Darling Ingredients Inc (DAR) 2004 Q4 法說會逐字稿

(Operator Instructions)

Good morning everyone, and welcome to the Darling International conference call to discuss the company's fourth quarter and full year 2004 results. With us today are Randall Stuewe, President and Chief Executive Officer of Darling, and Mr. John Muse, Executive Vice President Administration and Finance. After the speakers’ opening remarks there will be a question and answer period.

(Operator Instructions)

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

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

Thank you, Operator. Good morning ladies and gentlemen. Thank you for joining us for a review of Darling's fourth quarter and full year 2004 earnings results. With me on the call today are Randy Stuewe, our Chairman and CEO, and John Muse, the Executive Vice President, Finance and Administration.

Before we get started, I'd like to remind everyone that we recently made our investor information kit available on our website at www.darlingir.com/investor. The kit includes background and history on the company and its industry, general information about the company's two business segments and answers to frequently asked questions.

On today's call, Randy will begin with the discussion of the highlights of our results and some of the trends that impacted our performance over the last year. John will then provide additional details about our quarter and full year financial performance. Randy will conclude the prepared portion of the call with some general remarks on the business, after which time we will be happy to answer any questions you may have.

Before we begin, I need to remind everyone that this conference call will contain certain forward looking statements regarding the business operations of Darling and the industry in which it operates. These statements are identified by words such as may, will, expect, believe, intend, anticipate, should, estimate, continue and other words referring to events or circumstances to occur in the future.

These statements reflect Darling's current view of future events and are based on its assessment of and are subject to a variety of risks and uncertainties beyond its control, including business and economic conditions in its existing markets that could cause actual results to differ materially from those contained in such forward looking statements. Other risks and uncertainties regarding Darling, its business and the industry in which it operates or reference from time to time and the Company’s filings with the Securities and Exchange Commission.

Darling is under no obligation to and expressly disclaims any such obligation to update or alter its forward looking statements whether as a result of new information, future events or otherwise. With that I'd like to now turn the call over to Randy.

Thanks Brad. Good morning everyone. It's a pleasure to be here with you this morning and I'd like to begin to discuss our fourth quarter and 2004 fiscal financial result.

For both the quarter in the year, Darling's financial results were impacted by the following. Lower availability of raw material supplies as a result of the continued closure of US export markets to US beef. Two, higher energy prices for both diesel and natural gas. Three, a declining and volatile commodity price and market for our finished goods. Additionally we would like to point out that 2004 was a 52 week year versus 2003 having 53 accounting weeks. And four, there were several financial events that positively impacted the fourth quarter of 2003, and John Muse will take you through those to help you reconcile.

First of all, I'd like to begin with a discussion of some of the key drivers and elaborate a little bit for you. First of all, lower raw material volumes. These continue to impact our business and there continues to be an import ban on US produced beef by most countries around the world, including the European Union, Japan and many Pacific Rim countries. Today there is no confirmation regarding the lifting of this import ban for beef products or the beef derived co-products which Darling manufactures.

Although we can all read in the media that the US government is optimistic on resolving this situation, there has been no timeline and no resolution as of this call.

Additionally, the raw materials available to Darling were impacted by the closure and curtailment of several of our suppliers during the year. When we net back the statistical impact here and look at the cattle slaughter year-over-year, it was down 7.5% versus 2003, and down 5% in fourth quarter alone.

Secondly, energy remains a substantial part of Darling's operating cost. Energy, both diesel and natural gas, were highly volatile and escalated throughout the year. To put it in perspective, our energy prices are now double what they were in 2002. While we use a combination of risk management tools, both forward ownership and physical and futures based tools, the market has now moved to a level where our forward ownership has ceased.

Additionally we passed the, and have the ability to pass on, some of this risk to our suppliers and customers and we have executed on that throughout the year. Finally, in the energy arena, we were forced to burn yellow grease during second and some of third quarter as an alternative to natural gas, and we will continue to possess that as a tool to manage this risk.

