Jim Herbert - CEO Rick Calk - COO Steve Quinlan - CFO.

Bill Mark - Janney Brian Weinstein - Williams Blair Charles Haff - Craig-Hallum David Stratton - Great Lakes Review Kurt Kemper - Hilliard Lyons.

Welcome to the Neogen Third Quarter Fiscal 2017 Earnings Results Conference Call. My name is Christine 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. You may begin..

Good morning and thank you Christine. Welcome to our regular quarterly conference call for investors and analysts. Today, we'll be reporting to the results of our third quarter that ended on February 28.

Now, I'll remind you to start with some of the statements that we made here today could be termed us forward-looking statements and these forward-looking statements of course are subject to certain risks and uncertainties.

The actual results may differ from those that we discussed today, but 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 joined this morning by this live telephone conference, I'll also welcome those who may be joined by way of simulcast on the worldwide web. Following our comments this morning, we will entertain questions from the participants who were joined on this live conference.

And I'm joined today by Rick Calk, Neogen's Chief Operating Officer; and Steve Quinlan, Neogen's Chief Financial Officer. Earlier today, Neogen issued the press release announcing the results of this third quarter which ended on February 28.

Net income for the third quarter of this 2017 fiscal year increased 24% to 10.3 million or $0.27 per fully diluted share that's an increase from last year's 8.3 million, which equated to $0.22 per share. Current year-to-date income for the first nine months is approximately $31.3 million or $0.82 a share this compares to $0.71 a share last year.

Revenues for the third quarter increased 15% to 88.4 million this compares with the previous year's third quarter revenues of 76.7 million. The quarterly revenue and net income results both for this third quarter, both represent records for the third quarter for our 34-year-old company.

On a year-to-date basis, revenues for the first three quarters of the year increased 14% to 262.7 million. A dedicated group of 1,500 employees around the world kept our success record going yet for another quarter. This third quarter was the 100th in the past 105 quarters that Neogen reported revenue increases as compared with the previous year.

This record now spans 26 years and includes all consecutive quarters for the last 11 years. Operating income for the quarter came in at 16.2% compared to 14.7% in the same quarter last year. Gross margins which of course are major component of operating income settled down at 46.3% and that compared to last year's third quarter of 45.9%.

Adverse currency translations continue to detract from our revenues, our gross margins and our operating income. When we started the year nine months ago, I thought that the currency trade win should at least be neutral after the year we've had year before.

However, the devaluation of the British pound, its relationship to both the dollar and euro along with the Mexican peso have all started out headwinds that's Steve give you more details on that later in the call.

I think I can probably stop at this point by pointing out that our balance sheet continues to be solid with growing assets and no debt shareholder equity has improved by 12% when compared to where we were to be at the end of the year on June 1.

I'll then come back a little bit later in the call and talk about our growth strategy to give you view of both our international and domestic acquisitions and talk a bit about the programs that where we think we'll continue to grow.

Let me stop though at this point and give Rick Calk an opportunity to talk about some of the growth over the past quarter for both our Food Safety and our Animal Safety groups, Rick?.

Thank you, Jim, and welcome to everyone who is listening. Jim is already reported on the overall sales and profit performance for the third quarter of our 2017 fiscal year. And I'd like to provide a little more detail on the performance of our Food and Animal Safety segments as well as offer you some perspective of the markets in which we participate.

Now before I discuss our results for the quarter, it's important to note that these results reflect the adverse impact of strength of the U.S. dollar compared to other currencies. And Jim said, Steve will provide more detail on the effects of these effects of these adverse currency translations during his portion of the call.

As stated in the press release, revenues of our Food Safety segment increased 24% during the third quarter compared to the prior year, now this was aided in part by the acquisitions of the Deoxi and Rogama, both of which reports to our Brazil subsidiary as well as Quat-Chem which reports to our Neogen Europe Group.

Organic growth for the Food Safety segment was 12% for the quarter. Food Safety highlights for the quarter included a 29% increase in sales of our rapid test to detect natural toxins.

This increase was largely due to the increased sales of test to detect the mycotoxins DON and zearalenone in corn and wheat which is grown in the U.S., Canada and in Europe. Neogen's ability to rapidly respond throughout the value chain to these unforeseen mycotoxin outbreaks gives us the strong competitive advantage in the milling and grain markets.

We expect this increased testing from mycotoxins to continue at least through the late spring. Needless to say, Neogen will be ready to respond to whatever grain producers and processors need from us during the growing season.

In fact the excitement from our customer base is heighten this year as we respond with testing options from mycotoxins which address additional customer concerns. At the end of January, we launched our full line of reveal Q-plus Max Mycotoxin test. There are two main factors making these tests superior to anything else on the market.

One, they use water in the extraction process eliminating the need for hazardous materials in the testing process, eliminating the handling and disposal of these materials for our customers is a true game changer.

And number two, our platform brings to the market the only test available allowing our customers to test the same process sample for more than one mycotoxin. That's a major time saver for operations that can run many tests in the single day for multiple mycotoxins.

Each year, millions of Americans have allergic reactions to food, and we read about it daily in the newspapers. Although, most food allergies cause relatively minor symptoms, some food allergies can cause severe reactions and may even be life-threatening.

There is no cure for food allergies, strict avoidance of food allergens and early recognition and management of allergic reaction to food are important measures prevent serious health consequences. Sales of Neogen's rapid test for food allergens such as milk and gluten increased 14% in the quarter compared to the prior year.

