RiceBran Technologies (RIBT) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the NutraCea Second Quarter 2008 Conference Call. (Operator Instructions) This conference is being recorded today, Monday, August 11, 2008. I would now like to turn the conference over to Marilyn Meek with the Financial Relations Board. Please go ahead.

Thank you, and welcome to NutraCea conference call to discuss the Company's second quarter 2008 results for the period ended June 30, 2008. On the call with us today is Brad Edson, CEO of NutraCea; Leo Gingras, Chief Operating Officer; and Todd Crow, Chief Financial Officer.

Before we begin, I would like to remind everyone of the cautionary language about forward-looking statements contained in today's press release. That language applies to any comments made on today's call. With that said, I would like to turn the call over to Mr. Edson. Brad, please go ahead.

Thank you, Marilyn. Thanks, everyone, for joining us today for our second quarter 2008 conference call. I'll make some opening remarks and then review some of the financials with you. I'll then turn the call over to Leo Gingras, who will provide you with an update on our operations, and then I'll wrap up with some closing comments and then open the call up for questions.

We had indicated on our first quarter call that we anticipated our second quarter to come in between $9 million and $10 million in gross sales. We're pleased to report that sales came in at $10.3 million, slightly exceeding the high side of our estimated revenue number. This is even more positive considering that this was accomplished concurrently with an intentional buildup of added inventory for new customer rollouts anticipated to begin in the fourth quarter of this year.

Additionally, during the quarter our domestic facilities were operating below their capacity due to supply constraints from the rice millers. Concerning pricing, towards the end of the first half of this year, most of our existing long-term equine customer supply contracts were renegotiated and repriced upwards to better reflect a current market price. The balance of our customer agreements are scheduled for upward repricing in the second half of this year. The effects of this should begin to be reflected in improved margins in future quarters.

Additionally, as we stated in our last conference call, all of our domestic facilities should be running at close to capacity by the latter part of this quarter and continue to run at this pace through the fourth quarter of this year. This will provide us with the largest amount of raw brand for processing that we have had since the inception of the Company.

As I mentioned last quarter, we're building significant inventory to handle planned rollout of our products to several existing and new customers beginning in the fourth quarter. Some of these new customers have been in the planning stage for extensive periods of time. Although these customers can't specifically be identified at this time, I can tell you that they include baby cereal, breadings and batters and certain meat products based on a new application for which we only just received USDA approval a couple of months ago.

We are continuing to build inventory level this quarter in anticipation of these rollouts. By the end of the fourth quarter we anticipate that we should utilize most of the inventory except for small cushions that we will maintain.

We're also pleased to report that Irgovel, our newly-acquired Brazilian rice oil facility, in its first full calendar quarter of operations produced record pre-tax profits of US $1,017,000 for the quarter. This was achieved even prior to the implementation of our proprietary technology and expansion. This expansion is now underway and scheduled for completion by the end of the first quarter of next year. We anticipate the new technology will allow us to increase the profitability of the plant by reducing expenses and increasing the quality of the rice brand oil and defatted brands to allow its use in human food applications.

These technological enhancements are anticipated to be putting us into a position to significantly increase the current profitability of the plant. In addition, we will be increasing the production of the facility by approximately 60%, which provides the potential of increasing new growth in net profit numbers by an additional 60%, and in reality probably more, since profitability typically improves with economies of scale.

Therefore, once expansion has been completed, estimated again by the first quarter of next year, and the new technologies in place, we anticipate increased profits from Irgovel that may move north of $3 million per quarter.

Since this plant is the basic model for our recently announced China plant and is essentially about a seventh the size of the current plant planned in China, and it's about a quarter of the size of the China plant after we do our expansion at Irgovel to be completed in March of '09, you can easily model the potential for revenue and profits of the planned China facility.

Additionally, given the economies of scale that can be attributed to the much larger China facility, it is anticipated that we'll experience even more improved margins in China. Further, this should allow our investors to better model the future potential profitability from the plants that we're currently constructing. I'll go into more detail on this later in the call.

Based on our contracted business today and understanding that we are still constrained by raw bran supply and the need to build inventory this quarter, we anticipate third quarter 2008 sales for the period July 1, 2008 through September 30, 2008 to come in slightly higher than second quarter, and we expect the net loss to narrow.

Although we are not in a position to give specific guidance for the third and fourth quarters, we do anticipate a meaningful increase in revenue and a significant improvement in the operating numbers in the fourth quarter over the third quarter, and a continuation of quarter-over-quarter increases in net revenues as well as improvements in operating income.

Previously, we indicated that we anticipated being profitable by the end of the fourth quarter of 2008. It appears based on the schedule of the utilization of the new Phoenix facility, the completion of the Irgovel expansion and the sourcing of consistent US supply of bran, that we appear to be about one quarter off and anticipate profitability to occur by the end of the first quarter 2009. Although, as I just indicated, we should continue to track very positively quarter over quarter.

We're in ongoing discussions with other rice mills in the US and internationally, and Leo will give you an update on this shortly. We expect to be able to provide further updates on additional expansions and inaugurations by the time of our next scheduled conference call.

As reported in our release, which should be out today, we record revenues of $10.3 million for our second quarter, compared to revenues of $13 million for the second quarter of 2007. Excluding a one-time licensing of $5 million that we received last year, net revenues for the second quarter of 2007 were $8 million. Sequentially, net revenues for the second quarter of 2008 rose 102% over first quarter 2008 of net revenues of $5.1 million.