Next our administrative cost, they grew year over year for us and it's in result as relative to our compliance with the Sarbanes-Oxley Act. I'm proud to announce today that we are in compliance with Section 404 of the Sarbanes-Oxley Act, but it didn't come without a cost. The total expense to gain compliance for Darling this year was approximately $1.2 million. That was relative to about $100,000 spent in 2003.

In our restaurant services segment, we continued to grow. Our customer base has now grown to an -- in excess of 83,500 accounts. That includes our rendering and restaurant services accounts.

Our grease trap business experienced double digit growth in 2004. Additionally, we added some expertise in the sales and the marketing area with the addition of Robert Siemen (ph) to head up our sales and marketing effort. To that, we have launched a National Service Center concept focused on leveraging our national footprint for cooking oil and grease trap service. During the first year, we have landed several accounts coast to coast that are utilizing this new service center.

Finally, during December we were able to close on a new grease trap service provider in the Orange county Los Angeles area called Minute Man. This brings additional accounts and additional serviceability to the LA/San Diego metropolitan area.

In the capital investment arena, we continued to focus on the modernization of our operating plants and our fleets. We'd like to announce that we received Board approval during the fourth quarter to expand, modernize and retrofit our Fresno plant, along with various other projects around the country geared at reducing energy and improving our processing efficiency.

While executing our business plan during 2004, we remained committed to maintaining a strong balance sheet. Our cash balances continued to grow. We'll receive many questions from you, I'm sure, on what we're going to do with the cash; but what I'd like to comment on was the purpose of the cash being built on the first hand.

To refresh your memory, during 2003 in December there was the first BSE event. During 2004, we anticipated some type of government action that may or may not require additional capital, and we wanted to be in position to take advantage of that opportunity. Two, we have a war chest. And as acquisition candidates or opportunities become available from time to time, we want to be in position to take advantage of that. And three, we wanted to be able to withstand any commodity cycles the company may incur, and that commodity cycle includes both volume or price.

At this time I would like to turn the call over to John Muse and let him take you through a detailed discussion of our quarterly financial performance. After John concludes I'll have just a few comments and then we will open it up to questions, John.

Thanks Randy, and good morning to everyone. Net income for the fourth quarter of 2004 declined to 0.9 million, or $0.01 per share as compared to net income of 8.9 million, or $0.14 per share, in the fourth quarter of 2003. The 8 million decrease in net income for the fourth quarter resulted primarily from decreases in net sales due to lower raw material volumes, and other income which more than offset decreases in cost of sales, and income taxes.

For the fiscal quarter ended January 1, 2005, Darling reported net sales of 71.4 million, as compared to 96.2 million for the fourth quarter of 2003. Decreases in raw material supplies and finished good prices accounted for the majority of the 24.8 million decrease.

As we mentioned in yesterday's press release, one of the factors which contributed to the significant year-over-year decrease in other income was a gain of 4.1 million that we realized in the fourth quarter of 2003 as a result of our early retirement of debt.

Interest expense also increased by 800,000 in the fourth quarter of 2004, due to the issuance of 35 million senior subordinated notes in December 2003, and a 700,000 reduction of interest in the same period of 2003 as it relates to FAS 15 accounting.

Operating income for the fourth quarter was 3.5 million, as compared to 10.2 million in the fourth quarter 2003. Operating income in the fourth quarter was significantly impacted by lower availability of beef raw material supplies as a result of the continued closure at export markets to U.S. beef. And also higher energy prices and lower commodity prices for finished goods.

At the segment level, rendering generated net sales of 41.8 million for the quarter as compared to 65.6 million in the fourth quarter of 2003. This is a decrease of 23.8 million And as Randy mentioned earlier, lower raw material volumes in the rendering segment impacted net sales for the quarter.

The restaurant services area generated net sales of 29.6 million, as compared to 30.6 million in the fourth quarter of 2003. And this was accomplished even though yellow grease prices declined by 13% in the fourth quarter of 2004 verses comparable period of 2003.

During the fourth quarter of 2004, the Board approved a plan to close our Canadian operations in London, Ontario, Canada. Darling recorded a loss in discontinued operations of $400,000. This loss was primarily due to severance and accrued pension costs.

