Darling Ingredients Inc (DAR) 2010 Q2 法說會逐字稿

Good morning, everyone. Welcome to the Darling International conference call to discuss the Company's second-quarter 2010 financial results.

With us today are Mr. Randall Stuewe, Chairman and Chief Executive Officer of Darling International, and Mr. John Muse, Executive Vice President, Finance and Administration. After the speakers' opening remarks there will be a question-and-answer period.

This call is being recorded and your participation implies consent to our recording this call. If you do not agree to these terms, simply drop off the line.

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

Good morning, ladies and gentlemen. Thank you for joining us to review Darling's second-quarter 2010 earnings results. Randy Stuewe, our Chairman and CEO, will begin today's call with an overview of our second-quarter financial performance and discuss some of the trends that impacted our results. John Muse, Executive Vice President, Finance and Administration, will then provide you with 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, begin, look forward, expect, believe, intend, anticipate, should, estimate, continue, momentum, and other words referring to events to occur in the future. These statements reflect Darling's current view of future events and are based on its assessment on and are subject to a variety of risks and uncertainties beyond its control, including continued turmoil existing in world financial, credit, commodities, and stock markets; a decline in consumer confidence and discretionary spending; the general performance of the US economy; and global demands for grain and oilseed commodities, which have exhibited volatility; and each of which could cause actual results to differ materially from those projected 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, everyone, and thanks for joining us today to discuss our financial results for the Company's second-quarter 2010. As with past calls, our primary objective is to provide you with additional color on our operating performance.

I would like to begin by saying that our results remain virtually unchanged from the first quarter of fiscal 2010 and from the same period last year; but the mechanics in which we achieved those results was a little bit different by comparison. Compared to first-quarter 2010, our raw material tonnage declined due to mild spring weather with less deadstock and lower overall carcass weights on cattle being slaughtered. However, when compared to prior year our tonnage grew, primarily because of improved business conditions and acquisitions.

On the finished product front, we saw improvements in BFT and yellow grease prices, but unseasonably early and hot temperatures detrimentally affected finished product quality, which in turn lowers the net selling price for the fats and impacted our earnings.

Meat and bone meal pricing for the second quarter of fiscal 2010 was erratic and traded lower compared to first quarter of fiscal 2010 and significantly lower than second quarter of fiscal 2009, before finally rallying at the end of the quarter, driven primarily by a resurgence in exports and a run-up in the soybean complex.

On the acquisition front as many of you know, on May 28 the Company acquired the rendering business assets from Nebraska By-Products for approximately $15.3 million. This is one of the largest and most efficient deadstock processors in the country. We are excited about this acquisition and have begun the integration of this business into our portfolio. Results reflect five weeks of operations during the quarter.

Now I would like to take a minute to give you an update on Darling's progress into biofuels. In July of 2009 we joined forces with Valero Energy to take initial steps towards the formation of a joint venture to build a renewable diesel facility in Norco, Louisiana, at a site adjacent to Valero's St. Charles refinery. The proposed facility is expected to convert grease -- primarily animal fats and used cooking oil supplied by Darling -- into renewable diesel and is expected to produce approximately 10,000 barrels per day or approximately 135 million gallons annually.

As we have discussed in the past, the success of this facility is heavily reliant on our ability to receive project financing approval from the Department of Energy. We continue to work closely with the DOE on processing our loan application and are proceeding with detailed engineering and obtaining the necessary sign-ups. We will keep you posted as new information becomes available.

Turning to San Francisco, we continue to work closely with Mayor Newsom and the city and port officials of San Francisco to clear all the necessary hurdles prior to beginning construction of our proposed 10 million gallon bio-diesel facility. We remain optimistic that the remaining opposition can be overcome and the final project diligence can then be performed.

I will now turn the call over to John Muse for a more detailed review of our financial results. After John finishes, I would like to provide some closing remarks, and then we will open it up to questions and answers. John?

Thanks, Randy, and good morning to everyone. During the second quarter of 2010, net sales were $166.2 million compared to $155.3 million for the same period last year. The $10.9 million increase in sales is primarily due to higher finished product margins and slightly higher raw material volume.