Consumers and regulators around the world continue to increasingly demand the processed food is virtually guaranteed, not to contain an unlabeled food allergen. One other food safety highlight was increasing sales of our rapid microbial test systems which were up 20% in the quarter.

When we acquired the BioLumix product line in 2014 to add to our Soleris product line, we thought it would be a case of one-plus-one equaling three, and it's truly turned out that way. The automated systems allow the food and nutraceutical industries to test for spoilage microorganism in a fraction of the time of conventional testing methods.

The Animal Safety side of our business reported a revenue increase for the quarter of 8%. On an organic basis, our Animal Safety revenues for the quarter were about even with our prior year's third quarter.

As we detailed in previous quarters, we knew we faced the difficult comparison with the prior year due to the removal of our thyroid replacement product for dogs and that happened last July. The impact of the loss of this multi-million product will continue to be felt in the fourth quarter of our current fiscal year.

In last year's third quarter, our Animal Safety rodenticides side business benefited from an outbreak of voles in the Northwest United States. Voles are a rodent of particular concern in orchards and have a damaging effect on the overall fruit market.

That outbreak and the increased application of our rodenticide has now subsided leading to the softness that can be seen in quarter-over-quarter comparison in our rodenticides business. But with all that said, we had a number of highlights in the quarter for our Animal Safety group.

Our sales of rapid test to detect drug residues and forensics samples increased 39% compared to the prior year quarter and this was due mainly to the lab business in the U.S. and Brazil. In the quarter, we also had a significant increase in sales of durable syringes for veterinary market.

Our durable syringes are primarily intended for large animal injections with the same syringes and needle are used repeatedly to deliver vaccines and other medications to several animals. Neogen has been in the business of developing and selling durable veterinary syringes since 1985 when we acquired our Ideal Instrument subsidiary.

We see the precise delivery of medication is a critical step in the overall health and safety of livestock. And this led us to acquire the Prima Tech veterinary instruments company late in 2013. The innovations in syringe technology coming from the Prima Tech acquisition, helped fuel our third quarter increase in syringe sales.

In the third quarter, we also launched the line of disinfecting products specifically formulated for the effective cleaning and disinfection of veterinary practices in animal care facilities. This product line complements our comprehensive line of biosecurity products formulated specifically for a wide variety of animal care applications.

Jim, I turn it back to you..

Thanks, Rick. Steve, how about providing little color behind the financials and talk a bit I guess we're all have to know what happened on the currency conversions, but lay that out for us. And more importantly, we haven't discussed our genomics business, so cover that in your comments..

Sure Jim. As Jim and Rick have both indicated, we were overall pleased with our results for the third quarter as we achieved solid revenue and earnings growth. The currency wins did continue to be in our face this quarter, both a little less intensity than previous quarter this year.

The pound sterling is worth 15% less this quarter versus dollar than it was in last year's third quarter, with the decline primarily the result of the Brexit both in the UK last June and the accompanying uncertainty on how massive that exit maybe. The Mexican peso is declined 14% relative to the U.S. dollar and has been volatile.

At one point during this quarter with all the noise regarding the wall and immigration, the peso felt almost 22 to the dollar before recovering somewhat to close to quarter at 19.8 to the dollar.

The Brazilian real on the other hand strengthened significantly during the quarter and was 23% higher than it was time last year, helping boost to be comparative revenues and earnings at our Brazilian operations.

Overall, the negative impact of the stronger dollars on our comparative revenues for the third quarter was $1.7 million and this was about $0.01 hit on the bottom line. In constant currency, our overall growth was 17% versus the 15% we reported today and reported overall organic growth of 5% would have been 7%.

On the Food Safety segment where all of our international operations report and where the effects of currency movements are primarily recorded, the impact was even more pronounced. The reported 12% organic growth was actually 16% in constant currency.

Now, Rick already discussed some of the highlights of our growth in the domestic Food Safety business and a good portion of our Animal Safety business.

In a little while, Jim is going to talk -- discuss some of our international operations and I am going to focus on the highlights in the genomics business and then give you some financial color on a consolidated basis.

The genomics testing business continue to develop nicely in the third quarter with worldwide growth of 20% and 24% for the year-to-date period.

This business which has more than doubled in the volume in the past two years is based in Lincoln, Nebraska and has expanded in the past year as we added capacity in Scotland to serve the European market and then purchased the Deoxi Lab a leading genomic laboratory in Brazil.

Volume gain to be made on the strength of incremental poultry business, gains and testing for the commercial cattle market and university research projects. A particular note, our new testing options offer to the commercial diary market allowing the producer to understand a heifer's genetic potential well before breeding.

These tests which were developed in Lincoln and are sold through our Lexington Animal Safety field sales force have been well received in the marketplace with sales up 500% in this last quarter.

We will continue to invest in capital equipment and perhaps more importantly information technology to support the needs of this business as it continues to expand. Looking now to corporate financial, Jim mentioned that our gross margins were 46.3% for the quarter compared to 45.9% in last year's third quarter.

We had strong organic growth in the Food Safety segment and favorable product mix primarily the result of the vole outbreaks in North America and Europe and strong allergen and forensic kit sales. And these helped to overcome a loss of the higher margin ThyroKare business that Rich discussed and the negative impact of currency movements.

For the year-to-date, our gross margins were 47.6% versus 48.1% last year. Our operating expenses overall were up 11% for both the third quarter and year-to-date.

Sales and marketing expenses rose by 10% for each period with the largest components of this increase commissions, shipping and royalty expenses, all of which are based on revenue increases and higher salary expense, the result of increased staffing and compensation increases.