Now turning to the fiscal year ended January 1, 2005, Darling reported net income of 13.9 million, or $0.22 a share, as compared to 18.2 million, or $0.29 per share, for the fiscal year ended January 3, 2004.

The company also reported a decrease in net sales of 3.1 million to 320.2 million as compared to 323.3 million for fiscal 2003. The 4.3 million decrease in net income for fiscal 2004 resulted primarily from one, increased interest expense, primarily due to the issuance of senior subordinated notes, as well as a 2.5 million reduction in interest expense in fiscal 2003 related to FAS 15 accounting. Also, decreased other income, which included a gain of approximately 3.4 million in early retirement of debt, and a loss of 1.7 million attributed to the early retirement of preferred stock in 2004. We also realized a gain in 2004 of 2.8 million, resulting from a settlement with past insurers.

Operating income for the 2004 fiscal year was 30.6 million as compared to 27.2 million in fiscal 2003, an increase of 3.4 million in operating income.

At the segment level, rendering generated net sales of 201.1 million as compared to 214.2 million in fiscal 2003, a decrease of 13.1 million. Restaurant services generated net sales of 119.1 million for fiscal 2004 as compared to 109.1 million for fiscal 2003, an increase in sales of 10 million.

Our effective tax rate for the 2004 fiscal year was 39.3%.

As for the balance sheet, as of January 1, 2004, Darling's cash and cash equivalents totaled 37.2 million versus 24.8 million at the end of fiscal 2003. On January 1, 2005, the company had working capital of 39.6 million, as compared to working capital of 31.2 million in January of 2004.

I'd now like to turn the call back over to Randy.

Thanks John. Before we go to questions let me say a final word or two here. The collected impact of reduced raw material volumes, declining commodity prices, continued export restrictions, higher natural gas and diesel prices have challenged our earnings throughout the year. However, in spite of these difficult and uncertain conditions, Darling has been able to achieve strong earnings, and continues to position its business for the future.

I want to thank everyone for their support, and would like to open the floor to questions at this time.

(Operator Instructions)

One moment please for our first question. Our first question comes from Jeff Gates of Gates Capital Management.

Yes Randy, I was just wondering if the new speed regulations come out as you expect, as far as the separation of SRM material, what's the opportunity as you see it for Darling in terms of potentially getting more input from either other independents that fall by the wayside, or from some of the captives that then outsource some of their materials. How many pounds a year would be the opportunity set?

I'll take a stab at that Jeff. I mean the -- number one, the regulation to do that has not even to a degree been proposed out there. It's been talked about in general public comment documents from the industry. We've made comments in the past that we view the regulation that could take SRMs out, as an opportunity for Darling. The discussion that exists out there today revolves around what the definition of an SRM can or will be. And that can be from different ages of animals, to different amounts in different animals.

To us, you know, as I said, we view it as an opportunity but there's so much unknown about it today, and as we said early in the call, if this would be January 1, 2004, we would have made the statement we anticipate government regulations sometime during the year. Well, we are still making that statement today; but as time goes on, the likelihood of this becomes less and less predictable. I'm certain that doesn't answer your question. I mean, I'd just sum it up and say we view it as an opportunity, but there's so much unknown right now its hard to say what the impact or potential opportunity could be.

Well, is it fair to say that the captives typically have one plant contiguous to their slaughtering operations? And so they would need something that's totally separate?

Yes, I think if you want to go at it from that angle, this is going to have to be a separate product, a separate line, with separate rules, and thus a capital investment decision will have to be made by either the captive or the independent as to whether they want to be in that business. As we all know, it's a challenging business from the return side, and it's also a challenging business from the environmental permitting side.

So that's where we kind of view it as an opportunity. It's a significant volume but it's not a significant volume in any one location.

I have a couple of financial questions if I could. What do you expect your pension expense to be for 2005, and what your cash contribution might be. And secondly, what do you expect CapEx to be in 2005?