Net income for the second quarter of 2010 was $11.4 million or $0.14 per share as compared to $11.7 million or $0.14 per share for the same period last year. The $0.3 million decrease resulted from increased operating costs and depreciation and amortization expense related to acquisitions and the Company's investment into the renewable diesel project with Valero.

Interest expense was $0.9 million during the second quarter 2010 compared to $0.8 million during the second quarter of 2009, an increase of $0.1 million primarily due to an increase in rates and fees from the amended credit agreement that we -- were partially offset by an increase in outstanding balance related to the Company's debt.

Operating income decreased by $1.4 million in the second quarter of 2010 compared to the second quarter of 2009. $1.0 million of the decrease resulted from increased depreciation and amortization.

The Company recorded income tax expense of $6.2 million for the second quarter of 2010 compared to income tax expense of $7.6 million recorded in the second quarter of 2009, a decrease of $1.4 million.

At the segment level, Rendering generated net sales of $120.8 million for the second quarter of 2010, as compared to $119.6 million in 2009. Our Restaurant Services business generated net sales of $45.4 million for the first six months of 2010 as compared to $35.7 million for the same period in 2009.

For the six months ended July 3, 2010, the Company reported net sales of $329 million as compared to $288.3 million for the 2009 comparable period. The $40.7 million increase in sales is primarily attributable to higher finished product prices and increased raw material volumes.

The Rendering segment generated net sales of $247 million for the first six months of 2010 as compared to $223 million in the comparable 2009 period. Restaurant Services generated net sales of $81.9 million for the first six months of 2010 as compared to $65.1 million for 2009.

For the six months ended July 3, 2010, the Company reported net income of $22.8 million or $0.28 per share as compared to $16.5 million or $0.20 per share for the 2009 period. The $6.3 million increase resulted primarily from higher finished product prices and increases in both volume and yield of raw material.

On July 3, 2010, the Company had working capital of $84.6 million, and its working capital ratio was 2.22-to-1 compared to working capital of $75.1 million and a working capital ratio of 2.05-to-1 on January 2, 2010. At July 3, 2010, the Company had unrestricted cash of $66.5 million and funds available under the revolving credit agreement of $108.9 million compared to unrestricted cash of $68.2 million and funds available under the revolving credit of $109 million at January 2, 2010.

The Company made capital expenditures of $9.4 million during the first six months of 2010 compared to $10.8 million of capital expenditures during the same period in 2009. The decrease in CapEx was primarily due to a modernization project at our Turlock plant which took place in the previous year.

Finally, turning to acquisitions, on May 28, 2010, the Company began including the operations of the Nebraska By-Products acquisition in the Company's consolidated financial statements. The Company paid $15.3 million in cash for assets and assumed liabilities consisting of plant, property, and equipment of $9.6 million, and tangible assets of $2.8 million, and goodwill of $2.7 million, and other expense of $0.1 million on the closing date. The goodwill from this transaction was assigned to the Rendering segment and is expected to be deductible for tax purposes. The identifiable intangibles have a weighted average life of 11 years.

I will now turn the call back over to Randy.

Thanks, John. In summary we are pleased with our performance through the first half of the year. All aspects of our business are performing solidly amid volatile global economic conditions. We continue to be very excited about our partnership with Valero and the potential opportunities that renewable fuels will bring to Darling and its shareholders. We look forward to updating you on this as developments occur.

Our balance sheet remains strong, and we will continue to be opportunistic on the acquisition front as we are constantly exploring ways to improve profitability, grow our earnings stream, and position our business to continue to deliver enhanced shareholder value.

With that, we would like to thank you for your participation and now we would like to open it up to calls. Operator?

(Operator Instructions) Farha Aslam, Stephens Inc.

Hi, good morning. Question about volumes in the quarter. Clearly, volumes are up year-over-year. We were wondering, Randy, if you could give us some color on core volumes versus what acquisitions helped you out on.

