RiceBran Technologies (RIBT) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the NutraCea 2012 second-quarter financial results conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Wednesday, August 15, 2012.

I would now like to turn the conference over to Mr. Thomas Walsh, Senior Vice President of Alliance Advisors. Please go ahead.

Thank you. Good afternoon, everybody, and welcome to the NutraCea second-quarter 2012 earnings conference call. With us today are John Short, Chief Executive Officer; and Dale Belt, Chief Financial Officer. Before I turn the call over to John, I'd like to remind listeners that during the call, management's prepared remarks may contain forward-looking statements which are subject to risks and uncertainties.

Management may make additional forward-looking statements in response to your questions today. Therefore, the Company claims protection under Safe Harbor forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today, and therefore we refer you to a more detailed discussion of these risks and uncertainties in the Company's filings with the SEC. In addition, any projections as to the Company's future performance represented by management, including estimates today as of August 15, 2012, and the Company assumes no obligation to update these projections in the future as market conditions change.

This conference call and certain financial information provided in this call is available at www.nutracea.com on the Investor Relations page. At this time I'd like to turn the call over to John Short, Chief Executive Officer. John, please go ahead.

Thanks, Thomas, and thanks to everyone who has joined our call. Dale Belt and I will deliver some prepared remarks, but I want to let listeners know that we also have with us here in the office Colin Garner, who is our Senior Vice President of Sales; David Hutchinson, who is our Senior Vice President of Operations; and Robert Smith, who is our Senior Vice President of Business Development. They will be with us through the call and will be available to field questions when we get to the Q&A period.

Today I want to comment on where we are as a Company, the progress we've made, and where we see the Company going directionally in the future. I'll address some of the highlights of the first half as they relate to our overall strategy and vision for NutraCea.

NutraCea has entered some tough times in the past few years. Many companies faced with similar challenges did not survive the worst economic downturn and financial crisis since the Great Depression. Yet we're here as a viable company, with what I consider to be a very bright future.

I am not going to rehash the history, since that's been well covered in the past; however, we should all take comfort in knowing that in spite of the obstacles faced, our proprietary and patented technologies and unique qualities of our product offerings, combined with what I believe is a particularly strong management team for a company of our size, has allowed NutraCea not only to survive, but to begin to grow our business in the face of some enormous obstacles.

I strongly believe, as does our entire management team, that we are poised to grow our USA segment revenues, to complete the planned expansion in Brazil, and to begin to see the fruits of our efforts related to product development and R&D efforts with both our customers and with our strategic alliance partners.

Of course, none of this comes without challenges. The worst drought in 50 years has had a major effect on grain prices and will continue to put pressure on the price of raw bran purchases in all geographic areas. The decline in the exchange rate between the US dollar and the Brazilian real continues to affect our reportable Brazil segment revenues, even as sales in local currency increase. And we'll continue to experience the negative impact of operating the existing Irgovel plant while installing new processes and preparing for a four- to six-week shutdown in the fourth quarter of this year to complete the plant expansion at Irgovel.

With regard to fundraising, I want to comment on our success in raising funds announced last week and share our approach related to further fundraising and asset monetization. As noted in our 8-K and related press release, we raised a combination of senior and subordinated convertible debt totaling $1.1 million that closed July 31. Under the terms of those agreements, we can raise additional funds under the notes, and we intend to round out that raise. It's expensive money and dilutive, but necessary to execute our vision for the business.

On previous conference calls in response to questions about dilution, I asked the not-so-rhetorical question, do you want to own 100% of Richie Valens or 1% of the Beatles? As we sit here today, I believe that continues to be a fair analogy. The dilution we're forced to take to raise capital today sets the stage for much greater value creation as we execute our tactical and strategic vision for the business. We will work hard to minimize future dilution, but we'll need to raise capital to pursue the strategic alternatives available to NutraCea as they arise.

The funding put in place at the end of July will allow the management team to turn our attention away from fundraising and to focus on driving sales and day-to-day operations. That change in focus should not be underestimated. I have spent as much as 50% of my personal time on fundraising and related activities and now intend to spend much more of our time supporting tactical and strategic business development and revenue growth going forward.

Regarding asset monetization, we have made the decision not to restart the idle Lake Charles, Louisiana plant; to redeploy some assets to other locations in California, Montana, and Louisiana; and to monetize the remaining assets in Lake Charles. Dale will talk more about that later in this call.

On the subject of USA segment revenues, this is the second quarter in a row we have shown positive revenue growth. I find this particularly encouraging, as historically this segment of our business has lagged our Brazil segment revenue growth. We're generally pleased that the decisions we made in adjusting our business model and strategy are beginning to yield the positive results intended. Domestically, our sales team is pushing hard to leverage customer successes, involving use of SRB as a meat extension, and in the launch of RiBran DF, our defatted bran product.

Next, I want to comment on our planned expansion at our Brazil-based rice bran biorefinery, Irgovel. In general, we view 2012 as a transition year that positions Irgovel for very significant growth in sales, profits, and cash flow beginning in 2013. Operationally, we continue to make progress with the addition of new products, new technologies, and upgrades to machinery and equipment at the plant. The overall project is proceeding as planned, but not without the challenges that I already noted of operating the plant while undergoing a major upgrade and expansion.

When you shut down parts of a production facility of the size of Irgovel, you experience a significant loss of efficiency. In the first half we made brief shutdowns to install new electrical power substations and to fully replace a 30-year-old animal feed plant with a modern state-of-the-arts animal nutrition plans that can compound in -- call it both wet and dry blend feeds.

In addition, since the closing the first half, we've produced and begun to deliver to customers the first commercial samples of rice lecithin. We expect commercial sales of this unique product, which is hypoallergenic, gluten-free, and non-genetically modified, to get under way in the next month or two.