In our 10-K we reported that we expect the payment to be 1.9 million on the pension asset. As far as our CapEx for 2005, under our credit agreement it is spelled out that our limit for CapEx spending is approximately 14.2 million for 2005, Jeff.

Thank you.

Next question please.

Our next question comes from Mark Boyer with ROI Capital Management.

Could you guys comment on bio-diesel as an opportunity for the company?

Sure Mark, this is Randy and I'll take a stab at that. Bio-diesel recently became financially viable via the subsidy that was approved by Congress. Now let me comment about the perspective of that for us here. Bio-diesel is still in a very infant stage in the United States, both from distribution and from manufacturing, and from the understanding of the technology to produce it.

The government put subsidies in place for the production of bio-diesel in the amount of $1 per gallon of bio-diesel produced from what they describe virgin fats, or virgin fats and oils, in this case it would be animal fat; and it put $0.50 a gallon in place for used cooking oil.

The program or the length of the subsidy as it is written today is it expires on December 31, I believe, of 2006. Darling has begun to study that opportunity, and we have studied it in various aspects. One -- if you look at the business from a pure financial worksheet standpoint it looks like a gold mine opportunity, to be honest. There are a number of bio-diesel plants going up around the country right now.

As we dig deeper into studying that business, and we want to get smarter in these areas, a significant portion of the earnings and revenue stream of that opportunity come from the production of glycerin. The glycerin market today is what I would describe as somewhat fragile and fairly small in total tonnage. Production to the degree of bio-diesel, to the amount that is being discussed right now, could have substantial impact on the glycerin market, making the economics of that business challenging at best.

The third thing is, as we study it we have not been able to uncover a person making bio-diesel today out of a 100% animal fat consistently, and being able to achieve the ASTM standard. There continue to be technology challenges in the arena stemming around the production of bio-diesel for handling or converting the variable free fatty acids that come off the product. So I'd like to say in conclusion, Mark, is that it's a business we're studying, its viable on the back of a napkin today, but there's some significant challenges that still exist under that business.

Thank you.

Our next question comes from Tyson Bauer with Wealth Monitors Incorporated.

Couple of quick questions, Randy and John, and that would have to relate to -- you discussed the reduction in volume. Would you -- what would you attribute that volume reduction to? Is that strictly the loss of the export markets, has there been any reduction in consumption, domestic -- or as we walk into Q1 obviously we are going to run into the situation of packers idling some facilities, and the kill rate being significantly lower, weekly in Q1. What needs to take place to have a recovery in the volume side?

Tyson, this is Randy, I'll take a shot at this, and clearly it's a shot because we don't participate directly in the packer side or the retail food side of the meat business. But I think -- as we look back, and the metric we use to chart our business are the cattle kills. And when John and I went back and continuously restudy this, the cattle kills through the year, while down from 665,000 head a year -- or a week in 2003, they were 615,000 in 2004. That doesn't look like a major drop, but when you start to look at second quarter of this year – well, first quarter of 2004, and this was kind of a progression, was 600,000 a week, second quarter was 650,000 a week, third quarter was 620,000 a week, and fourth quarter was 591,000 a week.

There's been kind of a gradual and steady decline that we've experienced out here, some attributable to our plants, some not. There's been a series of press releases that have been announced out there since December to January, or November, from IBP Tyson idling capacity, to Swift idling capacity. And it's all in relation to -- as it was summed up to me, apparently the freezers are full, and they don't have a customer to kill any more animals.

And number two, there are several services that track the margins for processing animals. I believe one is called HedgersEdge, and that, as we follow it, has shown negative cattle processing margins pretty much throughout the year, other than a few weeks here and there that were positive. Those have run substantially red.

The Canadian border, we've seen all the writings that have happened there, it was due to open March 7, and then an organization called R-CALF was capable of getting an injunction to close that. And I saw a press release last night that says that that isn't even going to be scheduled for trial for another 124 days. Whether or not that's true or not that's what the press release said.