Okay. Well, I mean, this is -- as we have tried to explain here, trying to do comparisons here has been a little bit of a challenge for you guys and we understand that. You know, compared to second-quarter '09, volumes are up. The grease business or the restaurant trade clearly improved for us.

That is probably a little bit due to an improvement in general operating conditions at the restaurant level due to an improving economy. Then also I think there is just a little bit less glamour on steel and grease and the biofuel business of collecting grease out there. So we saw that business begin to improve, and our volumes are showing improvement year-over-year and growing pretty well.

On the fat and bone front or the rendering volume front, first-quarter 2010 we had a pretty good amount of deadstock come in, which you do see in winter weather. And spring was relatively mild for us. So our core volumes remained relatively strong in second quarter, and that would be a combination of city and country tonnage.

If you break it down even further, the Midwest remains a little bit weaker year-over-year, as far as total slaughter volumes that feed our plants. And then the West Coast remains weak year-over-year from where we were a year ago.

The West Coast carried a pretty good chunk of volume growth for us last your. It has backed off, primarily from the poultry side that hasn't returned out there yet. Whether that is due to shifting some of the poultry tonnage by our big supplier to the Midwest or just general conditions, we're not sure, Farha.

But at the end of the day the second-quarter 2010 had pretty good volumes. I guess I would just then take you to the next piece of the question to answer for the group then is -- if your volumes were improved, what was the impact of price?

And as we have talked about it, and you can see, that while tallow and grease prices were up what would appear to be substantially over Q2 '09, what happens is for the way that this Company has structured its risk profile on formulas, is that we were buying a lot of material against tallow, if you will in some cases, and then not being able to sell it as tallow, as the product deteriorated and degraded due to the hot weather. The hot weather stepped in here in mid-May in a lot of the Midwest. And by the time the trucking was completed and the processing done, there is very little tallow to be processed and sold out there, so it gets downgraded as high acid.

Traditionally, we have seen that impact start in the back half, late June, maybe early July; hit us for a couple of months; and then improve. So what we saw this year was predominantly our entire bucket of Midwest fat became high acid sooner than it has in the past. And we took impact against our formulas and then just the net impact on earnings there.

So that is going to be something that continues in the third quarter? Or have you adjusted your formulas now with your packers to adjust for the hot weather?

You know, you don't adjust your formulas. Because traditionally it has been a couple-month phenomena in the past. As we all know the weather has been extremely wet and super hot this year.

What we have done in the past has always had enough good stuff to blend with the bad stuff so you'd never see it. This year, the good stuff just doesn't exist anywhere near where the bad stuff is, so it becomes uneconomic to do it as we have done in the past.

So you are going to see the traditional downgrade that we have seen in the past in third quarter. I mean, the weather is undoubtedly very, very hot up in the Midwest. We are -- the month of July and the first half of August our volumes are very, very solid and there are heavy deadstock volumes coming in for this time of year now.

Okay. Then going forward, did you in this quarter spend to integrate the Sanimax and the Nebraska acquisitions? And do you expect expenses related to the integrations to be lower going forward?

Farha, the integration cost in the second quarter were up from the Nebraska By-Products, as we only had that for the five weeks. After the acquisition we always go in, upgrade the fleet, and then also approach the facilities from a safety standpoint and bring those up to standard.

That took place in the first quarter on Sanimax, so we had very little of the integration cost in the second quarter for Sanimax. But that did hit us in the second quarter for Nebraska By-Products.

Thank you. And then just going forward, your outlook on pricing, do you anticipate raw material pricing to follow grain prices up? Or is there anything in terms of demand for yellow grease and tallow that would not allow those prices to follow corn higher?

Good question. You know the whole commodity complex from corn to the soybean complex is very bullish right now, driven predominantly by the wheat situation in Europe, and the market is starting to look forward and trying to figure out how many acres it has to plant in what hemisphere to balance the necessary carry-outs that are going to be required to support the different industries and feeding around the world.

As we look at the [S&D], Farha, I mean it's -- the question becomes a little bit political in the sense of -- does the ethanol blending wall get moved from 10 to 12 this year? Does Russia and China really need to import more grains?