Ultimately, the expansion at Irgovel will allow us to process more than 100,000 metric tons of raw rice bran per year as compared to our current 70,000 metric tons. Our goal is to have all improvements fully operational by the first quarter of 2013. We expect the completed project to contribute significantly to higher revenue, increased margins, and improving EBITDA, as the capable management team in place at Irgovel turns its entire focus to efficiently running the plant and maximizing sales mix.

Because we expect the Brazil segment to show significant improvement in financial performance during 2013, I want to take this opportunity to comment on what that an improved performance means in terms of cash flow to the corporate segment. As noted on prior calls, for the foreseeable future all cash flow from the Brazil segment will remain in Brazil to support higher working capital and debt service levels associated with the Phase I projects, as well as future projects that we intend to pursue. We do not anticipate cash flowing to the US for Brazil operations in 2013. This is driven not only by operational needs, but also by agreements governing the relationship with our equity partners in Irgovel.

Next, I want to comment on raw bran prices. While we can't predict how commodity prices will trend, we're monitoring them very carefully and adjusting our business strategy and pricing model appropriately. We will continue to adjust selling prices as necessary while maintaining our competitiveness. The effect of the US drought on corn and soy crops is a major event affecting the entire food supply -- not only in the US, but worldwide.

The spillover impact on raw bran prices is uncertain. The price of bran has risen approximately 8% in California and 4% in Louisiana since the end of June. In Brazil prices have seen increases approaching 10% or more.

One school of thought is that raw bran prices will increase due to the pressure on traditional livestock feed sources of corn and soy. On the other side of that equation, that would mean we have an opportunity to raise prices for our animal nutrition products and still remain competitive. Prices for our human nutrition products are more elastic and less sensitive to price increases. All in all, it's a balancing act that we're monitoring closely.

At this point in time, I'll hand the call over to Dale, who will review our first-quarter 2012 financial results. Dale?

Thanks, John. I'll begin with an overview of the financial results for the quarter ended June 30, 2012, and then I will cover some cash flow matters.

Consolidated revenues for the quarter totaled $9.7 million as compared to $10.5 million for the same period the prior year, which is a drop of 7.5%. In short, the USA segment was up, and the Brazil segment was down.

On a year-to-date basis, revenues for 2012 were just slightly above even by 1.6%. Had it not been for the drop in the foreign currency exchange rate with Brazil, we would have shown an increase in year-to-date sales of more than 10% for June.

USA segment revenues improved 9.1% this quarter to $3.2 million, as compared to $2.9 million during the prior-year period. I feel this is significant, because it shows a continuation of the significant revenue increases we enjoyed in the first quarter of this year, although the rate of increase has slowed a bit.

Through June and we are 19.5% ahead of last year. During the second quarter animal feed revenues decreased $0.1 million on lower volume, and human nutrition product revenues increased $0.4 million due to the impact of price increases and higher volume.

Brazil segment revenue decreased $1.1 million to $6.6 million, compared to $7.6 million in the prior-year quarter. But this story is not that simple. During the second quarter, revenue decreased $1.5 million as a result of an 18.4% decline in the average foreign currency exchange rate between comparable quarters.

On a local currency basis, prior to converting into US dollars for reporting purposes, the Brazil segment actually had a 5% increase in second-quarter revenues. I believe it's important to remember that Irgovel achieved this local currency-based increase despite the disruptions that are created by the plant expansion project that John has already commented on.

Consolidated gross profit totaled $1.8 million compared to $2.6 million for the same period the prior year. Gross profit percentage fell to 18.2% from 24.6% in the prior-year second quarter, a decrease of 6.5 gross profit percentage points. USA segment gross profit totaled $1 million in the quarter, down slightly from the $1.1 million for the 2011 quarter.

USA segment gross profit margin was 31.7% for the 2012 second quarter, compared to 38% for the 2011 second quarter. In the US raw bran costs were on a continually escalating trend that started in early 2011 and have continued to rise through the first quarter 2012 before it began to moderate a little bit during the second quarter 2012.

On a per-ton basis, raw bran costs were up 17% to 19%, depending on the region, in comparison to the 2011 quarter numbers. In the past month of July we have seen prices per ton rise by $5 to $10 per ton. To offset the impact of higher raw bran prices, last year we increased SRB selling prices in the first and fourth quarter and will consider future price adjustments this year.

Brazil segment gross profit totaled $0.8 million for the 2012 second quarter as compared to $1.5 million for the 2011 second quarter. Gross profit margin was 11.6% for the 2012 quarter, compared to 19.5% for the 2011 quarter. Gross profits suffered due to higher bran prices and the negative impact of the plant expansion project on production efficiency.

Raw bran costs were approximately 18% higher as of June 2012 compared to June 2011. A portion of these costs were offset by higher selling prices. In addition, we experienced an unfavorable shift in sales mix to lower-margin bulk animal feed products, primarily due to delays in bringing the new animal feed production equipment into full production mode. I would add that those issues have been resolved, and the animal feed plant is currently fully operational. In general, the plant expansion project has led to inefficiencies which have resulted in higher production costs in 2012.

Regarding consolidated operating expenses, I simply want to point out that our SG&A expenses and professional fees combined were down approximately $1 million. As stated many times in the past, we're making every attempt to control these costs and drive them down, where possible, although at this point, significant declines in routine expenses going forward are not expected.

We did incur an impairment of $1.1 million on million equipment located at our idle Lake Charles facility that I want to comment on a little bit. The Lake Charles facility has been idle since 2009. With regard to the use of that facility, management has determined that we will not restart that facility, and that we will redeploy certain pieces of equipment to other locations and sell off the excess, as John mentioned earlier.

During the second quarter of this year we received some potential interest from a buyer for certain pieces of equipment. And while we have not reached any agreement on the sale to date, we will continue our attempts to sell excess equipment. Based on the used equipment market and other data, we have written to value down to the estimated net realizable value as required by GAAP accounting rules, which resulted in the impairment.