So, I mean the Canadian border remains closed, that was a source of about 1.5 millsion cattle into the country. We kill about 36 million a year, so it was kind of that, that extra 5%. And then mainly on the other side, that the packers will tell you is it's the closure of the Pacific Rim, European Union, and Japan mainly that gets depressed. And as I said earlier, there is nothing out there today other than a little bit of optimism that will tell you when that customer is going to start buying again.

Is there any realistic hope that Japan will unilaterally open the border to the U.S. without some type of joint agreement between the U.S. and Canada?

It's too difficult for me to say. I really can't comment, I'm not close enough to it, I read what you read.

OK. And last question, just a financial question, John. With Easter ending up to being in the Q1 this year as opposed last year being in Q2, what impact -- obviously as things slow down volume-wise around the Easter timeframe, what impact does that have by shifting it up one quarter?

Well, I mean any, anytime during the year that we have a holiday week, obviously the routes aren't run and it does have a day of less pick-up, but the normal big times that really impact the Company are really more around Memorial Day and the Christmas holiday season.

OK, so no real impact whatsoever.

I didn't say that, I said the other holidays are the more -- are the ones that have the bigger impact because it's more across the board.

OK, thank you gentlemen.

Our next question comes from Myron Menterrnock (ph) with Eagle Rock Capital.

Hey guys. In the fourth quarter, I noticed in the 10-K that you reduced your discount rate to 6% from 6.5? How does that flow through the income statement? Is that a fourth quarter hit or does that flow through all four quarters?

That is spread out through the year, Myron. What that does is just -- it impacts the expense by lowering the discount rate, and pretty much the 6% as you've seen it went from 7.25 to 6.5 to 6, and that's reflective of what the rates are on the long-term, and that's much -- and that is basically spread out over the full year. It's raised -- basically raised our expenses for this year by about $400,000 in pension costs.

OK. Were there any balance sheet items, balance sheet adjustments in the fourth quarter that affected your income in the fourth quarter, that flowed through your income statement that, you know, aren't apparent?

No.

No, all right. Just checking, thank you.

Our next question comes from George Gross (ph) with Joseph Gunnar.

Hi, guys. From the look of the average monthly pricing for -- like for yellow grease, DFT and MDN (ph) (inaudible) it appears all three commodities experience significant price declines in Q4 compared to Q3. Which commodity experienced, like, the largest sequential decline for you guys in sales, and can you rank these commodities in terms of -- like the revenue shortfall?

On our average pricing in the fourth quarter -- and the best thing to do is we normally reference the Jacobson (ph) price list -- in fourth quarter of this year on meat and bone meal the Jacobson averaged around $144 a ton compared to fourth quarter 2003, where it averaged $231 a ton. That was almost a 38% decrease. Tallow in the fourth quarter this year was approximately 15.5 cents compared to almost to $0.20 in the third -- in the fourth quarter of '03. And then yellow grease, averaged around 13.5 cents compared to a little over $0.15 in '03.

Those prices, obviously compared to '03, are substantially down. The '03 prices were up, reflecting back prior to the case of BSE that was discovered in December 23 of '03, because Canada in that Spring had their first case of BSE, and they were not exporting, so the prices in the U.S. were up through that period.

Current prices today, even though the prices we saw on the fourth quarter moved into January February, prices today for meat and bone meal are in the 180 to 185 range, tallow around $0.18, and yellow grease is in the $0.14 to $0.15 range.

OK. and what about, how much was the decline due to volume? I mean in terms of your revenues?

In the revenues, in the K, around -- a little over 9 million for the year was reflective as to volumes, and approximately about opposite on the prices as well.

I mean, is that the volume, on 9 million, like for the year there?

Yes, that's for the year.

Like, for the year commodities. And how --

And obviously the bigger part of that was in the fourth quarter, as Randy had walked through on the cattle kills. The volume, cattle kill volumes and the volumes that we had available to process moved down, from the second quarter to the third quarter to fourth quarter.

So I guess if you were to rank the -- like the commodities, I guess, like, the biggest contributor to the decline would be, like, the meat and bone meal?