Our general and administrative expenses rose 13% for the quarter and have increased 19% for the year-to-date. Recent acquisitions account for the bulk of the quarterly and year-to-date increases with the largest components salaries, non-cash amortization of intangible assets acquired and related legal expenses.

Depreciation, primarily related to information technology and equipment expenditures was also a component of the increase for each comparative period.

Research and development expense were 8% over the prior quarter and are up 6% for the year-to-date, as the Company continues to invest in its product development programs in both new products and enhancements to existing products, primarily in the Food Safety segment.

Operating income rose almost 28% to a total of $14.4 million or 16.2% of sales compared to $11.3 million or 14.7% recorded in the third quarter last year. Other income for the third quarter was 1.1 million compared to the 264,000 in the prior year quarter.

The Company recorded a gain of 660,000 related to the settlement of a licensing agreement during the quarter and also recorded 440,000 of income related to net currency gains, primarily related to dollars denominated business in the UK.

Interest income in the current quarter was significantly higher compared to the prior year due to interest received on funds and deposit is Brazil, higher cash balance and rising interest rates on those balances. Our effective income tax rate in the quarter was 34% and that compares to 29% in last year’s third quarter.

Last year in the third quarter the Company amended its tax returns based on revised calculations of its research and development and demand and production activities and claim higher credits and deductions resulting in the lower rates in that period. For each year-to-date period, the effective rate was about 34%.

We generated $15.9 million in cash from operations during the quarter and invested about 2.6 million in property and equipment. For the year-to-date we’ve generated 45.4 million from operations and spend 8.9 million in property and equipment. Our inventory rebalances have increased 17% since the beginning of the fiscal year.

This is largely due to continued efforts to build out some of our key inventories both domestic and international to minimize back orders and improve overall service levels. In addition, the Company has acquired about $3.1 million in inventory from its two acquisitions this fiscal year.

Accounts receivable balances were flat in spite of the increase in revenues and our DSO has remained at 63 days for the past three quarters. The balance sheet indeed does continue to be solid. Overall, it was a very solid quarter and we’re going to work hard to close this fiscal year on a strong note.

Jim?.

Thanks, Steve.

As I listen to these two guys talk itself like we’re talking a lot of about the international and at the expense of why we're talking about a lot of great things that have happened domestically, but I think in focus the international importance is that we believe and have for sometime that's probably two-thirds of our total market opportunity outside the U.S.

and we’ve been growing good both places domestically and international, but domestic has outgrown international, and so we’ve had an opportunity to play a little catch up at an opportune time when we look at the problems of wind in our phase on currency translations, if we're buying properties in U.S. dollars, it will take you back.

So, let me talk a little bit about our international performance as a part of the overall growth strategy, that’s one of them strategies that the Company as you will remember. And our operations in Europe where we now have nearly 200 people, once again showed strong growth, up 31% in British pounds compared to the prior year.

So, this increase was reduced to 12% when we translated it to the dollars as we've discussed. Our Neogen Brazil operations were up 47% in Brazilian real. And in this case, I think as Steve mentioned, we actually got a boost to pushing them up to 81% when we converted the dollars as the real strengthen from its position a year ago.

It's still below where it was the two years ago, but it did get some recovery during the past June. Our Neogen China operations for the quarter were up about 68%. Indian operations were up over 200%. Canadian revenues were about five times what they were previous years. Now, these last three years all are working from a smaller basis.

Mexico was the exception to our revenue growth internationally then Mexican peso, revenues were up a strong 15%; however, due to the declining -- continued decline of peso versus the dollar when we recorded in these U.S. dollars at 15% up was actually down 1.7% when converted to U.S. dollars. Those are views that are close to the story.

We'll remember that we believe this international strategy is important for our future growth and years to come. In addition what we're able to show right now and the current the future strategy is paying out in current dollars and current performance.

When looks at Food Security and the need to produce higher quality food for that emerging middle-class around the world, it clarifies that Neogen's focus I think is there down. It's estimated that by the year 2030 and that's just 13 years away, the middle-class will grow from approximately 1.8 billion people to 4.9 billion people.

And it's not difficult to foresee that China and India will have the two largest and fastest growing middle-class populations. That's why Neogen is in China and in India. We're making good progress in China, but we still have tremendous amount of expansion and still available to us.

India is one that's requiring a bit more patience and as especially somebody like me. But I'm intrigued that the base that our folks are building from our company operations located in Southwestern India.

I think it's also clear that these two countries and others, many others in fact that have that growing middle-class are going to be able to produce the quantity of higher quality food that this population's growing demand. That's why Neogen food brings needs really to both Brazil and to Mexico.

Brazil as an example with the largest cattle population in the world, two times that of the U.S. along with the available land and educated population with the good work ethics will continue to be in a position to likely become the world's largest food exporter.

Because of proximity, we believe that Mexico will continue to have good growth in food production especially since its West Coast ports are in easy reach to Asia. As we look at Neogen's growth strategy, we've talked about international but we obviously have had good growth based on acquisitions.

These acquisitions have not been haphazard even though we've done 36 of these since the year 2000. All of them have been accretive and all of them are still producing revenue for the Company. We made four acquisitions in the last 12 months and that's not this fiscal year but the last 12 calendar months.

And I think they illustrated our continued focus on the Company's mission to take just a second to talk about those. Now, this time a year ago, we acquired Deoxi the largest animal genomics testing laboratory in Brazil. We’ve purchased that one on a Brazilian real basis which U.S. dollars any would have cost us a year earlier.