The Company's two business segments, NutraCea and Irgovel, recorded net revenues of $3.9 million and $6.4 million, respectively, for the second quarter of 2008. The decrease in product sales by our NutraCea segment in the second quarter of 2008 over the prior year second quarter was primarily due to an increase of $615,000 in sales in our stabilized rice bran product line, which is offset by sales for the period ended June 30, 2007, of $4.6 million of one-time, unique specialty nutraceutical products for two former customers of ours.

Net loss for the second quarter of 2008 was $6.1 million, or approximately $0.04 per share, compared to net income of $2 million, or about $0.01 per share for the same period last year. The second quarter 2008 loss was primarily due to the absence of any meaningful licensing fees, a lower domestic supply of raw bran, and an intentional inventory build by the Company during the quarter. Our NutraCea segment had a loss before income taxes of $6.9 million, while the Irgovel segment reported income before income taxes of $1 million for the second quarter of 2008. These sales were achieved at the same time that we were increasing our inventory during the quarter.

Now, it's important to note that we are meeting our current contractual customer needs and that our inventory build is designed to meet future obligations currently anticipated to hit us during the fourth quarter.

SG&A expenses were $5.9 million for the second quarter of 2008, as compared to SG&A expenses of $5.7 million for the second quarter of 2007. The $214,000 increase was due to $1.4 million of SG&A site-specific costs for our Irgovel segment, offset by a reduction of $1.1 million in SG&A expenses at our NutraCea segment.

I'd like now to turn the call over to Leo, who will bring you up-to-date on our operations.

Thank you, Brad. Let's begin with a review of current operations. I'm pleased to say that operations in Louisiana are looking much better beginning in August, with our Mermentau facility currently operating at full capacity. The Lake Charles operation is fully functional and operating at 65% of capacity as our supplier ramps up bran supply, which we expect to be at 100% in September.

The outlook for rice milling and therefore bran supply in Louisiana is positive for the balance of the crop year, although rice export business conditions are always subject to rapid change. California operations continue to be steady and near capacity. As previously mentioned, we expanded the Arbuckle plant by 4,000 tons per year. The project came in on time and within budget.

It's important to note that we took and processed all the bran that was made available to us this last quarter. However, due to the slow milling situation in South Louisiana over which we have no control, we only operated at about 30% of capacity.

As you just heard me say, we expect to see the mills run much closer to stated capacity from this point to the end of the year.

As Brad indicated, we are very pleased with the progress made at our Brazilian rice bran oil subsidiary. Capacity utilization continues to improve and in the second quarter we operated at 90% of capacity, which is 70,000 tons per year. We are currently running at full capacity. Plans are underway to increase this capacity to 115,000 tons by the first quarter of 2009.

In addition, we will install new technologies to reduce expenses and create new value-added products. Longer term we intend to increase capacity to over 200,000 tons per year.

Progress in our new Stage 2 product in infant cereal facility in Phoenix continues. We anticipate 5,000 tons of annual capacity to come on line in the fourth quarter of this year, with an additional 1,650 tons starting the first quarter of 2009.

As previously stated, this plant will include equipment for packaging consumer cereal and nutraceutical products. So that expectations are set at realistic levels, it's important to note that when a new facility of this size is brought on line, you don't run it at 100% on the first day. We will ramp this facility up to its capacity over a period of two quarters, and by the end of the first quarter of 2009, we will bring online at capacity of 1650 tons that will be available for additional production beginning in the second quarter of 2009.

Engineering work on our wheat flour mill in Indonesia continues. The oceanfront site for the project is prepared and ready for construction of this 500-ton-per-day capacity plant. The facility will incorporate NutraCea equipment for stabilization of wheat bran.

Preliminary engineering on our China project, which is anticipated to be the largest rice bran oil plant in the world has started. I personally inspected and reviewed this site that has been located for the plant. When operational, it will have the capacity to process 500,000 tons of rice bran annually, producing both oil and defatted bran for Chinese and international food ingredient markets.

Similar to our Brazilian operation, the Chinese site is located very close to a deepwater container port for easy access to export markets.

We have previously discussed construction of the stabilization plant in Indonesia. Key pieces of equipment have been fabricated and are ready to ship from the US and the project is on schedule. At this time we are considering expanding the scope of this project to include rice bran oil, extraction and refining. As we proceed with the expanded concept, project timelines might be extended.

A few words about inventory. In the last conference call I stated that we were building inventory to provide a cushion in the event of a slowdown in rice milling this summer. We did indeed build inventory of stabilized brand which peaked in May and has since been declining. The return of Louisiana operations to near capacity in August will now provide sufficient product for new sales to existing and new customers anticipated to begin in the fourth quarter.

New output from Louisiana comes at a good time as our worldwide distributor network begins selling rice bran to the meat processing industry. Since obtaining USDA approval for this application in May, we've seen a tremendous amount of interest in using bran in meat products such as hot dogs, chicken nuggets, and sausages. Several containers have already been sold and shipped to the Philippines in the second quarter. Additional containers have been sold and are in transit to Indonesia, Malaysia, China and Europe. We anticipate US sales soon once companies complete their evaluations.

We have several other new food applications for rice bran which are also very promising. Additional patent filings have been made to protect these technologies. We remain confident that demand for our products will continue to grow.

Earlier, Brad mentioned our efforts to obtain additional bran supply. We are currently negotiating with a number of rice mills, both in the US and overseas, and expect to have agreements for significant new quantities before the end of the year.

