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Neogen Corp. (NASDAQ:NEOG)

F4Q08 (Qtr End 05/31/08) Earnings Call

July 22, 2008 11:00 am ET

Executives

James Herbert - Chairman and CEO

Lon Bohannon - President and COO

Rick Current - CFO

Analysts

Tony Brenner - Roth Capital Partners

Steve O'Neil - Hilliard Lyons

Vito Menza - Sandler Capital

Peter Coyle

Operator

Good day, everyone, and welcome to the Neogen Corporation fiscal year 2008 year-end results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. James Herbert. Please go ahead, sir.

James Herbert

Good morning and welcome to this regular quarterly conference call for investors and analysts and as was just reported, we'll be reporting today on Neogen's fourth quarter and the full year that ended on May 31.

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. The actual results may differ from those that we discuss today. And the risks that are associated with our business are covered in part in the company's Form 10-K, that is filed with the Securities and Exchange Commission.

In addition to those of you joining us today by live telephone conference, I'd also welcome those who may be joining by a 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 prepared comments this morning, we'll entertain questions from participants who are joined by this live telephone conference. I'm joined today by Lon Bohannon, Neogen's President and Rick Current, our Chief Financial Officer.

Earlier today, Neogen issued a press release announcing the results of the fourth quarter and the fiscal year that ended May 31, 2008. And those of you have seen in the press release will see that we didn't break the tradition. We once again set a new record for the company for both the quarter and the year.

However, let me turn over the program at this point to Lon Bohannon, Neogen's President and Chief Operating Officer to fill in on the details. Lon and his team can take justifiable pride in this very outstanding performance for both the quarter and the year. Lon?

Lon Bohannon

Thank you, Jim, and welcome to everyone listening on the conference call, as well as those joining us via the Internet. As Jim indicated, Neogen issued a press release earlier today, describing our fiscal year 2008 fourth quarter and year-end operating results. 2008 marked the achievement of an important milestone to many of us, and I am sure many of you have been looking forward too for several years.

For the first time in our history, Neogen achieved total annual revenues in excess of $100 million. This significant accomplishment is attributed to the hard work and the commitment of Neogen's total work force. At the beginning of the year, our employees dedicated themselves to hitting sales of $100 million and then they worked as a team to make that goal a reality.

In a few moments I will talk some more about year-end results, but I would like to begin by providing just a few details on our outstanding fourth quarter that continued our strength of exceptional top and bottom line quarterly growth.

Our fourth quarter revenues of just over $27 million, represented the 20% increase, compared to the prior year, and continued our string of quarter, showing an increase in revenues, compared to the prior year. This is a record that now covers all but five quarters in the last 17 and one-half years. I think even more impressive, that overall 20% increase in revenues resulted in a 46% increase in quarterly operating profit, compared to the fourth quarter last year.

But not only was this our best quarter of the year in terms of incremental percentage growth in operating profit, it extended our impressive run of profitability in consecutive quarters that now dates back over 15 years to the fourth quarter of our 1993 fiscal year.

In spite of some very challenging economic conditions, Neogen was able to improve its gross margins to 52%, compared to 51% in last year's fourth quarter. Both direct labor and overhead declined as a percent of sales due to cost saving initiatives and better leveraging of facilities and staff that resulted in an overall improvement in productivity.

International sales remained strong for the quarter, coming in at 40% of total revenues. This strong fourth quarter performance helped push international sales for the year to more than 38% of total revenues and that kind of provides nice segue for me to move on to discussion of our year-end results.

Hitting a 102.4 million in sales was not easy but we were fortunate to get strong sales growth in most all of our operating groups. Most of the growth performance in these operating divisions was explained in some detail in the press release issued earlier today. So, I thought I would spend some time in this conference call, providing information on some of our top performing product lines in fiscal year 2008.

One of Neogen's core product lines continues to be test for the detection of natural occurring toxin. In 2008, this 20-year-old product line achieved organic sales growth of 12%. International sales of mycotoxins test kits were particularly strong, led by exceptional performance in our Neogen Europe operations, where sales of mycotoxins and histamine test kits grew more than 50%.

Another product line with strong growth in 2008 was our group of diagnostic test kits to detect drug residues. Sales of test for the dairy antibiotic residues and milk were up 25%, compared to the prior year, and our drug residues sales to the forensic market and animal racing industry increased 23 % over the prior year.

