NEOG

Neogen Corporation (NEOG)

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Neogen (NEOG)

Q1 2012 Earnings Call

September 27, 2011 11:00 am ET

Executives

Lon M. Bohannon - President, Chief Operating Officer and Director

James L. Herbert - Chairman and Chief Executive Officer

Steven J. Quinlan - Chief Financial Officer, Principal Accounting Officer and Vice President

Analysts

Brad Hoover - Sidoti & Company, LLC

Steven F. Crowley - Craig-Hallum Capital Group LLC, Research Division

Gregory Halter - Great Lake Review

Reggie Miller - Credit Agricole Securities (USA) Inc., Research Division

Stephen A. O'Neil - Hilliard Lyons, Research Division

Gregory W. Halter - LJR Great Lakes Review

Marco Rodriguez - Stonegate Securities Inc., Research Division

Anton Brenner - Roth Capital Partners, LLC, Research Division

Scott Gleason - Stephens Inc., Research Division

Presentation

Operator

Welcome to Neogen's First Quarter Fiscal Year 2012 Earnings Results Conference Call. My name is Monica and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Jim Herbert. Mr. Herbert, you may begin.

James L. Herbert

Thanks, Monica. And again, to those participating, good morning, and welcome to our regular quarterly conference call for investors and analysts. Today, we'll be reporting to you on the results of our first quarter, which ended on the 31st of August. And I'll remind you that some of the statements that are made here today could be termed as forward-looking statements, and these forward-looking statements, of course, are subject to certain risks and uncertainty. The actual results may differ from those that we discuss today. Those risks that are associated with our business are covered in part in the company's Form 10-K as filed with the Securities and Exchange Commission.

In addition to those of you who are joining us today by live telephone conference, I also welcome those who may be joining by way of simulcast on the World Wide 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 participants who are joined on this live conference. And I'm joined today by Lon Bohannon, Neogen's President; and Steve Quinlan, our Chief Financial Officer.

Earlier today, Neogen issued a press release that announced the results of our first quarter the 2012 fiscal year. And once again, we continue the succession of another record-breaking quarter in terms of both revenue and earnings.

As I will discuss in the next few minutes, there were times during the last 3 months that our team of now approximately 700 employees felt some challenges. However, I think all of us once again remember that the toughest thing about success is you have to keep on being a success, and I think the results that we'll report today prove that.

As the press release reported, our revenues increased in the first quarter by 6.5% and to $45.7 million. That compares to $42.9 million in the first quarter of last year. This quarter marked the 78th quarter in the past 83 in which we've shown increased revenues as compared to the year earlier. Given the nature of our business, I even marvel at times at how we only had 5 down quarters in the last 21 years.

Net income for the first quarter was approximately $6 million or $0.25 a share. This is approximately 3% greater than the same quarter last year.

Though this quarter obviously didn't show the strong double-digit growth at the top and the bottom lines that we normally can report to you, I'm reasonably satisfied with the results. Over 41% of our total revenues for the quarter came from international markets. For the past several months, we've been operating in what I would define as a sloppy world economy. Let me quickly say that I don't believe our operations are sloppy. In fact, quite to the contrary.

However, we just had more moving parts in this quarter than we normally expect. In some cases, we delayed shipments to customers because of government-imposed currency transfers, which have now been resolved. In a few cases, our product mix almost turned topsy-turvy and increased revenues came from lower-gross-margin products than they were a year ago.

Our revenues in our GeneSeek operations were down almost $1 million as compared to the prior year because of timing differences from parts of Europe, Australia and New Zealand. A year ago in the first quarter, we satisfied a pent-up demand that we'd been building for several months for a new genomic test, and that bulged that first quarter revenue of last year. However, that same business is now flowing on a more steady basis, and some of it will fall into the remainder of this fiscal year.

Our operating margins for the quarter came in at 20.5%. This is down about 2% compared to the same quarter last year. However, I think many of you remember that it's long been our goal to try to hold the operating margins at around that 20% level. And I think we've been telling you for the past several months that we thought that 20% was about right, and it was a healthy objective and that we'd be continuing to invest more into our expansion efforts to take advantage of overall market growth.

During the quarter, we used some of the cash balance to get better prepared for that growth that I just mentioned. We spent almost $5 million in Kentucky to add a 120,000-square foot facility to enlarge our manufacturing capacity, increase and improve our distribution operations and expand our sales and marketing space. We used about $800,000 in the acquisition of VeroMara labs in Scotland and the consolidation of those labs to our facilities in Ayr, Scotland. This opens up new markets for us in the aquaculture/mariculture area and also some cutting-edge technology related to diagnostic tests to detect important toxins in shellfish.

We spent both financial and management resources during the quarter in expansion areas. This included getting 2 products ready for market launch that employ new technology that we believe has considerable long-term impact. We expected that the first product from each of these new platforms should be released this quarter, in fact one of them perhaps even as early as this week. We also spent considerable effort in increasing manpower during the quarter. We hired 66 new employees to allow us to take advantage of expanding market opportunities going forward.

As I said, all of this is happening in the midst of a lot of moving parts. In the extreme southwestern part of the country, we've seen more severe drought and hot weather than has ever been recorded. Some estimate that as high as 40% of the cattle herds in Texas, the nation's largest cattle producer, have now been liquidated. In other parts of the country, we saw an overabundance of rain, which caused crops to get planted late in the spring and therefore pushed harvest back probably about several weeks as compared to last year. With a few exceptions such as the drought-ridden area, I think that our customer bases pretty much around the world is healthy, but I think the uncertainties have caused them to accumulate cash rather than grow.

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