NEOG

Neogen Corporation (NEOG)

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Neogen Corporation (NEOG)

Q2 2010 Earnings Call

December 18, 2009 11:00 am ET

Executives

James Herbert – CEO

Lon Bohannon – President & COO

Richard Current - CFO

Analysts

Steven Crowley - Craig-Hallum Capital

Scott Gleason - Stephens Inc.

Brian Jeep – Sidoti & Company

Marco Rodriguez - Stonegate Securities Inc

Stephen O'Neil - Hilliard Lyons

Anton Brenner - Roth Capital Partners

[Joseph Potman] – Wells Fargo

Presentation

Operator

Good morning ladies and gentlemen and welcome to the Neogen second quarter fiscal year 2010 earnings results conference call. (Operator Instructions) I will now turn the call over to Mr. James Herbert. Mr. Herbert, you may begin.

James Herbert

Good morning and welcome to our regular quarterly conference call for investors and analysts. Today we will be reporting on Neogen’s fiscal year 2010 second quarter that ended on November 30, 2009.

I’ll remind you that some of the statements that are made here today could be termed as forward-looking statements. These forward-looking statements of course are subject to certain risks and uncertainties, and the actual results may differ from those that we discuss here today. These risks associated with our business are covered in part in the company’s Form 10-K that’s filed with the Securities and Exchange Commission.

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

Following our comments this morning, we’ll entertain questions from those of you that are joined on the live conference, and I’m joined today by Lon Bohannon, Neogen’s President, and Richard Current, our Chief Financial Officer.

Earlier today Neogen issued a press release announcing the results of our second quarter and the first six months of the company’s 2010 fiscal year. I’m very pleased with these results considering the economic situation that’s been encountered by many of our customers.

Revenues of our second quarter were approximately $35.3 million or a 13% increase from the previous year’s second quarter. The second quarter net income increased 18% over the same quarter a year ago to approximately $4.6 million, and that’s another quarterly record for our 27 year old company.

This translated to $0.20 per share compared to the prior year’s $0.17 when this is restated for the 3-for-2 stock dividend. You will remember that the company declared a stock dividend of one additional share for each two shares held, that dividend became effective on Tuesday of this week and the shares outstanding increased from approximately 15 million shares to approximately 22.5 million shares.

The results of the second quarter extends our consistency record to the 71st quarter in the past 73 when Neogen has reported revenue increases as compared to the previous year. That’s a record that now spans 19 years.

Year to date revenues for the first six months now stand at approximately $67.6 million, that’s a 13% increase compared to last year’s first half. The year to date net income for the first six months now stands at approximately $9 million or an 18% increase over last year’s $7.6 million.

A lot of the credit for this accomplishment goes to Lon Bohannon’s operating group, and in fact the credit goes to all of Neogen’s over 500 employees throughout the world. Because of some timing issues it was again a particularly good quarter for cash flow as we generated over $7 million in cash from operations for the quarter.

Of course all these factors continue to strengthen Neogen’s balance sheet and this has resulted in a 10% increase in shareholder equity compared to our position just six months ago on May 31. At this point I’ll stop talking about the quarter and in a few minutes Lon can give you some of the real color of the various areas of our operations.

Instead let me talk about what I see for the company in the upcoming quarters and some of the factors that effect the marketplace for our products. We were successful in putting a part of that cash that I just mentioned to work effective December 1st with the acquisition of the BioKits Food Safety Division of Gen-Probe.

This company located in Deeside, Wales is only a few hour’s drive from our headquarters of Neogen Europe Ltd. located in Ayr, Scotland. The business had sales of approximately $3 million in the prior 12 months. The business is concentrated in diagnostic test kits for the detection of foodborne allergens and an interesting group of tests to determine meat speciation.

We believe that this latter piece of business is apt to grow as there’s more concern about economic adulteration and the desire to better authenticate meat products for ethnic reasons. The majority of the business is within the European Union where we are already building a good market share. Furthermore the acquisition brought approximately 50 new diagnostic test kits to Neogen’s offering.

A number of these test kits for the detection of foodborne allergens had not yet been developed by Neogen. Neogen has enjoyed strong double-digit growth in the foodborne allergen business for the past number of quarters. We’ve talked about that in several quarter conference calls. In fact based on a new study just released by the Center for Disease Control, food allergies among US children jumped 18% from 1997 to 2007. That’s a 10-year period.

Some of this increase may be due to a greater awareness of the disease by parents and healthcare providers, but for whatever reason there’s a greater concern and a continuing need by food processors to guard against the inclusion of allergenic products that are not included on the label of the food.

Weekly reports of food recalls due to food safety issues and of course from widespread coverage by the popular press has continued to draw the attention from lawmakers. These food safety concerns are also impacting our US international trade.

As an example last week, Russia added four more US pork processing plants that are banned from selling product into Russia. Russia by the way is one of the five largest export markets for US pork. This brought about a total of banned plants to 11 that Russia now has that are not eligible to ship product into Russia, and Russia now states that US pork process producers and processors could face a complete halt based on antibiotic residues that they have found in finished pork products.

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