Darling Ingredients Inc (DAR) 2010 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Darling International conference call to discuss the Company's third-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 of this call. If you do not agree to these terms, simply drop off the line. I'd now like to turn the conference 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 third-quarter 2010 earnings results. Stuewe, our Chairman and CEO, will begin today's call with an overview of our third-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. 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 assessments of 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 oil seed commodities which have exhibited volatility and biofuels that can cause actual results to differ materially from those projected in such forward-looking statements. Other risks 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 results or otherwise. With that, I would now like to turn the call over to .

Thanks, Brad. Good morning, everyone, and thanks for joining us today.

First I would like to take a moment and review our third-quarter performance and then I will conclude with some commentary about our recently announced merger with Griffin Industries. Overall, we were pleased with our third-quarter performance. While basically unchanged from second and for that matter, first quarter 2010, the events influencing our performance were notably different. Let me comment about some of the moving parts.

From a raw material volume perspective, we saw improvement in both rendering and restaurant services. Overall, we are seeing improvement in the meat sector on most fronts.

Beef kills are up 2.1% year over year but more importantly, exports are now up 23%. However, pork slaughter is down around 4.1% year over year and poultry is only up marginally.

We saw increased rendering tonnage in most parts of the country with the exception of the West Coast. While a high percentage of the increase was attributable to acquisitions, we did see improved performances throughout the Midwest.

However, the additional tonnage came primarily in the form of dead stock. Extreme summer temperatures created many challenges in both processing and merchandising this input.

As we noted in our 10-Q, the extreme summer temperatures forced us to deeply discount our fats and greases or as our balance sheet reflects, put them in inventory and store them for future blending and sale.

On the restaurant services side, we continued to see improvement in our grease collection business. While it would appear that the consumers are starting to eat out more, this is not totally consistent on both the East or the West Coast.

On the finished product front, we saw a fairly volatile quarter once again as the world reacted to a drought in Russia, a depreciating US dollar, declining yields in both the US corn and US bean crop and continued strong Asian demand. While we finished the quarter with significantly increased prices for all of our products, the prices sold during the third quarter did not reflect these improvements primarily due to the lower quality raw material we were processing. With summer temperatures behind us, we anticipate being able to capture more of this improved finished product value going forward.

Now I'd like to comment on our strategic initiatives and we are especially pleased about our recent announcement of the merger with Griffin Industries. As I mentioned on our conference call on Tuesday, the combination of the two companies will propel our market position and we will solidify our position as the nation's leading independent render and recycler serving the nation's food industry.

We are very excited about the expanded capabilities the merger brings us. It diversifies our raw material supply, it expands our national reach to serve our customers, and it helps us obtain the number one position in the bakery byproducts recycling business and ultimately it increases our feedstock availability and further enhances our proposed green diesel venture with Valero.

Overall, this is an excellent fit from a strategic, geographic and corporate cultural perspective. We believe this is a win-win opportunity for Darling and the Griffin shareholders.

We look forward to updating you further once the merger closes which is now targeted for mid-December. We continue to work closely with the Department of Energy on project financing in connection with our joint venture partnership with Valero Energy to build a renewable diesel facility in Norco, Louisiana.

The proposed facility is expected to convert grease, primarily animal fats and used cooking oil, supplied by Darling into renewable diesel and will produce approximately 10,000 barrels per day or around 135 millions gallons annually. We are in the midst of finalizing documentation related to the joint venture with Valero and are in the process of negotiating our loan guarantee with the Department of Energy. We will update you as more definitive information becomes available.

Additionally, integration efforts of the Nebraska By-Products acquisition continue to progress with plant processing efficiencies, routing improvements and SG&A efficiencies being implemented. Regarding our San Francisco project, we're also working diligently with the city and port officials to clear all necessary hurdles prior to moving forward on our proposed 10 million gallon biodiesel facility.

We remain optimistic that final due diligence in this process will be performed and completed in the near term. I would now like to turn the call over to John for a little more detailed review of our financial results. After that, we'll open it up to questions and answers. John?

Thanks, , and good morning to everyone. During the third quarter of 2010, net sales were $168.7 million compared to $159.9 million in the year ago quarter.