Well really, when you process product -- we call it getting in fat and bone -- and then we separate it, the yield that you get out of fat and bone is pretty close to being an even split between protein and fat. So the pricing -- with the price decrease going down on the protein there would have been more of an impact there.

OK. And could you break out your sales of yellow grease, DFT and MDN?

No we do not.

In terms of the -- like the restaurant services, in the last quarter, you talked about -- like the National Service Center. Can you give us some color with respect to how things are progressing, how has Bob Siemen been doing, and was he responsible for any major account wins during last quarter?

Yes, I can give you some color, George. What I'd be careful of is we don't reveal names of the accounts. It's a very, very competitive business; and as I can view on the screen here, I do have some friends on the screen here. So, we've been able to bring into the National Service Center -- of our 84 or 83,500 stocks, we are now running approximately a couple thousand new accounts through there. The Service Center is geared at handling both Darling pick-ups and third party vendor solutions, such we can give a customer a one stop shop. This has all started to happen for us here during the last six months, it’s picking up momentum, and we've added also another professionally seasoned sales person on the West Coast to assist Bob Siemen and give us that professional presence at the large restaurant and national chains now. So I think my key word there is stay tuned and we'll see how it progresses.

OK, OK thanks. I'll just get back into the queue here.

Appreciate it.

Our next question comes from Rick Giesen with National City.

Thank you gentlemen, my questions have been answered, thank you.

Thanks Rick.

The next question comes from Evan Steen with Eos.

How are you doing? In the past, in the late 80s, early 90s, you guys used to give out weekly volume numbers. Would you be willing to do that, or could you give me some sense of how much the processing volume is down -- I guess quarter-over-quarter or maybe year-over-year?

I'm not aware of that the company ever released any type of processing volumes or anything. That's something that we do not --

But you definitely gave it out on a weekly -- how much raw material was processed on a weekly basis. I have the numbers, you know, from the mid-80s to the early 90s.

Well -- prior -- that’s required for becoming public, and as now that we are a public company, that is -- for competitive reasons as well as other reasons we do not disclose that.

OK, could you -- in light of that, it seems the trend here, and it’s been going on for many years in this -- of the lower volume -- forget about the cattle kill. Just the lower amount of volume being processed, whether it’s because people are doing it in-house or because there's a less of a kill, or whatever the reason. That seems to be the driver of a part of your business, the rendering. And I'm curious how you guys view that from a longer term perspective, and especially considering the fact -- I know your commodity prices are actually what I would consider towards the high end at this part of the cycle, and in this quarter you barely earned a penny. So my concern really is moving forward as the commodity prices are high right now. At some time they're going to start dropping. The volume is weak, you have the restaurant business picking up to sort of offset some of that. But there's lot of fixed costs, you mentioned you're closing the Canadian plant, I'm not quite sure why. But from a management perspective -- from a longer term, given that the cycles, you know, tallow can get cut in half from here at some point going in to the future. What you're doing to sort of take all those variables to ensure that -- you know, you make a decent amount of money or be profitable when the cycle's at the bottom cycle.

I'm a little bit disturbed here that EBITDA dropped in half at a time -- what I would consider to be very, very high commodity prices. I know that natural gas and energy and so on and so forth, but if you're going to make one penny during this period, I mean, as shareholders what are we going to look like going forward.

Evan, this is Randy, I'll try to answer it. Several pieces there that were co-mingled in that question.

First of all, the volume impact that we felt during 2004 was much different than this company's felt over the last many years. Relatively speaking, our raw material tonnage in the rendering segment has been flat to slightly growing, population growth maybe, and we kind of look at that as kind of a pretty natural thing going forward here.

From the commodity price perspective, I want to turn you back to that -- in the K we will highlight to you that we've moved more and more of our business to formula. From a year ago it was at 50%, we've now moved more of our rendering segment to 55% formula. So frankly, in that sense, in a pure sense, you don't care whether tallow is $0.20 or $0.10. We've tried to take the hills and the valleys out of it. The impact in fourth quarter, and for the year to a degree, has been volume driven as a result of the closure of the export markets. John, anything else you want to add?

