Darling Ingredients Inc (DAR) 2006 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Darling International conference call to discuss the company's third quarter fiscal 2006 financial results. With us today are Mr. Randall Stuewe, Chairman and Chief Executive Officer of Darling International and Mr. John Muse, Executive Vice President, Administration and Finance.

[OPERATOR INSTRUCTIONS]

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

Thank you, Lynn. Good morning, ladies and gentlemen. Thank you for joining us to review Darling's third quarter 2006 earnings results. Randall Stuewe, our Chairman and CEO, will begin today's call with an overview of our third quarter financial performance and some of the trends that impacted our results.

John Muse, our Executive Vice President of Finance and Administration, will then provide you with some additional details about our financial results. Randy will conclude the prepared portion of the call with some general remarks about the business after which time we will be happy to answer any questions you might 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, 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 current events and are based on its assessment of and are subject to a variety of risks and uncertainty 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 are referenced from time to time in the company's filings with the Securities and Exchange Commission.

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

Thanks Brad. Good morning, everyone. I'd like to begin my remarks by reviewing our third quarter results and provide you with some additional details about the factors that impacted our performance. As we mentioned in our press release, despite a generally more favorable operating environment in the third quarter, low finished product prices remained our most significant challenge.

The average price of our major finished products was substantially lower during the third quarter of 2006 as compared to the same period in 2005. Fat prices, while showing some improvement over the previous quarter, continued to lag prior year levels and meat and bone meal prices actually declined throughout the quarter on a year-over-year basis.

Tallow prices showed some improvement. However, due to the fact that our production of this product is minimal during the third quarter as hot summer weather impacts the quality of our raw materials, we ended up selling most of our production as yellow grease and were thus unable to realize the full impact of this positive development.

In addition, the substantial growth of ethanol capacity in the United States is driving increased production of DDGs, distillers dry grains. These DDGs are marketed against Darling's meat and bone mill and has new ethanol plants come online, short-term regional dislocations of our proteins are possible. Fortunately these challenges were offset by a number of positive developments that enabled us to generate a 25% increase in operating cash flow and a 3.7% increase in operating income.

Our raw material volumes remain favorable. While cattle slaughter volumes remain volatile and continue to challenge several of our plants, for the most part, the majority of our plants are showing improved volumes, and we are optimistic that we will be able to grow our volumes that serve our plants in the coming time. We continue to make progress on the recovery of our collection expenses. The use of energy surcharges are finally catching up along with our usual growth of accounts.

However, as we've noted in our release, the competition for yellow grease for the production of biofuels is clearly causing some regional challenges in our metropolitan areas. Overall we are holding our own, but the challenge is not going unnoticed.

While energy prices have declined from their highs earlier in the year, it is expected that energy prices for natural gas and diesel will remain at elevated levels for the remainder of this year. As you know, energy is a significant input for Darling.

During the quarter, there was a positive development on the energy front that we would like to make you aware of. Beginning in October, the IRS will be granting a $0.50 per gallon alternative fuel mixture credit to us if certain criteria are met. Specifically the U.S. government will reimburse us $0.50 per gallon or roughly 6.8 cents per pound to users that substitute an alternative fuel for natural gas.

In our case, we would use yellow grease or animal fats. While specific guidance from the IRS is still being developed, Darling is proceeding with a plan that will factor this subsidy into our future energy consumption decisions. And we'll be making decisions about which fuel to consume on a plant-by-plant basis on a month-by-month basis.

While the financial impact of this subsidy has the potential to be significant to Darling, it is difficult to make any projections given the volatility of both natural gas prices and grease prices.

On the renewable fuels front, Darling is committed to making the right decision and clearly understands its value proposition for this developing opportunity. As we have discussed before, Darling possesses the largest supplies of low-cost feed stock in the country. This presents a very unique opportunity for us. We continue to make progress on perfecting the technology to process animal fats, and we'll keep you appraised of our plans for this business as it develops.