The $8.8 million increase in sales is primarily due to significantly higher raw material volume offset by lower finished product prices for meat and bone meal and lower finished product prices for fat as a result of lower product quality. Net income for the third quarter of 2010 was $11.4 million or $0.14 per share compared to $16.1 million or $0.19 per share for the same period last year.

The $4.7 million decrease resulted primarily from lower selling prices for finished product due to lower product quality caused by extreme summer temperatures which has had an impact on the raw material quality. Additionally, increased operating costs and depreciation and amortization expense related to the acquisitions combined with the Company's investment in its renewable joint venture project attributed to a decline in net income. Similarly operating income decreased by $6.1 million in the third quarter of 2010 compared to the third quarter of 2009.

Interest expense was $0.9 million during the third quarter of 2010 compared to $0.7 million during the 2009 third quarter, an increase of $0.2 million primarily due to an increase in rates and fees from the amended credit agreement that was partially offset by a decrease in outstanding balance related to the Company's debt. The Company recorded income tax expense of $6.3 million for the third quarter of 2010 compared to income tax expense of the $8.7 million in the third quarter of 2009, a decrease of $2.4 million.

At the segment level, rendering generated net sales of $125 million for the third quarter 2010 as compared to $121 million in the year ago quarter. Our restaurant services business generated net sales of $42.8 million for the third quarter 2010 as compared to $38.9 million for the same 2009 period.

I'll now review our nine-month results. For the nine months ended October 2, 2010, the Company reported net sales of $497.7 million as compared to $448.2 million for the 2009 comparable period.

The $49.4 million increase in sales is primarily attributable to higher finished product prices and increased raw material volume. For the nine-month period, the Company recorded net income of $34.2 million or $0.41 per share as compared to $32.6 million or $0.40 per share for 2009. The $1.9 million increase results primarily from higher finished product prices and increases in both volume and yield of raw material.

On October 2, 2010 the Company had working capital of $91.4 million and its working capital ratio was 2.23 to 1 as compared to a working capital level of 75.1 and a working capital ratio of 2.05 to 1 January 2, 2010. At October 2, the Company had unrestricted cash of $77.1 million and funds available under a revolving credit facility of $108.9 million compared to unrestricted cash of $68.2 million and funds available under the revolving credit of $109.1 million at January 2.

Our Company's capital expenditures were $15.9 million for the first nine months of 2010 compared to $14.1 million capital expenditures during the same period of 2009. The increase in CapEx was primarily due to an increase in current year capital expenditures as compared to prior years. I'll now turn the call back over to .

Thank you, John. In summary, it's been quite an eventful year for us thus far as we continue to execute on our long-term growth initiatives. While (inaudible) economic headwinds persist, we are seeing signs of improvement both globally and here in the US.

We believe we are managing our business effectively to navigate these challenges. We are maintaining a healthy capital structure and we are positioned well to help improve long-term shareholder value.

We want to thank you for your participation in this call and your continued following of Darling International and now I'd like to go ahead and open it up to Q&A.

(Operator Instructions) Mark Sigal, Canaccord Genuity.

Just wondering with regard to non-formula business, do you get the sense that you can reap the benefits of deriving commodity price environment over the next several quarters? Are you seeing signs of pressure on the raw material side from your suppliers?

Mark, this is . There's formula, there's non-formula, as we've discussed many times in the past. I think for all the listeners and differentiating and both answering your question and answering the follow-up question to it is in the quarter, the formula sides -- our formulas didn't work as efficiently as you would like them to be because in some markets, you were buying off of a higher grade product, in the case, tallow, and then having to discount it down to yellow grease prices.

So in lingo here, we were buying high and selling low. On the non-formula business, we do reap the benefit of those rising markets. We don't really have to share that when it's in the case of a non-formula. So the portion that's non-formula, it's flowing through pretty good right now.

Okay, great, that's helpful. And then just curious as to your thoughts -- I know yellow grease pricing has done quite well as of late. Just curious as to your take on the sustainability of those favorable pricing tailwinds. And can you talk about maybe in a bit more detail trends in eating out occurrences perhaps by geography in your major region?

Sure, I'll comment a little bit. When we look at our volume year over year, we're up quite a bit now versus '09 on a volume perspective in that restaurant services segment. And that's excluding what I would say to be downgrades of tallow into that segment.

So our pickups in our volumes at the restaurant level are up. Part of that is due to kind of if you will the scaling back of the biodiesel industry in the United States, so there's -- to a degree, there's less competition for that feedstock.