Now I'd like to discuss our recent financing and cash flow-related matters. In the corporate and USA segments we continue to focus on managing cash flow and work toward becoming operating cash flow positive. So far in the third quarter we raised $1.1 million in cash from the issuance of additional senior convertible dentures and convertible sub notes and related warrants.

We also modified the senior debenture issued in January such that we will not be required to make monthly redemptions on the debenture until February 2013 instead of August 2012. Under the current terms of the convertible sub notes, we can raise an additional $575,000, which must be completed no later than August 20.

We are currently in discussion with several potential investors under the subnotes to close out the financing. Prior to this conference call we received a number of questions from shareholders asking if these new funds will be enough, and if we are done. My response to that is, we will raise the funds necessary to continue building the business and meet our operational needs. And we will make every attempt to do it on a favorable basis as possible when and if required. And we will work hard to minimize dilution to shareholders of additional fundraising, if necessary.

These new instruments will be required to be carried at fair value on our financial statement, similar to the instruments we issued in January 2012. Each quarter going forward we are required to value the -- fair value these convertible instruments. That write up or write down in value each quarter will create other income or other expense.

In the Brazil segment we are expecting all operating cash flow to be utilized on the plant expansion project and for working capital needs. Also, the temporary plant shutdown planned in the fourth quarter will exacerbate the cash flow issue at Irgovel, so we need to plan for that. We anticipate additional bank financing will be necessary to complete the project and meet the additional working capital requirements associated with increasing production volumes and revenues.

So with that, I'll stop here and turn the call back over to John for closing comments.

Thanks, Dale. Before we open the call to questions, I want to add some additional comments about our strategic alliances with Beneo and DSM and comment on an upcoming change that will impact our Board composition.

During the beginning of the second quarter, we faced some initial obstacles in the logistics and product testing protocols associated with our distribution agreement with Beneo. I'm happy to say that we worked through all of those challenges, and sales to Beneo, while delayed for several months, are now underway. I feel very positive about the prospects of our exclusive co-branded SRB distribution agreement with Beneo, and I expect our Beneo alliance to begin to contribute significantly to growth in international sales of SRB as we finish this year and move into 2013.

Our research and development project with DSM is proceeding under the terms of the joint development agreement, and it remains on track. We continue to be encouraged by the progress made.

Finally, we received a number of questions prior to the call related to the Board transition currently underway. We will have two current directors transitioning off the Board in the next 120 days, and we're working diligently with the chairman of our nominating and corporate governance committee to complete an orderly transition to new directors within that 120-day period. I want to thank the directors who will be transitioning for their hard work on behalf of the Company and of our shareholders during the time since I joined the Company.

This concludes our prepared comments. At this time, I'll open the call for questions. So Camille, if you could please start the Q&A portion of the call?

(Operator Instructions). [Edward Orr], private investor.

Given the current operating margin -- and this is at the top line, not segmented -- Dale, you mentioned this quarter operating margin was 18.2%. I figured with some price changes, maybe we'll make an assumption to 20%. And if you look at just the SG&A and the professional fees, in order to cover that at a 20% operating margin, you would need to double your sales. So could you give me a specific plan, time-based if you could, on how we're going to achieve that?

Well, I follow your math, and I can understand how you do that, but my comment is that a fair portion of our operating costs in the US at our plants are somewhat fixed. And as we grow sales and volume in those facilities, you're going to see not an incremental growth in gross profit, but you'll see more what I would call an exponential growth, because those fixed costs -- depreciation, for example -- certain levels of labor staffing on running the plants and facilities won't go up dramatically, if at all, in some cases. And we could run significantly more product through our facilities without increasing the cost incrementally on those gross profit margins. So as we increase prices and increase our volumes, it will grow much faster than that.

So I follow your doubling the revenue to get the even concept, but it's less than that.

But it's still a long stretch, and I'm just looking for the game plan.

Well, the game plan is we're out there with our sales force, meeting with customers, pushing our product, promoting it, going to the shows, doing all the things you do to grow your sales. That's what it's all about right now for us, and it's one of our highest priorities, that we need to grow our sales here in the US.

And as John mentioned on the Beneo agreement, that is why we have viewed that as a very important relationship going forward, that Beneo internationally -- we are just not even hardly scratching the service before we entered into that agreement with them. And they are now getting us into countries that we just simply did not have the resources to pursue an international sales force.

John Short here. I'd also like to caution you on looking at the Company that way. I think it's actually very important to look at the segments. And if you look at the segments, we mentioned earlier that in Brazil we are in a transition year.

We've shut down a number of times already this year to install and start up new electrical power substations, to start the animal plant, to start the lecithin plant, etc. Each one of those shutdowns -- you know, this is a large industrial facility, think 20 acres mostly covered with machinery and equipment. And when you shut those things down, because you disconnect the external power and you need to start back up, technically we're shut down for 36 hours. But to shut down the entire plant and restart the plant and bring it back up to full production has tremendous impact on efficiencies.

We've gone through three or four of those during the course of the year so far, and we're going to go through another one, a major one, in fact, in the fourth quarter, which we expect to be a four to six-week period where we will shut down the entire plant, expand the extractor that is at the heart of the facility, add the deodorization capability, bran preparation capability, etc.

Now, as Dale said, we've built those into our financial planning and models. When you look at 2012, you have to look at 2012 at Irgovel as absolutely a transition year where we are investing for the future of that business. We expect to complete the expansions and the technology adds in the last quarter of this year as we move into the first quarter of 2013.

This will timed a little bit to match the Southern Hemisphere rice harvesting cycle. Typically, you see the mills in Brazil shutting down -- Hutch, I'm going to say this, and then you correct me. But last half of December, most of the month of January. So we may get everything done by the end of the year, but we may actually roll some of it into the typical industry shut down.