I'm also pleased to report that the integration of National By-Products is moving along seamlessly, and as our third quarter results show, we are beginning to feel and see benefits from this combination. With an expanded network of facilities, particularly in the Midwest, greater customer and business diversification and a broader bench of senior management talent, Darling is well-positioned to drive improved operating efficiency and capture growth opportunities going forward.

Finally, I'd like to update you on the legal issues we have noted. First off, we continue to seek affirmative relief in California. This case is proceeding as planned. The second case we have disclosed involved a utility in New Jersey. As we had previously disclosed, we won a substantial arbitration award and have made a decision to sell this award. At this time, we are awaiting the New Jersey courts affirmation of this award.

With that, I'd like to turn the call over to John Muse so he can provide some additional color on our financial results for the quarter. After John concludes, I'd like to provide some closing remarks, and then we'll move to a Q&A session. John?

Thanks, Randy. And good morning to everyone. For the third quarter of 2006, Darling's net sales were $150.2 million as compared to $79.3 million for the third quarter of 2005. The majority of the $39.5 million increase in sales, which was partially offset by lower prices for finished products, is attributable to our acquisition of National By-Products in May of this year.

Net income for the third quarter 2006 is $1.8 million or $0.02 a share as compared to net income of $2 million or $0.03 a share for the comparable 2005 period. The $0.2 million decrease in net income for the quarter resulted primarily from significantly lower prices for finished products, protein products and fats, higher depreciation and amortization and higher legal expenses related to certain ongoing actions in which Darling is the plaintiff.

Interest expense in the third quarter was $2 million compared to $1.5 million during the third quarter of 2005, an increase of $500,000 primarily due to the increase in debt outstanding and a result of the National By-Products acquisition. During the third quarter, the company reduced its long-term debt by $5.2 million.

Operating income increased to $.2 million in the third quarter. The principle factors contributing to the increase were the inclusion of the operations of National By-Products, higher raw material volumes and improved recovery of collection expenses. These increases were partially offset by lower prices for finished products, lower production yields, higher legal fees and higher plant maintenance and repair costs.

At the segment level, rendering generated net sales of $82.6 million for the third quarter as compared to $49 million in the third quarter of 2005. This reflects increased volume resulting from the National By-Products acquisition. Restaurant services generated net sales of $32.6 million as compared to $30.3 million in the third quarter of 2005.

For the nine month period ended September 30, 2006, Darling reported net sales of $278.9 million as compared to $232 million for the 2005 comparable period. Increased sales generated from the acquisition of National By-Products accounted for the majority of the $46.9 million net sales increase.

For the nine months ended September 30, the company reported a net loss of $1 million or $0.01 per share as compared to a net profit of $5.7 million or $0.09 per share for the 2005 period. The $6.7 million increase - decrease, I'm sorry, in net income for the nine months ended September 30th resulted primarily from a $4.5 million in charges related to pre-payment fees and write-off of deferred loan costs in connection with the termination of the company's previously subordinated debt and revolving credit facility, lower prices for finished products, higher energy prices for natural gas and diesel fuel and also higher legal expense.

Operating income for the nine months ended September 30th was $7.8 million as compared to $12.4 million for the same period in 2005. The principle factors which contributed to a $4.6 million decrease in operating income were lower finished product prices, higher natural gas and diesel fuel expense, higher legal expenses and higher plant repair and maintenance expenses. These decreases were partially offset by higher raw material volume, improved recovery of collection expenses and operating cost improvements.

At the segment level, the rendering segment generated net sales for the first nine months of 2006 of $146.5 million - I'm sorry, of $188.5 million for the first nine months as compared to $146.5 million for 2005. Restaurant services generated net sales of $90.4 million as compared to $85.4 million in the first nine months of 2005.

Additionally, Darling made capital expenditures of $8.2 million during the first nine months of 2006 compared to capital expenditures of $14.5 million in the first five months of 2005. This decrease of $6.3 million was primarily due to lower expenditures in fiscal 2006 on two major projects at Fresno, California and Wahoo, Nebraska facilities that were identified over normal maintenance and compliance capital expenditures in fiscal 2005.