We still are experiencing in geographies some pretty significant theft going on but even net of theft, we're up pretty nicely here. The two places if you had to say where aren't we up, New York City and Los Angeles, two bellwether locations in the country for us, but at the end of the day, the rest of the country is up solidly.

What we are seeing on the pricing standpoint is obviously the rise in corn here into the mid-fives, finally it's cooling down and feeding economics should improve here a little bit or feeding appetites should improve for the product, so we should come back a little bit more into animal feed again this fall. But we're seeing very, very strong European biodiesel demand right now or feedstock pull to produce biodiesel on the continent.

And it just is really amazing to see how much product that they're starting to pull out here. Additionally you're starting to see Neste fire up their -- I believe their Singapore plant. They're struggling a little bit, if I understand. I don't have that for a fact.

But at the end of the day, you're starting to see increased demand all around the world for the yellow grease feedstock to the point where we saw actually tallow trading below yellow grease in some markets and so -- yellow grease because of tax structures in Europe and also because of it's a lower saturated product for conversion purposes.

Okay and just lastly, can we look for an update on perhaps some target operating metrics for the new combined entity post the closing of the deal or will we have to wait for the Q4 call for that? And secondarily, do you have any better sense of if the DOE is waiting financial close or further detail to emerge before you hear one way or the other from them on the Valero JV?

Okay, well let me comment first about when additional data. There's a series of financial obligations we have to close out there in the form of the bank structure or the bank financing for both the revolver and the term loan that's going under the deal and then also there's some other financing things we have to do.

Essentially as those documents go forward and we secure the financing and get closer to close here, there will be more and more detail out there as we will be willing to and able to share with the marketplace on the Griffin transaction. So I'd ask you to bear with me there.

We would love to tell you everything we could about it today, but as we go forward and got to secure it, we really can't. So that's where we're at on that.

On the DOE, the DOE is aware of the Griffin Industries transaction. The DOE at least verbally views it positively to us. It makes us a stronger company, more feedstock, more financially secure long term in their eyes and we remain optimistic that there is potentially a deal there, although final terms with them on the term sheet and financing have not been worked through. They are under pressure to try to either fish or cut bait in a sense here to get the deal done or not get the deal done as we turn over the different Congressional seats here shortly.

So I think the view is it's kind of a use it or lose it mentality there today, so there is motivation to get the deal done. There have been very few -- I think there's 15, 16 or 17 of these projects in the coffers there.

We are to my knowledge the only biofuel project of the type there. I think they've only completed three or four now in a year.

So they're under some pretty good pressure to make good deals. We brought them a good deal here. They like the project, it's a matter of just trying to reach amicable terms on what we can accept, Valero can accept and ultimately under our new credit facility that will be negotiated here what's workable within that.

Farha Aslam, Stephens Inc.

Quick question regarding the Griffin acquisition. Could you just share with us your exposure in terms of a pie chart to species currently and then what it will be post Griffin? I know it will be increased in poultry, but just trying to get a good read more or less.

I think that we are pushing it out here on the website. Today our system was roughly about 77% beef and pork and a little tiny bit of poultry and then the balance being used protein oil. And once we're done in the mix here, then we will be -- the new company will be about half poultry and -- a little over half poultry and then the balance will be cooking oil and the beef and pork side with about I want to say 25% of it being bakery then.

Okay and then then when you look at volumes going forward for you guys, could you just share with us what you are seeing in terms of pork and beef volume coming in through your plants?

Well I won't give you absolute numbers. I'll tell you what I've seen here in about the last eight weeks.

We have seen pretty solid volumes starting about the end of September coming in on the beef side. While the summer was heavy dead stock, we saw the packer side pick up pretty sharply in the back half of September.

And as I look through where we have been in October here, the volumes remain strong there. The pork side is very well -- it's a smaller portion of ours, our pork side, our pork killers continue to run pretty strong. So overall, I would say we're pleased with our volume here from the back half of September forward right now.

Great and then final question. In terms of leverage at the -- post the transaction, what is the kind of debt to EBITDA do you envision this Company being at?

We are looking at close to be at about a 2.95 debt to EBITDA on projections.

And when do you anticipate closing on all of the debt to finance this transaction?

In December.

Okay, thank you very much.