The volumes have a bigger impact -- if you walk through the K, you'll see that the decreases and so forth related to the volumes -- on the prices you've got a change, and sales were down, but you'll also notice cost of sales were down, as well. With the formulas that we have in place, as Randy said, we really don't -- pricing on those accounts, it doesn't matter what the finished product price is. That's why the formulas are in place to protect us from those swings.

However, if you don't have the material to process, that is the bigger impact of what we've seen during -- happen during 2004 that we've not seen in prior years, and the formula cannot protect us there.

Right. But it was my understanding that the margins on sort of the spot as opposed to formula are much higher than a formula base when the markets are good.

Of course. When the markets are up you're going to make -- you're going to level the hills and valleys. It just depends on what you want.

OK. Let me ask it a different way. If you're making one penny in this quarter -- going forward the way I'm tracking it, the commodity prices may be up from Q4 but on a year-over-year basis they're going to be down again in Q1, and they're going to be down again in Q2.

Your SG&A -- I assume most of it is fixed, so what can we do in terms of topline where you're looking at the gross profit to try to -- I don't know, get a bit of a better gross profit margin going forward, seeing that the revenues are soon to (ph) be a function of the end market prices and volume.

What else can be done to sort of lower the fixed costs, and I guess maybe you can mention – I’m not quite sure why you're closing the Canadian plant.

If you -- when you're talking about the prices and so forth, and they change from year to year, the -- in looking at 2004 versus 2003, our operating income was actually up 3.5 million on an operations standpoint. 2003 had the early retirement of debt and the FAS 15 accounting impact on interest expense, which lowered the interest expense artificially by 2.5 because of how that accounting works, and move the profits into the equity portion of the balance sheet.

Yes, I'm really looking at operating -- I'm throwing out all the onetime stuff like (multiple speakers) --

OK, I'll address Canadian for you. In looking at Canada, with the -- with the situation in Canada with their cases of BSE, and the borders like it was -- our operations, what we have in Canada -- it was -- it was essentially what we would call a transfer station. We did not have a processing plant in Canada, it was a transfer station of trucking activity to move product from Canada into our Michigan operation. Because of the BSE situation, beef products was not allowed to be brought into the U.S. for processing. That lowered the volume available to us from Canada, and because of the comingling of the little bit of poultry and pork that we had, it was to our advantage to not have our operation there.

We can, when the border opens back up for that type of activity, still contract with those type suppliers and have someone else to operate it. But we did not feel in the long term or short term it was to the company's advantage to continue to operate in Canada as we have.

OK, well one last question. I know you don't give guidance, but from -- from what you've indicated it seems like if the kill is down and commodity prices are up a little bit, but natural gas and obviously oil -- oils are going higher, diesel's going higher -- and I know Q4 is seasonally a little bit weaker because of the holidays. But I mean -- I guess it sounds like Q1 may be a little bit better than Q4, but it doesn't sound -- by much, given what's going on right now.

I -- you know -- I -- you have to look at the factors, and the factors are where cattle kills are in the first quarter of this -- during the first quarter through the first 10 weeks, they're running at an average of 585, where in the fourth quarter they were running at 595. They -- the cattle kills have gone down a little bit more, but not the reductions that we had seen earlier in the year. And also, prices were -- in January and February, as have been reported -- stayed fairly low at that time, but can -- starting in March -- have started to rebound. And that's about the only guidance that we can talk about.

OK. OK, thank you, thank you very much.

(Operator Instructions)

Our next question comes from I-Wen Lim with Seaport Group.

Hi guys, how are you?

We're good.

Actually, I just wanted -- if you could comment on the correlation of pricing and competing products such as (inaudible), and also I guess the overall energy pricing and how it effects the pricing of your finished product, and what that impact is on you guys?

Net, probably from a trend perspective for the meat and bone meal and the tallow fraction, what you find is a pretty strong correlation to the soybean complex. And we've seen the soybean meal and soybean oil complex start to react or rebound -- hit bottom after the record crop production here in the United States, and then an anticipated record crop in South America which the Brazilian crop, while will still be a record, continues to get smaller from earlier anticipated levels.