Food allergen diagnostic sales experienced yet another year of superior growth with an increase of 16%. Although recalls associated with harmful bacteria have garnered more headlines recently, inadvertent contamination of food allergens continue to be a major cause of food recalls.

Diagnostic kits sold into the life science research market were another area of strength, with organic growth of 16% in fiscal year 2008. This represents a third time in the last four years this group of products has achieved double digit same-store sales growth.

Our 2.5 year old Soleris product line of instrument-based test systems for the detection of general microbial contaminations, spoilage organisms had another outstanding year in 2008. This unique product line achieved overall organic growth of 36%, with expanded market penetration into the nutraceuticals market, and placement of systems with distributors in a number of export markets.

Neogen's eight year old line of veterinary instruments continued their recent trends of double-digit percentage annual sales growth in 2008, led by the introduction of new syringes and syringe needle combos in a hard pack format. Sales to OTC distributors and large OEM animal health customers increased 13%.

A 35% increase in 2008 sales of dehydrated culture media was our best ever annual growth performance for the Acumedia product line. Our Acumedia products also support sales of our test kits to detect specific pathogens, like Salmonella and E. coli which also had a terrific year, achieving organic growth of 18%.

Neogen's AccuPoint line of products for general sanitation had another exceptional year with growth of 15%, as we continued to gain market share in the beverage industry in several international markets.

I know that was a long list of percentages for a lot of different products, but I want to give you a flavor of just how strong the year was and how broad-based our growth was across most all of our product lines.

The only real product line disappointment in fiscal year 2008 was rodenticide and disinfectant sales that sell below last year by approximately 5%. And most of this sales shortfall occurred in the area of rodenticide sales for the US market. In fact led by strong shipments to Mexico, international rodenticides sales were up 24% for the year.

I do not like to make excuses but I do believe the market for domestic rodenticides was below normal for a large part of calendar year 2007, and I do not believe Neogen lost any significant market share in 2008.

In addition I would also say that this product line did have an increase in sales of about 4% in our fourth quarter, compared to last year. We also experienced a good year in terms of margins, and our gross margins improved 30 basis points to 52% of sales, helping Neogen achieved a 33% improvement in operating profit, compared to that 19% increase in total revenues for the year.

Our net income of $12.1 million, or $0.81 per share, was also up 33% over the prior year. I know this will be a tough act to follow in a year ahead. When we look at fiscal year 2009, we plan to make some investments in personnel in the areas of sales and marketing as well as research and development.

In some cases it will take six months probably to a year for some of these investments to start paying dividends in the form of new products and increased sales. However, we firmly believe that personnel investments in these areas are critical to maintain desired future sales growth, as we now turn and look at getting to $200 million in total sales for the company.

I can assure you that management will continue to make every effort to ensure that earnings growth keeps pace and exceeds revenue growth. We certainly have an impressive track record of success in this area. I think we realize that we must be diligent managing our expenses and raising prices where necessary to maintain acceptable margins.

We’ve already implemented price increases for virtually all products and we are monitoring all expense categories on a regular basis to determine when further adjustments may be necessary.

Neogen's balance sheet remains strong with good cash reserves and no long-term debt. Cash flows for the year were sufficient to fund acquisitions and capital expenditures of more than $12 million, and stockholders' equity increased 21% in the 12 months ended May 31, 2008.

Our excellent financial performance in 2008 was capped off by the announcement that Neogen has been selected for and is now a part of the Russell 2000 Index. I think the unsettled situation we are experiencing the stock market largely offset the positive impact joining this prestigious index could have had on our stock price, but it is still in honor to be part of this widely used and well recognized index.

So obviously our 2008 fiscal year was a tremendous success from an operations standpoint. However, Jim Herbert has often said quoting early in Berlin that toughest thing about success is that you have to keep on being a success. I do think that Neogen management team understands that we need to remain focused on achieving double digit same-store sales growth and increasing our market share with our core product lines.

To that end, we are developing plans that will allow us to achieve even higher sales and earnings in the quarters and years ahead.

I think it would be appropriate at this time to turn the conference call back to Jim who will spend some time discussing Neogen's future outlook.

James Herbert

Thanks, Lon, and, of course, we all do take pride in the achievement of reaching the $100 million revenue level, but I can assure you that we will not spend much time asking for accomplishment. Instead I think the rest of the staff like myself looks upon this as a milestone towards that next level, and I have a great amount of confidence that we will continue this performance as we move toward the $200 million goal and beyond. That confidence comes from several reasons.

