NEOG

Neogen Corporation (NEOG)

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Neogen (NEOG)

Q2 2012 Earnings Call

December 22, 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

S. Brandon Couillard - Jefferies & Company, Inc., Research Division

Larry Southam

Brad Hoover - Sidoti & Company, LLC

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

Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division

Joseph Hartman

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

Gregory W. Halter - LJR Great Lakes Review

Anton Brenner - Roth Capital Partners, LLC, Research Division

Scott Gleason - Stephens Inc., Research Division

Presentation

Operator

Welcome to the Neogen Second Quarter Fiscal Year 2012 Earnings Results Conference Call. My name is Hilda, and I will 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 Mr. Jim Herbert. Mr. Herbert, you may begin.

James L. Herbert

Well, good morning, and welcome to our regular quarterly conference call for investors and analysts. And today, as you know, we'll be reporting to you the results of our second quarter that ended on November 30 and the first 6 months of Neogen's 2012 fiscal year.

And I need to remind you, of course, that some of the statements that are made here today could be termed as the 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 today.

These risks that are associated with our business are covered in part in the company's Form 10-K as filed with the Securities and Exchange Commission. In addition to those of you who are joining us today by live telephone conference, I'd also welcome those who maybe joined 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. And following our prepared comments this morning, we'll entertain questions from participants who are joined by this live telephone 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 announcing the results of our second quarter of the 2012 year. And I guess we learned quickly what happens when you miss analyst expectations.

From a revenue standpoint, we are once again reporting record numbers, but just barely. Revenues for the company's second quarter were approximately $44.9 million, and that's about 2% ahead of the same quarter last year. This brings the first half of the year to a total revenues of about $90.6 million, or a little better than 4% ahead of a year earlier.

Net income for the quarter was approximately $5.2 million or $0.22 a share, as compared to the prior year's second quarter of $0.26.

On a year-to-date basis, net income now stands at approximately $11.2 million, as compared to $11.9 million in 2011. Then if you want to calculate that down to per share, that calculates to $0.47 a share in the current year, compared to last year's $0.51.

Well, while I'm pleased to report that we remain solidly profitable, I'm, of course, not pleased to report that we did not meet the high expectations that we have grown to expect from ourselves.

In fact, this is quite a bit different from the report that we had prior year, last year at Christmas time, when we reported second quarter revenues at 5.25%, and net income was actually up 33%.

And that's probably one of the reasons this made this quarter a little more difficult by comparison. Though the quarter was not monumental, it was the 79th quarter in the past 84 in which we reported revenue increases that compared to the prior year. I think that record now spans 21 years.

Let me start by making my -- remainder of my comments here by giving you assurance that we do know exactly what happened during the past 3 months, and we know how we're going to go about correcting the business and getting it back on its normal course.

You may remember that we began talking with you at the end of last fiscal year about how we plan to expand our overall capabilities to take advantage of market growth that we expected in both our Food and Animal Safety areas.

A big part of that planned expansion was in people. And frankly, we intended to hire on a phase-in basis and trickle those new employees in over the course of 6 to 8 months and, therefore, let the early group bring in increased revenue to cover the cost of the later hires.

We've now pretty much increased our manpower numbers to where we expected, but unfortunately we didn't trickle them in on the plan that we had in mind.

At the end of November 2011, just a month ago, we had approximately 730 employees, as compared to 640 employees a year earlier, and I think that will give you a pretty good idea of what happened to this bottom line shrinkage.

I think that the sluggish worldwide economy has also began to catch up with us, particularly outside the U.S. When the world economies began to go topsy-turvy about 12 quarters ago, we managed to continue to show nice increases in both the top and bottom lines.

And I guess I'd like to think that we drove through that sluggish economic situation. But in the last 2 quarters, the slugging has just been more difficult. This has particularly impacted our European operations, where we've been able to grow about 20%-plus each quarter for the past several years. Neogen Europe, however, this year was only able to achieve a 4% increase in revenues for the second quarter.

There, we've done better where we had our own sales organization on the ground in the U.K. and in France. But in the rest of the EU, that's mostly served by our independent distributors, has been much tougher. In fact, 12 of our 17 strongest European distributors are showing reductions in year-to-date revenue.

But in no case do they believe that they've actually lost market share. I think this simply reflects the economic slowdown in places like Ireland and Greece and Spain and Italy and Portugal. Being able to collect on what we've sold has also been an impediment in a few cases there.

So we know what has happened, and also, we know what we're going to do to get back on track. And I’d like to quickly highlight those, and Lon will talk more about them. But in the past several months, we've been doing a number of things that we think will help our progress during the last half of the year. On the Food Safety side, we will be adding a whole new family of diagnostic products in the pathogen detection area. I'm sure Lon will talk about those in his comments in a few minutes.

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