So we've seen a rebounding of that complex from $0.21 oil up to $0.23 to $0.24 oil, and soybean meal from the 150's back into the 180's. Additionally, competing ingredients for our product on a global basis for oleochemical, or soap manufacturer, is palm oil. And we've seen palm oil rebound slightly here across the board.

The yellow grease component of our business is one that trades in a correlation to a discount to soybean oil depending on what's in it, and generally finds its way back into feed formulations. It's a fairly complex valuation model. It doesn't necessarily mean when corn is down yellow grease is down, because it has to do with what's the price of the alternative feedstuffs that may or may not require an energy substitute. So I hope that helps. What else can I answer for you?

That's it, thank you.

(Operator instructions).

Our next response comes from George Gross with Joseph Gunnar.

Yes, I guess my follow-up question here, like -- like with the decline in raw material prices, your finished goods -- I mean -- they've impacted you, but I'm sure they've impacted the mom and pops and the regionals more than you guys. So -- is it a fair assessment that the -- that this market dynamic could create an opportunity for you in the acquisition area?

I think the safe way to answer that question is -- is that the industry has experienced some fairly good times over the last couple years. Obviously in prudent balance sheet and cash management, you hate to buy a company when prices are up. So we're hopeful that our strong balance sheet, provided that one of these businesses does come for sale and is a strategic fit that may arise from time to time, we'll take advantage of it, George. All I can say is stay tuned, I'll give no guidance on that.

OK, thanks.

We have a follow up response from Jeff Gates with Gates Capital Management.

Yes, I was just wondering if you can give us an idea of the amounts of collection income on an annualized basis you have now. And I see it's been up 3 to 3.5 million in each of the last two years. And I'm wondering if you expect that sort of magnitude of increase to continue, and what the potential is there?

Well John's pointing to me and I'm pointing at him, so I guess he's pointed back at me Jeff. That's a number we don't release, that's one you've been capable of backing into. It directly relates to our ability to charge the customer for a recovery of our collection expense of the business. It relates to how we're growing the restaurant services, and without giving any guidance, hopefully we can keep growing that segment. And it becomes -- it remains a strategic focus for this company.

And how much -- secondly, how much of the Sarbanes-Oxley do you expect to be an ongoing part of your expense structure?

The answer's probably too much. During 2004 was kind of a learning experience, and the initial documentation for Sarbanes-Oxley -- we spent, as we reported, 1.2 million for the year. And if you look at our third quarter, where we'd been, and take that away from where we ended up annually, we had about $0.5 million in the fourth quarter.

We would expect that to come off a little bit mainly because of the initial start-up of the documentation. But as we look forward, Sarbanes-Oxley -- as the rules are written today and the laws are -- it is something that corporate America will have going forward, and there will be a cost associated with it. I think we'll learn even more this next year as to how much of that cost really was a one time start-up and cost associated with that. And we'll go forward from there. It should be down but I really don't know by -- I could not guess by how much.

And lastly on the -- I understand your pension cash contribution expected to be 1.9 for '05, but what would you expect the expense that goes to the P&L to be?

It will be triggered by the discount rates, and so forth, as to what we've got -- that's something that is very difficult to project. Also the valuation date of our funds and that -- when that is done, so if -- you can see the trend line as interest rates have gone down over that period of time. You've seen -- and in the report -- how that trend line basically occurs. And it's triggered by the discount rate as to where -- if rates level off or improve, then you'll have the impact accordingly.

But don't you do that in October for the following year or something?

Yes, but we don't disclose that in advance. The only thing that we disclose is the amount of the contribution.

OK, thank you.

Thank you.

Gentlemen, there are no further questions. Do you have any closing remarks or any further comments you'd like to make?

No Paul, you can go ahead and close it off here.

Ladies and gentlemen, thank you all for participating in today's Darling International fourth quarter and full year 2004 conference call. This concludes today's presentation, you may now disconnect.