First of all, I believe that the mission of our company is clear and it is on target. In early days of Neogen, we spend a great deal of time trying to explain and even sometimes justifying how you could build a company around food and animal safety. The vision, of course, was right and most of the things that we’ve done along the way were also strategically correct.

Although we used different sales forces and marketing groups for our Food Safety and Animal Safety Groups, they both operate towards the common mission of providing solutions for the problems that surround the world's food and animal production.

Third-party studies that have projected the food and animal safety market will grow somewhere between 3% and 7% annually over the next five years, and some projections were even higher than that.

The second reason for my confidence is the fact that the world has truly become smaller. A better distribution logistics and consumer demands will continue to draw the world's consumers and suppliers closer together.

As an example, the US consumers now expect deep fresh melons on a year on basis; however, they do not expect to get Salmonella from the melons that came from Mexico. Retailers in Europe and the US expect to be able to offer shoppers fresh sea food year around, but as the wild harvest continues to diminish the world becomes more dependent upon aquaculture and these retailers of course can not afford to buy unsafe products from China. They produce 70% of the world's aquaculture supply.

Pet food manufacturers buy ingredients in the world market, but they cannot afford to purchase wheat glutin from Asia that contains a harmful additive. European consumers want paprika that is bright red in color but not because someone in India added a carcinogenic diet.

The third reason that I am confident about our future growth is because of production economics. Over the past year, in particular, we’ve not only seen consumers suffer injury because of poor food quality, but we’ve also seen a number of food producers suffer significant financial losses. Though the examples are numerous, we only have to look back a week or so to see what happened to US and Mexican tomato producers as a result of the unsolved Salmonella problem.

Millions of dollars of tomatoes have rotted in the fields in these countries because of consumer fears. However, as of today that fear is now shifted to peppers. The same can be said to animal producers as it relates to animal safety issues. Animal disease has taken selective cuts at the worldwide beef producers market. The US could not export its beef to several significant countries, so Canadian producers could not send cattle to the US for processing and that situation frankly has crippled the Canadian cattle industry.

The fourth reason for my confidence of our future growth is because of our current track record. I believe that Neogen has established traction with its products and with its marketing strategy. This last quarter as Lon indicated was the 65th quarter in the late 70, in which Neogen has shown an increase in revenue, compared to the same quarter in the prior year. That is over 17 years now.

Our compound annual growth rate for the past five years is approximately 19% annually, and on top of that we’ve expanded far beyond the US to a point where now 38% of our revenues for the fiscal year '08 came from sources outside the US. So these are the four that I am confident about future. I can also tell you that we did a number of things during the past year to strengthen the company and to strengthen that confidence.

We are continuing to grow the company just as we’ve grown in the past. We will get a part of our growth from increased market share we will get a portion of our growth from the development of new products from our research and development groups and we will also get a significant part from strategic acquisitions that fit our mission of supplying solutions for both Food and Animal Safety.

From the market share standpoint, we had several products during the past year that gained more consumer acceptance. As an example, one recent independent study indicates that our AccuPoint line of Food Safety products outpaced all of our competitors combined based on the number of instruments that we sold during the past three years.

Both divisions are well positioned to grow with new products that are coming from R&D. Furthermore, we are greatly stepping up that effort. We announced a couple of months ago that we were adding 23 new scientists to our R&D effort, which almost doubles that group. I can assure you that we’ve identified new product opportunities for both of our operating divisions that will keep this group fully occupied in the years ahead.

There are a couple of great things about new products as it relates to our business. First, we can identify those new product opportunities with the relative amount of certainty. Secondly, most of the products that we developed can be completed in a year or less which means that we can bring a new product to market in a timely fashion with just a little bit of foresight.

During the past year, we’ve made good strides in growth to the synergistic acquisition area. The one that we completed last month marked the 14th acquisition that we’ve done in the past seven years and we haven't done a bad one yet. The three that we did during the past year were all bought at fair prices, were extremely good fit with our businesses and provide continued growth opportunities.

The River needle business, as an example, strengthened our worldwide patents and put us in a dominant position as a supplier of detectable hypodermic needles for animal injection where there is a concern of a broken needle finding its way into finished meat products. The product line that we acquired from DuPont just a couple of weeks ago also strengthens our animal safety position back inside the farm gate.

