Darling Ingredients Inc (DAR) 2006 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Darling International Conference Call to discuss the Company's second quarter fiscal 2006 financial results. With us today are Mr. Randall Stuewe, Chairman and Chief Executive Officer of Darling International, and Mr. John Muse, Executive Vice President of Administration and Finance. After the speakers' opening remarks, there will be a question-and-answer period.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. Brad Phillips, Treasurer of Darling International. Please go ahead, sir.

Thank you, Stacy. Good morning, ladies and gentlemen. Thank you for joining us to review Darling's second quarter 2006 earnings results. Randall Stuewe, our Chairman and CEO, will begin today's call with an overview of our second quarter financial performance and some of the trends that impacted our results.

John Muse, the Executive Vice President of Finance and Administration, will then provide you with some additional details about our financial results. Randy will conclude the prepared portion of the call with some general remarks about the business. After which time, we will be happy to answer any questions you might have.

Before we begin, I need to remind everyone that this conference call will contain certain forward-looking statements regarding the business operations of Darling and the industry in which it operates. These statements are identified by words, such as "may," "will," "believe," "intend," "anticipate," "should," "estimate," "continue," and other words referring to events or circumstances to occur in the future.

These statements reflect Darling's current view of current events and are based on its assessment of and are subject to a variety of risk and uncertainty beyond its control, including business and economic conditions in its existing markets that could cause actual results to differ materially from those contained in such forward-looking statements.

Other risk and uncertainties regarding Darling, its business, and the industry in which it operates are referenced from time to time in the Company's filings with the Securities and Exchange Commission. Darling is under no obligation to, and expressly disclaims any such obligations to update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.

With that, I would now like to turn the call over to Randy.

Thanks, Brad. Good morning, everybody. Thanks for joining us this morning. I would like to begin my remarks by reviewing our second quarter earnings and provide you some assistance in reconciling the performance. At the end of my presentation, I will provide you some detail on our progress towards integrating National By-Products into our portfolio.

I think it's fair to say that the operating environment in the second quarter remained quite challenging and continued to deteriorate from the first quarter. The main drivers as discussed in our 10-Q filing were lower finished product prices, higher energy costs, increased administrative costs related to the acquisition and ongoing litigation expense.

Despite the increase in net sales we realized as a result of the NBP acquisition, our results of operations declined to a net loss on account of the above factors. Couple this with the 4.5 million in charges related to the earlier retirement of our sub debt and the write-off of our deferred loan costs related to the refinancing and you have reconciled our operating results.

While raw material tonnage for our Company improved year-over-year, our selling prices for our finished products declined substantially. For the quarter, we saw yellow grease decline by over 30% year-over-year and down an additional 12% from first quarter. Meat and bone meal and tallow declined 27.5% and 25.5% on a year-over-year comparison.

As we have discussed in the past, our rendering segment is supported by formula pricing, while our restaurant services segment is not and remains vulnerable to commodity swings. Overall, weak feed demand and excess global supplies of fats and protein continue to weigh on commodity prices.

However, if you study futures markets for fats and proteins, you will notice a steep carry in anticipation of lower corn and soybean supplies and a growing demand for bio-diesel feedstock. Additionally, while energy did receive during the quarter, we are still playing catch up on our recouping our additional cost for processing and trucking.

For the quarter, we did show improvement for recovery of collection expenses through the use of energy charges and formula adjustments.

On the legal front, we have initiated several pieces of litigation, which we seek affirmative relief. Last quarter, I provided a brief overview of two legal actions we are pursuing that contributed to our expenses. We are seeking affirmative relief in Newark, New Jersey, in a contract default on behalf of the utility, which used to supply steam to our plant. Recently, we won that arbitration. We are also seeking affirmative relief in a property dispute in California. As neither of these claims has been totally resolved, litigation costs remain an ongoing expense for us.