It would appear the animal complex is starting to normalize and may feed some more animals here. So I think overall from a base standpoint things look pretty good going forward from there.

You would think that with $0.41 soybean oil that you're going to see a little bit of lift to our product. And traditionally, summer feeding of our fats and greases begins to commence again then here towards the end of August. So we should see some buoying of those values coming on here.

It is kind of interesting that as we look at it and how it relates to what we are trying to do with Valero, this is the time of year that we absolutely would love to have that green diesel hydrocarbon facility, because the technology is impervious to taking a high-acid material. Where a lot of -- whether the chemical guys or the feeders won't take some of this high-acid material. So I think you are going to see that is the reason we are optimistic and excited about that facility one day here in the future.

And then additionally, when you look at additional demand in the world, you are starting to see -- for next year you're going to see additional biofuel capacity or mandates come on in Argentina. You are seeing the startup of the Tyson plant which I am sure you are familiar in Geismar, Louisiana. And then you are seeing the Neste plant in Europe and Singapore come on sometime during late next year.

So I mean at the end of the day I think there is going to be some pretty significant demand for our products. You're just in a summertime lull. How it relates to Darling here is the markets are still very, very limited for the products that we make especially during this time of year.

Okay, great. Thank you very much for your answers.

Dan Mannes, Avondale.

Good morning. A couple follow-ups. First and going back to the original question on the downgrading of the fats, can you just walk us through the mechanics real quick? Because optically it's a little confusing that we see revenues going higher from price, but at the same time margins going down.

Can you just walk us through mechanically how that is running through and how that works relative to your formula arrangements?

Okay. Dan, in looking at the Q and looking at the business segment, the change in finished product prices were down $0.4 million in total for the Company; but we were down $4.2 million in Rendering.

As Randy was saying, let's say our formula is buying meat and bone meal and the fat on a tallow price for the fat. And then from the packer that we are getting that material, then we bring in deadstock and the lower quality material that we are seeing because of the high temp and the high acid. That finished product cannot sell at that tallow price.

That is one reason there in the second quarter you saw the spread between yellow grease and tallow widen out. Tallow went up in value mainly because supply-demand; there wasn't that much tallow available in the second quarter as it was in the first quarter.

So the spread widened. The product that we were selling it for went down in value. So that relationship widened out, so we got less for that product.

That is just how the formula works. As Randy says, normally we have enough good product to blend that in and not have that impact, especially this time of the year. But because of the warmer temperatures, and the amount of the deadstock, and the quality of that deadstock coming in, it downgraded that product substantially.

Got it. So in theory, in a more normal quarter where you wouldn't have had the downgrading, your revenues would have been even higher, thus offsetting the --?

Absolutely.

Yes, and Dan, it is one of those things where you buy it off of tallow and then hopefully, while you are bringing in some off-grade material there is enough still good grade in the system somewhere that you can get enough you can get the tallow revenue back out of it.

It is an anomaly that happens usually as I said in July, a little bit in August. But we have not seen it where it has happened to us from Ohio to Colorado all at the same time across the country here.

Got it. Then as it relates to third quarter and since you do your comparisons year over year, we never see it in the third quarter anyways because it happens each third quarter.

Yes, it has always been transparent there. You have never seen this type of impact in the second quarter.

Got it. Briefly, we haven't talked -- we didn't talk about this much on the call. With the expiration of the tax credit, we have seen bio-diesel production being fairly modest. But on the other hand, given the renewable fuels standard -- and it looks like the still expected compliance with it on this year -- wind prices have improved dramatically.

So outside of the fact that grease prices were a little soft this quarter, what is sort of your thought process on the potential economics of the green diesel JV? Are they just as attractive with the RINs as they were effectively with the tax credit?

Yes, I think -- number one it's a good question. I mean it is something we are spending a lot of time studying and analyzing. But as we kind of predicted all along, you can have a mandate or you can have a subsidy or you can have both; but if you've got to have one, you'd prefer to have the mandate because the low-cost producer ultimately wins.