JinMing Liu, Ardour Capital.

Two quick questions here. In terms of the Griffin transaction, are you going to assume any more (inaudible) from the acquisition?

No, we are acquiring the stock of the Company and it is a debt-free company.

It's debt free, excellent. In terms of the bakery business, you said it's 100% formula. What is the benchmark you use to do the formula pricing?

It's tied -- the procurement and the sale of the product is tied to the value of corn. Obviously it works very similar to any of the raw material formulas in the rendering side.

You put a fixed margin on it and you process and in most cases, it is a straight pass-through on corn. So as corn goes up, so does what you pay the customer, but the finished product sales go up. You lose a little bit on timing on the way up and you pick up a little bit on the way down. But it is a straight pass-through with very limited exposure.

Okay, let's say it's a dollar margin, not the percentage margin in terms of the formula pricing and on the bakery side.

We'll not release that right now. You'll to wait on that and then you will get to see it broke out eventually as a segment.

Dan Mannes, Avondale.

A couple follow-up questions. First on the cost side, the couple extra million you picked up on the operating side, any way you can break that out between integration versus maintenance versus I think you had a fire at one of your facilities in September. I don't know if you can sort of give us maybe an allocation there so we have some idea of what is ongoing versus what is -- may just be transient in the quarter.

The other expenses, Dan, came from several different areas. A small portion did come from some of the work that we have been doing on the acquisition and the SG&A area.

Year to date we are about a little over $700,000 on the Valero joint venture project and then there is -- the other portion is coming from the acquisitions. That is rolling in because a lot of that is a dead stock type business from the national Nebraska beef side.

So those are the primary areas that the increased cost is coming from, and as well from our baseline business on trout. Trout revenue was up over last year which increases cost for disposal in that area.

Okay so that's all that -- that all flows into that $4.9 million of year-over-year increase and sort of other costs --

Yes, those areas that I tried to lay out there kind of would flow into those areas.

I thought the Valero stuff went below the line. I didn't think that would be will in COGS.

Well, okay, you're just saying just in other income and expense (multiple speakers)

No I'm focusing in (multiple speakers)

I'm trying to cover all (multiple speakers) go ahead, I'm sorry.

No, on the COGS line, you added sort of your explanation for the change in year-over-year COGS in the rendering segment. There's about a $4.9 million increase.

Correct.

For other items and that's what I was really focusing on.

Over half of that is from the acquisitions that were made at the end of last year and this year.

Real quick on the Griffin acquisition, first of all, any thoughts on when you might file that S-3? I can't imagine I'm the only one who's pretty interested in seeing the historicals.

I think, Dan, I think here possibly later today and worst case probably early next week.

We will keep our eyes peeled. One question related to that. You can tell me to wait, but on the volume trends, obviously poultry has some different volume trends than maybe beef has a little bit.

I guess I was wondering, when you look at Griffin's historical performance and given how heavily formula they are, I'm wondering if there's sensitivity to volume relative to price versus you guys. You seem to add a lot more price to volume. I guess I'm just trying to contrast that a little bit.

Well I think over time, that will become clearer to you as we are able to share more with you. What I can share with you today is a significant portion of their rendering, nearly all other than a little bit of Street business they do, is on formula.

There are fair formulas to the customer and the supplier here. They are very similar to ours. Where Griffin has been very, very successful is they have been able to take their raw material streams and create through some pretty significant capital investment over time some really nice value-added products that they market into the market. So to a degree, not only is it insulated from the slings of the commodity market, they're selling value-added non-commodity products as end-products here.

Okay, so their historical performance may have some different drivers necessarily than what you had historically.

Very much. It's been a strategic move on their part. They've done a very effective job, great leadership in transforming the Company.

If I criticize myself and Darling, we're very commodity focused in what we put on the Street. They are very value-added focused on what they deliver to their customers.

That sounds like the synergies given the lack of geographical overlap, the synergies are maybe more on the revenue side with maybe you taking some of the expertise they have and value adding their products.

That would be exactly what we have a dream of both operationally -- they run very efficient plants and secondarily, they have got a focus on taking different raw material streams, segregating them and value adding from there where if you say in our classic world in the plants that you visited, we dump everything into one pit and try to make a product out of it. They look and say what is the highest value product they can make and can they afford to segregate the different raw material streams.