I've already mentioned how large the animal population is in Brazil and Steve has talked some about our animal genomics business, now it's growing on a worldwide basis. In May of last year, we acquired Preserve International, our largest competitor in the U.S. for cleaners and disinfectants. They bought not just U.S.

market share, but also chemistries that we needed in order to enhance our competitive position. In December, we acquired Quat-Chem another cleaner and disinfectant company located in Manchester, England.

We bought the English business valued in pounds sterling so again it took us fewer dollars to make that transaction than it would have a year ago These two acquisitions will likely produce approximately $30 million in disinfectant revenue on an annual basis our net income without some revenue casualty.

Back to number of years ago, Neogen acquired a part of its current line of cleaner and disinfectant products from DuPont and at the same time acquired distribution of other DuPont cleaner and disinfectant products in all of the Americas. Overtime, DuPont sold that business to another firm and then later this firm sold to LANXESS last August.

So, we did not have any new products that competed with the LANXESS product line in 13 about 15 distribution countries. LANXESS cancelled our distribution agreement which is their prerogative. So, we think that we’ll make up all of that loss revenue from that distribution fairly quickly.

In the short-term, we’re likely to lose up to a $1 million in revenue that we would normally have enjoyed in the fourth quarter. The most recent acquisition that was in December when we acquired Rogama, the largest rodenticides company in Brazil and also a producer of insecticides that used in animal agriculture.

This one again fits into our worldwide strategy of biosecurity where cleaners, disinfectants, insecticides and rodenticides, to tell the story again, if you can take clean animal to a clean farm and keep the farm clean by keeping out insects and rodents, we can deliver meat, milk or eggs to that farm gate without great concern about animal diseases while at the same time reducing the concern about antibody residue.

This biosecurity program I think obviously gets more important to us every day. Of course for the Rogama acquisition further bulks up by our presence in Brazil and that we purchased that one in Brazilian real, but we funded with U.S. dollars.

International growth and acquisitions are two of the four legs of our ongoing growth strategy, the third is market share those of you are familiar with the story or heard this one.

As the market grows and we continue to keep up with that growth and perhaps take a bit away from our competition along the way, this one will continue to help fulfill our growth in the bottom line results.

Even though efforts toward food safety have increased in the past decade, really on worldwide basis emphasis has been there which still having increasing problems as we try to produce more food on the same land mass, running our process and plants at higher speed and trying to distribute food further from the point of production. Just in the U.S.

in 2016, we had 273 food recalls from FDA, and that’s about a 23% increase compared to the prior year. The fourth leg of our growth strategy is new product development. I think we continue to stay close to the marketplace and working on new products at food producers and processors are going to require.

We have 75 scientists that are working in three principal locations around the world and that are keeping that pipeline full. We have several exciting ones that will be coming out over the next few months.

In conclusion, I think I could say we’re at the right place, at the right time with the right products and the right management team to continue the same programs that have made us successful over the last almost 35 years now.

We began our annual planning and budgeting process last week and I get an opportunity to see how the new fiscal year starts to unfold. What I am seeing at this point and the opportunities that I saw in visits to our Brazilian, English and Scottish operations last month again leave me excited about the future and where we’re going.

Let me stop at this point Christine and open up for any questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Paul Knight from Janney. Please go ahead..

This is actually Bill Mark on for Paul.

First question, what was the organic growth rate in Animal Safety?.

It was virtually flat Bill..

And then just on the revenue dynamic in terms of Food Safety and Animal Safety coming in closer to parity then what we’ve seen over the past six or eight quarters.

How do you think about operating margin and the long-term goal of getting back to 20%? What do you guys need to do in order to get to that figure?.

Well. Great. We’ve of course made some progress based on third quarter last year.

There is a lot of things to get involved in that both, those who are new to the story, our program for sometime has been to take a look at operating profits and 20% or above there when we get above 20% when we start to look at where we can put money back into the growth of the business as long as those growth opportunities present themselves.

When they get below the 20%, we start looking back upstream and you know where we might have some leakage or we might have missed in estimated some. The one thing we don’t know how to do and we’ll never know how to do I guess is what to do with currency fluctuations.

The currency fluctuations again this quarter took away a piece of operating profit, had we’ve been dealing with a level playing field and I think then who would win higher.

The second thing is you know I kid my folks and friends in the accounting that they come up with all sort of ways to make life harder to by changing the way we report things from quarter-to-quarter.

Once upon a time when you made an acquisition, you took all the cost that was involved in due diligence and you folded into the cost and what was leftover you call that goodwill and you amortize it over 17 years and it was all clean and simple and we all know what to do, but it was too simple and overtime our accounting rules have made it more complicated including the fact that now if you spent money in due diligence which you dame sure you should do, you expense to month and month in which you spent it, not over the like of the transactions.

So, it's possible to have acquisition that cost you $200,000 to $300,000 in due diligence cost you write-off before you have recorded the first dollar worth of sales.

So, those are some of the things that complicated haven’t made all of those excuses will play the hands is dealt to us and you know I think we only get back to the 20%, we got ways to get back there.

I feel good about as we mature some of these businesses, we are improving our gross margins asset through the session yesterday with one of our major groups that we're looking at budgeting and as they talking about improving gross margins have single digit compared to where they are this year. So, those are some opportunities that are out there.

Our 20% is still our bogeying I think we can still be there that was a long political answer to your simple question, but that's kind of what I see..

Thank you. And then just a second one on the genetic testing business.

What's driving the growth in that segment and then have you seen any increased demand associated with your partnership with Illumina?.