Before turning the call over to John, I would like to conclude my prepared remarks by giving you an update on our acquisition of National By-Products. We closed the transaction on May 15, which means that we operated as a combined entity for the final seven weeks of the quarter with June being our first full month of operation.

From day one as a combined company, we hit the ground running with our integration plans. The primary focus is on sharing best practices from both companies and working to instill them across the entire organization. Some of the highlights of our integration are as follows: First of all, we have consolidated our trucking routes within the Midwest corridor and have redirected the respective tonnages to the closest and lowest cost location. Secondly, we have ceased rendering operations at our Indianapolis plant.

We will continue to operate this facility with reduced staff in order to support our restaurant services business. And additionally, we have closed or in process of closing two additional reload stations, which are no longer needed to support the Indianapolis location. Third, the tonnage that was going into Indianapolis has now been redirected to find a home at our Coldwater, Michigan plant. This incremental tonnage will provide processing synergies along with lower freight and processing cost.

Fourth, from a marketing perspective, we have redesigned our go-to-market approach for both proteins and oils. This approach includes both a standardization component, along with a branding emphasis. Additionally, we have realigned our people resources in order to lower our costs and have one voice to the market. Finally, we will be completing the analysis on several other fringe locations and will decide in the near future whether to consolidate or to continue to operate these locations.

I would like to turn the call over to John now, so he can provide some additional color on our financial results for the quarter.

Thanks, Randy, and good morning to everyone. For the second quarter 2006, Darling's net sales were 87.2 million as compared to 81.3 million for the second quarter of 2005. Increases in sales from the Company's acquisition of substantially all the assets of National By-Products, which were partially offset by lower prices for finished products, accounted for the majority of the [5-point] million increase.

Results of operations for the second quarter 2006 declined to a net loss of 3.1 million or a loss of $0.04 per share as compared to a net income of 2.7 million or $0.04 a share for 2005. Net income for the second quarter of 2006 decreased by 5.8 million, primarily due to significantly lower prices for finished products, higher energy costs mostly related to diesel fuel, high legal expenses related to certain actions in which Darling is the plaintiff.

As Randy touched on in his remarks, net income was also substantially affected by 4.5 million in charges related to prepayment fees of 1.9 million on Darling's retirement of subordinated debt and 2.6 million in write-off of deferred loan cost related to the refinancing of our previously-- credit agreement.

Interest expense in the second quarter was 1.8 million compared to 1.6 million during the second quarter of 2005, an increase of 200,000, primarily due to overall increase in debt outstanding as a result of the acquisition of NBP. As a note, on May 19, 2006, Darling entered into two interest rate swap agreements. The cash flows from the Company's 50 million floating rate term loan has been exchanged for fixed rate contracts, which will bear interest at 5.42% excluding the borrowing spread under the credit agreement. Both swap agreements mature April 2012.

Operating income decreased by 3.9 million in the second quarter, caused primarily from lower finished product prices, diesel fuel prices, higher legal expenses and 700,000 of acquisition-related cost. These decreases were primarily offset by higher raw material volume, improved recovery of collection expenses and operating cost efficiencies.

At the segment level, rendering generated net sales of 60.4 million for the second quarter as compared to 53.2 million in the second quarter of 2005. This reflects increased volume due to NBP acquisition. The restaurant services business generated net sales of 26.8 as compared to 28.1 million in the second quarter of 2005. This reflects significantly lower grease prices in the second quarter of 2006 as compared to the same period in 2005.

Turning to the six months ended July 1, 2006, Darling reported net sales of 163.6 million as compared to 152.6 million for 2005. The Company also reported a net loss of 2.8 million or $0.04 a share as compared to a profit of 3.7 million or $0.06 per share for the 2005 period. At the segment level, restaurant services generated net sales of 57.7 million as compared to 55.1 million in the six months ended July 2, 2005. The rendering segment generated net sales of 105 million at the six-month period as compared to 97.6 million for the 2005 period.