Capital expenditures related to compliance with environmental regulations were $.4 million and $1.4 million for the nine months ended September 30, 2006 and October 1 of 2005 respectively. On September 30, 2006, Darling had working capital of $18.5 million. And our working capital ratio was 1.35 to 1 compared to a working capital of $40.4 million and a working capital ratio of 1.95 to 1 on December 31, 2005.

As of September 30, 2006, Darling had unrestricted cash of $6.2 million and funds available under the revolving credit facility of $61.1 million compared to unrestricted cash of $36 million and funds available under the revolving credit facility of $35.1 million at December 31, 2005. I'd now like to turn the call back over to Randy.

Thanks, John. Before we open the call to questions, I'd like to conclude with a couple comments. Darling is working to position its business and deliver superior shareholder value. Our business model remains solid. Finished product prices are improving. Our balance sheet is strong. And we continue to pay down debt. Our integration plan remains on target. That concludes our prepared remarks. We'd like to now open it up to questions. Lynn, I think we're ready for questions here.

Thank you.

[OPERATOR INSTRUCTIONS]

Our first question is coming from Tyson Bauer of Wealth Monitors.

Good morning, gentlemen.

Good morning, Tyson.

Good morning.

Another successful quarter, given the challenges you faced during the third quarter. A couple of quick questions. One has to do with the subsidy as an offset as far as taking out supply in the marketplace with the DDGs that are coming on and replacing some of your demand. Any analysis or any further information you can provide on kind of those two issues offsetting each other?

Help me out. Ask the question a little clearer for me.

Okay. You've got the subsidies, one for tallow and one for yellow grease that was in the transportation bill.

Okay.

Which should allow you and other facilities to burn or use that in place of natural gas. So that's taking some of the supply out of the marketplace because you're using it in-house. On the flip side, you've got DDGs that are coming onto the marketplace and in localized areas are using those instead of MBMs or soybean mill, other products. Is there an offset with those two components?

I think, I think that dives into a general commodity discussion here. And I'll address both issues kind of independently, and then we'll see if we can make a linkage here between them. The energy impact to Darling here is a fairly simple calculation that we have discussed before in prior times. And what we do as a team here is evaluate and look at the delivered burner kit price for natural gas.

And today if you look down at -- the futures market closed last night. We haven't opened yet, but you've got first quarter natural gas averaging about $8.40 at the NYMEX at a $1 or so to get it to our plants. And so, you've got $9.50 gas delivered burner tip. We try to look at then the price of fat delivered to the burner tip, which is what we use as essentially a 60% of the fat price conversion factor plus a few cents per MMBTU for a little bit of extra maintenance and hassle with dealing with it and run the calculation.

So prior to October 1, we were running that analysis. Post October 1, we now have to subtract about $4.00 in MMBTU from the gas equivalent to make that decision. So it's an ongoing month to month calculation. Obviously by us taking that much fat and converting it back to BTUs, it does have an impact on the grease prices or fat prices in the country. I mean, if you, if you look at going out of third quarter, we had tallow at about $16.73.

Tallow at the close last night was showing about $19.50 to $19.75. Yellow grease went out of the quarter, the third quarter, at $11.29 average. Last night we're showing $15.50 yellow grease. And protein is improved from about $1.38 to $1.55 to $1.65. The impact of DDGs is, as we said in both our press release and Q here in our discussion, is somewhat regional as these large ethanol plants come online.

A 50 million gallon ethanol plant puts out about - puts out 500 tons of animal feed a day that they've got to move. And that's a substantial amount in any one location. So obviously 100 million gallon plant puts out 1,000 tons. And so, as these plants are coming online, I believe the number - there's 105 operating. There's 42 under construction at this time.

