Darling Ingredients Inc (DAR) 2007 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 2007 Financial Results. With us today we have Mr. Randall Stuewe, Chairman and Chief Executive Officer of Darling International; and Mr. John Muse, Executive Vice President, Administration and Finance.

(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, Judith. Good morning, ladies and gentlemen. Thank you for joining us to review Darling's second quarter 2007 earnings results. Randy Stuewe, our Chairman and CEO will begin today's call with an overview of our second quarter performance and some of the trends that impacted our financial 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 may 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, and thanks for joining us today. As you may have already seen from our press release yesterday afternoon, we continued our momentum from first quarter and enjoyed a very solid performance throughout our businesses during the second quarter.

Operating income when adjusted for a legal settlement in first quarter of $2.2 million and the recent mass termination withdrawal liability in the second quarter, improved our operating income by nearly $3.8 million. Adjusted for non-reoccurring events, operating income was $18.6 million for second quarter, versus $14.8 million in the first. Additionally, we have approximately $1.2 million reserved on our balance sheet for the alternative fuel mixture tax credit that we have previously discussed and are currently awaiting IRS clarification.

There were four key contributing factors to our second quarter results. First, soaring finished product prices, strong raw material volumes, third, a positive performance by our restaurant services segment, and finally, continuing benefits from acquisition synergies. Each of these I will talk a little bit more about now. Throughout the second quarter, we continued to experience increasing finished product prices.

Compared to first quarter, tallow rose nearly 36%, yellow grease rose 24%, but meat and bone meal was only up 7%. Overall, the price improvement on our finished products appears to be driven off the growing and anticipated global demand for grains and oil seeds for the production of biofuels.

Also, throughout the quarter, our raw material volumes remained strong even though cattle slaughter was lower year-over-year. Relative to first quarter, our volumes were slightly lower. This was primarily due to seasonally mild weather that we experienced in the Midwest, which correspondingly reduces our dead stock or mortality tonnage. Regionally, our West Coast volume continued strong due to continued robust consumer demand, and our dedicated packer plants in the Midwest saw their volumes improve as cattle slaughter volumes grew over first quarter.

Our restaurant services segment showed a nice performance; several factors contributed. First and most importantly was the -- was the price movement or the price increases of yellow grease. Secondly, we saw our rendering company cease operations on the East Coast, which provided us with new tonnage. I would also like to note that our overall customer growth continued near plan, we saw an improved collection of our -- an improved recovery of our collection fees and finally, our national service center and sales approach is continuing to gain momentum.

Finally, the integration of National By-Products acquisition, which was completed during the second quarter last year, continues to perform very well and the synergies are clearly evident and may exceed earlier expectations. Now, let me turn to an update on renewable fuels. As we have referenced in prior calls, renewable fuels are clearly an opportunity for Darling and one that Darling is uniquely and well positioned.

We continue to make progress in developing and understanding of the options and the vehicles available for us to participate. The renewable fuels business is rapidly developing on many fronts. It is also a business where technology and government rules are key to survival and both are continuously evolving. First, as we have said all along, we believe that Darling is uniquely positioned to participate in this opportunity either through direct investment, a partnership or by selling its feedstock.

We believe that at this point in time, while we are excited about our options, it is important for us to remain cautious for the following reasons. Currently, Congress is continuing to make progress on final terms of future energy legislation, but many critical details await clarification. While the House of Representatives pass their version on Saturday night, many details will have to be reconciled with the Senate versions and worked out in conference.

Specifically, the co-processing of animal fats by the petroleum business and secondly, the development and commercialization of what is now referred to as renewable diesel. Most importantly, there has a firestorm of Congressional reaction to the ConocoPhillips and Tyson announcement we discussed on last quarter's conference call, where Tyson's animal fats would be blended directly to the refinery stream at a Conoco petroleum facility.

This announcement has attracted both positive and negative publicity in Washington. While current tax law and legislation allows for a $1 per gallon subsidy, various challenges are taking place on the legislative front that may either eliminate or reduce this subsidy. The resulting outcome could significantly alter the landscape of the biodiesel business.

Additionally, as I am sure you can all appreciate, technology is rapidly evolving and the process and -- and the processes that perform for petroleum refiners are currently -- that are currently being used can now be duplicated in a cost effective and standalone or integrated plant. This process is referred to as hydrotreating and isomerization or cracking and actually transforms animal fats or vegetable oils into hydrocarbons.