We're in budgeting process that's where I can speak pretty knowledgeable as we look at wrapping up the year and starting a New Year. I guess without saying to me things that actually you shouldn't say, but Steve is looking at me across the tables saying don't start telling things that everybody else don't know and I won't.

But the Illumina partnership for instance continues to be good, we had for those people who are unfamiliar with that story, quickly, we had developed our own models for genetic prediction on bovine species and some other things. And for Illumina we gave that to Illumina, Illumina made the chips for us.

We used the chips but then also we're also selling those chips to other people who were using their own equipment to get results. And that was when the Illumina thought maybe they are to be getting themselves. So, there is a part of the process, we said we'll license due to sell your chips with our content.

And you paid us what's total like a royalty fee on what's your sale. I think that helps us in the long-term because it makes our genomics model even more popular, but it also gives Illumina stop to sell their and that program come on pretty good.

And I think it shows opportunity for expansion around the world, I don't remember exactly what the numbers were probably I shouldn't say that I did remember, but that one is doing well.

What's driving that business? Well, its we've did some with our sales by increasing where we are last, I think last month we did 218,000 samples in one month, which pushes us to well over 2 million samples this year, which would make us clearly the world's largest animal genomics testing laboratory.

And in addition to that, we've built out a nice lab in our operations in here Scotland where we're doing good a bit of business there some of that it might be one-time year ago had come to Lincoln, Nebraska.

Now, we get it done closer to home and as I mentioned in my comments, we purchased the Deoxi in Brazil within the last 12 months and that piece of business is growing. So, when you put I think maybe when Steve talked his numbers, he was talking about consolidated our genomics business. On top of that we bought that business like small to smart guys.

We’ve been wanted to be in the genomics business for a number of reasons since it was a part of our strategy. We didn’t think we could get there on our own. We needed to buy our ways in and we talk it.

We talked to the scientist there and I said, if you can do all this with a little Holstein calf at a week of age what could you do, could you do the same thing with salmonella and E. coli and they said absolutely, we can do the genotyping there.

We can to tell you where it came from and we’re expanding that business going forward using that genomics capability to help in the Food Safety business, if we knew all along we could.

Ed Bradley and his people have put together a program where we’re now working with two or three of the largest meat producers in the world and helping them establish the method in which as they get a break in the field with one of those pathogenic bacteria that we can help them probably determine where that might have come from.

So, all that’s breathing toward saying that’s another one with those right product, right place, right time and we were -- I think the timing and all is fortunate, but I think we'll be able to take advantage of it..

Thank you. Our next question comes from Brian Weinstein from Williams Blair. Please go ahead..

Maybe we can start to just on the dry culture media and other segment that was up significantly in the quarter, up from frontline.

Can you just talk about more specifically about what was going on there?.

I want you to take it Steve..

Sure..

You're talking about the dehydrating culture media there?.

Right, it's in the 10-Q, the reporting on the slide culture media and other. The other includes our genomics business that’s running through Neogen Europe, includes our Animal Safety product line and running through Brazil and Mexico. Those are kind of the things Brian that are running through that other line.

The genomics business in Europe, we talked about the lab that we expanded in Scotland last year to increase our capabilities for the European market. The genomics business there has grown tremendously. So, that’s kind of the biggest line item in that number..

I'm sorry, you can ahead..

Yes, I just was going to blame it on my accounting buddies again in an effort to simplify sometime we complicate it so..

Yes, I mean percent trying just in that line rather culture media and other heavy trending kind of consistently in that 12 million or so. So, the top up there, you're saying is all really related to genetics over in Europe.

Does it seem like a big jump in the quarter?.

Well, there is another piece that’s smaller than that, but of magnitude and that’s our forensic kits that we’re selling into the Brazilian market to serve the commercial labs in that market. There was a law that changed last year requiring all commercial drivers be tested, drug tested prior to getting their license and that’s a big piece of that..

Okay.

And then on the rodenticide?.

I mean it might Brian just to kind of bring focus on what we called the dehydrated culture media business, we run an operation here that we’ve acquired back a number of years ago, it's important that what we’re doing, we call it our Acumedia media operations. And we sell, this is media that growth media that causes things to grow.

It's very important in the diagnosis of certain microorganisms because you got to grow them up to get the quantity enough to be able to find them. You know I mean this goes back to the invention of Louis Pasteur.

At the same time that dehydrated culture media are used to produce useful products and they go into vaccine -- they used to grow for vaccine production and things like that. So that business is strategic and has been its important in what we have in the U.S. as we serve the world.

But then we acquired the Lab M operations, it’s been about a year ago and they guys are just a little over a year ago. Again, that’s a middle England operation in Manchester and that’s helped expand what we’re doing with the sale of the dehydrated cultural medium products.

These are -- some of that is for plates where it goes out to companies they have the petri dishes a streak them and decide on things. So it’s very important part of our criteria as we’ve grown maybe in an effort to improve transparency.

We might have put them in the same bucket with some other things it might have been a bit misleading, so I apologize for that..

Brian, the biggest thing that I should have mentioned right out of the gate was the two acquisitions, the Quat-Chem and Rogama acquisitions are also running through that.

I was talking more when I was giving you the earlier color it was more on kind of the continuing business, but then there is the those two acquisitions are also what will do so those numbers as a fall..

We need to look at that when we report those. That based in Brazil mixed up with vaccine production in England something is wrong. Thanks..

Yes, no problem. And lastly, I have a question on the rodenticides and the insecticides and disinfectants sectors, I know you have the wall operating last year but just a trend line on that seems like net-net, we're sitting about 19 million last quarter, down a few millions sequentially here.