What you are seeing there right now is that the net value of the ultralow sulfur diesel and the RIN value combined will pay you adequate to make a return on the green diesel facility. In fact, the economics are very, very transparent out there.

To us it actually looks as good if not better than it did when the subsidy or tax credit was in place. So as far as we are going forward, we have kind of checked that box and our pricing formulas and how we intend to go to market with that product will compensate us for that, Dan.

Got it. Then last question is on the M&A environment. Clearly you have still got a pretty good balance sheet and a lot of firepower available. Without talking about specific opportunities, is there still a market out there?

You have had two acquisitions so far. You have looming tax law changes that may be incenting. But is there anything out there to look at? Being opportunistic is one thing, but are there opportunities to look at?

Yes, there clearly are opportunities to look at every day. It's interesting that there is now what, four months, five months, whatever is left to get anything closed here before year-end. So I think you're going to see an acceleration of people that have been contemplating bringing stuff to market, trying to move it before year-end here.

So, yes, we have got the war chest. On one hand we kind of say two things. One we have got our Valero project paid for in our savings account. On the other hand we are essentially debt-free and ready to go forward if something comes available.

Sounds great. Thanks.

Stephen Share, Wisco Research.

Good morning. On the renewable diesel JV, I am curious. It seems like last call you mentioned construction would be early 2011, at least that was your best guess. Is that still the case?

Yes, essentially, Stephen. This is Randy Stuewe. We are at the mercy of the Department of Energy here a little bit. They have been wonderful to work with; but they have also told us that we can't say anything. So bear with me as I try to answer your question without saying anything here.

The reality is we continue to work with them. It's a very dynamic and intense program with the DOE providing consultants and with them hiring consultants on our behalf to represent us; and then the consultants agree on how to move the project forward.

I see a timeline here -- either DOE approval or non-approval I guess you would say here -- by the end of the year, with us hopefully putting a state in the ground and at least ordering long lead-time equipment sometime early '11, with a start-up somewhere around third quarter, commissioning third quarter of '12.

Okay. Then secondly, on the renewable diesel, will yellow grease and tallow work equally as well? Is one better than the other as far as producing diesel?

The technology would say that it is neutral on that. But at the end of the day when you're using a process which is called hydro-treating, you are essentially hydrogenating the product. So one that is more saturated -- in the sense animal fats are more saturated than liquid cooking oils -- animal fats probably work a little bit better.

Okay. So it wouldn't necessarily -- we have a wide spread this quarter between tallow and yellow grease. You would still probably see that spread even after we have a couple diesel plants online?

Yes, I mean what we have said all along here is that in our product mixes we are about two-thirds to three-fourths animal fats; one-fourth to a third cooking oil. And that is pretty much the blend that we would intend to send down to the green diesel plant.

Whether that spread narrows or not, time will tell.

Okay. Then just quickly on the issue you had around the unseasonably warm second quarter. How is it tracking so far this quarter? Are we seeing the same level of unseasonably warm temperature?

In other words, will it continue to be a headwind? Or do you see it not as severe, because obviously last July and August were hot, too?

Yes, I mean what we are seeing so far is as everybody has reported across the country. It is just as hot if not hotter. The good news is -- or the bad news is it is just as hot as it was at the end of second quarter. The good news is that it has killed more cattle, as you have seen; it has been reported. We got a substantial amount of dead animals out of the Kansas feedlot areas here due to 100-plus-degree heat swings that happened there.

So kind of the bad news is the quality is just as bad. The good news is there is more of it.

Okay, thanks. I'll pass it along.

You bet.

JinMing Liu, Ardour Capital.

Good morning, gentlemen. Randy, firstly, just a follow-up question regarding the downgrade of tallow into some other products. My understanding on that, if the quality of your animal fat is bad enough you have to sell it as yellow grease. Basically was that part of the revenues still stay in the Rendering segment? Or you have got that part of revenue transferred into the Restaurant segment?

JinMing, if we do a downgrade to yellow grease in the Rendering to the Restaurant Services, as you have indicated, we show that. In this case, it wasn't -- some of this wasn't downgraded to the yellow grease because you also have to understand -- if you think tallow downgrades at this time of the year, yellow grease even downgrades more, when you consider it has been sitting out in a metal container out behind a restaurant and it is in over 100 degree temp.