We are already had a small group of disinfectants that were used by the producers of pork and poultry in North America. They help keep farmers free of bacterial, viral, and fungal diseases. However, our land was not complete. The 14 new products that we acquired from DuPont not only filled out the needs for animal producers, but also have given us access to more international markets since those groups of products were sold in approximately 50 countries.

One of those countries where the DuPont product plan was strong was Mexico. Just few months ago, we, you may remember, established our own subsidiary in Mexico to handle product distribution and to consolidate some strong but separate distribution that we’ve enjoyed there in the past. I just returned yesterday from several days in Mexico and I can confirm my belief that food production in Mexico and Central America will continue to grow and become an even larger supplier to the worldwide food system. As a result, there will be an increasing opportunities for Neogen in both the food safety and animal safety areas in that part of the Americas.

In closing, I am proud of our $100 million revenue attainment, but I am even prouder of our growth in earnings for the past year of 33% which of course surpassed the revenue growth. I am optimistic about the future and I cannot help but remember an old Texas adage that says if you are going to grow, go like hell and if you not sure of your direction, do not use the spurs.

I can tell you that I know we are going to grow and I believe that we know our direction. As a consequence I think the company will continue to make these kinds of tremendous strides in both revenue and earnings over the next few years and it is now our goal to hit the $200 million revenue with an ever-increasing earnings per share record.

That concludes our prepared comments for the morning and let me turn the conference back to the moderator for any questions from those of you who are joined by the live conference.

Question-and-Answer Session

Operator

(Operator Instructions). We are going to go first to Tony Brenner at Roth Capital Partners. Please go ahead.

Tony Brenner - Roth Capital Partners

Thank you. Two questions. First is, Lon you mentioned that you have been increased prices pretty much across the board. Can you indicate roughly when those price increases were implemented and approximately what a blended increase rate might have been?

Lon Bohannon

Yes, thanks for the question, Tony. We started actually increasing prices towards the middle of our 2008 fiscal year. So we had some price increases that were done in the November-December time frame. Certain of our groups went through additional price increases in April. Our Food Safety Group put through a blanket price increase that will take effect on July 1. We are having our monthly operations meeting for animal safety and we are talking about further price increases there going in on July 1. I do not know that we’ve an overall average.

We’ve had certain areas where we have had to do price increases in the 15% to 20% range and then we had certain products in the Acumedia product line for example where we had to put in some of those kinds of price increases. I would say we are certainly in that 5% to 7% range overall in terms of trying to put price increases through and we would like to think that we could have some kind of impact like that over the year.

However, we are going to have to continue to monitor the situation. We are not telling our customers that we can promise that we can put in a price increase and then not raise them again for 12 months. We know what the situation is like and we are going to do everything possible to hold down our cost and limit the impact of those and work with our customers to minimize the effect on them but we are also going to do what we need to do to maintain our margins.

Tony Brenner - Roth Capital Partners

Thank you. The other question I had is I am having a hard time reconciling the long list of double-digit sales increases for various product lines on the Animal Safety side with what apparently according to the release is virtually all of the sales increase for the year being contributed by the Kane and Rivard acquisitions?

James Herbert

No, Lon's probably got a closer number, but we did have same-store sales number. I do not know Rick or Lon you have got a rough idea on that. It was in the single-digit area.

Lon Bohannon

You have got two different operating groups there. You have got the Hacco Group that we talked about or that I talked about, their sales were down 5% for the year.

Tony Brenner - Roth Capital Partners

Well, release says that Kane and Rivard acquisitions contributed $5.4 million of the gain on year and for the full year your Animal Safety sales look like they were up 5 or 5/6?

Lon Bohannon

Yes, that is correct. So it is overall for Animal Safety about 1% increase. So you have got the Hacco that is down about five and then you have got the same-store sales for the Lexington division, which is the largest of all of our operating divisions that were up 4%.

Tony Brenner - Roth Capital Partners

Okay. Thank you.

Operator

Our next question we will go to Steve O'Neil at Hilliard Lyons. Please go ahead.

Steve O'Neil - Hilliard Lyons

Good morning, Jim. Good morning, Lon. Great year and great quarter.

James Herbert

Thanks, Steve.

Lon Bohannon

Thanks, Stephen.

Steve O'Neil - Hilliard Lyons

Just a couple of housekeeping items that I could not find fast enough. In veterinary instruments, can you break that down between the specialty needles and the OTC business for retail stores? Because you used a figure of 13% I was not sure what that was for?