And as we do those things, and we come online next year, we will have tremendous increases in productivity. We have new products that have come to market recently. We'll have more new products coming online. But the effect on efficiency in the plant is really impressive. It is not a one for one.

And if I could add to that, Ed, as a follow-up to what I was trying to explain about fixed costs and so on, at Irgovel we have about 250 employees, give or take, working there right now. This is prior to the expansion.

It's been pretty steady at that level for quite some time now. About 170 to 180 of those employees are actually what I consider cost of goods sold labor costs. And with this plant expansion, you have to remember, we are going to go from 70,000 metric tons to over 100,000 metric tons -- meaning we're producing a lot more product, and we're going to be -- have a lot more product to sell.

We will not be increasing those labor costs or the number of people at all. And in fact, with some of the efficiencies we may even see it go down, and that's certainly what we're hoping. So you can imagine the impact of growing your production capability by that kind of amount but not increasing any of your labor costs of running that plant. And that's the kind of impact that you'll see. And it's a similar situation here in the US.

As your sales increase, yes.

Ed, I don't know if that answers your question. Feel free to expand on it, if you like.

Partially. I just want to try to get a commitment on when we're going to be able to close the gap just to be break even on an operating basis.

Our objective is to do that ASAP. The things that we are doing, and I think Irgovel is an example, is we are clearly taking some hits in this transition year to position that business to be highly successful from 2013 on. And that's what we expect to happen.

I hope we do it. I do have one more question.

Please.

Have we determined that rice bran protein isolate is a commercially viable product?

It is Colin Garner speaking. In terms of the protein content of stabilized rice bran, it is very applicable to all the customers that we talk to and it's very applicable to the types of products that we get involved in. Whether you use words like isolated or otherwise, it's not that relevant.

SRB is what it is. People understand it. Customers understand it, and we are finding more uses for it in the various marketplaces that we attack.

The product that I'm talking about is similar to isolated soy protein, which is about a 90% protein.

That's not the --

No, I'm talking about a separate product, just an isolated protein from rice bran.

Ed, you know that we're in the midst of a joint development agreement with DSM. The objective of that agreement is to concentrate protein from rice bran. We continue, as I said in the prepared comments, in the development phase of that project. That is to say, it is still an R&D project.

And as that project comes commercial, we will certainly let the market know. We remain very encouraged by the work that's being done there. And we think that as that work is completed and we do bring products to market, they will compete in that space with the soy protein family of products, which are soy proteins, and soy protein concentrates, and soy protein isolates, and all of those.

But as we sit today, this is an R&D project under our joint development agreement with DSM, which is subject to confidentiality agreements, and we're not in a position to say anymore about it without a joint approval from DSM.

Well, my question was, have we determined if that is a viable product? And I would assume the answer is no. We have not determined that yet.

The answer is, there is an enormous global protein shortage.

Correct. Reason for my question.

Hence, the answer to your question is, there is a market for protein. There is a large and growing global market for vegetable protein, including rice protein.

Okay.

Ed, thank you for your questions. Camille, do you want to go to the next question?

Peter Trapp, Bifrost Funds.

My question has to do with the balance sheet. You mentioned that you spent almost 50% of your time raising funds of about $1.1 million. And I'm looking at the current portion of the long-term debt, which means that it's due within 12 months in the amount of $7.4 million.

And behind that, long-term debt net of current portion of approximately $10 million. And I'm wondering how much time you're going to have to spend on this -- the first question to ask is, how short term -- I mean, is any of this $7.4 million imminent? And how do you -- what's your plan here to raise that amount of money?

This is Dale, and the answer to that question is contained in footnote 7 of our 10-Q that we just filed. You have to look at the debt broken down by locale, because all of the current portion of debt, or almost all of it, I should say, is in Brazil. And they're simply working capital lines of credit that we have -- almost all of them.

Okay, I will obviously review that note. Thank you for that.

Just to add to that, just one follow-on comment -- it's not term debt. We don't -- we do not have a looming, huge quarterly principal payment or something like that coming due, because I think that's where you were going with that part of your question. It's not the kind of situation.

Okay. I was worried that there would be a balloon payment coming up, and that you would be struggling to try to meet that or roll it over.

No.

But anyway --

No, that's not the case.

Okay. Moving on. The previous gentleman had raised the question of raising enough money for working capital, etc., and for the projects. I mean obviously, this Irgovel downtime and capital expenditure is quite significant. Admittedly, you're not paying 100% of it because of the minority interests, or the other partners, who I presume are putting up their share, too.

But I think that's the background to the question may have been the fact that previous administrations had talked about expansions and talked about new products, etc., and getting over working capital humps, when in actual fact, they were going down a slippery path with no return.

Therefore, your struggles and good work in turning around and reorganizing and getting it out of bankruptcy. And I would just hate to see that you go down that slippery slope again by taking an aggressive expansion program that doesn't allow for sufficient working capital to keep you from that slippery slope. I was just wondering if you could speak to that a little bit.

Yes, Peter, let me respond to that a little bit. You know, I know you have been involved with the Company for a very long time. And I know you watched historically as -- I guess the way I'll describe it -- focus may have been lost by the prior management team.

One of the things that we have been paying a lot of attention to is to stay very focused. And the first thing we're focusing on is rice bran only. As you know, we exited the non-rice bran business.

Second thing, you know that we have still pending some opportunities in Asia and other places, but to further focus, we made the decision that for this year we're going to spend our management time and resources on two things, which are Brazil and the US.

We paged Beneo as our distribution partner for EMEA and all of those other markets we have talked about so we have their boots on the ground, their management team on the ground, not our management teams. Within that focus on the US and Brazil, we are extremely focused on completing our Phase I projects and rolling those projects out in a sequential way that can start to drive revenues -- knowing that you don't take a big industrial plant and shut it down without -- and shut it down three or four times during the course of a year to bring in new product without a financial impact.

