November 24, 2003
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
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
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
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
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
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
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
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
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
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.