For example, rather than creating a methyl ester product whereby all you have done is separate the glycerin from the fat by introducing methanol and a catalyst, hydrotreating separates the oxygen molecule and creates a hydrocarbon. The resulting products are renewable diesel, naphtha, and various liquid petroleum gases. The renewable diesel is nearly identical to number one petroleum based diesel.

Benefits include a higher [heating] value resulting in improved combustibility, significantly better cold flow properties, zero sulfur content and most importantly, the product becomes pipeline ready. This second generation technology ultimately produces a more fungible and possibly a superior product. Commercialization of this process is underway and with several plants either operating or under construction around the world.

Ultimately, our decision to enter the renewable fuel arena hinges on several factors. First, as mentioned, is the final clarification of government subsidies and their rules, and secondly, is a better understanding of the potential ramifications of renewable diesel technology and its impact on the future livelihood of biodiesel. As we have discussed before, we are approaching this cautiously and will communicate any decisions that are made.

Before I turn the call over to John, I would like to briefly discuss the outlook for our finished products. Prices for fats and greases as most of you know have softened from their highs we saw during the second quarter. Softer yellow grease prices are fairly typical this time of year and appear to be related to seasonally lower fee demand.

Additionally, as you know, lower natural gas prices have made burning greases uneconomical, but as the winter season approaches, it should become a more viable option. On the tallow front, we anticipate continued strong demand as a replacement for palm oil by the fatty acid and chemical industry. We saw substitution begin this spring and palm oil prices remain high.

Also, new biodiesel demand is beginning to be felt at several facilities that have now either been retrofitted or constructed the capability to handle animal fats and yellow greases. Overall, we expect volatility to remain quite high in the feed grains and oilseeds arena related to the final growing conditions and ultimate harvest yields. Fundamentally, our prices remained strong and demand for our finished products remained good.

I would like to now turn the call over to John Muse who will provide you some additional color on our financial results for the second quarter and for the first six months of 2007. John?

Thanks Randy, and good morning to everyone. For the second quarter of 2007, Darling's net sales were $159.4 million as compared to $87.2 million for the second quarter of 2006. The $72 million increase in sales were primarily due to the Company's acquisition of substantially all of the assets of National By-Products and higher finished good prices. Net income for the second quarter of 2007 was $9.5 million or $0.12 a share, as compared to a net loss of $3 million or a loss of $0.04 per share for the 2006 comparable period.

The primary reasons for the $12.6 million increase in net income for the second quarter of 2007 was due primarily to significant higher prices for finished products, the substantial completion of the integration of National Products, which were partially offset by the 2006 impact of $4.5 million in charges related to prepayment fees and write-off of deferred loan costs in connection with the termination of our previous subordinated debt and senior credit facility, and a $1.2 million charge related to a mass termination withdrawal liability arising from a multi-employer pension plan that was terminated in June 2007.

Interest expense in the second quarter of 2007 was $1.3 million, compared to $1.8 million during the second quarter of 2006. This was a decrease of $0.5 million primarily due to a decrease in rates and outstanding balance related to the Company's outstanding debt. Operating income increased by $15.9 million in the second quarter of 2007 primarily from the inclusion of the National By-Products operations and higher finished product prices. The increase was partially offset again by higher raw material prices, higher natural gas and diesel fuel and a multi-employer plan mass termination withdrawal.

One of our multi-employer plans of which the Company participates has -- had given notice of mass termination for the plan year June 30, 2007. Therefore, on June 30th, the Company recorded a termination liability of approximately $1.2 million. During the quarter, we increased our estimated annual tax -- income tax to reflect favorable increases in commodity prices. The increase in income before taxes reduced the effect that favorable permanent deduction such as domestic production deductions had on the estimated annual effective tax rates.

This change adversely affected the estimated annual effective tax rate. The annual effective tax rate was also adversely affected by state taxes and certain non-deductible expense limitations for income tax purposes. At the segment level, rendering generated net sales of $112 million for the second quarter, as compared to $60 million in the second quarter of 2006.