And some of this is repetitious, and feel free, Peter, to comment afterwards, but for example, we ended up -- we talked about our substations. We shut down a whole plan to rewire it for electricity. We also shut down the plant, a big portion of the plant, to replace in full our old animal nutrition facility.

Now, that animal nutrition facility started to come online -- I'm looking at Hutch -- April-ish? We now have it through -- as we moved it through May and June and into July, and we moved it up to speed, we've ended up with some new product launches that take us into new businesses that we haven't been in previously.

We launched a high-end equine line, under a new horse brand, for Irgovel. I think we actually launched in June, and July was our first month of sales. We sold 6,000 bags of this new product, 50-kilo bags, so we're talking about six tons of product. And these are at significantly higher prices than we've had in our animal nutrition business previously. And we have the opportunity, Peter, to leverage that further. So first, new go in terms of product coming out of the investment. I think, quite exciting.

Our next product launch is lecithin. And Hutch, do you want to share an update on where we are on our lecithin project, knowing that we're just moving to market right now?

Yes, we're actually -- with all of the equipment necessary to produce rice lecithin. And of course, as we all know, rice lecithin is pretty new to the marketplace. It is, to my knowledge, the only rice lecithin facility in South America producing commercial-grade rice lecithin. That product is actually being grown right now and is available for sale. So we're ready to go.

We have samples out the door, too.

We've got samples in customers' hands, where they are evaluating the product. They're looking at ways that they can incorporate this particular commodity into their formulas. So it's going to be normal R&D types at that point. Yes, we're doing it. It's happening.

So, Peter, I understand your concern, and it's a fair concern, but we're very focused on the individual pieces of the expansion. If the animal nutrition products out there, they are much higher quality, higher priced product -- get rice lecithin out there.

And just so under you understand, formerly, Hutch, what did we do with gums?

Well, gums were pretty much a waste product. They were collected, and just basically landfilled or sold for whatever whatever value that you could get for it. Basically, they were worthless at that point.

From a processing standpoint, gums tend to ferment pretty quickly, and if you don't deal with them immediately, they are pretty well worthless. But now we have the ability to capture those gums and process them properly, where they have a shelf life, if you will, and actually turn it into a very valuable food-grade emulsifier. So we're taking out a product that was literally trash, and we're turning it into a wonderfully useful product.

And Peter, these are the things -- while we're going through the shutdown, restart, shutdown, restart exercise we're through in this transition year of 2012, it's hard to see the benefit of these things. I have to say hats off to the Irgovel team for increasing sales in local currency terms while we're going through this exercise. Because they've lost a large number of production days during the first half of the year, and yet still managed to increase sales.

So we're not pleased with the overall financial results in this business, without a doubt. What we're doing is an investment in the future, and we're actually very excited about the future. We have visibility to being able to get all of the way through that Irgovel conversion and bring the plant to full production at much higher levels of sales efficiency in 2013. And we think that will produce significantly improved results for the shareholders.

And just one point there on the Irgovel sales and translation of the Brazilian currency to the US. If I remember correctly, you don't hedge -- or hedge against your Brazilian exposure, and therefore you are forced to take a foreign exchange gain or loss on a quarterly basis. But if my memory serves me correctly, it does have to do with the income statement -- is it not a contra-account against the weakened earnings and the equity account?

You're correct. When you convert the balance sheet to -- which you do at -- for example, on the second quarter, on June 30, you convert the balance sheet based on the exchange rate that day at that point and time. And the difference between that rate in the last balance sheet conversion, that difference flows through the equity section and does not hit the P&L, just as you described.

What I'm talking about in the effect of the foreign currency is that we're required, as all companies are, to convert foreign currency profit and loss statements at the average rate for the period. And for example, in the second quarter of 2012, that average exchange rate was 0.626. And that is what we used to convert 2011 second-quarter P&L.

When we converted the second quarter of 2012 P&L, that rate was 0.511. So if you're going to do an apples-to-apples comparison, you would need to compare Quarter 2 2011 and Quarter 2, 2012, before you convert, which is what we -- that is your local currency in Reals numbers.

And that will tell you if you actually had an increase or decrease in volumes, and so on. But the impact of having to convert at a lower rate is what we are referring to here as the decline. And there's nothing we can do about that, because as you rightly called out, we do not have a hedging program that deals with that.

Okay. Well --

We're just -- go ahead.

I don't know if there's a whole lot of other people in the queue, but I have a couple of other questions. So do we want to ask the operator if there's anybody else that wants to jump in?

Peter, there are indeed other people in the queue, but since we have you on and you're on a roll, let's go.

Okay. Well, on a roll --

And I appreciate the other folks holding for a second, because I think these are pertinent questions, Peter, thank you.

Okay. I guess the -- other issue that came up is obviously how you're going to raise the working capital that's needed. Do you have a sense of what the working capital needs are for the rest of the year? Do you need to raise another $1 million? Another $500,000? Another $1.5 billion? Are you able to approximate, given what you have to do with Irgovel?

Peter, is your question Irgovel, US, general?

No, it's total Company. But given what's going on at Irgovel, and with the shutdown, and you're funding half of the, obviously, the shutdown and the opportunity cost from the loss of sales there, and the need to raise money, also, for working capital to keep growing the US, I'm just trying to get a sense as to whether it is $0.5 million additional -- $1 million additional -- just a general idea.

Let me comment this way. Dale, feel free to jump in as well. Again, it's important to break the business into segments and look at the two different segments. We model them in great detail on a monthly basis and forecast them forward, etc.

One of the things that you guys will recall is we are not giving any forward-looking guidance in terms of results. I think your question is a fair one, and let me respond to it this way. Dale, feel free to comment if you don't think this is fair.