Sounds great. Real quickly on the loan guarantee process, you mentioned the DOE being under the gun given the changeover.

One question I was going to ask was on the other side is given some of the uncertainty of that continued funding, is there another thought that maybe they are in a delay pattern until they know? I wanted to hear from you given that you're actually talking to them.

You know, it depends on whether you ask me on Monday or Friday. I think I'll leave it at that.

One moment they're anxious, the next moment, I don't get it. All I know is that it continues to proceed ahead I said on several calls this week again. At least the verbal body language is positive at this time.

Got it, that's really helpful. Then the last thing is I think you had fires at two different facilities for different reasons over the last couple months. Anything to read into that and any operational issues you have run into because of it?

No, they were unfortunate in both cases. They damaged warehouses, basically buildings not really the operations part of those facilities. They were both related to spontaneous combustion of high-fat or high-moisture feed ingredients on weekends.

So it taught us that maybe we need to be on weekend watch a little more in some of these warehouses. But if you follow the Midwest at all, it's remained relatively warm and very humid with the rains up in the Midwest. So it just -- it was just our turn in the barrel, if you will, here.

Got it. Thanks for the color.

(Operator Instructions) William Bremer, Maxim Group.

Most of my questions have been answered. Just want to get a little color on the possibilities of Griffin's underlying business to the export market. What do you foresee there over the next say year or so?

Well, I mean, remember, exports are an opportunistic thing for both companies. Their facilities are positioned differently. Their customer base is very different than ours and their finished products are very different.

The input -- most of the cooking meal that's made out of the bakery business is a substitute, a caloric substitute for corn. It ends up back in the poultry business.

Their relationships with their poultry suppliers have relationships to much as the poultry rendering business does to buy back some of the material if it makes sense on the poultry fab side. And then the different poultry grade finished products they make find homes both in pet food and aquaculture and the primary homes of aquaculture is in the Pacific Rim.

So as different ingredients around the world move up and down in price, then different volumes of Griffin material will go export. Very strong export year for them this year given the value of the dollar, the tightness in fish meal because pet-grade poultry meal can go into aquaculture and is very nice low-ash substitute for aquaculture.

Can you give us a sense of what percentage of their top line is exported?

Don't know yet, Bill. I'm sure -- I don't know that we break that out for anybody. But at the end of the day, it's not a lot.

I appreciate it. And then finally, John, I noticed in the Q the $900 million regarding the fire that won't be covered by insurance. That's going to hit the fourth quarter in G&A?

It wasn't $900 million. (multiple speakers) the fire was $900,000. As said, it was in the warehouse side of it.

Same as what we did in the third quarter when we had the fire at the Lynn Center facility, we booked a loss but then we booked a receivable for the insurance proceeds. We have full replacement coverage plus business interruption coverage on those entities, so you're looking at around a $300,000 charge on both fires.

Roman Kuznetsov, Gates Capital.

Hi, it's actually Jeff Gates. I just had a question on Griffin's green diesel plant. How big is that? How long have they been in that business and the bench strength of the management in that part of the business.

Yes, I'll comment a little bit about that. Obviously that will be broken out eventually here as we report, Jeff. What I can tell you today is they were one of the pioneers in the business of converting waste greases to ASTM quality biodiesel.

It's a small plant, probably capable of 5 million gallons or less. Where they're located, the margins in that business do not support selling it into the road fuel and they have effectively branded some different products that go into the solvents business.

What we gained from their knowledge and their technology there long term will be if we choose to do something out in San Francisco, we now have a working model for the last years. They know how to do it, they're very professional at it and they do it very, very well.

They understand the yields, the cost and the technology to clean up material upwards of 15 to 20 [acid] effectively. So while it's not a big part of the Griffin business, at one time it was a segment that they wanted to charge off into with some pretty significant plans.

But ultimately they had found what we had found in the biodiesel business was that you don't change the cold flow properties enough of the product to make it a product that the petroleum industry really wants to handle other than on a seasonal basis. So green diesel is the creation of a hydrocarbon which we will be making down in Louisiana. They are just simply converting and making animal fat and used cooking oil biodiesel in very limited quantities.

You also sound like every time you talk about the Velaro project, you talk about pretty much like you're definitely going to be doing it. And I'm just wondering, would that project be viable without DOE loan guarantee?