In addition, we will obtain 4,000 more tons from a current supplier due to the capacity expansion at Arbuckle, California. Similar arrangements will be made with current and new suppliers in Brazil to provide additional bran to support our expansion. The same will occur in China.

As a side note, when I joined NutraCea 16 months ago, we proceed about 12,000 tons annually. We now have an annual run rate of 140,000 tons, which will rise to at least 185,000 tons by the first quarter of 2009, then to 280,000 tons by the beginning of 2010, then to more than 780,000 tons by the end of 2010, when our China operation comes on line. These numbers are all based on publicly announced projects.

Although we don't often speak about bran procurement due to the sensitive nature of supplier relationships, I can assure everyone that we fully understand how critical this function is and that we forge very strong, long-term, mutually beneficial relationships with our suppliers.

I'll conclude with a few words about our recent shift towards production of rice bran oil and defatted bran. As with all food commodities, prices for vegetable oil have risen to historic levels. These prices are expected to remain high for some time, and in fact recent publications of the United Nations Food and Agriculture Organization and United States Department of Agriculture are predicting these values will remain elevated for a decade or more.

Rice bran oil is a premium vegetable oil that is in high demand. The co-product of oil extraction, defatted rice bran, processed with our new technology and supported by provisional patents for varied applications will work very well in a number of food categories. Bottom line, we believe that the value derived from marketing oil and defatted bran as separate products is better than selling them as a combined product, mainly, stabilized rice bran.

Therefore, we are moving toward rice oil extraction facilities. This is not a departure from our strategy, but rather a refinement that we believe has the potential to dramatically increase the overall value that we receive from our raw materials. Brad will elaborate further on this in a moment.

I'll now turn the call back over to Brad.

Thank you, Leo. Many of the people on this call are very familiar with our Company, and many of you are hearing this story for the first time. Let's take a few minutes to summarize some of the key points of our business model and strategy, and how all the pieces are now coming together.

NutraCea, as a proprietary unique technology that allows us to stabilize rice bran, a byproduct of the rice milling process, that quickly goes rancid due to a lipase-induced rancidity that's inherent in the grain and initiated by the milling process. This byproduct comprising approximately 60 metric tons annually is one of the world's most vastly under-utilized food resources.

Over the last couple of years we've been building a proprietary processing facility primarily in the United States to service the equine and food ingredient business at a time of historic demand for food worldwide. Due to supply shortages and population growth, there is clearly an overwhelming need for our products.

As Leo just mentioned, sometimes a part can have more value than the whole. This is what has prompted our strategic move into the rice bran oil business. After substantial research and development and much effort, we are now able to expand, modify and incorporate our unique stabilization technology into the rice oil production business. We are protecting this process and application by new patent filings. To date, we have over 13 new patents that have been filed to further protect our intellectual property, or IP, in this and surrounding areas.

Rice bran oil is a natural extension of our business. There is not much of it in the world. It is less than 0.05% of the world's edible oils market. The primary reason is that historically it's not a very profitable business. It is capital intensive, it's energy inefficient, and more than 80% of the raw supply that is used in the process is simply sold as low-grade animal feed at the same or lower price than you purchase it for. We are about to change all that.

We have been working on improving the process by implementing our proprietary equipment and incorporating some unique and patent-pending technology. This will allow us to cut costs significantly, improve the value of not only the oil, we feel confident that it will allow us to achieve significant additional premium value on the byproduct, which is the defatted bran, all protected by new patent filings on the process and certain uses of the ingredients. Let me elaborate on this for a second.

Right now, when you operate a rice bran oil refinery, the raw bran goes in, about 20% of it turns into oil, and 80% of it goes out at the same price of often lower than what it went into the process for. Net result is a very low value, energy inefficient, capital intensive business.

When we implement our new technology, which is on both the front-end and the back-end of the process, 20% of the rice bran oil comes out at a higher quality oil, the production cost is significantly decreased, and the byproduct, the defatted bran, is worth much more incrementally.

Using our Brazil plant as an example, in Brazil we have 70,000 tons that go in. 14,000 tons go out into oil for around $1100 to $1600 per ton, depending on the amount of refining that we do. The rest of it goes out basically at the same price it went in for.

When we've completed our installation of our technology at the end of March 2009, the current 56,000 tons of annual capacity that's going out could be worth an additional 100 to 200 more per ton, resulting in estimated potential incremental revenue and profit of approximately $6 million to $12 million per year on top of the $4 million that we expect to be making annually just from the current oil business. Don't forget, we're planning an additional expansion that is anticipated to almost double the new capacity numbers.

This stabilization process will also play a major role in our wheat milling and stabilization facility in Indonesia, which will be a model for many large wheat millers. This plant which we are building with a joint venture partner will not only produce significant revenues and profits for the Company when built, but will also allow NutraCea to have a working model to demonstrate and license the technology to numerous wheat millers throughout the world who could benefit greatly from the huge increase of profits by salvaging as much as 10% or more of their current production. The resulting IP and potential licensing income is NutraCea's. Only the mill itself is jointly owned by the venture.

Even though our plant is yet to be constructed, we are involved in preliminary and ongoing discussions with a number of large wheat millers worldwide who may be interested in licensing the technology and equipment. Over 700 million tons of wheat are milled each year, and over 25% of that amount, or approximately 175 million tons of unusable fractions of the wheat goes into the animal feed market at nominal values. Unlike rice mills, wheat mills tend to be large and many of them are owned by some of the largest corporations in the world. The opportunity here is quite significant for us.

