Welcome to this special conference call this afternoon related to new developments at Neogen.
Before beginning my comments, I will remind you that some of the statements 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. The risks that are associated with our business are covered in part in the company’s 10-K as filed with the Securities and Exchange Commission. We will also be filing an 8-K on these acquisitions within the next 10 days.
Following my comments this afternoon, we will entertain questions from participants who have joined us in this live conference.
Earlier today we issued a press release announcing Neogen’s acquisition of two separate companies from United Agri Products. United Agri Products is a subsidiary of ConAgra Foods. Neogen acquired the stock of both HACCO, Inc., and Hess & Clark, Inc.
Let me first talk about the fit of these two acquisitions to Neogen’s strategy and its mission. Then I will talk about each of the two entities and our plans for our future operations.
As you know, the mission of Neogen is to provide solutions for food and animal safety. This mission led Neogen in its development of diagnostic test kits to detect harmful residues or diseases that are a threat to both food and animal safety.
The diagnostic test kit business has been and will continue to be an important core business for the company. We will continue to develop, manufacture, and market tests for the detection of natural toxins, bacterial pathogens, food allergens, drugs, unique proteins, and pesticides.
Neogen management has always known there were opportunities for products of intervention as well as these products of diagnosis that would fit well in our food and animal safety mission. In fact, Neogen has several intervention products such as our immunostimulant vaccines and our vaccine and development work for Botulism.
During the past 20 years we have built one of the strongest assets of the company – a distribution system which allows us to reach the market from inside the farm gate through to the dinner plate. We are particularly pleased with the distribution system we’ve built to reach the nation’s poultry and livestock producers.
We’ve always told you that any acquisitions we did would fit our expansion strategy. We’ve been successful in the past because we have knowledge and experience related to the businesses that we bought. We believe it is important to understand the functional areas of product research and development, manufacturing, and marketing. We’ve always looked at acquisitions candidates where we had expertise in at least two of these three areas.
The two acquisitions that we announced this morning clearly fit in this overall strategy of food and animal safety and also fit our formula of businesses that we know something about.
We began exploring the possibilities of the acquisitions of HACCO and Hess & Clark about 10 months ago. As we saw ConAgra Foods beginning to focus on the retail food business and divest other areas, we felt these two companies might be good candidates.
Let me first talk about HACCO, Inc. This company is a leading rodenticide developer and manufacture, and is located in Randolph, WI, near Madison. The market for its products is mainly the agricultural and food industries. This company has 80,000 sq. ft. of well-maintained plant facility and equipment located on 19 acres. The company has 60 rodenticide registrations with the EPA, along with some valuable trademarks.
The control of rodents is a key intervention opportunity for both food and animal safety. Rodents take an economic toll because of food destruction, as well as presenting food and animal safety concerns, as they carry numerous disease and bacterial infections.
Even with modern rodent control today, some experts estimate that between 20 and 30 percent of the world’s food supply is lost to rodents each year. The contamination of food products with the rodent hair, urine, and feces has long been under regulatory authority by both the FDA and USDA.
We plan to continue to operate the Randolph, WI, site with the same team and general operations. The company employs approximately 35 people at that site – many of whom have more than 10 years of experience. In fact, the plant manager and the manufacturing manager each have about 20 years of experience operating the HACCO business.
The plant operates under the regulatory authority of the EPA and has excellent manufacturing and safety protocols, and is well respected throughout the industry.
That plant has been doing some insecticide toll manufacturing for another of UAP’s business. However, effective immediately we have stopped any insecticide manufacturing and that portion of the business was not acquired. We expect to use the equipment and available manpower instead to manufacturer the disinfectant line that we acquired from Hess & Clark. We will discuss that more in a moment.
These rodenticides are generally considered as safe products — for anything other than rats and mice. They are second and third generation anti-coagulants whose chemistry is much like Warfarin that was first discovered years ago. In fact the plant still manufactures some rodenticides using Warfarin.
HACCO has a strong relationship with Syngenta, now the world’s largest producer of agricultural chemicals. One of our active ingredients is owned by Syngenta and licensed to HACCO.