So, can you talk about the sequential change in that line and is this sort of more normal type of a revenue trajectory that we should we thinking about? Just to remind us, if there is anything last quarter that was kind of unique there?.

Steve, I don’t think it feels okay, I’m not sure what -- it feels good I mean it's growing, I am not sure what for year-to-year it was in reporting you Steve..

Brian, if you’re talking the sequential change, we don’t focus specifically on that but the third quarter of the year for those, particularly those businesses is kind of our lowest revenue quarter and then we talked a little bit the rodenticides business is a little bit soft with the vole outbreak subsiding and then the insecticide business.

It did about what we thought they were going to do, but little bit lower than last year. So, no, as Jim said, there is no issues in the businesses I think there were some explanations that made sense to us and we think that the fourth quarter those businesses will rebound a little bit..

It’s certainly looking good going forward I mean we’re right in the middle and particularly when you look outside of the U.S.

We’re strongly in the middle and the mosquito control and I don’t need to tell people how important mosquito control is to human disease spread and what those problems are though there is a lot of mosquitoes they can grow in stock tanks where cows drink too, so there is good opportunities to for this insecticides business.

And it's heavily influenced by the weather and did we -- everybody is wondering now that we get a cold enough winter to kill insect all for basically they're going to come back and our guys are listening process trying to plan that because you can't start making them overnight.

So, I think the insecticides side of our business it fits right in with a strategy. There will be some seasonality as Steve pointed out and some issues based on weather, but in the long-term it's a strong place and we're not overburdened by competition there..

Okay go back to the first question. Let me ask one of them on operating margins.

Can you talk about specific things that you think that your team is able to do to drive gross margins higher in the short-term and I want to extend on any of those specific items? I mean what you guys are doing to drive other than sort of even integrating acquisitions in the more mature increased markets? So, it's a specific set that you guys are doing about the growth in the operating margin side, you alluded to exactly to be more specific.

Can you be more specific of that?.

I think from two standpoints, one way to improve your margins is to increase prices and I think we've got into a position that we're in a better spot to increase prices as we look at and where we stand with competitions.

And we're looking at pricing not just that pricing but if we do something for our customer that saves same money or make same money and we charging more for that, and our people have been pretty creative on pick up the significant area.

I think we're going to have an opportunity to increase prices whether we haven't named any name to the wall on that yet, but we're starting to do our budgeting process I think that's there. It's that because we do all those things other than we're not in a commodity auction that we can make it or we can sale it the cheapest.

As we've gotten bigger economies of scale coming in. So there are clearly helping and are going to continue to help our cost as it relates to that raw material. We're continually aim for more economical raw materials on our animal safety side that's the cheap cost.

And our direct labor cost are good, we're not squeezing money out of our employees that makes great, but and as we've been able to automate, we've been able what might have been 8% or 9% direct cost which is down a percent or two now because of effective automation that's helping us.

And we've got kind of a fixed amount of overhead and administrative cost, we don't have to have one Rick Calk and one Steve Quinlan and the more dollars we dividend them over. The better off, we look there. So, I think and there is a lot of things working for us, the economies of scale and ability to increase prices.

It's just too early to say what I think the margin is going to reflect the next year because we're just beginning to get into that process. But what I've seen so far looks pretty promising..

Thank you. Our next question comes from Charles Haff from Craig-Hallum. Please go ahead..

First question I had Steve, you mentioned $440,000 gain.

Was that foreign currency or can you just explain that a little bit?.

Sure, Charles, that's a couple of pieces, we have our hedging program is in those numbers and then it's really -- it’s the difference between what we collect when we actually collect the receivable and what we actually invoice it at.

So, the difference in the currencies in that time period is where we recognized that other income and expense down in that line. So, we just happen to have fairly significant activity in the UK where they sell in some cases dollar denominated sales and then they -- the dollar actually improved against the pound in that period.

So, we have some pick there. So, that’s really what sides there 440, 000, it's kind of fall of the, it’s the Brazil, the Mexican, the pound the euro all is compared to the dollar in those markets. And then there is offset to that four additions to that with our hedging program..

And then for D&A revenues which were classified in Food Safety this quarter.

What were those?.

The absolute amount?.

Yes.

In the food safety segment and then also forensic kits, if you have it?.

Our forensic is kind of spread across and we have forensic products going into need in Europe. Forensic product it’s a part of our Lexington operations and then because of some of that now going to Brazil and some of that gets recorded in Brazil. The product might have been in the company transport at the Lexington and so.

I'm not sure we’ve done a consolidated forensic that’s not been too important for us to look at that we are do..

Okay..

I know it's better but I don’t think we can get you a number on that right now, Charles..

Genomics is about 2.7, Charles..

Okay. Great. Thanks, Steve. And then Jim when you think about your international distribution infrastructure obviously you have a lot of opportunity internationally you mentioned about two-thirds of your total opportunity there. Have you kind of view your current international distribution.

I know you did an acquisition of a Chinese distributor couple of years ago.

What are the things pockets do you see that need to be filled going forward in the next couple of years?.

Good question. John. Thanks. First of all, if you look at Food Safety and Animal Safety a little bit separate. The distribution system on the Animal Safety side is a big different. They were dealing with larger products we’re delivering about pallet load by 50 gallon drum whatever.

So you need truck and warehouses and so that means that you need to be a part of what's already very efficient and existing distribution system. So, regardless of where we are in the world a big part of those products move through the distribution system to the people that are going to get it to the end users.