We are pleased to update you that we believe we are closing in on realizing some value from the nutraceutical and pharmaceutical arena. We have dedicated an increasing amount of time and energy to identifying and IP protecting certain new processes and uses for isolates and chemistries associated with stabilized rice bran and possibly other grains that our process applies to.

Many of our studies are well underway to being finalized and we are now exploring certain potentially available value propositions to the Company on large nutraceutical and, more importantly, pharmaceutical companies. We feel we may be close to not only announcing but also realizing value from these initiatives within the next few quarters.

As I stated previously that we should continue to increase our gross sales on a sequential quarterly basis, and our operating numbers should improve quarter-over-quarter for the foreseeable future.

One of the most important questions that we've been asked is how will we finance the large capital expenditures for the projects that we've already announced including our most recently announced project in China? And we have been exploring several options which run the gamut, from equity, through debt, and all the permutations in between. Basically, the question comes down to one of limiting dilution and carrying interest and similar expense as alternative.

We are evaluating our operations very seriously and methodically. The money is available to our Company, but we are going to be as selective as possible in determining what is best for the shareholders, and we will be as careful as possible not to compromise the capital structural integrity of this Company as we move forward on these initiatives.

We expect to be able to arrive at how we will proceed before September 30, 2008. And this should result in the Company being able to execute on its capital projects in the most accretive way possible for our shareholders.

We believe the projects that we have underway bring with them the potential of hundreds of millions in annual sales in future years, and significant amounts of net profit as can be seen by the example of our Brazilian project's dynamic earning potential, which we believe to be very small in comparison to what we are planning for the future.

The earnings capacity of these projects that become more apparent should allow us to access the capital markets constructively as we move forward. Now, it's important to note that we are building a Company that has the potential to play a significant role in addressing the world food crisis.

Ladies and gentlemen, there are no shortcuts. There are no magic fixes. There are significant capital expenditures that need to be made. There are key and strategic individuals and teams and infrastructure that need to be put into place, much of which we have already done. And there are global companies and governments of incredible size and stature who have chosen us, NutraCea, to partner and work with to mutually execute on these objectives. I assure you, we not only intend to follow through on these objectives, but we will do so in a way that will benefit our shareholders and our customers.

We feel the years ahead will reflect the benefit of the decisions that are being made by us today. I'd like now to turn the call over to our listeners for questions, and would like to request that we limit each listener to a single question and one follow-up question. Now, let us take the first question.

Thank you, sir. (Operator Instructions) Thank you. Our first question is from the line of Steve Denault with Northland Securities. Please go ahead.

Good afternoon, everybody. You made reference to taking some pricing I think both in the second quarter and then possibly here on some of the contacts in the back half of the year. What is the new pricing across your complex?

Steve, the (inaudible) that we have with the company is one where we have chosen not to discuss pricing initiatives, because it puts us at somewhat of a competitive disadvantage when we're dealing with different customers in different dynamics. But generally speaking, what we're talking about is at the end of -- toward the end of the second quarter, throughout the second quarter, mostly toward the end, we're repricing the equine customer contracts to bring them more in line with market conditions. Because many of them were structured quite a while ago.

Okay. What is that? Is that a 10% increase or that's -- you don't want to get into.

We don't want to get into it, because we have many customers with many dynamics, and the customer demand-and-supply issues are different in respect to them. But overall we have chosen to reprice and renegotiate all the contracts, because, again, they were not reflective of current market conditions. S

o, again, across-the-board there were increases and you'll just have to see how that's affected when you look at future margins. The future margins and the future sales between the segments will reflect that benefit of what we just did.

The rice milling facility in Brazil did what in tonnage for the quarter?

Let's see. 90% of our capacity, so if you'll let me punch the numbers real quick, 15,750 tons.

Okay. And then on the 20%, that was -- where you're yielding the oil itself, what was the ASP on that, Brad? I think you threw out a range.

The ASP range is dependent on the amount of refinement, Steve, and that is typically $1100 to $1600 a ton on the oil side. And then on the defatted bran side, we have not implemented our technology. That does not go into place until towards the end of the first quarter of next year. So, basically it's a pass-through on the defatted at the moment.

So, maybe $100?

You know, it varies, because the price of bran fluctuates literally on a daily basis, but whatever the price is that we're paying when it goes in, you're typically getting at or slightly less, actually, on the way out.

Okay. I mean, that 35% gross margin on that business is pretty good. Is there anything unique in the quarter itself, or is that representative of what we should anticipate moving forward?

I think that that quarter was probably typical with the understanding that it will definitely improve once you get the defatted technology in place with our proprietary and patent-pending technology. So, as far as operating margins on the oil side of the business, I think that's what you can expect going forward. And then as far as overall margins, based on our new technology, it should increase significantly.

Okay. So, I'm assuming Sacramento ran at 100% capacity, as did the Arbuckle facility? And you made reference to Mermentau, obviously it was down in the quarter. How about Louisiana No. 2? What kind of capacity did you get out of there?

Steve, just to recap. Sacramento basically ran at capacity. Arbuckle was close, but we did have a little down time to install that new equipment. We know that Mermentau was down all summer, and Lake Charles for the quarter was probably operating at about 50%.

Okay. And Phoenix comes on line in the fourth quarter?

Yes. We begin bringing it on line in the fourth quarter.

Okay, perfect. Thank you.