As we stated earlier, the 6.5 million decrease in net income primarily resulted from the 4.5 million in charges related to prepayment fees and write-off or deferred loan cost in connection with the termination of the Company's previously subordinated debt and revolving credit facility, lower prices for finished products, higher energy prices and higher legal expense.

Additionally, Darling made capital expenditures of 5.6 million during the first six months of 2006 compared to capital expenditures of 7.5 million in the first six months of 2005. This is a net decrease of 1.9 million, primarily due to less expenditures related to our two major projects that were completed in Fresno and Wahoo. These were projects that were identified over normal maintenance in our capital projects in 2005.

On July 1, Darling had working capital of 19.3 million compared to a working capital of 40.4 million on December 31, 2005. As of July 1, 2006, Darling had unrestricted cash of 5.7 million and funds available under the revolving credit facility of 57.1 million compared to unrestricted cash of 36 million and funds available under revolving facility of 35.1 million at December 31.

I would now like to turn the call back over to Randy.

Thanks, John. While it's safe to say we are disappointed in our performance in the second quarter, we are pleased with our overall progress in executing our integration plans. Raw material tonnage has remained strong and finished product prices are starting to show signs of improvement in July and August. Overall, we are pleased with where we are headed. I would like to conclude by saying we appreciate your support and look forward to your continued confidence in Darling.

And at this time, that prepares -- that concludes our prepared remarks and we will turn it over to Stacy for questions here.

[OPERATOR INSTRUCTIONS]

Our first question is coming from Tyson Bauer from Wealth Monitors.

Thank you, gentlemen. Actually, your quarter wasn't too bad; it is pretty much on the mark with expectations at least ours. The way -- going through the numbers, taking off some of the one-time charges that were related to debt and also the acquisition-related 700,000, it looks like you were slightly profitable on the pretax line?

That's correct, Tyson.

Okay. Entering into Q3, a lot of things are turning into your favor along with commodity prices, the kill-rate, and let's talk about the kill-rate. It looks like we are getting a quicker response to possibly [inaudible- technical difficulty] quarter reopening, but obviously if you look at cattle prices, if we look at the kill-rates going through, they seem to be holding their own pretty good for a typical time when they would go down after the 4th July weekend. Would you expect that kill-rate to be above normal or where we have seen them in the last couple of years?

Yes, I think, first of all, Tyson -- this is Randy. You hit several good points there. If you look at it, we've been struggling in the prior quarters with volume underneath this while we had pretty decent prices. And at the end of the day, now, we've got strong volume coming back to us throughout most of the country.

The Midwest packer plants are only starting to feel, as you pointed out, the resurgence or the opening of the borders. And so, I think that overall, if you follow cattle margins, we have seen some pretty strong cattle margins come up in most of the country here through the last 60 days. I think they should hold on. I think we've seen first quarter to second quarter -- statistically, you've seen a 13% increase in raw material tonnage, and we frankly don't see much of that tonnage backing off in the near future.

Now, I also want to point out that if you do follow out in California, what has happened with the tonnage and this is always the time of the year we talk about the quality of tonnage. We had with the tremendous heat that hit across the United States; we have had a substantial increase in mortalities of basically dead cows and hogs. And so, therefore, we have been processing a lot of a not-so-good material, which then turns into the lower priced yellow grease material that we have been selling.

Yellow grease, when you look at it from where we were at the end of the second quarter, the yellow grease was a little under $0.10, I think $0.0993. We have seen yellow grease now in August come back to around $0.1125 and $0.115. And we have seen tallow that went out in the month of June at about $0.15 rebound to about $0.175. So, we have seen tonnage improve, we have seen prices improve. And so, overall, I think we have got a little bit of wind change that's going on for us right now.

What we're seeing with the increased volume, increased prices and lower expenditures, that's a pretty damn good equation going forth?

It's certainly our inputs that make for a better discussion, hopefully on the next call.