The restaurant services business generated net sales of $47 million, as compared to $26 million in the second quarter of 2006. This reflects the integration of NBP acquisition and significant higher prices for our finished products. During the six months ended June 30, Darling reported net sales of $298 million, as compared to $163 million for the 2006 period. The Company also recorded net income of $19.1 million or $0.23 per share, as compared to a net loss of $2.8 million or $0.04 a share of loss for the 2006 comparable period.

At the segment level, the rendering segment recorded sales of $213 million, as compared to $106 million in the first six months of fiscal 2006. The restaurant services segment generated net sales of $84 million, as compared to $58 million in the first six months of 2006. As we stated earlier, the increase in net sales and net income resulted primarily from higher finished product prices and the acquisition of NBP.

Additionally, Darling made capital expenditures of $5.7 million during the first six months of 2007 compared to the capital expenditures of $5.6 million for the first six months of 2006. Capital expenditures related to compliance with the environmental regulations were $1 million for the first six months of 2007, compared to $200,000 for the same period of 2006.

On June 30, 2007, Darling had working capital of $27 million, compared to working capital of $18 million for the period ended December 30, 2006. At June 30, Darling had unrestricted cash of $6.2 million and funds available under the revolving credit facility of $87.6 million, compared to unrestricted cash of $5.3 million and funds available under the revolver of $71 million at December 31. The Company also reduced by $19.5 million our debt during the first six months of 2007.

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

Thanks, John. Before opening the call to questions, I would like to close with a few comments. Our second quarter results continued to build on our outstanding first quarter. Fundamentally, our underlying businesses remained strong. We are proud of the successful execution by all of our employees, whose dedication and hard work continue to play a pivotal role on the success of Darling, as well as our management team who is committed to growing and improving our earnings stream.

As John mentioned, we lowered our debt by $19.5 million during the first half of the year. Our balance sheet is incredibly strong and we are now in a solid position to evaluate, grow, and invest in new businesses. As we head into third quarter, we hope to further build on the momentum of the past three quarters and to continue to deliver outstanding results to our shareholders. We appreciate your support and look forward to your continued confidence in Darling.

This continues our -- concludes our prepared remarks. We would like to now open up to questions. Operator?

Thank you.

(OPERATOR INSTRUCTIONS)

Your first question is coming from Tyson Bauer of Wealth Monitors Inc.

Another great quarter, gentlemen. Couple of quick questions for you. Randy, you touched on some of the pricing expectations. Just wanted to touch on that a little further. Do you believe that the prices we saw in June and July are peak levels that we may return back to later this year, but it is unlikely to exceed?

There was clearly a run-up in second quarter that we saw tallow run up to $0.33 as there was some panic buying [the cover in] palm oil and grease reacted very sharply also to some different fundamentals that are out there. The interesting thing, Tyson, that would tell me that those prices may be highs or may not be highs here is that traditionally, when we have seen high prices in this business, it's been because of the supply disruption somewhere in the North America or South America in the sense of a soybean crop or a corn crop.

If you reference the Chicago Board of Trade as your benchmark here, when you start to look out and look out at December '08 corn, December '08 corn is showing higher prices -- showing out there -- September is showing 387 (inaudible) charge market for the first time for an extended period of time that these businesses have seen, you have got soy bean oil out in the high 38s, 39s yet a year out.

So, it is kind of hard to say there is probably a little bit of euphoria here that hit us in second quarter with some really good demand, probably then being overdone to a degree here in the start of third quarter because of what we reference as seasonally lower feed demand. This is the July period, August period are traditionally our lowest price time, because of a reduced feed demand for our products.

Are you surprised palm oil's data is strong as it has given that we are entering in the Malaysian harvest season, where the expectations are that they are going to take full advantage of the oil prices?

Yes, if you look at palm oil, it is the only market that is out there that I can find that is truly inverted with prices being in the low 800s on the nearby, but being slightly discounted for the OND Jan/March period. So, but traditionally, palm oil is higher. Historically, it is high, and that should provide support for our products into this country.

It has been a long time since we have been the primary feedstock into the chemical and fatty acid industry. So, this is kind of new demand. Additionally, we are starting to see a couple of small biodiesel plants power up, but when you start to talk about fuel versus speed, a small biodiesel plant of 20 million or 30 million or 60 million gallons will take off of the market anywhere from 200 million to 600 million pounds of grease or animal fat, that's a substantial support that we have not seen yet.