The yellow grease then basically turns into brown grease, so you have a downgrade factor there as well. But some of that is moved over, but the majority of this product was just a downgrade of sales in the Rendering segment.

Okay. I was just trying to figure out your increase in the Restaurant segment for the second quarter; it was due to some just general improvement in the economy.

It was pricing. Price improvement was a major component of that. And then, and since some volume improvements in that area as Randy had pointed out.

Okay, good. Another question is related to the ethanol tax credit which is going to expire by the end of this year. There are chatters out there that this tax credit may not be renewed next year.

Say, if that happens, your products are sensitive to the core and complex as well. What is your take on that, if say that tax credit does expire next year?

Tax credit relative to bio-diesel, JinMing, or ethanol?

Ethanol.

Ethanol, I guess we don't share that that credit is going to expire. We share that it may be reduced by, I don't know, $0.07 to $0.09 a gallon. But we are more optimistic that the blending mandate is going to move from 10% to 12% next year.

I think what is interesting here and what the market is finally starting to understand is that maybe you don't need all the tax credits or the tax subsidies. You absolutely need a mandate to drive the business.

How this comes about -- I think the ethanol industry will continue to get the support it needs, and you will see that somewhere between $0.36 and $0.45, and it will continue to move on up.

Okay. Thanks a lot.

Tyson Bauer, Wealth Monitors.

Good morning, gentlemen. A couple quick ones, just a follow-up. Why shouldn't we expect product yields to continue to deteriorate in Q3 from Q4 or Q2, since you have a full quarter of the Nebraska acquisition? And also, at least in the local headlines here, renderers refusing to pick up deads, either due to capacity or it's just uneconomical to do so, leaving feed lots to compost on site. Your thoughts on those?

Well, I mean will product yields continue to deteriorate? The answer is no. It is a small enough piece of ours, it is a seasonal piece; you may see a limited impact there. But I don't think it is anything that would be considered material.

The comment, you are referring to a Kansas article that was out there where they actually praised us on the ability to go out and service these feedlots as quick as we could. Many, many thousands of animals went down very quickly.

The good news is they went down. The bad news is that some people call us an hour after animal goes down and some people call us three days after an animal goes down. Three days in 100-degree heat and you can only -- I will just skip the lunchtime conversation. You can imagine that you can't pick that animal up.

So, in Rendering vernacular, we were processing a lot of gray matter where the only thing you could do is just leave it and bury it or compost it there. And there is very specific rules on how you bury it there. So some lots were forced to do that.

But at the end of the day I think we did a really good job. We have got animals piled up everywhere in the country right now; trying to get them processed through; we are working through these floods in Iowa that continue to both take animals down and make it difficult to run our Des Moines plant.

As many people saw on Fox, the city of Des Moines was under water for several days. Thus our plant was caught in the middle of that and we were forced to move tonnage around.

So the good news is tonnage is very strong right now for July and August. The bad news is that it's really not very good tonnage.

Okay. Going to the fat prices, it's been fairly stable throughout '10 relative to the previous four years, almost flat line on tallow and not a significant movement in yellow grease. You mention ethanol possibly going from 10% to 12% at the beginning of '11.

Does that now bring a counterbalance of increased DDG volumes? We have already seen an increase in DDG railcar orders occurring now. So either they are getting filled up or they expect to be getting filled up.

What impact will that create and counter the increase in expected corn price, if ethanol increases in its blend ratio?

You know, it is a fascinating question and it is one that we have not come to a consensus on internally. The reality is that DDGs are approximately -- depending on feeding ratio -- 80% to 85% the value of corn. So long term, as the marketplace learns to feed more and more DDGs they will understand those economics.

Traditionally if you think back in the cattle cycles of the past, when corn got cheap the farmers would ignore the opportunity cost and they would tend to feed animals on farm with corn versus going out and having to buy ingredients.