Quick question in regards-- there has been articles published in bio-diesel magazines and the papers out in the West Coast, regarding Darling being named in these articles as a supplier for bio-diesel facilities, one, Jatro, other, City of San Francisco. We have not seen releases from Darling. Could you comment on where you stand in that industry and why you are being named in these articles?

Well, first of all, I think it's important to point out that we have made no feedstock supply agreements or commitments to anybody out there and at this time, we-- that is not one of our strategic initiatives to give our feedstock to anybody. We think that's a substantially important position to hold as we determine where we are going into the renewable fuels areas.

As we have discussed in prior calls, we have checked off a lot of boxes that are getting us comfortable with that business. We are still in the early stages of figuring out if we want to be in that business. We thought it was important to get National By-Products integrated and under our belt and understand the capabilities of their facilities and get our management teams on the ground and then decide where we are going to go with that.

I think the article that was JatroDiesel out of our-- something Jatro out of Dayton, Ohio, we have never had a discussion with that person to our knowledge, and then, Mayor Gavin Newsom in San Francisco. While we do operate a facility that can be very attractive for entering the bio-diesel business in the Port of San Francisco, we have not made any decision at that time.

The bio-diesel business is something, as we have said all along, is very fascinating to us. We hold a key component to entering that business with our substantial amount of feedstock. But at this time, we have not jumped over the line yet and said where or when we are going to enter that business.

When we look at the expected yields that the USDA has put out recently with corn stock yields and also the expectation of a much lower acreage on soybeans going into next year, are we looking possibly at an extended period of better pricing for your end-commodities?

The thing that's really puzzling to us and while I don't want to pontificate on where the commodity prices are going, we are entering what I would consider to be a new era of commodities right now, and with the renewable segment driving that, the substantial amount of corn demand coming from the ethanol segment is unprecedented. The output from that process while ethanol, it produces a feed product called distillers dry grains, which are having to find a home very rapidly in the domestic feed rations in the US right now. So, we are using more corn, but we are putting out more by-product.

Soybean oil tanks around the country are as full as they have been in the recent history in anticipation of bio-diesel demand picking up here as these plants come on line towards the end of 2007. You will see, if you follow the futures market at all, you will see proteins for soybean meal representing $160 to $170 a ton, but you see the fat side of it going from $0.24, $0.25 to almost $0.30 by December of next year.

So, we have entered what I consider pretty much uncharted waters for the soybean and the corn complex, all trying to figure out which acreage is going to get more, which is going to get less. But, when you compare it to our products, today, we are very attractively priced both as a feed ingredient and as an energy substitute. And why I say energy substitute, if you look at yellow grease today at $0.11 a pound, that equates to $6 natural gas. If you look at natural gas in November through March, you will see it is going to average somewhere around $10, which would equate to $0.15 to $0.17 yellow grease.

So, directionally, there is a lot of things out there that would say that this thing could turn. But, as we speak today, it's only slightly improving.

Sounds good, I'll get back in queue. Good job guys.

Thank you, sir.

Thank you. Our next question is coming from [Robert Morgan] from New Salem Investments.

Good morning. Just a couple of little things. First of, just want to get an update on what the cash and debt position might actually be? I heard you mention 5.7 million cash, but unsure of the debt?

The debt at the end of the quarter was 99 million. 5 million of that was current and 94 million was classified as long term.

Okay. Do you have a weighted average price for that or weighted average rate?

Well, we have converted the 50 million, as we indicated, into a fixed rate swap, which [calls down] 50 million of that is 5.42%, plus our borrowing spread under the credit agreement of 1.25. So, we are a little under 7% on half of that debt and then the other is floating rate LIBOR.

Okay. And then, also, on the last call, you had mentioned a nationwide grocer agreement, just wondering if we can get an update on that and you had also mentioned that there is possibly some of a ramp going into the third quarter with that agreement. Any details there?

Yes. I mean -- this is Randy again, Robert. It's needless to say the agreements were signed in that-- The restaurant services segment continues to click along nicely for us. The issue there is predominantly, as we pointed out, that very little of that product is on formula and is substantially affected by declines in commodity prices.

