company revenue for the quarter..

And our next question comes from Paul Knight from Janney Capital Markets. Paul, please go ahead..

This is actually Brian Kipp on behalf of Paul. We're beating this up pretty good but I think there's like a few more, hopefully I can fuse out of you guys. One is in context to the cumin comments you've made throughout the call.

Just thinking in context to the -- I think need to be cessation was $1 million to $2 million opportunity, I know you said you haven’t sized it, but one, is there a competitive landscape on the allergens for cumin testing right now? Are you guys kind of leading the market? And two is that a good proxy to think about it more as like the meat speciation market size and seasonality or do you think there's a little bit longer tail to that?.

Well I mean -- let me see if I can, I guess five questions, let's see if I can get them all in. First of all do we have competition? Unfortunately yes. Are we the leader? Yes. We were the first out for peanut.

The first test we developed got -- I don’t remember how many years ago was to detect the presence peanut because it is the biggest problem that’s out there today or it was at least, certain to recognized as the biggest problem because of anaphylactic shock that just occurs so rapidly. So we are the leader.

We do have one, I guess I might say two competitors. We don’t take any competitor lightly but who have probably some significance.

But this is a test that was developed to protect from food allergies, to make sure that some in this case peanuts, where it would normally be used to make certain peanuts didn’t somehow get into the food supply and did not appear on the label.

And it's amazing, some of that, we've got a couple of guys that are users that are putting breeding on chicken and seafood products and say why would they want to use a peanut allergy test. Peanut meal is commonly one of the carriers for spices, it goes into things like that.

So that's where that product line was developed and that's where it all fits and that’s where the big opportunity is going forward. But then when you get into something like economic fraud, who on earth would have thought, somebody would have thought, about how to increase the profit of cumin by banning that peanut that’s sticking the pan.

So its best of times worst of times again. We think that's going to grow speciation -- meat speciation. I'm not sure we've mentioned it but it's certainly growing. Close to this time a year ago we were all talking about what we now refer to is horse gate, where horse meat was getting blended in with beef and created problems.

I talked about I think speciation is 77% of seafood that we import or that we sell in this country is not the same is what’s on the label. That’s a speciation issue which I think we don’t have to answer that today, but I’d like to have one and I think those are the kind of things going forward.

So this whole issue of food fraud, whether it’s because we can find something it’s an allergenic product to do it or because we have developed the speciation products that we have today, I think -- there this continue to be there and they are unpredictable. Fortunately we’ve got find it real quick..

Yes fair, I guess I was looking and thinking context to the 350,000 pounds of meat recalled in connection just looking at that is proxy to meat speciation, is that like kind of the same size of meat recall that we saw in Europe and just thinking I know it’s a different type of test..

And that one speciation, that was pre-seasoned, probably a lot of it frozen product that had cumin in it as a flavor and spice and they were able to check back and find out that somebody unsuspecting who bought that and made a beef product out of it had not reason to guess there would be peanuts in it..

Yes, I’ll shift I guess that was just I thinking in volumes of pounds, is it about the same size. I know it’s on cumin side and peanut allergy. So I appreciate all the color. I guess one other thing I wanted us was the ripple effect.

The Chinese government or FDA was consolidated about two years ago and there hasn’t been a lot of convention around new guideline structures et cetera.

We’ve asked -- the Food Safety Modernization Act is kind of one driver on reform in the U.S., but have you heard any ripples out of China as to direction now that they’ve been two years fully consolidated and potential opportunities for additional regulations there or is it still work in process?.

I think it may always be work in process but they clearly are adding a lot of regulatory strength there. It’ll just be a log and cleaned up.

That’s reason that non-Asian countries more concerned than they would if they were located somewhere else because they don’t want to get caught branded with the same item that the Chinese guys are and they got to protect themselves because they don’t what to get in either. But the middle class population is growing demand better.

They’re not driving a car and they like to have their baby’s drink milk that doesn’t have leather extract in it..

And lastly for me, Steve, the Chem-Tech milestone, and I know you lighted BioLumix is outperforming.

Are there additional potential contingent milestones outstanding? I am sure we’re kind some in the 10-Q just any color around that potential conversion et cetera?.

No. We don’t have any contingencies on any acquisitions that have not yet -- that number had been placed..

Nothing in the backlog, all right, appreciate it..

The reason this one was kind of usual was when we got a contingency we kind of estimate what we think that might be in and we allow a lot of time to capitalize the purchase, but if you don’t, you don’t capitalize it. So that hurts, all of sudden you just took an $83,000 and don’t write out of my pocket but....

And our final question comes from the Larry [Southern] from My Broker LLC. Larry, please go ahead..

One question that occurred to me over the years, could you talk about the competitive situation especially in the Food Safety and other segments. There are certainly other companies who claim to have they have great products for testing for allergens et cetera.

Just give us some idea of what’s there and what’s and market shares in some areas?.

That’s a mouthful..

Yes..

I think it’s very difficult to quality how we shape up because of our business built and protecting food and animal safety or carrying the food safety all way back to the -- in our case back to hatching egg this morning 21 days before the chick got there, they're carrying you all the way through to McDonalds that says we’re not going to buy any chicken that has got drugs in it or through raised on drugs.

When they say drug free, they say we want to make sure you didn’t and have really expose it to a drug. So if you cover that, we’ve don’t anybody that’s got products that fit in those 20 odd stops between hatching egg to MacDonald’s chicken sandwich. So we’ve got some competitors in certain areas where we compete in pathogen detection.

We’ve got very formidable competitors there. We’ve got some competitors in allergen side but not near so formidable. And they’re not the same people. They’re all different. So it’s a good question but kind of an impossible answer, I'm afraid..

And we have no further questions at this time. Mr. Herbert do you have any final remarks..

Well, I do. I’ll now look at in window here and I cannot see a pile no anywhere. So, we got a great quarter ahead of us and it’s got to feel good to be not only working with good opportunities but spring time is coming.

So thank you very much for the continued support and understanding that you provided and I guess it will be a little while longer before we’ll be able to formally talk to you again. We get the end of the fourth quarter where we have to wait until we get to the end of the year.

But hopefully we’ll be able to send out a few press releases along the way so you don’t forget us. So thanks so much for your continued support and your participation this morning. And we’re out..

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