Thank you. Our next question is from the line of Joseph Halpern with Halpern Capital. Please go ahead.

Hi, guys. Could you just elaborate a bit more on this potential in China? I know you're building one plant, the 500-million-ton plant, but what's the amount of rice that's milled in China? What's the amount of bran available, etc.? What's the potential for the country?

Well, the potential, the country itself probably has in the range of in excess of 20 million --

30% of the world's rice.

So, you have about over 20 million metric tons of bran and probably close to 30% of the world's supply of bran and, of course, rice production. From our standpoint under our contract with the Chinese partner, Bright, which is affiliated, of course, with the Chinese government, we are looking initially at an opportunity here for perhaps three plants of that size magnitude following the first plant to total up to three, although the agreement is open-ended to go beyond that. But the contemplation is to take it up to three plants at a half million tons in size, half million metric tons of capacity these plants will generate, which is about a little over seven times the size currently of our Brazil facility.

Okay, and over what period of time do you anticipate the three plants being constructed?

Well, the initial plant that we're starting should begin construction subject to permitting within --

The beginning of '09.

The beginning of '09 and you're looking at about a 20- to 24-month period to get it up and running. Sometime during that process the evaluation will be done of whether we should initiate the construction of follow-up plants. It is our expectation that the follow-up plants would not wait until the completion of the first facility if we intend to do it.

Okay, super. Thank you.

Thank you. Our next question is from the line of Tom Bishop with BI Research. Please go ahead.

Hey, Brad.

Hello, Tom.

Just for starters, just a quickie, what did Dillon do this quarter, or not do?

I think Dillon was running at about 30% of capacity this quarter.

You're still not able to keep that one running because you're stockpiling inventory for Q4 sales, right?

We had that, and there's also going to be a move -- a lot of the customers now that we have are involved in packaging, as well as just the processing of the materials, which is one of the reasons that the Phoenix facility is so important to us. Because they integrate the packaging line and some specialty integration of specific customer needs, in addition to the production of the products. So, the Phoenix -- and that's not something we can do at the Dillon facility. It just isn't set up to do it and it can't be modeled to do that. So, we're constrained also by the limitations of what some of these current and pending customers want to have, especially in the baby cereal business, which requires some specialty packaging.

I'm a little surprised that the profitability got slid out a quarter. I mean, you're going to have LA No. 1 and No. 2 at full capacity in Q4, and Brazil will be kicking in, and especially all of these contracts that you've stockpiled for -- in Q2 and Q3 you're going to be shipping to in Q4. So, why is it that we can't get to profitability here in Q4?

Well, you're going to have --

It sounds, by the way, like you're talking about the end of Q1. Are you talking about for Q1 you'll be profitable or by the end of Q1, so that Q1 won't even be profitable?

Previously we're expecting by the end of Q4 that we would be achieving profitability. I mean, it looks like, as I said, that will slide to the end of Q1, where we should be achieving profitability. And that just had to do with a better understanding of the ramp-up involved in the Phoenix facility, which is a major contributor to our numbers, and also the ability to absorb some of the site-specific SG&A costs that are going to be associated with the Irgovel facility and some of the ramp-up associated with beginning the project in China.

So, Q1, really, we shouldn't expect a profit for Q1 itself, because you're not going to hit profitability until the end of Q1?

Right. It's unlikely that Q1 itself will be a profit. It's likely we'll be tracking toward profitability and probably running at a profit by the end of Q1, but it's unlikely that the quarter itself will achieve profitability, although we'll be tracking very closely to it.

I feel like I'm chasing a very big carrot here. All right, thank you.

Thank you. Our next question is from the line of Steve Denault with Northland Securities. Please go ahead.

I think it was 90 days ago when you reported first quarter results, and you had made reference to Dillon being sold out for the balance of the year. And now it sounds like it ran at 50% capacity. How should we interpret that or reconcile that?

And it feels to me like the story is evolving a bit away from Stage 2. We know the equine is well developed and established, we know rice bran oil is well developed and understood and established. And, of course, the holy grail always seems to be the Stage 2, but it's been undeveloped. Is that the way we should continue to think about this business?

Steve, here's my assessment, and I've always said this from day one. Stage 1 and the permutation of Stage 1, which is basically our expansion into the oil business, is one where it's a very definable, easily modeled commodity-type business with good margins. And it's basically a reflection of how much scale that you can build.

Stage 2 is not a commodity business. Stage 2 is a sales-specific, customer-specific business with high margins, but it does not act like a commodity. It has a specific use, it's a specific product, and it's a specific customer-designated product, either in the nutraceutical phase or in certain high-end.

The Phoenix facility integrates certain components for us that allow us to more make that Stage 2 product, or Stage 2 processing more aligned with specific customer needs. But also, more importantly, as we've moved into the nutraceutical and the pharmaceutical arena with our partnership, with HerbalScience, we've come to the conclusion that there are basic value-added propositions associated with stabilized rice bran and Stage 2 products. And those propositions can be more specifically identified through unique chemistries and specific isolates that will give us a better return on our investment than by taking bulk ingredients where the ability to make claims, and the ability to make specific marketing claims is more limited.

So, when you reduce the active ingredient in isolate in chemistry levels and you start appealing more to the pharmaceutical industry, the ability to achieve value added is much clearer, and the ability to achieve that value added without the massive capital expenditures necessary to construct some of these things is really dynamic. And so we've made that move into that science arena now that some of these studies are being completed, as some of this research and patented technology is getting closer to achievement. This is far better for us than doing the bulk ingredient business where our ability to make some of the claims is limited.