On the Brazil side, we have lots of assets in that business. We have bank partners and private equity partners who have supported us, and I believe that we are in good shape from a funding point of view to cover everything we need to cover through the end of the year. We have a couple of additional pieces to put in place, but I believe those are in process and will happen timely. So I think we're and good shape on the Brazil side.

On the US side, we just went through a fundraising at the end of July, and we have scope to round out that fundraising, which we expected to over the next few weeks here. When we do that, I do not expect that we will need to go back to the market for additional operating funds, working capital funds through the balance of this year.

Having said that, I want to be clear with everyone that we have opportunities that present themselves from a strategic point of view, and if an opportunity were to arise to, for example, fund Irgovel 2 in the US, or something like that, that will of course, require capital raising.

And the form of that capital raising, unknown -- or we're not in discussions at this plant in time to do that between now and the end of the year. As we said, our focus is to complete the expansion in Irgovel and to focus on driving profitable sales in the US business. But we continue in terms of our future vision for the business. We've said previously we would like to replicate the built-out Irgovel bio-refining business model. We'd like to replicate that in the US, and we would eventually would like to replicate that in Asia.

And as those opportunities materialize, appropriate partners come to the table, we'll pursue them. So in the short-term, we think this raise covers our operating cash needs through 2012 and into 2013. But we always have our eyes open for those strategic opportunities, and for the right strategic opportunity, we would look to raise additional capital.

I'd like to add one quick comment. Go ahead.

I would just like to say in response to that is I would like to reiterate the previous gentleman's comments about getting to working capital or getting to breakeven. Because you've already been down the Asian slippery slope once, and I think before you get to profitability, to go down that road again would probably -- I think would dishearten a lot of your shareholders. But that's just my personal opinion.

I was going to add one thing about the future comment -- about Irgovel shutting down for the last piece of the installation of equipment that will happen in the fourth quarter. At least, that's the plan at the moment.

We're going to do everything possible down there to mitigate the impact of that. We will try, where possible, to build up some inventory, have some product to sell. There's a number of things that we can do to mitigate that.

So I don't want anybody to walk away from this call with the impression that the place is just dark down there, and nothing is leaving the building. But it will be functioning, and there will be things happening there. So it's not just a completely switched-off kind of situation. I mean, it will be an impact, make no mistake, but we're doing everything we can to make it as small of an impact as possible.

Okay, I'll get back in the line.

Peter, thank you. Operator, Camille, will you go to the next question?

(Operator Instructions). Vern Field, Private Investor.

My question, I guess, continues on the Irgovel theme, somewhat. The improvements down in Irgovel, if they are going to bring capacity up to -- I believe you said 100,000 tons. Will that enable you to make those -- will those be immediate sales, or you going to be faced now down with the typical sales cycle of 18 to 24 months to fill that pipeline again? Am I making myself clear?

Yes, yes you are, Vern. In the case of Irgovel, so there are two things in your question that I want to parse. The first is I think you're referring to the fact of a long lead time sell-in cycle for human ingredient products and applications for major global food companies or fit market food companies. And for sure, there is a long lead-time process where we have to go to the R&D guys, to the marketing guys. And that cycle can be 18 or 24 months.

We have many of those cycles running in the US business at different stages of development. I think everybody is aware -- everyone on the call will appreciate that we do not have permission to use customer names. Hence, we do not. And yet, somebody on the message boards picked up the fact that a new launch from a large global meat company included rice bran. And since we're the only Company selling rice bran into human ingredient, that came from us.

So without mentioning names, we're starting to see, on the one hand, inroads into major global meat players, small to start -- they need to build up over time -- but the good news on those is we have visibility out in the marketplace that we have made it in; we're on the vendor grid; we're in approved products. Those products are on the shelves. And at the last Board meeting, our Board had the opportunity to taste them with us, and they taste great. So I would urge you guys to give them a try and help drive our sales, because it has the additional virtue of a great-tasting product.

So that's your long lead time question. And that is more a question for the US market at this point in time. But you can see that in the first half, we're up 20%, 19.5%, in the US segment sales. And we made some very, very nice inroads with Colin, Robert, Hutch supporting our sales team to do that.

Your Irgovel question is a little different. And let me try to cast it this way for you. Down at Irgovel the Company used to, when we got involved, sell predominantly crude oil and bulk animal feeds, with a certain amount of what I'm going to describe as lower-quality compounded animal feeds that were sold in bags. And think mini-Purina, but think a low-quality mini-Purina. And Hutch, will you explain the difference for everybody between the quality of that old bagged product and what we get out of the new plant, just to give a flavor of the differences?

The easiest way might be to draw a mental picture. People certainly can relate to different types of breakfast cereals. And one of the common analogies I compare those old products to is like a Grape Nuts type breakfast cereal or a granola-type breakfast cereal that -- you have this mixture of pellets plus premix, plus various feed ingredients. They were done in such a fashion that it wasn't a homogenous mix, and they weren't pelletized to present a nice, finished, animal feed pellet, like you might see from some of the US manufacturers, some of the larger quality US manufacturers.

So if you just mentally envision this loose granola-type mix in a bag, and then you compare that to a proper type of animal feed that you would see, that it's properly pelleted, and inside of this pellet is a nice mix of various ingredients that have been properly blended, correct amounts of pre-mix, precisely blended in such a ratio to achieve certain parameters. All of these pelletized nicely in a proper bag. It's literally a night-and-day difference between products.

And that is the difference between the old Irgovel animal feed and the new Irgovel animal feed. It really is a night-and-day difference. The good thing is the market there has responded very favorably to this new format of mix, this new animal feed.

It's what the customers want.

They been asking for this for quite a while. And we've always wanted to do that. And we're now able to do that for them. So -- very nice.

So Vern, in response, what happened is previously we would take this granola mix, as Hutch was describing, and if you wanted to throw some vitamins and minerals on top, it was essentially sprinkled on top of the bag, and it would sink to the bottom of the bag. So you had granola, and when you are feeding your animals, you are not necessarily getting the right blend.