You couple that with diesel fuel increases and we have been trying to move our business model to recoup the additional diesel cost, but you can't really recoup the lower commodity prices. And so, while we are adding accounts, the expenses there are coming online pretty rapidly. But, pretty much that segment is highly susceptible to commodity swings.

Okay. Thank you.

Thank you. Our next question is coming from Jeff Gates from Gates Capital Management.

Yes, I have a couple of questions. First of all, if I look at the incremental contribution from National By-Products of about 2.3 million for the seven weeks that you owned it, how much incremental-- how much extraordinary item hit that profitability number during the quarter, number one? Number two, can you update us on what you see happening as far as SRM removal regulations? And third, the 10 acres of developable land that you own north of San Francisco, what might be a range of reasonable expectations once you get clear title of that property in terms of proceeds that you might be able to get from that?

Jeff, this is John. On the-- as you saw in the - in D&A, breaking out the acquisition portion, 2.3 million, there were some costs associated with a little bit of the ramp up but not a lot. One of the bigger impacts on that again is the fat prices, that is - in the Midwest, the heat that was through that area, the downgrades in the quality of the product had an impact on the earnings during that period. Now, I will let Randy address SRMs and so forth.

Yes, from a - remember on the National By-Products model, and we are, while we have been studying that for a year-and-half here and getting comfortable with it, the first thing one has to remember is it's less formula than the Darling model. And formulae, it's based on yellow grease, which declined slightly more than the tallow model, which our business is based on. So, we felt a little more impact there. Additionally, as John pointed out, it's predominantly a dead stock model. So, it felt the quality impact from the hot temperatures.

From an SRM perspective, while there is nothing final or remotely final out of the government today, I think it's becoming clearer and clearer that the government is intending to remove SRMs from animals. And the debate is whether it's going to be SRMs out of animals over 30 months or all animals dependant on age. I don't think that's been resolved, but it continues to be discussed out there.

We continue to be part of those discussions. And I can't tell you that we are going to see a rule here within the next 30 days or within 2006 yet. But, I can tell you that we have worked as a team to identify facilities and processes, by which we are going to want to handle that material.

Relative to the litigation out in California, I would prefer not to comment on any - on ongoing litigation there. I mean, the facility that was being discussed out there is an old rendering plant that we are trying to work with and put it up for sale eventually someday. And what the market will be at that time, it's hard to say when we would get title for it.

That last question is what can be that the -- why I guess philosophically, why is the yellow grease part of the business not on formula and how hard would it be to change the business model, so that it was a formula-driven business?

Well, the predominant source of yellow grease other than when you are downgrading dead-animal material into yellow grease during the summer months or restaurants. And collectively, you've got way too many customers that make 2 to -- 200 to 400 pounds a week to administratively manage it on a formulae basis, Jeff. I wish we could, the larger customers, we have moved as we bring on some of the chains into our national accounts program. They are being brought on formula programs for us.

Thank you.

Thank you. Our next question is coming from Nader Tavakoli from EagleRock Capital.

Hi, guys. Most of the questions were asked. Can you tell me, Randy, how long in the quarter did you have the National By-Products assets merged in and can you just make some more comments regarding how that's going and to the extent you would modify some of the things that you said regarding that merger early on, if at all?

Yes. I mean essentially, we closed May 15. Prior to May 15, we were developing plans as to what we would do when the bell rang, if you will. And, essentially, we broke down our integration strategy into three to four different areas, one being collection routes. Essentially, let's make sure that we are driving the fewest miles to pick up the tonnage and deliver it to the closest plant. That integration in our opinion is virtually complete at this time for both fat and bone or about rendering feedstock and the restaurant services piece. The overlap there has been defined and redirected.