We're going to continue to see some pressure as DDGs fight for a portion of the animal feed ration out there. The good news is we're seeing the price of corn move up. We're seeing corn as of last night's close, quote, "out there between over $3.50 a bushel now for new crop corn here."

That's having as much impact on yellow grease prices as anything and also having the same impact on what we call the middle proteins or for feed consumption. So I hope that answers. That's a long answer, Tyson. And I'm not sure it addressed it, but I think it took out a couple topics here.

Exactly. And plus, you should be having favorable feed formulas, I would assume, giving grain prices. As far as an investor perspective, if you believe grain prices are going to stay elevated, obviously the equipment guys have had their runs in the stock market. Fertilizer guys have had their run.

You guys who are equally beneficially impacted have not had a stock price movement. I think it's a lack of understanding of what those higher grain prices can mean to a company like Darling. That's just a little commentary.

One quick question. The material quality, we know because of the heat in the beginning of the quarter. We should not see that repeat in the Q4 as we've seen in years past. Is there somewhat of an opportunity cost calculation or a [degradation] of quality of the material that you have a number to that should not repeat itself or usually get the benefit going into Q4?

Tyson, this is John. I think in Randy's remarks I think he pointed out that even though tallow prices were up in the third quarter to an average of $16.73, because of the quality of the product we were manufacturing and rendering...

Right.

... the yellow grease price averaged $11.29. And so, we were selling most of that product at a yellow grease price during the quarter. So hopefully during the fourth quarter when cooler temperatures, we will return back to what would normally be sold at tallow prices will now be sold at tallow.

And, Tyson, this is Randy. For the most part, a lot of that impacts the West Coast. And as many of you followed in July and August, there was somewhat of a crisis out there as the extreme summer temperatures hit out there and ultimately we even ended up having to landfill some of our dead animals because we couldn't process them quick enough. So it was a significant challenge to break it out. We don't do that for anybody. But as John pointed out, the price spread was substantial between yellow grease and tallow this summer.

Right. Obviously a significant improvement in Q4. And the last one I'll go into the Q is can you explain - we see a lot of tallow plants in Europe and Brazil. We don't see that here in the U.S. Is that an opportunity for Darling, given the amount of tallow you run through your facilities here in North America?

What kind of tallow plants are you referring to?

When you read the articles regarding where they use tallow to make biodiesel down in Brazil and over in Europe.

Okay.

We really don't see those here in the U.S. Why is that?

Well, first of all, the answer has been there's been no real incentive to produce biodiesel, whether it's from soil or animal fats until the subsidy went into place. The issue here is the quantity of raw material that's available and then also the control of the feed stock. There is not a significant amount of it in the sense of an overall marketplace. And then also the feed stock's produced by a limited number of players.

We're seeing in Europe there are several animal fat plants. In Brazil, there is one due to start up here in fourth quarter. And in the U.S., there are several animal fat plants that are on place. The technology and the process capability exists. And as time goes on here, it's obvious that animal fats provide anywhere from a $0.50 to a $0.75 a gallon benefit to making biodiesel. And I think you'll see the capacity increase.

And do you have any future plans with that technology?

You just had to ask that, didn't you?

I did. I knew you can't answer it, but I had to ask it.

Well, good, then you answered your own question.

You're considering it at least?

You answered your own question.

All right. Thank you, gentlemen.

All right.

Thank you. Our next question comes from Jeff Gates of Gates Capital Management.

Hi. A couple questions. As far as integration cost savings, was there anything in this quarter as far as the costs to get there, one-time costs, to integrate, if you could quantify that? And also how much cost savings do you expect to get, and how much have we seen so far?

Jeff, I think, I think I'll give you a general comment on the integration. We look at the integration from two levels: operational and then administrative. Operationally we break that down into routes, redirecting tonnage and then transferring best practices, if you will. And I think Mark Myers and the management team of National in the Midwest have done a tremendous job of completing that task.