Now we compound those pellets in such a way that you get the right balance of vitamins, minerals, defatted bran protein, and end. What happened with that is the customers are very excited. And to your point, as soon as we turned on the animal nutrition plant, we are literally selling everything we make there.

Last time we were down in the plant, we had two hours worth of bags in the warehouse -- literally as fast as they are coming off the bagging machines, they are out the door. So as we turn that on, and as we turn the extractor on and get to larger levels of capacity at the end of the year, we expect that to continue. Because we're producing a beautiful, balanced compounded product that, as Hutch was saying, the market is demanding.

The same thing happens on the oil side. And just to clarify, we are in the mode, we said this previously, of under-promising and over-delivering. We said we will produce at least 100,000 tons of raw bran during the course of the year. Is there a little bit of upside on that? Yes. Would we get some more efficiency if we would do that? Yes. But 100,000 metric tons per annum is a good benchmark to operate off of.

On the oil side, we have -- we're selling all of the oil we can produce. We have people in line who want it. We have discussions underway with people who have asked for commitments on the new capacity. So in response to your question generally, we believe that as we turn that plant on, we are not going to have problems selling the increased capacity.

Excellent. That's exactly where I was coming from. And it sounds like you are going to be ramping up pretty quickly.

We expect to ramp up -- we budgeted, I can't remember, Hutch, right, Dale, three months build up?

But from a demand -- because when you turn these things on, you're not going to run them 100% capacity day one. You're going to adjust them, and bring them up, and built them up to full capacity. So I think we have, Hutch, 90 day build to get to capacity?

Yes.

But demand for that product we have.

Which is what I was referring to in my prepared comments when I mentioned the working capital requirements when we turn the plant back on. Obviously, we will have to buy -- have inventory, raw bran, ready to go to meet at higher level of capacity. And then we're going to have a brief, probably 30-day period where we're building up AR, receivables, that we're cranking out the product again.

Yes. Gentlemen, in regards to the future looking completed plant down in Irgovel, is this what you would claim a showcase plant, and one that which perhaps the Bright Foods would be interested in having in their home territory?

Well, Vern, let's be careful about all of this stuff. And one of the things we don't want to do is misrepresent anything to anybody. So let me describe it this way.

Irgovel is celebrating its 40th anniversary this year. The animal nutrition plant that we replaced -- and we just replaced it with a new, fully-automated, state-of-the-art, beautiful facility -- how old was the old one, Hutch?

30 years old.

30? 30 years old? So it was a pretty gnarly old plant that has been replaced with a new plant in a 30-year-old building. That 30-year-old building has been dressed up. We certainly cleaned it up with new roofs on it, redone the walls, redone the floors, all of that sort of thing, as part of the expansion.

But this is not a greenfield build of a brand-new facility. Now, having said that, the technology that is in the facility is absolutely state of the art. So I invite all of you shareholders to come to Pelotas, and we will give you the tour. What you will see is a plant that has been there for 40 years that has had some great upgrades to bring the latest technology and to produce an extremely high-quality and very current product in all of these areas that we're investing in.

But I don't want to give you the impression -- the project with Bright Foods was a greenfield build, where you go out and start from scratch, build everything, brand-spanking new, on new foundations and concrete platforms. This is not Irgovel. But Irgovel can still be a great performer based on the investments that we're making, and we think it will be.

Yes, absolutely. What people are buying is the technology, anyway. In any event, switching gears, John, Beneo. Are those sales -- do you anticipate sales being of the nature to fill an initial pipeline with subsequent sales after that, or -- tell me the nature of this. Is this all customer sales -- how does it work?

Vern Field is on. Vern, I am going to ask Colin to take that one.

Vern, it is Colin Garner speaking. And effectively, the relationship that we have with Beneo-Remy and they have with their customers is once a technical food ingredient is accepted, it's an ongoing basis. So it just builds, and it builds, and it builds. That's the plan, and that's exactly what will take place.

This is Dale. And I think this is important for everyone to understand, because this is actually good thing for us.

Beneo is our customer, and they will be selling our product into the countries where they already have a presence, and a salesforce, and they are selling other products that they sell to those customers. And what I wanted to really grasp here is that we're not going to be -- they're not like a distributor or a commission sales agent-type of relationship.

We will not be treating their customer as our customer. So it's good for us, because we will have one customer. And that's who we have to deal with and ship to. And then they will handle it from there with their customers. So that's a good thing for us. Administratively, that's obviously -- makes it a lot easier on us.

From a sales perspective, however, it sounds to me like this is a similar situation where you've got an 18- and 24-month sales cycle and we might be at Ground Zero. Is that correct?

Let me address that one, Vern. If we were starting at Ground Zero -- if Beneo were starting at Ground Zero, that would be correct. But they're not. You may know that Beneo is a 160-year-old rice biomining company that has spent that 160 years developing applications for components that come from broken white rice.

Beneo was also a customer of ours in 2007 and 2008 before attempting to get into the bran business through another avenue. And they have spent a lot of time developing applications, customers, channels, distribution for stabilized rice bran in the markets that we have licensed to them.

So in theory, you could be starting from zero with Beneo, but they are way down the road in terms of development applications, customers, etc. And we are very excited about that opportunity. It has started to generate a little bit of revenue just in the last couple of months.

I mentioned in my prepared remarks that we ran into some problems coordinating testing protocols, actually, is what it was. And we agreed to do some tests here, do some similar tests there, make sure they match up before shipping. And there are two external labs that we were using couldn't quite get their protocols lined up. We've now resolved that problem. And we have a several month delay in terms of the startup of this, the bad news.

The good news is that we've been able to generate almost 20% growth in our USA segment where these sales would fall in the first half of 2012 with very, very little participation from Beneo. So we do not have that 18- to 24-month cycle to deal with in the case of Beneo, and we expect to start to see increasing contribution from that relationship this month, next month, and the month after.