The second piece was the plant optimization piece, and as I talked about, we have ceased rendering operations or cooking operations at our Indianapolis plant and moved that tonnage up to Coldwater, Michigan, and essentially have furloughed that plant until we decide what we want to do with it in the future. With that plant come several transfer stations and that tonnage has been redirected and those transfer stations are in process of being closed at this time. The third piece that we have talked about is really, it's somewhat soft but it's got real benefits.

And the two companies had very different go-to-market processes for marketing their commodities. The National By-Products model involved a branding and a direct-to-consumer process. We have adopted that now for our Midwest plants and we are starting to see the benefits of that by moving more material by truck, less by rail, and hopefully lowering our cost on eliminating some of the rail fleet and potentially raising our sale price for that product.

The administrative side is one that's -- as we said, we are only seven weeks old at the end of the quarter and there has been some body count reduction. But, at the end of the day, the majority of our effort right now is getting that company integrated into the administrative processes necessary for SEC filing and that wonderful Sarbanes-Oxley Act that's out there, Nader.

Right. Great. Thanks. I think that's it for me.

Thank you.

[OPERATOR INSTRUCTIONS]

Our next question is coming from George Grose from Joseph Gunnar.

Yes, good morning, Randy and John. Like, with respect to the bio-diesel and the different options that you are looking at, I mean, when do you expect to have to make a decision on that front?

George, this is Randy. I don't know that there is any timeframe. I think the safest answer as a representative of the Board here is I want to make sure that our earnings are back on track and the business is being integrated and we got our core under control. We have spent a lot of time studying that business. There is a lot of different technologies out there. We work diligently on our technology, and I just like to leave it at that and we will announce when we announce here.

And your, like your technology, is it mainly having to do with the feedstock or--?

Well, I mean philosophically of Darling is a to enter the business. It needs to be able to process its quality of feedstock, which ranges from restaurant grease to dead animal fats to packer quality animal fats. And there is very little technology out there today that handles those quality, and we want to make sure what we bring to the party is our portfolio of feedstocks around the country from 42 facilities. We just want to make sure that we get it right when we go.

Okay. I guess with respect to the contribution for National By-Products, so I guess it looks like this quarter, National By-Products, it contributed 30 million in sales, is that reading it correctly or -?

Hold on. Yes, around-- that's right, 30 million.

Okay. So, I guess, like the base Darling business would be like 57 million or so?

Right.

Okay. So, I guess, it's really the impact, I guess, the commodity prices on the rendering side, which is really the big swing here?

That is correct.

Okay. I guess, when you talked a little bit-- when you outlined a little bit about the, I guess the - where you are with respect to integrating National By-Products, I know, in the past, I mean, you talked about synergies of 1 million to 3 million, and that was just initially. Can you talk as to where you are now with respect to the synergies?

No, I don't want to put a number on it, George. That will take care of itself over time here. I mean, I think my comments to Nader about all the processes that are complete at this time are - I think it's safe to say we are where we thought we would be at, if not ahead of the curve right now.

Okay. And how much longer do you think that - well, like, when do you think you will be fully integrated?

Well, from a routing and collection standpoint, we are there today. From a plan optimization standpoint, pretty much by the end of the year. And from an administrative standpoint, given all the SEC stuff that has to happen, that's going to be an ongoing year-and-a-half issue for us.

Okay.

I think we have got what John until the end of the 2007 to integrate Sarbanes-Oxley into the organization. So, the administrative side, it would be safe to say, George, December of 2007.

Okay. I guess, in the overall picture, I mean, like what's your [copy]? I mean, is there a lot of positives? You are number one independent render or the largest player on the restaurant services side? You got a nice business in grease trap used oil collection, and you might have the potential exposure here to bio-diesel, however you approach that. But, yet, it seems like very little of that is reflected in your stock price. I mean, can you maybe give us - provide us with as much granularity as you can, what you think is your overall strategic plan for unlocking shareholder value?

Well, clearly, being 130 years old, we got a core business in the rendering side. We shored that up with the Midwest integration of National By-Products giving us a huge platform of both feedstock and flexibility in the Midwest. We continue to grow our restaurant services segment. Our grease trap business is right on plan where we thought it would be.