You just touched at it, on the -- when the Tyson's supply leaves the market, is the market already prepared for that, or what occurs at that point in time?

You know, to a degree commodity traders are purchasing people, say, pretty much short term and I don't think that they even remotely felt the impact of the animal fats or greases coming off the markets yet, that would be my view.

Okay. Do we have any empirical data or hard data now that we have more ethanol plants coming up with the DDG supply hitting the market? Obviously, MBMs are still relatively weak depending on what historical time periods you want to look at, anything from that that you can offer?

Not much, Tyson. I mean, we continue to see the ethanol crush in this country is running north of what -- the 8 billion gallon rate now, and -- but yet we have not seen really any impact on meat and bone meal prices for us. Meat and bone meal, if you will, going into the third quarter is still the bright spot out here. Meat and bone meal has actually traded at a premium to soybean meal at times now during the second quarter given that there has been $40 to $50 a ton volatility in the soy complex.

The interesting thing with meat and bone meal is that it is relatively high fat compared to soybean meal. So, it looks like we have got a little bit of feed formulation, encouragement or enhancement going on here where they are recognizing the fat content of meat and bone meal versus what they have done historically in feed rations. And so, we have seen the meat and bone meal remain very solid here given all the volatility. It is back to about even money on a cash basis with soybean meal today, which is a good thing for us.

Okay. A quick one, then I will get off the line. One, yield expectations Q3 versus Q2, and also Q3 '07 versus Q3 '06 for modeling purposes, just a relative statement there. Also, John, if you could give me your year-end debt projection. And then, Randy, if you can touch on, even if you were to make a decision on the alternative uses of your end product, are we more than a year out before we see any topline effect anyhow?

I don't know where to start with all those questions, Tyson. What is your question relative to yields here? I am confused by that.

Yield expectations, obviously Q3 should be lower than Q2 just because of the weather situation. Last year, we had a lot of heat on the West Coast. What are you seeing here early or what do you anticipate Q3 versus Q3, on a year-to-year comp? Are we going to see a lot lower quality materials coming out of Darling this year as opposed to last year?

Yes, I mean, our view at least now headed 45 days into the quarter here that it is fairly typical from what we have seen in past years, while we haven't had the extreme heat in the West Coast, we have had a relatively cool summer in the Midwest until here about the last two, three weeks. And so, it appears to be balancing itself out.

Okay. And then, the debt projection, John?

Debt projection, as we have indicated, we had reduced the debt by about $19.5 million during the first six months. I would anticipate with where our earnings are, we will have a little more higher tax payments in the second part of the year and CapEx should be up a little bit from what the first six months has been, but not significantly. We were right at six, I would anticipate us in the second six months to be around six or seven. So, debt will -- we will have the revolver down to a fairly small level and if we -- as the market continues the way it is now.

All right. And the last one, and then I won't ask anymore questions is, are we more than a year out on any meaningful topline effect, whether you make a decision in the next month or in the next two quarters?

I guess I don't want to speculate on that at this time. I think as we referenced there, we got a lot of things we are working on and bear with us.

All right. Thanks a lot, gentlemen.

Thank you. Your next question is coming from Dan Mannes of Avondale Partners.

Good morning, everyone.

Good morning, Dan.

Couple of questions. Just wanted to follow up on the last one about Q3, you talked about yields and then in your prepared commentary, you talked about volume in Q2 being lighter than Q1. Now, while we are likely to see worse yields in terms of lower quality material in Q3 versus Q2, how are volumes shaping up?

What we are referencing, if we just look backwards for a minute, in Q1, we had a significant amount of tonnage in the Midwest related to the circovirus related to the -- some swine herds that were up there. So, between winter and the circovirus, our first quarter was incredibly strong with tonnage.

Second quarter was only slightly less, it picked up in the second half of the quarter as we saw a rendering facility on the East Coast shutdown and we picked up some pretty good tonnage there. The West Coast remained strong. And most importantly, we saw our packer plants which we would be our Omaha, Wahoos and Tulsa and Fresno, Californias come roaring back with the first time that their tonnage has been as high as it has in probably five or six quarters.

So, going into the third quarter here, traditionally, you are going to see a higher dead stock volume than you see over second quarter, because of heat stress. The packer kills at least in July were running slightly less than '06 and slightly less than second quarter. But, generally speaking, if you break it down on a state-by-state basis, Nebraska is running way ahead of where they were a year ago. And so, overall, I think Dan, I think volume is pretty much in there where we thought it would be. It could be a little more.