The company has two of the best known brand names in the rodenticide business — Havoc and Ramik. We believe that we will be able to continue to build on those strong brands.
Once we get through a transition period of about two months, all sales and marketing for the rodenticide business will be headquartered at our Lexington, KY animal safety headquarters. The products will be manufactured and warehoused at Randolph and shipped to customers from that site.
HACCO had revenues this past year of approximately $8 million and even though the rodenticide market is estimated as high as $300 million, HACCO is still a significant player since the market leader is much larger than all the other players.
The second acquisition is of Hess & Clark, a company located in Ashland, OH, since 1894. During recent years, the company acted as a toll manufacturer for its parent United Agri Products and the product offering was a reduced.
This acquisition gives Neogen a disinfectant product line and an antibacterial for animals.
Hess & Clark has five basic disinfectant products that are registered through the EPA. These products are used primarily for disinfecting animal production facilities, veterinary clinics, and general premise control. Both the poultry and swine industries offer outstanding opportunities to increase revenues of these products since they are very effective in destroying some of the most important pathogens that affect swine and poultry production. Those opportunities have not been actively pursued in the past few years.
Neogen is not acquiring the Hess & Clark plant at Ashland, and none of the employees of that company come with the acquisition. Neogen intends to move the equipment necessary to manufacture disinfectant products from Ashland to the HACCO plant in Randolph for formulation and packaging. Randolph already has an outstanding laboratory and research facility that make this move a good opportunity. Also, it makes sense since both disinfectants and rodenticides are regulated by the EPA.
The antibacterial produced by Hess & Clark is an almost identical product to one that Neogen has been marketing for several years as a part of its Squire line. In fact, the Hess & Clark products have competed for the same business.
We will move all the production equipment necessary to produce the antibacterial products from the Ashland plant to our FDA-approved manufacturing facility in Lexington, KY. This too is almost a “bolt on acquisition” since we have space in our current plant to accommodate this production and have the necessary manufacturing infrastructure to be able to integrate it well. Since it is a FDA-approved product and we are already producing a number of FDA-approved products in Lexington, there is a good fit with regulatory agencies. We anticipate that we will only need about three additional people at Lexington in manufacturing and packaging operations to integrate this business.
The Hess & Clark operations had sales this past year of approximately $2 million in the products that we will be maintaining.
We believe that the two acquisitions will integrate well with Neogen’s mission and its management expertise. Both offer good intervention solutions to food and animal safety. Both operations will be accretive to the top and bottom lines. On an annualized basis we expect they should add revenues of $10 million and will provide us with continued growth opportunities.
As with most acquisitions like this, there will be a few months of integration before they are completely up and running. The rodenticide business should have very little disruption from its present operation — even though we will be changing warehousing and distribution, and integrating sales and marketing activities over the next couple of months.
We expect it will take several months to move the antibacterial product from Ashland to our Lexington plant, get it up and running, and get a transfer of FDA licenses.
Similarly, it will take us a few months to get the disinfectant product integrated into the Wisconsin plant. We expect this will take about $100,000 in building modification to accommodate some of the large mixing tanks. Our biggest problem here is winter weather that will most likely slow up progress until spring.
In the meantime, we acquired inventories of those Hess & Clark products, or have toll manufacturing that should allow us to keep most of the products in the market place until we are up and running in our own plants.
Obviously, until the operations are fully integrated we won’t see the full impact on profit. Therefore, it is difficult to predict today what the impact will be on revenues and bottom line results for these next two Neogen quarters.
I can assure you that the earnings per share that will be provided as a result of these acquisitions was acquired a multiple well below the current multiples of Neogen stock.
We used approximately $7.5 million of our cash in making these acquisitions and $2.5 million from our bank lines. This is the first bank borrowing in several years. We still have available to us approximately $12.5 million in bank line at a below prime interest rate.
This concludes the formal comments. I’d be happy to answer any questions. I’m joined today by Lon Bohannon our Chief Operating Officer and Rick Current our Chief Financial Officer. Both have been closely involved in the due diligence activities that led to these acquisitions.