Now, to support that, we’ve got a group in the field that are calling on their particular major protein producers, be there dairy, be there chicken, pigs whatever that are same and when you place your order as for Neogen, and that same group has also able to sell things like I did in ample replacement program where you don’t have to have trucks and warehouses.

So, that’s kind of hybrid system on the animal side. We’re in the process of expanding. We’re in good shape there with the U.S. I think we’ve had everybody we need in the U.S. and are properly addressed. We’re not that good a shape in the rest of the world because sometimes we’re in a good shape we’re expanding.

Then if you look over at that might exclude safety side they will allow for your customers and you don’t have as many branches and farmers get it around the world s you do. This is naturally of the world that are running in process and plants.

So there we are able more to go direct in the U.S., Canada and Mexico, we have our own feet on the ground where 90% of all that business is rolling in from our sales people will have right orders.

When we get outside of the U.S., we rely on distributors in and we’re in a 110 countries I think now and we rely on distributors and some of those however on the Food Safety side, we’ve got our own sales force that’s covering the UK that's Scotland, England, Northern Ireland, Ireland and then we’ve got our own sales force in Germany, own sales force in France and our own sales force in the Netherlands.

So from that standpoint we have our own sales group, we got our own sales force in Brazil covering the food and safety business. So, I think as we depend upon what we’re doing and where it is will expand distribution through distributors as we avail ourselves with some of those international distributors that we don’t have today for Animal Safety.

And there will be some other opportunities like the China opportunity that you talked about. In fact that’s how we started in Asia and Europe, we had good distributor in Scotland where you liked each other and we bought that business and rest is history.

So I think from that food & safety standpoint we’ll continue to look at opportunities where we can add into those countries where you not only get the place where I got for practices somebody has got to bribe, somebody or whatever but I think there is going to be opportunities that will continue to expand our food and safety distribution through some of the places today where the grabs are working with distributors..

Okay. I’m just trying to understand you know you are putting up very strong growth in these countries.

All you are in Europe as well but then thinking more about Brazil, China, India, Mexico, you’re putting up very strong growth in those countries and I am just wondering if distribution becomes a constraint at some point argue pretty well you have a pretty good line of sight for the next couple of years and it’s not going to be constraint for you?.

I think that is true it doesn’t take UPS and FedEx moves a lot of our Food Safety products around. There is cigar sized boxes that contain biscuits. So it's even much easier to move those around.

But in most of the countries where we are today, there is an established what some people would refer to as an animal health distributor business and our products did well there. We worked with the couple of major producers.

Merck is short of a partner of hours in working only animal genomics there because that gives their people who are selling vaccines and pharmaceuticals sub master sale when they go to the field. So I think we’re okay..

Okay. And then last from me Steve on Animal Safety organic growth or reported growth you know for the fourth quarter you got a lot of cost currents going on here. It was about flat this quarter and I am just trying to figure out how to model Animal Safety growth in the fourth quarter.

Is there any assistance you could give me there in terms of my inputs and how I think about that?.

Charles, Rick talked a little bit about the ThyroKare that's going to be a $1.8 million or so whole in the fourth quarter that we have to make up. So and I think we will make that up, but anytime you're trying to recover a $1.8 in the quarter it's going to make your organic growth look fairly sluggish.

So we can talk after the call, I don’t know that I can give you much except to say that the markets are still strong, and there is a lot of pieces and parts that are moving in there. But I can't give you anything specific now..

That business is growing. I mean it's in the casualty on because LANXESS. There is probably $1 million worth of product in there that we would have sold it belong to LANXESS that they’ve taken away from us that we would normally gotten in the fourth quarter.

But we're bringing on instead though more than that by adding the Preserve acquisition which came on this year..

Yes and Quat-Chem..

Thank you. [Operator Instructions] Our next question comes from David Stratton from Great Lakes Review. Please go ahead..

Really quick, can you dive in a little bit on the dairy genomics, huge growth this quarter and just kind of what you see going forward and maybe how big of the business that is right now kind of get some color around that growth?.

Yes, it's a true place to easy place to be able to determine the value of genomics.

If I can take a day old dairy calf little black and Holstein heifers calf and inner Magnolia China and I can pull dozen of half out of retail and put it in accordance, send it to Lincoln, Nebraska and they can come back in 10 days and give you a prediction, it says how good milk producers she's going to be, what kind of feed conversion you might expect, what kind of -- how quick of will she breed back, what kind of calf what kind of mammals would you make.

Those are truly, truly game changing kind of things and that's really kind of where we are. The milk production around the world is competitive based on supply and demand. And the successful dairymen are going to be those that are make sure that they're saving the right genetic stock.

And that's exactly what our program does it allows them to from a group of females to select the one they want to keep for replacement. So that's become even more and very important as we move along. And that it's now become pretty well established as I can do sex semen I can go through.

I can take the semen from the bull and through a process eliminate those that would have provided male calves and inseminate those cows only with the female producing semen. So, now I've got a lot of population of their efforts to select from. So, it is the selection process makes it even better.

But that's -- I don't know whether that's the almost comparable another story. But I don't know whether that helps you or not, but that’s the importance of what we see. And the dairy business around the world is important.

It always has been important with that’s why we’re there with diagnostics to be able to check the presence of antibody residues in milk. It is important going into the diets of infants and children and I think always will be.

So, anything that can happen that be able to improve the cost production of milk for the safety of that milk, if you want to continue to be important..