Our grease collection business is lagging a little bit of where we want it to be, but it is making progress. Those are what I would call the two Rs, rendering and restaurant services. And as we have talked earlier in the call, we are evaluating the third R of the strategic platform, which is renewable fuels.

And overall, Darling has a nice blend of opportunity there between the three segments, to balance them out and take advantage of whether renewable fuels have a better margin or potentially one day, some type of dedicated processing for SRMs would make sense. I mean, the beauty of the Darling network is that it is national collection system of raw material.

But the challenge that we experienced in second quarter is very much price-driven and that becomes the platform for us to move forward, and as shareholder value is delivering and at the same time, trying to take out some of the volatility that we worked hard on for the last three years that we have to continue to evolve over the coming quarters.

And I guess with respect to taking out the volatility, I mean where - how much work do you think that you need to do here? I mean are we looking at like another year, another 18 months of volatile results, because it is very hard here to kind of try to forecast where your sales and earnings are going to be given the volatility of the commodity price, which kind of begs the next question is that, is this -- being a public company, is this like the best option for Darling here?

George, all I can answer to that is that trying to remove volatility and find better margin products to put our feedstocks into is just going to be an ongoing challenge for us. And at the same time, I don't want to remotely comment. We are a public company and we operate as a public company.

Okay. Thank you.

Thank you. Our final question is coming from the Tyson Bauer from Wealth Monitors.

A couple of quick follow-up questions. Can you break out, John, the restricted stock expense that is supposed to occur after the transaction and the timetable how long that will last?

Well, the restricted stock that was issued at the time of the acquisition has a true up 13 months from the date of the acquisition. And the amortization of that will be over that 13-month period and that's a little over - approximately $600,000.

Okay. Also, during the quarter and as we are entering Q3, are we still seeing the poultry producers dumping product or material into the market, or are we starting see them true or right-size their production levels?

This is Randy. You are seeing exactly as you laid it out. They have backed off on their production cycle here. So, you are not seeing the Southeastern United States poultry fat moving up on top of the Midwest fat as -- to the degree that you saw it in June and early July or May, June and early July.

So, hopefully, that's behind us. Additionally, we are starting to see Europe wanting to import fats and greases for use into their bio-diesel industry right now, which is a new change for us. So, we are starting to see movement off the East Coast that is additional demand for products for that industry.

Speaking of the Coast pricing, West Coast pricing has been pretty rough on you in the last couple of quarters. Has that reproved or does it still lag behind the rest of the regions?

It still lags but it's come up substantially from where it is, and the spread between West Coast and Midwest now has narrowed to more reasonable -- predominantly, the protein issue has hurt us on the West Coast because of absolutely no exports for that product. There is some rumor in the marketplace that Indonesia is getting close to reopening its border, but for meat and bone we've not seen it yet.

And then finally, your competitor Baker has three building permits for facilities for bio-diesel production. It sounds like you are more prone to going the other direction and being more of a feedstock participant if you decide to go down that route, as opposed to following their lead and actually being involved with the actual process. Would that be a correct comment?

No, I don't think so. I just thing it's a timing issue right now for us. We have made a decision that we will not provide feedstock contracts to backstop anybody at this time.

Okay.

So, it's just the opposite. We have not made a decision on an asset investment or a location at this time and are being careful to watch this thing evolve and make sure that it's not overbuilt and make sure that you do it right.

Are you watching their progress then fairly closely to see, and that will be a key determinant on what you do?

Not really.

Okay. Thanks a lot, gentlemen.

You bet.

Thank you. Now, I would like to turn the floor back over to management for any closing remarks.

Okay. Just wanted to thank everybody and appreciate your questions and comments and support, and we will talk to you here at the end of the third quarter. Have a great day.

This concludes today's Darling International conference call. You may now disconnect your lines at this time and have a wonderful day.