Okay, great. The second thing is on pricing, I mean the real spike we saw in pricing especially on grease, it looked like it happened more in June, and I know historically you have sold out a couple of weeks, sometimes even a month or so. Is there going to be some spillover effect, would some of that really peaking pricing not felt in Q2 and maybe is more likely to be seen in Q3 results?

There is the -- the tallow market to a degree has a better ability to sell forward and in the sense that there are some larger users there being the chemical industry, the feed industry does stay more spot, but yet we would probably reference it as a three to four week period. The thing about it is that one always has to be careful when they are looking at price, and then what I would tell people is that the reason that prices go up is because there is nothing for sale.

So, that last few cents of run up in both markets was related more to the market being sold out than absolute tonnage being traded there. So, we have seen tallow back off to $0.28, $0.29 Chicago, and we have seen grease come off from a second quarter average of $0.23 back off to that $0.20, $0.21. So, it's not as dramatic as people want to look at on an average basis, as you pointed out, on a peaking basis. It is pretty substantial.

On the grease side, I mean -- excuse me, especially with a pullback in pricing, to the extent that it can be verified that someone is getting pure fat rather than getting the recycled kitchen grease, is there a real demand picking up on the biodiesel front, because the economics for animal based yellow grease would seem to be pretty attractive now?

Yes, I mean, animal fat and yellow grease have always made for at least -- even when animal had hit $0.28 to $0.30 FOB our plants were still with $2 and $2.10 wholesale diesel prices, still [pencil] at a very attractive level for the manufacturer of biofuels.

What's happened here recently is, given the spread or given the lower feed demand for yellow grease, we have seen the tallow, because of the chemical industry, has hung in there even given the significantly higher cattle kills in second quarter and at least the start at third, to where grease has discounted beyond the $0.50 a gallon subsidy or the $0.068 and grease is trading around that $0.075 to $0.08 discount to tallow now making it more attractive to be used into biodiesel facilities.

The -- generally speaking, we have got a couple of facilities out there that are just powering up right now that appear to be potential consumers. But, I would still say that there has been no significant consumption to date as from the biodiesel industry, at least from -- from our sales ledger, we haven't seen it.

Great. And then, just switching gears real quickly. [Moving] to restaurant services side, it looked like you guys had a big uptick in terms of revenue. Can you discuss on ---I mean it looks like there was a big piece of price, but then on the other hand, it looked like it was offset by a higher than expected or higher than we expected cost number? Was there -- what was the -- what caused this increment, was this related at all to having been [buy] grease from other collectors or were there -- was there some change in formula strategy on the grease front?

Dan, the main improvement as you said on the restaurant services side had to do with the increase in price on the yellow grease. Remember, the -- on our formula contracts, we have less under formula on the yellow grease side, so that allows more of that price increase to flow into that.

But, it also represents, as Randy indicated in his script, was the increased business that we have been getting in that area as we continued to focus on the restaurants and the national service center expanding their client base. And then, also increases in our service charges to offset our collection, all of -- those four items all rolled in really is what you are seeing the results of in the restaurant service profitability and their margin improvement.

Right. I guess the question though, in your Q, you say increase in revenue on restaurant services was up a ballpark $11 million, and increase in COGS was up about $7 million plus, and given that I thought that business was much lower on a formula basis, it seems like that's a lot more give back on the COGS side from higher raw material, and I guess I was wondering if there was something else going on that you could give some more color on.

No, not a lot from that standpoint. There are -- some of the cost increase that we are seeing is in the trap area, where a lot of the municipalities have increased their charges for taking the product from us for disposal, but we have increased our charges to offset those price increases.

Yes, and I think, Dan, that's probably the piece that just clicked for John and I that we didn't communicate effectively is, that in the restaurant services segment is a significant piece called our grease trap business, and we have taken both a topline price increase everywhere in the country. And additionally we are exceeding our plan on growth there, and you couple that with the municipalities increasing their charges and that probably nets it out there.

And that is something that you would include on your higher raw material prices as a delta in your cost of sales?

It would be part -- just part of the handling cost that would be in there, yes.

Okay, great. Thanks for that color.

Okay.