While we were closing there and getting in process, we were studying it. So we hit the ground running pretty sharply in May. If we tried to quantify it for you, what we'd tell you is we shut down rendering operations in Indianapolis. We're in process of closing several transfer stations. There are one-time costs associated with that. And additionally we have moved around approximately 10,000 accounts in that Midwest corridor. To try to put a number to what that's cost you, I'm certain it's there, but it'd be hard to quantify.

The administrative piece is still very much underway. Obviously that includes and relies on the installation of computer systems into the national locations. And that's very much underway at this time. And there are ongoing expenses with that part of the integration.

But your ongoing corporate has been $7 million, $7.6 million a quarter the last couple of quarters. And I guess it was about $5 million or so prior to the acquisition. Is $7.5 million a quarter a good ongoing number?

You said for SG&A?

Your corporate expense that's not allocated to the segment.

What the expense or SG&A that came over from National, that rolling in, we will - we have seen a very minor change in expenses there as we roll in their activities into our corporate activities. We will in the next several months be looking at taking advantage of systems and integrating how we do certain functions as we go forward. But there will be obviously a small increase in our corporate costs as it does relate to the National acquisition.

And what do you expect CapEx to be for the year and for 2007?

Well, as we said, we were running around $8.2 million through the first part of the year. We'll probably run on an annualized rate a little higher than that because of some projects that we've got going. But that would be fairly representative of during the quarter of what we're looking at fourth quarter, understanding that we didn't bring National in until May of this year. So their CapEx needs were only in there for a partial part of the year.

You're saying it's going to be $3 million a quarter?

I guess based on the third quarter and what we're looking at and breaking - taking out normal, I should say, at normal, one-time major expense or any major projects that are coming up, what we've seen during the third quarter should be fairly representative of what we're planning to see going forward without any major projects.

Okay. And one last question. On the, on the, on the grease, the alternative fuel tax credit, how many pounds of yellow grease would you burn in a year, or gallons or pounds, I guess, however you want to quantify it - how many pounds a year of grease do you burn with natural gas at current prices?

Jeff, I think the answer there is is that we don't reveal that number. We haven't revealed our energy segment and what we consume there. And I really don't want to give that answer. What I did say in my comments was it can be significant, but it's tied to commodities and could be volatile here.

Yes, the whole, the whole calculation there evolves around where fat prices are and where natural gas prices are. As Randy pointed out, fat prices today are $0.15. You take the factors to take that down to a natural gas price, that would be equivalent to $9.00 in gas. With the alternative tax credit, you would get another $4.00 off of that. So it would be - if you were able to take the credit against the fat today being burned, you would be looking today at natural gas prices at a, at a plant of between $5.00 and $5.50.

Right. And what percent of your plants have the ability and the permit to be able to - what percent of your footprint of capacity has the ability to burn, to burn grease?

Today roughly 75% of our plants have the ability -- under the alternative fuel mixture law, if you read it, or the guidance there, we have to be able to blend in one-tenth of a percent of diesel fuel into that mixture. In most areas, that did not require any type of special notification or permitting modification. In some areas it has, so we have four or five plants out there yet that we hope to have permitted here by the first of December, which would take us up into about 85% of our footprint would have that ability.

Okay. And if I look at the total energy costs for the company, is it fair to say that just sort of a ballpark split between the natural gas required for, I guess, steam, right, and heat versus what you use diesel in your trucks - would it be fair to say that 80% of it or 90% of it's natural gas and the balance is diesel?

Jeff, we just - we don't disclose those relationships. We've just not pointed that out in the past. And we're not at a point today that we're going to disclose that relationship.

Okay. How many, how many diesel trucks do you have? You've disclosed that before, right?

We have over 1,000 vehicles on the road.

A thousand?

We have over 1,000 diesel trucks on the road, that's correct.

Okay, thank you.

Thank you. Our next question is coming from Dan [Mans] of Avondale Partners.