Excellent. Gentlemen, thank you very much.

Vern, thanks to your questions, and thanks for your support.

Peter Trapp.

Yes, just quickly, on the Lake Charles facility, could you give us some indication as to what equipment or what part of it will be moved elsewhere and to where? And what part of it will be at the buckboard or sold?

And to the extent that you are looking to eventually start up an Irgovel equivalent in the United States, would not the Lake Charles facility be a place that would be desirable to do that?

John, I will --

Hutch, do you want to take that one?

Yes, I'll take that. Peter, David Hutchinson here. The Lake Charles facility, obviously, has a mix of different types of equipment. Some of it what we would consider proprietary.

Other pieces of equipment, off-the-shelf and readily available, and easily procured by other methods. Our intention, obviously, is going to be to protect that IP. So we will absolutely not sell our IP. And that's our extruders. Those pieces of equipment will be kept for us in different locations. We're absolutely not going to give away that -- not going to sell that, I should say.

Other pieces of equipment that we have are more generic. Things like tanks, conveyors, pieces of equipment that we can use in our other facilities, we'll absolutely do that. So we envision taking a fair amount of this equipment and splitting it up, moving it to the other facilities that we have. And that's good, because there's some things that we can use there that will actually be improvements and allow us to see some additional efficiencies. But just want to stress that we are not going to give away the IP.

Things that we can't utilize in other facilities -- we intend to sell those at whatever the fair market value will be. So we're doing three things at a very high level. The IP stays with us, it always will. What we can use at other facilities we will, but we don't have to go out and re-buy that at retail. And then sell what's left. That is the general attack.

This is Dale. One thing I would add to that is I don't know if it's because of an improving economy or what, but over the last couple of years at least of in my employment here with the Company, along the way I think there have been one or two occasions where someone offered some absolutely ridiculous prices for some of the equipment there. And it was pennies on the dollar, and it was so insignificant of an amount it really -- it wouldn't have done much for us even if we had accepted the offer.

We have now starting to get some feelers at some prices that are more attractive, and makes it something a little more palatable, I'll say.

Exactly. You know, we're not going to give this stuff away. It costs us -- it costs everybody on this call pay a lot of money to purchase this.

Right.

And we're not going to give it away for --

We feel like if we take an orderly approach to this and don't just take the first lowball offer that comes down the road, that over time we can get some decent money out of it. But there's no way I could sit here and predict what that will be at the moment.

Some of the other things -- let me comment as well. We're already redeploying some of those assets to other locations. Hutch, you've moved I think centrifuges up to Dylan for the DSM protein project.

Correct.

And they've got some other things that are really being invested in what we view as very high potential endeavors. And quite honestly, it's nice to be able to get hands on them from there without having to go out and buy new ones, because cash is tight.

Well, that's been one of the reasons we haven't deployed those elsewhere already, is because once you move them, you are still going to incur some additional costs to install them and put them into play.

The other thing I'd like to mention to everyone on the call is -- Hutch was talking about our NutraCea stabilizers, our proprietary extruders. We are certainly not going to let those out of our hands -- let anybody have access to them.

The other thing I want to share with everyone is that we plan to redeploy a number of those extruders to Brazil in the Irgovel, to get involved first in remote stabilization of bran. Because we source bran in Brazil from a large number of rice mills, and as you get increasing capacity further and further away, it's important to maintain the quality of the bran that is being shipped in.

And eventually that will -- this is not a short-term target. Eventually that will give us the opportunity as well to move into human ingredient sales in the Brazil market.

So we are looking to, in the short term, cross over our extrusion technology into Brazil. And as we get the Brazil facility rounded out -- I can't remember, Peter, if it was you or Vern who asked the question, we absolutely intend to replicate that fully completed facility back into the US.

So that is in our strategic vision for the business. But first things first, get both of these facilities to cash breakeven; complete our expansion down in Brazil; bring those technologies on; and then we'll turn our attention to those big representatives.

So is the Lake Charles facility, then, going to be -- I'm assuming it's a fab -- it's a warehouse? It was an operating factory, so therefore it still has to be sold even on a stripped-down basis including the buildings, etc. So are you going to keep those and mop all of them, and use them at a later time? Or is that all going to go, as well?

Well, I want to remind everyone that unfortunately, we inherited this situation. But the Lake Charles building sits on a long-term land lease with our next-door neighbor, Farmers Rice Mill. So once we get the equipment out of there and we do end up moving most of it over a period of time, we'll actually be in a position to have some conversation about what to do with the building.

So that's down the road. We will tackle that when we come to it. But you are correct, you'll end up with a building there, and you've got to decide what you are going to do with it.

And my final thought was -- and this is more just an opportunistic thing -- with your activities in the Southern Hemisphere and the crisis up here in the Northern Hemisphere, is there any short-term way of taking advantage of that?

Peter, actually, the opposite, which is disappointing. I don't know if you've followed in the press the fact that the huge decline in forecast for the corn crop has resulted in some of the big players like ADM and these guys importing corn and soy from Brazil to cover some of the gap.

And what that has done is it has put upward pressure on feed prices in the Brazilian market, which is put upward pressure on raw bran prices. Because as that corn and soy is being exported from Brazil, creating the shortages in the Brazil markets, people are scrambling for alternative feeds for their herds. And it's actually forced us into a situation where you have to quickly move to additional price increases in that market.

So instead of being a situation that we can take advantage of, it's a situation that has put pressure on us. We're responding to that pressure, but dang, I wish it would rain.

Okay. All right.

Thanks, everybody. Thank you for your questions. And Vern, thanks for your questions. Operator, I think we need to cut off the call at this point in time. I want to thank everybody for participating. And I want to thank everybody for your support for the business.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.