Lon Bohannon

Yes, I think if you want that kind of break down we are going to have to go back. We do not break out that I am aware, Rick might have the number but I am not aware that we break out the retail segment growth separate from our overall veterinary instrument sales growth.

James Herbert

Not on a normal reporting, but we can get that.

Steve O'Neil - Hilliard Lyons

I thought you had mentioned it in the past.

James Herbert

We might have but we roll that altogether, in some cases it is the same syringes and needle combinations that we sell through the normal channels that we may put a private brand name on for somebody and then it ends up getting classified as specialty needles kits for one of the major vaccine and pharmaceutical group, but we can get that for you.

Steve O'Neil - Hilliard Lyons

I could actually just from a quality standpoint I mean you just tell us how to see specialty needles and the OTC to retail stores perform, or they both perform well during the year?

James Herbert

Yes. I think they probably were about equal for the year. We got a big punch last year a bigger punch last year percentage wise borrowed from the specialty needle side, but and remember back, I think they both had roughly the same good simultaneous growth.

Lon Bohannon

Yes, that OEM specialty needle segment is up about 26% for the year that is one that we break out. It is not as large as the veterinary instruments that go into the OTC market. So I know that those were double-digit same store sales growth as well, I just do not have the specific details further breaking it down in terms of what their retail segment is. However, we can get that information for you. We continue to experience growth in that retail segment.

Steve O'Neil - Hilliard Lyons

Okay, and that is fine. Are vaccines and biologicals becoming a less important product line and I know you did not mention those?

Lon Bohannon

Well, they are not less important from the standpoint of what they contribute to the operating profit. I mean they are two of our high margin products. They just did not have a year where we experienced the growth in those particular products. However, a big chunk of that runs through distribution, particularly the international customer that we’ve got there.

So they will fluctuate from year-to-year based on the timing of the large placement of orders, particularly it occurred around the fourth quarter time frame. However, it continues to be very a important product line for, we call the biologics group or product line and we actually have a fairly sizable growth in the 2009 budget for that particular area.

Steve O'Neil - Hilliard Lyons

In the microorganism testing, you mentioned that being up 18% and then you also mentioned AccuPoint being up 15%. Is AccuPoint within that or those, or you speaking separately for those two products?

Lon Bohannon

They are two separate product lines. The Acumedia dehydrated culture media was actually up 35% for the year. Strong growth internationally and also strong growth to what we call the traditional market, which is where those products are sold to customers, but then either repackage or to use it, it is going to fourth place.

Steve O'Neil - Hilliard Lyons

I may have missed both. I meant to ask was AccuPoint in the microorganism sales?

Lon Bohannon

No, AccuPoint is separate from the microorganism sales. AccuPoint is part of that general sanitation test system that we have and that was the comment that Jim made. We’ve gotten some very good third-party information there that would indicate that we placed more instruments in the last three years than all of our competitors combined.

Steve O'Neil - Hilliard Lyons

You have made a nice turnaround looks like in the microorganism testing business, then any comment on how you manage that?

James Herbert

Well, we still have ways to go. We’ve slugged our way back in there. We lost sight of what was happening. Probably our product line did not keep up quite as well as in 2000. We were missing a few things on the sales and marketing side. We’ve recovered as you point out Stephen, a good bit of that, but I think the best is yet to come. A part of this 23 new people that we are adding will be focused on the pathogen market area, including three new people totally in a new department in molecular biology, some great things in that pipeline that we expect to be coming out over the course of the next year.

Steve O'Neil - Hilliard Lyons

Then also in mycotoxin, it does continue to be a really nice business for you, any weather-related comments on the performance in 2008?

James Herbert

A little bit probably not showing a lot, but a little bit in branch as it relates to vomitoxin, probably might have begun to show up in the tail-end of '08. Most of that was probably coming in now. However, weather conditions, we had a fairly clean crop in the U.S. last year when you look back over the last 12 months. It is not nothing. I think we just picked up some extra market share, but do not think it is testing. Obviously, there is a few spots we are testing might have increased when we look at those international markets, but not as big. I think it was just a gain of market share.

Steve O'Neil - Hilliard Lyons

Now, I will not ask you for the whole list on fourth quarter, but any in terms of your product performance in the fourth quarter, any particular standouts in the fourth quarter?