(OPERATOR INSTRUCTIONS)

Your next question is coming from Bill Baldwin of Baldwin Anthony Securities.

Good morning.

Good morning, Bill.

Couple of items. First of all, John, do you care to kind of project out what you think the tax rate will be running at here in the second half of -- second half of the year?

Bill, with the adjustments that we have made on our projections for earnings and the impact that had on some of our [M1] adjustments and everything, what we do, we project out what we feel the rest of the year will be, and the six month 38.4% tax rate is pretty much what we would expect the rest of the year to be running at. And that's kind of why the quarter number is up the way it is, because that [just kind of] pushes that back into the quarter. So, we should be around that 38.4% for the remainder of the year.

Okay. And secondly, in terms of growth opportunities, are there additional opportunities for consolidation in the rendering industry here domestically, Randy, for -- as far as additional acquisitions are concerned?

Yes, Bill, there are -- and I think we have openly talked about in the past. I think -- probably now is probably the time to sell a rendering business in the sense there, but it would be probably pretty tough to buy because life is pretty good. The good news for us is our balance sheet is now intact and we are able to look at opportunities to come back by us. So it's fun to be back a year later in position to say, yes, growth is clearly an opportunity here and whether that comes in core business acquisitions or renewable fuels investment, I guess, say, bear with us.

I understand. And lastly, and this little bit educational for me, but can you talk a little bit about the dynamics of what's going on in terms of your export opportunities, and what we might be potentially looking at there over the next year or two? How you all see those markets looking out?

Well, predominantly, if you look at and you break the three products down, if palm oil prices remain high, I suspect that most of the tallow will end up back either in the chemical industry or back into the biodiesel industry as some of these facilities come online and relative to whether or not the co-processing happens at the Conoco facility. So, I think tallow is pretty straightforward where traditionally different grades of packer tallow have been exported.

On the yellow grease side, it is predominantly -- it is either consumed U.S. in feed or internationally it goes as an energy substitute or poultry feed and we don't see much change in there, although if it remains a significant discount to tallow, it could find its way back into biofuels. And meat and bone meal is probably the bright spot, that continues to open up markets around the world. And frankly, that is what's helped us on the West Coast is the reopening -- at least limited reopening of the Indonesian markets. And I frankly, only see meat and bone meal markets around the world continuing to open more and more over the next year.

Thank you.

Judith, are there any more questions?

Thank you. Your next question is coming from Dean Haskell of Morgan Joseph.

Good morning, gentlemen. Congratulations on a great second quarter. Can you hear me?

You bet, Dean. We were giving each other a high five there, sorry.

Okay, I couldn't hear all the clapping going on, so I wasn't --. Most of the good questions have been asked already and answered. But, let's talk about the -- some of the releases here in the quarter, the background on that contract dispute with the $0.5 million worth of land that could be or would be transferred, the legal fees that may be involved in that. And also talk more about the pension plan, what's -- what you think and where you think that's going and why that's happening on their end?

Okay. I mean traditionally, we don't make a comment about discussing open or pending litigation. We did reference in the Q the litigation on a piece of property out there where the -- where we had essentially a judgment ruled against us that said we have to go ahead and convey the property. The property was approximately 19 acres of land out in California and it's a contract that's been out there for, I don't know, 14 to 17 years, I get confused on it.

And it is something that we [seeked], as we have referenced in future or prior calls, we seeked an affirmative legal relief on that -- on that issue. And at this time, there was -- we did take it to court and we did have a judgment that said two things. One, that it needed to be conveyed to it, but secondarily, it provided some relief in the form of some environmental issues and remediation that was being required.

So, for us, it wasn't a total loss for the effort. The person that has the judgment has requested the court for reimbursement of legal fees, which we intend to contest. And then, we will just work through that and update you over the next quarter as that works through.

So, essentially, 15 or 17 years ago, you sold a piece of property to somebody and it was never conveyed, and that is -- is that the gist of the situation?

Yes, it was never closed on due to a lot of different contractual and environmental issues there. And so, we seek to either have the title lifted and return the property to us or to essentially get it closed.

Is this in Petaluma?

Dean, you are pretty warm.

Having lived there, so, okay. And then, the other question on the pension plan, your third-party purveyor there is going to close that plan. Have you -- why are they doing this, where do you think they are going with it in the future and is there any other impact on the other purveyors that you using?