But it's not necessarily change. Again, it's a refinement to better realize the value without having to have the exposure of large capital operational issues.

Okay. What did you say Dillon ran at in the quarter?

30%.

Okay. Was it sold or did that go into inventory?

That was sold.

Okay. Okay, perfect. Thank you.

Thank you. Our next question is from the line of Mark Kaufman with MLK Investment Management. Please go ahead.

Hi. This relates to two questions ago, your comment about earnings. I have a related question and that really is cash flow. Given your cash position and certainly your future capital needs, in case you can't raise the money or have difficulties raising money, how does your cash hold up here?

Well, there are two issues here. One, you have the issue of operational cash needs, I'd say short-term, over the next 12 months. And then you have the issue of capital needs. Up until now, we have financed all of our operational and our capital needs through equity, and so we have very little debt on the books, but we financed everything through that.

If the need for the capital projects is going to be funded out of operational funds that we have on the books, I think clearly we will not have enough money to do that. So -- which is one of the reasons we've been evaluating how we are going to effectively access the capital markets to be able to take upon ourselves the completion of the capital projects that we've already announced and some of them that we haven't announced. We're exploring that right now.

If we choose not to complete the capital projects that we have, then of course you'll have the money and you'll be able to operate. But our goal, of course, is to complete the capital projects, to pursue them and even further capital projects that we have yet to announce, and we haven't come to a conclusion of how we're going to access the markets for that.

I will tell you that collectively as a company, we feel highly confident that we will get the money that we need to complete the capital projects we have on the table. The question for us today is what's the best way to do it so that it's most accretive and value-added to the shareholders, and we expect to have the answer to that by September 30.

And not considering that you say that you have enough cash operationally right now.

We believe that we have enough cash strictly for operations to make it through a full year, so we don't have any going concern issue. The issue is that cash is not intended to be used with capital projects. That cash is intended to operate the Company.

The capital projects, which could be a substantial number, and we expect it to be a substantial number over this year and the following years, has to be accessed in a different way. And it's a comprehensive program that has to be dealt with specifically, and we think we'll have the answer to that certainly by no later than September 30.

One follow-up question. Is Dillon still sold out through year end?

What we make at Dillon, everything that we make at Dillon, we sell. The goal for some of the specific products and processes that we produce at Dillon are going to shift to the Phoenix facility. And the Phoenix facility should also sell everything that it makes. And, as I stated before, we expect it will take about two quarters. I think Leo had mentioned it will take about two quarters to ramp the Phoenix facility up to its full capacity. That's just the way you have to be careful on how you ramp up the initiation phase of the plant, but we expect the Phoenix facility, when it's fully operating, to produce and utilize its fully capacity and sell everything that it's making.

Thank you.

You're welcome.

Thank you. Our next question is from the line of Jack Vernon with Chamberlain Capital. Please go ahead.

Good afternoon, Brad. How are you doing?

Good afternoon, Jack.

Great. Brad, can you tell us a little bit about the stable of NutraCea products, the particular ones that some of which were sold in infomercial, website, the connection with Vital Living. I'm interested to see if you're going to start to kind of capitalize on some of those and some of the incredible health benefits that a lot of them produce?

Jack, we think that there are incredible chemistries and underlying actives in these ingredients in bulk that achieve these results that people who use these products get. And it's our feeling that those values are best released by partnering or looking into research programs and potential licensing or other opportunities in the pharmaceutical arena. And although we've had good success historically in the ingredients side of that, we think that our success and possibility will be better achieved more in the pharma and isolate side of that equation going forward, especially as some of the research projects we have come to fruition. And especially if some of the potential after having identified what the active chemistries are, we can go ahead and take that into the arenas where you can get pretty substantial potential profitability or revenues from that initiative.

And you think you'll be able to have an initiative that is signed off on by year-end?

As I said earlier in the call, I believe that we are within a couple quarters of not only announcing but hopefully achieving some real results financially from some of the research and some of the initiatives that the Company has already had underway for some time.

Okay, great. Thank you.

(Operator Instructions) And our next question is from the line of Peter Trapp with [Medford Capital]. Please go ahead.

Hello, Peter.

As I listened to your presentation and obviously you got this giant leap forward with this China, Brazil, Indonesia, and also what you're doing in the States. And it seems that obviously the three primary means of production here are the rice bran, capital, people management, and you're going to tell us what you're going to do on the capital side by the end of September. Rice bran, I guess, theoretically is a commodity, so the price is a world set price.

But the one area that it seems that there's a real, I don't want to say that it's a challenge, but I would think it is, is that people in the management, as you take these huge strides forward in these projects around the world, how are you going to harness the management needs here? And is this going to be internally generated? Is it going to be through joint ventures? Is it home people from the different countries? I mean, could you just talk a little bit about that, because obviously management is a huge issue going forward here with your projects.

That's an interesting question, because the projects themselves are fairly defined in what's needed to run them and operate them, both structurally and from a management perspective. One of the areas I do believe that assistance is often needed and certainly helpful is when you're working in foreign countries. The best possibility is to have a relationship with people in those countries that are on the same page as you are.

So, for example, in China. The Bright Group, which is one of the, if not the largest food conglomerate in the country, both the public company and the majority owned by the government of China, is certainly on the same page as us in trying to execute as fast and as quickly and efficiently as possible to get that project off the ground.