And then when we hit into that disinfectants, you mentioned that generic disinfectants and can you just give a little bit of color on that? And is that included in the veterinary instruments line items or is that with the other biosecurity things?.

I'll let Steve answer this the way he puts this on the segment..

Yes. That would fall in the cleaners and disinfectants area that instrument is pure vet instruments..

And then on the long on the disinfectants, are you seeing any early indications of people stepping up their disinfectants and purchasing due to the bird flu in Tennessee early signs of that. I know it's only maybe a few weeks old.

I was wondering, if you're seeing anything maybe there?.

Well, probably I can’t pinpoint exact gallon s and where, but that’s where our products come in as number one not just when you get an emergency, but on a regular basis last story putting a clean animal in a clean and keeping it clean, you got to start with the clean house and their can clean consignment whatever that might be.

This was the situation in Tennessee where I guess the whole secret they're largest poultry producer in the world had a breeder block that broke. I don’t think we know how the avian flu got there, but their systems being tested where they found it, pretty quickly.

Here is I can tell they when see they destroy that block, and so they will go back in after the clean up, they'll go back in with one of our disinfectant products we’ve got a couple of avian influenza and they make sure they got good and clean before they go right back with the next line of birds.

So, that’s -- it’s not a widespread as it was a year ago when a lot of product care across the upper midwest and hit all the egg production areas up there. But, we know it's a waiting to happen anytime. We don’t know where it comes from. Sometimes it’s a fighting rooster that came over from Mexico in somebody's coat pocket that had it.

Maybe it's a goose that brought from somewhere in, but it's always going to be an issue and as we continue to raise more animal on the same confined space and try to run them through same kind of processing facilities, it will just require more and more safety.

Anything, we can do to get a safer product to that farm gate is going to be big help and I think the world recognized it..

Thank you. Our next question comes from Kurt Kemper from Hilliard Lyons. Please go ahead..

Thank you for taking the questions. I got to kick off the call for a second, so sorry if any of these are repeats.

Steve, could you give me the revenue contribution from Quat-Chem and Rogama in the quarter?.

It's about $4 million combined..

Okay. And then I noticed allergens and toxin sales are pretty strong, the categories are up by about 10%.

Could you give any color on how drug residue did?.

Drug residues were down and that’s a business that we have a very strong presence in Europe and we think we’ve lost a little bit of share there. We have a number of new products that were working on that are due to be introduced near future but in that category the allergens were up I think approximately 14%.

Mycotoxins were very strong and those were up 29% and then the drug residues or dairy residues were down..

Okay. And then last question, could you kind of broadly speak about the margin profile or some of your acquisitions targets.

Is it generally lower margin in emerging markets or higher margin developed and any sort of color around that?.

We really are not focused on emerging markets much. Our product line is probably still a bit sophisticated for the emerging market. We are focused on those more developed markets and I guess you can say China and India are emerging markets I suppose.

But they're also where we’ve got a huge middle places that are developing that are already demanding safer higher quality food. So, to that extent, I think we’re doing good where our margins are, we don’t look and you probably remember if that story. We try to focus on operating profit, not gross margins.

You know I can have a product that’s not a whole lot attractive in gross margins, but if I can run it to the same sales force and don’t have any big sales and marketing cost and it's already fully developed and not only needs a spin 10% owned R&D, and it's truly bolt-on then I can get a big part of the gross margin all the way through to the net operating.

So that’s a reason we prefer to look at net operating because as you look back even at the acquisitions I talked about this morning, it is essentially all bolt-on. We’ve got three rules when we look at acquisitions. Number one, do we understand the technology. Number two, could we manufacture if we’re willing to.

And number three, do we have access to the marketplace. And in all of those they hit that category..

Thank you. Our next question comes from Peter Quill, who is a Private Investor. Please go ahead..

I won’t take much of your time because I know you’re getting hungry and it's chill time, but I have for a one question concerning.

Are you receiving any feedback yet about pushback of federal regulations for your products like your Food Safety or Animal?.

I think the answer is no. Nobody wants to mess with Food Safety. I mean that’s we’re going to rebuild, we can't on that with unsafe food and I think that, that’s sort of around the world. Will there be some changes over at EPA, actually that would probably mostly think that that’s in the first place like we’re there is some relaxation of some places.

But you know it’s a relaxing and that will make it easier for us to get product approved. But to certain I don't make any changes and having now to kill the insect or something that will take care of killing the microorganisms of the viruses of animal disease.

So, I don't really think whatever game is, we'll play the hand, but I don't think that's caused anything that really at this point will be big concern there..

Well, that sounds good I'm impressed with your 100th quarter of revenue increase..

Thanks Peter. Most of them we appreciate that..

Okay. I'm getting a little tired of having to say for 100th time I guess. But again good luck and keep up the good work. Thank you..

Well now we can try to say it because don't need any opportunity to contain these..

Okay. Bye now..

Yes..

Thank you. I will now turn the call back over to Mr. Herbert for closing comments..

Well thank you very much and thank you for your time this morning and your questions and your continued interest. I think you could tell from the comments here today and hopefully our answers that we continue to be really excited about where we are and where we're going. We're going into the fourth quarter now we've been wrapping up the year.

And we will be back to you quite as quick next time. And if we get the year in close, I think probably the next scheduled conference will be sometime mid-July I guess. So, in the meantime those that are looking at don't ever hesitate to contact me as it relates to anything having to do with the investor work.

And he does the great job on top of those investors work with them. And obviously, Steve and his team, we don't make forecast and they won't give you forecast, but they can help you develop your own model probably. So, thank you all once again and have a good week for all..

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