We own that multi-employer plan. Back in August of 2006 when the PPA, Pension Protection Act, was put into place, we as a company went back to our multi-employer plan funds and requested information on all of them. And as we had reported in our prior Q, three of those plans were in an underfunded situation, which doesn't mean there is a problem, but of the ones, we had three of them did report as being underfunded.

One of those was this plan that we were monitoring very closely, mainly because it is an older plan that had been frozen approximately four years ago with no new employees going into it. While we are a very small portion of that, and during the second quarter this year, that plan decided to terminate its activity and at that point in time, we based our liability on information that we had received from the plan back a year ago.

We feel that it's fairly accurate to say that it hadn't been a lot of change in the last year on the liability that they had given us. And so, we were -- we are required under GAAP when there is a plan termination to book that liability. As they go forward, we will learn a little bit more. We don't -- we don't think there will be any substantial changes from that, but we will monitor it over the next few months and know a little bit more about that.

But that was the -- really of the ones that we have looked at, that is the only one that we hadn't any real concern, and so it did terminate. And I think you will see some more activity on this across the country as the Pension Protection Act goes into place in January 1 of 2008 and with the funding requirements under that to make plans whole. So -- but we are -- we feel that with where we are on that today, we are in pretty good shape.

Okay. One last question. You had 1 million share increase in the fully diluted, is that just a function of options coming into the money?

That is correct.

Okay, thank you very much. Let's see a great third quarter.

Thank you. Your final question is coming from Chris Terry of Hodges Capital Management.

Hey guys, thanks for taking my question. I am curious to get a sense of capacity for you guys and then also, the growth through volumes.

Chris, on -- as far as volumes, we do not, have not and don't plan to release our volumes by our line of business segments. That's something that we have not -- we have decided not to give out.

And capacity, Chris, is kind of meaningless in this business because the majority of tonnage in the business comes from the rendering side and which is regulated by the government, and the government basically says that a food processing facility can slaughter on two shifts and then clean up one.

Most facilities only run five days, and as we all know, most capacity can run seven days, but given the -- the freshness of the material, you certainly don't want to store it that long. So, essentially you run five out of seven days in most facilities. So, if you are looking at it from that standpoint, you are running 120 out of 168 hours on average.

And this East Coast facility that went out of business, did you guys have any problems taking on those volumes?

No, this was -- this was, as discussed in earlier calls by several other investors, it was a Berkowitz Rendering and Fat Company and he had been operating a small plant for a couple of years. And so, all those accounts, while it was a major effort by our team out there to get all those accounts pulled in, they did pull him in both fat and bone and grease tonnage, and it's all been absorbed now. And I think we have done a pretty nice job of servicing all the customers out there.

My last question and you guys may have already answered this, I apologize, but what's your sense of pricing here going into the back half of the year?

Say that again one more time, Chris.

Your sense of prices looking into the back half of the year, do you see them kind of stabilizing here or what are your thoughts there?

Yes, I mean -- I am watching the Chicago Board of Trade open up and trade here against the USDA crop estimates. They came out with a little better yield and most of the private analysts were estimating that at 152.8 bushels, and given a 13 billion bushel corn crop and a bean crop of slightly less than what we have thought.

But, the bean complex, which most of our products trade against from a fats and a protein standpoint, we are still showing soybean meal in a 240 to 250 a ton going forward, and soybean oil in that $0.36 to $0.37. We are fairly priced on the soybean meal side from both history and tradition here, and on the fats and oils side, we are a pretty significant discount again from where we have been.

So, I mean you start to look at it from that perspective and you draw in the fact that the summer always looks the bleakest for us because of reduced feed demand. And it would be -- you could probably correlate or come up with some scenario where these feel pretty much like the [lows ran] as long as the Chicago Board of Trade holds.

Okay. So, net-net, do you think you can hold the $0.23 yellow grease prices and $0.29 tallow prices?

I don't want to give -- I am not in the business of forecasting commodities or I'd trade for my own account here. So, we will do our best.

Okay. Well, I appreciate it guys. Great quarter, thank you.

Thank you. There appears to be no further questions. At this, I will turn the floor back over to Randy Stuewe for any closing remarks.

Okay. Just want to thank everybody and I appreciate all of the comments and questions, and we look forward to talking to you in third quarter. Thanks.