Lon Bohannon

Again, I would make the same comments for the fourth quarter that I made for the year. It was very broad-based. All seven of the operating groups showed positive growth compared to the prior year for the fourth quarter even as I said that the Hacco, rodenticides and disinfectants product lines were up in the fourth quarter. A particularly strong quarter for Acumedia, a particularly strong quarter for the Soleris technology, that is used in detecting general microbial contamination and spoilage organisms but very broad-based in the fourth quarter.

Steve O'Neil - Hilliard Lyons

Great and then I will ask one last housekeeping thing and then I will let others get their questions. The other income 7000 versus 244 it is a pretty big difference and I know that it is a somewhat lumpy figure, just wonder if you could elaborate a bit on that?

James Herbert

That is really related to the transactions in foreign currencies in the current year and the prior, it went the other way Stephen, that is been really the best explanation we got.

Steve O'Neil - Hilliard Lyons

Okay.

James Herbert

As you better remember Stephen, because of the amount of money, the amount of revenues that we bring in based on euro-based denomination, we do hedge the dollar versus the euro.

Steve O'Neil - Hilliard Lyons

Okay.

James Herbert

Other currencies there, the pound we operate our European operations on the pound, but we do not hedge the pound. We are true hedgers. We are not speculators. We hedge when we look at where we are. We hedge and we rollout 90 days, and we continue that hedge based on what is happening.

So I think a part of the year our hedge was, we had hedged it below where the market was at the end of the month and right now our hedge is probably about even before the month. I think we are hedged at $1.57 now, Rick?

Rick Current

About $1.57.

James Herbert

However, we think it is important enough, but with enough business denominated in euros, we do not want to be gamblers there.

Steve O'Neil - Hilliard Lyons

Thanks very much.

Lon Bohannon

Operator

(Operator Instructions). We will go next to Vito Menza at Sandler Capital. Please go ahead.

Vito Menza - Sandler Capital

Hey, congrats on a nice quarter.

James Herbert

Thanks Vito.

Lon Bohannon

Thank you.

Vito Menza - Sandler Capital

Question for you. You have mentioned some investments that we are going to make next year. I know you previously spoke about the R&D investments, and now today you are speaking about some of the investments in sales and marketing. Now, with all that said, what operating margin are you going to target next year?

James Herbert

Well, we tried to space our expenses out though we are typically leading the market by year, particularly in sales and marketing, and maybe a bit more than a year in R&D. We continue to try to push that operating margin, put pressure to keep it going up, so it will be a little tougher battle as we move into next year, because of the money that we’ve invested in the R&D group, that pipeline, that new pipeline has not started to put product out.

However, we expect to continue to see some even slight improvement in operating margins despite the fact that we’ve got some early expenses.

Lon Bohannon

Yes, I think that is right. You look at the quarter we had and it was just phenomenal in terms of the percentage increase in operating profit, but compared to the growth in revenues. We are very much on track to continue to focus on getting same-store sales growth in the double-digit area, supplement it with acquisitions, so that overall we are going to continue shoot for that 20% number a year. We know that there are opportunities out there to achieve that.

Historically, we’ve always gotten more than that percentage increase through the operating profit line, and that too it continues to be our objective. We had this conversation little earlier this week. I mean overall, what we are trying to do is that at this juncture is try to get that operating profit line up to be 20% of sales. We achieve 17.6% of revenues in fiscal year 2008, which compared very favorably to the 15.7% that we had last year, and we are going to continue to look at ways to reduce our cost and improve productivity and get price increases and grow sales, so that we can continue to get that moving it in a positive direction.

So, we fully expect that we get a 20% increase in revenues we will be able to do better than that in the operating profit line. I just get a little bit nervous and do not want expectations out there to be 46% increase in operating profit whenever you get a 20% increase in revenues. It is really was a spectacular quarter.

Vito Menza - Sandler Capital

I understood, and I think a lot of times when Wall Street hears investment, they automatically take margins down year-over-year, so it is important point to clarify. I appreciate that.

Lon Bohannon

I appreciate the question. We knew that might come up, and we certainly do not have any intentions of turning in any quarters that would have a lower operating margin than what we did in the same quarter last year.

Vito Menza - Sandler Capital

Thank you. Great job, nice quarter, and nice year.

James Herbert

Thanks, Vito.

Operator

(Operator Instructions). We will go next to Peter Coyle. Please go ahead, sir.