You know, what I can comment there, Jeff, is that after you have drank the Kool-Aid so long, you really believe in the project. And as I've gotten closer to the really smart guys at Valero and their engineering staffs and their technical people, it's both a product and a process that we believe in.

It is a very expensive plant to build. It's one that's probably greater than our appetite that we could afford without the DOE. But it's also one that I think Valero truly believes in and we're just going to leave it at that.

We're hopeful that the DOE comes through but if they're not, then I would just not ever take plan B or plan C off the table at this time.

Right and if I look the -- you have given us the EBITDA trailing for Griffin without any synergies or anything and you've given us what the capital requirements are. If I look at the incremental interest expense based on market rates, we come up with something like $50 million pre-tax sort of additional earnings stream for Darling, the parent, on a cash basis, forget GAAP and charges for amortization and all that stuff. Is that kind of in the ballpark of how you're looking at this transaction?

Jeff, when we come out with our projections as post closing, we will address all that at that time.

Okay, thank you. Good luck.

Tyson Bauer, Wealth Monitors.

Jeff asked the key question on the DOE there on the alternative options. Given that would be a significant CapEx to bear upon yourself, would that then require a third party to get involved with you and the Valero JV?

Potentially. Is Valero big enough to do it if they believe in it? Yes, it would just have to be dealt with in the Valero capital system and compete against other projects and ultimately how Valero trades and values their internal money, they'd have to clear their internal hurdles and that is yet to be evaluated as we continue to progress with the DOE.

One of the viable options may be is they take a little bigger percentage of this JV, lowering your percentage, and of course all this doesn't matter after we see how the cards are played here. But those are -- the options are there beyond the DOE.

Absolutely Tyson, I think you said it well. We're not going to take anything off the table. We've put a lot of money into engineering. We understand the product, the process.

We understand what the value of (inaudible) are in this country. We understand the locational economics and the value-add potential to our fats and greases.

After you come through the third quarter and there was material sold in the third quarter at $0.19 and $0.20 per pound because it was 40 and 50% free fatty acid for us, and so there's a pretty extreme value to upgrading the value of our fat through this finishing system. And we would like to figure out how to get there. As I said, it's a very expensive product and process and hopefully we will have a workable solution here shortly.

Given the strength on the export market that you talked about and where corn is with the lack of their export data supporting at this current time, do you expect a break from the status classic corn formula if exports continue the trend they're going which could also provide you maybe a surplus margin?

Yes, I mean, the way to answer that is you will have a two-tiered market. You'll have a portion of it that has to go into feed because it doesn't have economic access to exports.

The value of the Darling system, when we feel like geniuses with these coastal plants is when exports come alive. So our Newark, Los Angeles, San Francisco, Seattle, those plants all start to do really, really well; we're starting to see increased exports off the West Coast now.

To a degree they were fishing behind the net for a little while and they have now come to where the West Coast is comparable to Midwestern values and some small export trades at this time. So that's a positive signal for us.

Given the price range tallow has been in for such a long time, are we just not seeing greater activity from the oleochemical guys? Or what is kind of your outlook or what you are seeing that has kept tallow in such a tight narrow price range?

You had a couple things that went on. You had the extreme summer temperatures to making products that some of the oleochemical guys, even the packers that "have fresh raw material" didn't have fresh finished product this summer. So there was a little bit of challenge trying to get that into the oleochemical business.

The oleochemical business has remained pretty good but I wouldn't say really aggressive there. Additionally you got to witness what we have been saying all along.

The technology to convert saturated fats into biofuel just doesn't exist out there today in sufficient quantity. These biodiesel plants that we're running could not run the tallows. They could run used cooking oil.

And so tallow had been lagging the bean oil market to the tune of anywhere from $0.13 to $0.17 discount throughout the summer because of both acid and saturation. As it cools down as RFS2 kicks in for next year, you're starting to see a little bit of improvement there in the oleochemical business because of where palm oil is is starting to feel a little more demand.

Thanks a lot, gentlemen.

That concludes today's question-and-answer session. At this time, I would like to turn the conference call back over to management for any closing remarks.

I want to thank everybody for joining us. I want you to have a great holiday season and we will talk to you more as the Griffin Industries merger closes here shortly. Appreciate it and have a good one.

That concludes today's conference call. We thank you for attending. You may now disconnect your telephone lines.