The credit markets out there and lines of credits to the different ag communities have improved a little bit, but still aren't as liquid as they were in prior and mid '08 and the past. So trying to get the industry back to geared up to feeding nontraditional or homegrown ingredients here is just going to take a while.

I think DDGs are going to play a much bigger role in animal feeding economics. I think DDGs are going to drive additional animal numbers in that Kansas, Nebraska, Iowa market. You may see a transition of hogs out of Iowa a little bit; but I think you're going to see a transition of more cattle into the area.

It is just going to take a period of time as people start to look at those ingredients. And the fact that rail rates have moved up, it is going to make more sense to long-term potentially move more animals there than to transport the material further out.

Okay. The last subject for myself, we have seen a trend the last couple of years and it has not abated here recently. And that is an increase in beef cow slaughter without any corresponding increase in heifer retention, leaving '11 and '12 suspect to continued herd shrinkage in the US.

Does that create a volume concern for you? How do you -- what plans do you have in place to try to overcome a shrinking volume concern in the next couple years?

Well, I mean -- if you sit there and study those numbers, which we try to -- I mean, what? The cow calf herd has shrunk for the last 10 out of 12 years, I believe is the number. And it would ultimately say eventually there is going to be no animals left in this country.

But what people ignore is the fact of the productivity of that animal, and the number of calves coming per animal today, and the fact that they have gone -- animal's lives have gone from 10 to 15 to 17 years now on average.

So I think what you are going to see there is sometime in '11 you are going to see a resurgence of the number of heifers being retained to increase that cow calf herd. I mean if you look back at meat consumption numbers around the globe today, you are starting to see -- we are damned near back to the 2008 level -- or pre-2003 levels on meat exports around the world today. So beef is coming back.

It is interesting, though, beef is coming back with $4.00 corn, which is really a fascinating thing. The US has normalized to the higher price. The value of the dollar still makes our exports feasible. And at the of the day, I think the US will return to being the meat producer of choice over time and you are going to see those cattle numbers come back. But they may come back in a different form than we have seen them in the past.

I know many of the packers talk about the fact that we won't see the cattle cycles that we have seen in the past. It will be more a grow or produce it to what we need cycle than it has been in the past.

But I tend to believe that history always repeats itself. You're going to see bigger numbers come back here as the market learns to feed DDGs and you've got abundant crops around the country again.

All right. Thank you, gentlemen.

You bet.

William Bremer, Maxim Group.

Good morning, gentlemen. Could you provide just a little more color on the rendering aspect? Okay, we're building in some acquisitions here. I understand the volume. But yet we are having some good volume, poor quality on the rendering. And that is my first question.

Secondly, on the Restaurant Services side, great growth quarter-over-quarter. Just want to get more color there. Can you speak a little bit on restaurant traffic and volume on that aspect?

Yes, let me -- I am not sure there is much more to say on the Rendering side. Volumes third quarter looked to be pretty good. Obviously there is the quality side there that we have already talked about.

The cattle numbers, while second-quarter slaughter was up a little bit, it is still wasn't up where I think it will be long-term here. But I think everything is pretty solid there are going forward.

Meat and bone meal, we may -- hopefully we will see an increase in exports here a little bit around the country that will bring those values back up. But even if we don't, I think we're in pretty good shape as the soy complex remains firm with $300 meat and bone meal -- or soybean meal out there. And obviously with $0.41, $0.42 soybean oil in a carry, I think we should be in pretty good shape there going forward.

The restaurant side as I commented early in the call, we have seen an increase in traffic again at the restaurants. But interestingly enough, it hasn't been in the large metropolitan areas of New York and LA yet. We have seen it come back slowly and mildly in those areas.

So I think there is still some opportunity to return to that, to some prerecession levels there. But good performance there.

Our grease trap business, while we looked at it and started to look at the different volumes in that area, which we don't break out, restaurants are still being very, very frugal on the number of services they are ordering. Their prices of the ingredients they are still putting through their menus have increased again; and they are trying to balance between a slight increase in restaurant traffic in some restaurants to higher ingredients costs.