Peter Coyle

Good morning, gentlemen, and congratulations on a great quarter and a terrific year. I mean I am sitting down here in Ann Arbor with my calculator and trying to figure out how many digits are going to be needed for your calculators up there. I did want to say congratulations for doing an outstanding job.

I think Vito hit the major aspect of my questions, which relates to research, and you have added, or going to be adding 23 new people and roughly what percentage of your revenues or your budget is going to be devoted to research, as I recall somewhere around 6% or 7% in the past?

James Herbert

Yes. Probably, if you look at the entire budget Peter, it is still somewhere in that, range overall. However, remembering that certain portions of our business and our product line we are probably putting closer to 10% of revenue into R&D where there is a need for new products as competitive rates.

At the same time, we’ve got other sides of our business that do not require that kind of a research investment, the products are stable there, we are still are able to maintain or increase our market share. So when you look at R&D as a percent of overall revenue, it could be somewhat misleading since that has been in a bigger percent in those products that are driven by new developments.

Peter Coyle

Well, thank you very much and I look forward to a new 9 or 10-digit calculator?

James Herbert

Well, next time you can send me one. Lon, do keep showing me the one that you sent him and mine is short 2, 3 digits, so...

Peter Coyle

Okay.

James Herbert

You really cost. One of those high-powered ones would remember me.

Peter Coyle

I do not know, may be I can get a 20 digit one.

James Herbert

There you go.

Peter Coyle

That is it. Thanks very much.

James Herbert

Thank you, Peter.

Peter Coyle

Well, again.

Operator

(Operator Instructions). We do have a follow-up. This is Steve O'Neil at Hilliard Lyons. Please go ahead.

Steve O'Neil - Hilliard Lyons

I could not let a conference call go by without asking about the BetaStar?

James Herbert

I would have been disappointed if you hadn’t. Well, if there was a story of Murphy being alive and well, it should have been his project. Interestingly enough, we thought we were well through the FDA. We’ve got an AOAC approval on the product, which meant that everybody has looked at it, they said it performs great and it stands up to all of its claims. That is a part of what is necessary to get an FDA approval, in fact, the biggest portion of it.

However, it drug on and drug on, and we could not understand what was happening with the project manager that was running that project at FDA, and it all came to light three weeks ago. We did not know it, but that product manager was suffering from a terminal illness, and died two weeks ago yesterday.

So as a consequence well, our project has now been reassigned to someone else and we do have a meeting with the FDA on the 31st of this month, which I have ever believed at this point that is the final place to face the balls over and that approval will be forthcoming, but it sure has been discouraging, Steve.

Steve O'Neil - Hilliard Lyons

I mean it seems like a very good product, and we are anxious to get it on the US market?

James Herbert

We are growing internationally with it. In all the other markets where we are, we’ve grown and we’ve gained some market share from competition, so we are anxious obviously to turn it loose in the US.

Steve O'Neil - Hilliard Lyons

What is the breakdown for your dairy antibiotic sales, I know it is mostly international, but how much is in the US?

James Herbert

Not enough to match anything, less than 1% in North America.

Steve O'Neil - Hilliard Lyons

So it is almost entirely international business?

James Herbert

Right. Yes.

Steve O'Neil - Hilliard Lyons

Great, thank you.

James Herbert

Good.

Operator

Mr. Herbert, with no other questions in the queue, I would like to turn the call back to you for any closing comments, sir.

James Herbert

Great. Well, first of all hopefully most of you on the call have received an invitation for our Annual Open House, it comes up Thursday of this week. If somehow we fail to get that invitation to you, consider yourself invited.

Hopefully, that is one of the big things that we do for investors and analysts and customers and local friends and neighbors. It looks like a clear day and last thing the sun will shine on us again. We will have a great Open House on Thursday afternoon of this week I think starting about 5 o’clock.

So those of you who are in a position to come, we would love to have you for, 4 o’clock, I am sorry. However, we will run a lot longer than that. We will run until the cold beer is out, so I am sure it will be longer than 4 o’clock. However, it is right there.

Thank you for all of you who participated on today's call and all of you that have been supportive and participated during the past year. It is great to be able to report these kind of results. However, as Lon says, we know that the toughest thing about success is you have keep on succeeding and we intend to do that. So that concludes our comments and good day.

Operator

Thank you. That does conclude the call. We do appreciate your participation. At this time, you may disconnect. Thank you.

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Source: Neogen Corp. F4Q08 (Qtr End 05/31/08) Earnings Call Transcript
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