China is faced with huge issues today. They have inflationary issues, they have a need for the product, they have the distribution as our partner. There probably is no better partner that we could have to get the job done, and they're 100% on the same page as us.

So, from the standpoint of logistics, which I think is probably more of a factor for us than maybe management. Logistics is where a partner situation helps a lot. And that's what we've done with China. That's where we've gone down to Brazil. We had an existing infrastructure that came with an existing management. We were able to fine-tune, streamline and expand.

So, in Indonesia, for example, we partnered with a large player in that space who has government relationships and a dynamic in the local industry, and allows us to go ahead and to implement on an expedited basis all the things that we need to do get things off the ground and rolling.

So, what we found is that a partnership relationship or a venture relationship with key players in the spaces that we go are extremely helpful for us. From the standpoint, though, of executing on the internal management, both from the top all the way down, I think that in the room with me we have Leo Gingras, who has operated and overseen over $1 billion operation previously, at his last tenure, and has the operational expertise to implement what we're doing today. And he's done quite well as reflected on the Brazilian operations, where literally just in a period of one quarter, we went in there and turned an operation that was losing money -- and this was before we've even implemented our technology -- just losing money in the basic oil business. And whipped it into shape where literally you're now seven figure profitable per quarter on the basic core business, before we've implemented our special sauce. So, from the standpoint of management, I think we're really well positioned there.

Okay. Now, what about the bench strength? I mean, behind Leo, obviously who is running this whole thing. Are you just using local -- are you using local talent for the countries, or is your bench strength here in the United States, which is then seconded to these other countries?

Brad Edson: Peter, it's really a combination. The way we approach these things is we keep our technology here in Phoenix, and a lot of the brain power is here in Phoenix. But when we build a facility like, say, in Brazil, you have to hire a local manager who speaks English and the local language. And that's what we do. We look for competent technical people in the country in which we're operating. And then we have oversight and assistance from Phoenix, which I think is the model bran that we're going to use elsewhere around the world, because as Brad just indicated, it's always really good to have local people who know the local business conditions.

And my follow-up question is on trying to, I guess it's probably fairly well known that the Chinese don't always respect international patent laws and secrecies. And I'm just wondering how you intend to plan around that and whether in fact you're going to land up selling the technology, in which case the Chinese have to put up some money to buy into the technology and the patents, or whether you have some way of putting some kind of secrecy around it such that they can't be compromised, as many others have in business in China.

That's a good question. It's one that we contemplated for a long time. That project in China was one that we had been investigating and reviewing and implementing over a two-year period. And the reason that we chose the largest player in the country, which is again a major component of that player, the Bright Group is the Chinese Government on both the local and federal level. We felt that in the scheme of things, the protection of IP, which is always important, although you are at risk anywhere in the world with IP, is not as good as you can get if you have a player who is your partner, who will effectively act to protect it on the same level you want to protect it yourself.

In China or in any country, I'm more -- I'm not concerned about our partner; I'm more concerned about the people around us, or the industries around us in any competitive situation, that wants to try to copy what you have.

By having the distribution partner and our financial partner and our logistics partner the biggest player in the country, I'm very confident that they will protect our interest better than we could ever protect our interest. Not that we don't take the steps to do so with IP protection and patents. It is in the interest of our partner to make sure that the technology stays as confidential as possible, because it is a complicated -- it is a core competency that we have.

And at the end of the day they're most concerned about us executing and performing, because they have a need for what we're doing. They have a need for what we're making. They have an economic and a national interest in getting this done. And I feel that from the standpoint of whether there's a risk of those people compromising the integrity of our IP, it's just not there, because that's not what's important. What's important is to make sure the job gets done and that there's no one else that interferes with that job getting done. And I think by picking the right partner, we've got an economic interest that's aligned with theirs, and part of that interest being aligned is that we're both on the same page. We and them -- we and they want to protect that IP for economic reasons. I think that's better than any kind of contract or any kind of patent you could file.

Okay, thank you.

You're welcome.

Thank you. Our next question is a follow-up question from the line of Tom Bishop with BI Research. Please go ahead.

Hi, Brad. What kind of margins could we expect from Brazil once we get into, say, Q2? You have the additional technology coming on for the defatted rice bran so that you can get $100 to $200 more a ton. How will that change the gross margin of the facility?

You know, Tom, what's really interesting is that once you increase the value of the byproduct, it's not all, but it's almost all profit. So, not only are you increasing the revenue almost 100% of it, other than your variable cost, which is somewhat minor, falls right to the bottom line.

So, from the standpoint how is it going to affect your margins? It's going to be a magnificent improvement over what you have, because it's growth in net basically falling right down. So, it's -- for us, it's a tremendous positive to the operation. And you follow that expansion through on the same basis.

As mentioned before, we thought it would be preliminarily somewhere in the range of $6 million to $12 million of annual incremental revenue. That's also $6 million to $12 million of annual incremental profit.

And that's -- okay. Can you walk us through Q2 being 151 million shares and August -- as of August, a couple of days ago on the 10-Q you put it down as 167 million shares. I can't quite -- this is -- the 151 is the diluted number, diluted shares for Q2 is 151 million, and for -- as of August 9 there is 167 outstanding. I just need you to walk through that a little bit.

The number of shares outstanding at record date of August 4, we reported that there were 168 million shares outstanding.

Right. I don't quite get how we get from 151 average diluted, which should be even higher than average outstanding.