I know Brinker's announced their restaurant trade was still down year-over-year somewhere between 3.5% and 4%. The QSR side seems to be pretty good, but the casual dining continues to be a little bit constrained.

So we are being careful there, Bill, but it looks like and our numbers show that our volumes are improving. And it is coming from somewhere.

So as we always say, if you think of the yellow grease business -- and you have got to be careful to seasonalize it a little bit. When the ballpark is open, the volume picks up. With the state fairs, people eating out a little more, summertime, etc. And then after the World Series -- which the Texas Rangers should go to this year -- it goes down.

Yes, that was a nice win the other night. Okay. Hey, John, just a little housekeeping questions. I noticed that we will have $3.2 million in charges in the second half to the joint venture project. Can you give us an idea of how that is going to be allocated per quarter?

In the joint venture side, Bill, as we indicated, year to date we are about $700,000 of expenses that has run through, through the first six months, down in other income and expense. We have also capitalized about $250,000 worth during that time. So, so far this year it was around $900,000.

The money in the second half is going to start moving much more to the capital side of it. You will see the investment side of that grow. We will still have some expensed items that will come through until the finalization of all of the contracts involved. Because the legal costs there would be expensed.

But from the standpoint of investment and so forth, we are looking for the majority of the dollars spent in the second half of the year to be more on the capital side.

Okay. Fair enough. SG&A going forward looks as though you had five weeks in of this acquisition. Can you remind us how many employees were in this acquisition?

We had approximately 100 employees in the acquisition on the Nebraska By. What you have to understand, year-over-year it shows that we were up about $790,000. 40% of that in SG&A was related to acquisitions -- the Sanimax, which we didn't have a year ago, and then just the five weeks of the Nebraska By.

So you are going to see a little bit that continue as we get those organizations rolled in, when you look at it on a comparable basis going forward. That is about, like I say, about 40% of that increase is there. And then we did have some moving expenses during the quarter, second quarter, that raised up SG&A.

Okay, great. Thank you, gentlemen.

John Quealy, Canaccord.

Hi, good morning, guys. It's Mark Sigal for John. I was just wondering if you could talk a little bit about relative mix within the Rendering business between tallow and meat and bone meal. They had kind of offsetting year-over-year moves. So was just curious as to the jump in cost of goods sold, if you were just much more weighted toward that tallow in the quarter?

Well, the way the formula works, it is based on what the prior week's pricing was. If you -- when you do an animal, let's say an animal goes to market at 1,200 pounds; about 350, 400 of that would be offal that we would get; and about half of that is water that is cooked off from a yield standpoint.

so we would be sitting there with about 200 pounds of product. Approximately 45% of that is fat, and 50% to 55% of that is protein.

As with the values there, when you are looking at tallow at $0.32, that's $640 a ton of value versus meat and bone meal in the second quarter at $285.

So the impact on the pricing, of that going up, obviously it is twice the value. Quantities are about the same, but the value of the product is double for the fat than it is for the protein.

So that is where you are seeing that increase coming on the raw materials side. The fortunate side of this, the protein, we don't have a quality discount issue on the proteins, but we did on the fat.

So that is where the cost relationship got out of sync in the second quarter, with the tallow prices running up and our quality impacting us and we are getting less value. That is why you see that relationship a little out of kilter in the second quarter.

Okay, that's helpful. Then just on the yellow grease side, you guys referenced some yield issues in the quarter. Would you expect a similar dynamic in Q3 given the lingering heat?

Well, that's a good question, because in the first quarter, yield impacts were zero to us in the first quarter. As you see in the second quarter, the yield factors were negative to us of $200,000 during the second quarter.

We are seeing a little bit of other materials ending up in the bins out there any time in these markets. But I don't see yield being that big of a factor on the Restaurant Services side going forward. Where we historically see our yield differences is obviously on the Rendering side.

Okay, great. Thanks, guys.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Stuewe for any closing remarks.

Okay. Just want to say thanks to everyone. And as we learn any more on our Valero joint venture and other opportunities out there, we will update you as we can. And otherwise we look forward to talking to you at the end of third quarter. Thank you, everybody.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.