It would be a weighted average in terms of the timing of when the actual stock went out. So, it's a weighted average during the period of time. And there was a financing that occurred in April, where there was some additional stock and some warrants that went out. And so that's going to have an impact on your weighted average during the period of time that we're reporting.

So, that would be pretty much already in the 151 in Q2, so how do we get from 151 to 168 now? That's what I need to know.

151 in Q2?

Right.

Of the weighted average?

You said there's an equity offering early in Q2, in April, so that would largely be in the 151. So, how do we get from the 151 average in Q2 up to 168 now?

168 is the actual number of shares that are out there on the street right now. And the weighted average is a calculation in terms of the timing when those were issued.

Okay, so what came out between now and then, can you just remind us what shares are now figuring in on August 8?

Primarily it was the result of the financing. It was about 22 million shares of stock that was issued, and there was a warrant coverage that went along with it. The warrant, of course, is currently above the market price. It won't figure in. It's somewhat anti-dilutive to the numbers, but it basically had to do with the 22 million share offering, and then you had some warrants that have expired. You had some warrants that were -- some that were issued and some that expired and were exercised.

So, the computation of those factors together will equate to the weighted average of the 150 range, and then the outstanding number of approximately 160 million at the end of the quarter. But if you'd like to have the specific breakdown of this, you could certainly give us a call offline and we'd be more than happy to give you the full analysis.

Okay. And, finally, can you just tell me about the timing in Indonesia and what the capacities are? I just want to get a little bit more meat on that one.

Well, Tom, the Indonesian opportunity is one that currently is, as Leo stated before, we've built the equipment, it's been fabricated, it's ready to be dropped in. We have some interesting opportunities subject to and depending upon our financing, which we haven't come to the conclusion of what the structure will be yet. But depending upon that structure, the financing in Indonesia may increase or may stay the same. And so probably best to address the Indonesia equation on the next conference call, because it's really going to be somewhat a reflection of how much money we raise and on the terms.

If we're able to get the financing done in a way that we hope we will, the opportunity in Indonesia will be expanded dramatically. If we end up not pulling as much cash as we'd like to on the capital raise and stick with the structure of things as we have it now, we'll probably leave the size and scope of that project as it stands, which originally, as you know, was about a $10 million commitment between the partners when we looked at that project. So, it's really a function of how the cap will go. And I can give you a better estimate and analysis of that after the September 30 date when we announce the financing.

Okay. Is that a $10 million project, was that for two plants or just one?

You know, the actual number of plants and how you structure it is really immaterial, because what you're talking about is implementing the stabilization equipment at site-specific locations. So, the opportunity for us is just depending on how we co-locate the fabricated equipment, although initially we're taking a look at two sites out there that we're thinking of putting it into initially.

If you get to go here at the end of September, how long will it take to get it up and running, I guess that would help.

Again, like Leo had mentioned early in the call, the opportunity to expand and integrate the stabilization facility into a larger oil processing facility could be quite dynamic. The ability to implement the SRB technology we could literally do within a 90-day period, if we chose to do it. But the economics, if we're able to expand the scope of the project, could be incredibly significant. And so, again, it just depends on what we do and the amount of capital that we get.

So, again, if we just do SRB and we drop it in, it could be up and running very shortly. You may remember in California at Arbuckle, we had it up and going within 90 days from the day we said go. And that's certainly what we could do, but, again, it depends on the capital and it depends on what maximizes the return for the shareholders. And that answer will be better determined by September 30.

Okay. So, it's a little bit on hold for now.

It's on hold based on size and scale, and as with many of our projects, we want to see what our capital ability is before we implement long-term projects that have -- unfortunately, once you've done the framework, it's difficult to retrofit, modify or expand. And so we're holding until we see what the capital structure will look like, and we can give everyone a better idea of the size and scope of what we're about to do.

As you know, I'm a big proponent of you not biting off too much, because this is quite a lot of plans here, and we're anxious to see some money coming in to the bottom line.

As I said earlier in the call, if you want to see bottom line numbers, you'll see the benefit. You already saw it this quarter from Brazil, the benefits of implementing our technology and moving aggressively into the oil business. Using the technology gets even better, so I think the demonstrable effects of what we're doing I think are on the horizon.

Well, I'm looking forward to 2009.

Excellent, so are we.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. I would like to turn the call back over to Mr. Brad Edson for any closing remarks.

In closing, I would like to thank everyone for their continued interest and support. We believe NutraCea is positioned to not only realize significant and consistent revenue growth over the next several quarters and beyond, but we're also in a position to potentially realize some of the inherent value of our IP relative to several potential applications both from a process and a usage perspective. We think we're poised now to capture an historical opportunity, being uniquely positioned to have a viable economic solution to rising grain prices and shortages that haven't been seen in recent history.

We pride ourselves in the ability to positively affect the quality of life with our processes and our products, and to do it in a way that can be very accretive to our shareholders and their values.

I look forward to speaking with you again on our next conference call to report our third quarter results currently scheduled for on or before November 10, 2008. And, again, I thank all of you for your continued interest and support. Thank you again.

Thank you. Ladies and gentlemen, this concludes the NutraCea Second Quarter 2008 Conference Call. If you would like to listen to a replay of today's conference, you can dial 303-590-3000, or you can dial 800-405-2236, and enter access code 11118109. Once again, those numbers are 303-590-3000, and 800-405-2236, with an access code of 11118109, followed by the pound sign. Thank you for your participation. You may now disconnect.