Good morning. A couple questions, some of which actually are follow-ups on Jeff's. The first thing on the energy side, we just heard this in the quarter. It looked like a year-over-year for the quarter it was about $400,000 in incremental savings on the energy front.

Given what we saw as a fairly dramatic decrease in natural gas prices year-over-year, any rationale why that wasn't larger? Has there been some hedging done at higher costs that'll roll off? Or is there some other reason why maybe we didn't see more of a decline in energy costs?

A lot of it had to do because we weren't burning the natural gas in that prior period. We were burning fat. So we had taken advantage of our capability to burn fat in comparing to third quarter of last year to this year. All our plants weren't burning natural gas. They were burning fat. So we had taken advantage of our capability.

So when we got into the third quarter of this year with the lower natural gas prices and where fat was, it was - the relationship was much closer. But that's the main reason. We did not burn all natural gas last year. We were burning fat at a reduced cost to us.

Okay. And is that something we would expect to see continue? Meaning in prior periods, not just in Q3, you've been burning fats pretty consistently in prior periods as gas spiked last year?

Well, we've been doing it, Dan, plant by plant. And there has been some real energy dislocations out there, as you can imagine. As storage filled up on natural gas, we could buy cheap natural gas in one city and expensive natural gas in another city where we'd end up burning fat. So it really goes region by region.

So the increase in tonnage - last year you were coming off of Katrina here. And so, it's a pretty hard comparison. Right now it's - I think October has been there is some benefit to burning fat. And there are some plants that are still burning natural gas even with the, even with the $4.00 in MMBTU subsidy that's out there.

Okay. Next follow-up question is on the integration front. You gave a fairly detailed answer, but I wanted to get a little bit more color in terms of when are we actually going to see some of the results. I mean, obviously you guys are doing a lot of work in terms of integration. And it sounds like with the closing of the Indianapolis rendering facility it's moving forward quite well. But when should we actually be able to either see them in the numbers or you'll be able to break them out for us or give us a little bit more insight into the, into the actual dollar values?

I think we're, I think we're making a lot of progress obviously. The operating cash flow number in the third quarter shows some of the benefit that we've experienced of moving the accounts around and getting the new tonnages through. I think - I guess I'll wait to address that for fourth quarter, and then you can make a judgment on that. I don't know that we're going to come out and put a number on it and say there's x dollars that's attributable to it because it's a very simple but yet complex integration, at least on the operational front. So...

Okay. The last question is on the restaurant services business. You have a note in your [queue]. And this isn't horribly surprising. But given the rise, especially in Q4, of yellow grease pricing, it sounded like you're seeing some competition in terms of people picking up yellow grease. Can you talk a little bit about that and maybe your expectations for that going forward?

Yes. We have been - as we've talked about, our national accounts approach is it continues to be successful, and we continue to grow our core baseline business there. What we're seeing from city to city and region to region is as some of these small startup biodiesel plants come online, there are several out there that are trying to use waste cooking oil.

And what we have seen and felt is that we will see those plants try to go out and originate their own used cooking oil by driving around and, if you will, picking up accounts, in some cases, stealing, in some cases, skimming a little bit off the top of a container. So it's been, it's been regional. It's been somewhat marginal or minimal at times.

But it felt like something that we wanted to disclose to people. It's not anything that's giantly new to us. We have seen it on the West Coast over the last year and-a-half. The reality of it is is if we lose 100 accounts in a month out on the West Coast, we pick them up the next month. As people understand, it's somewhat of a - it's a more complicated business than most people understand of driving around and picking up a significant quantity of grease.

And so, we don't see it as a huge threat going forward, but we see it as something that between the subsidy for burning it in your boiler, the subsidy for putting it in a biodiesel plant, which given that the fact that the subsidy now exists that's parity for burning it in a boiler, it would suggest to you that you probably shouldn't spend money to build a biodiesel plant on yellow grease. So hopefully it's going to level off. But I think subsidies make people do silly things. And we'll just have to endure it.

Okay. I mean, I guess the other side of this is I know it hasn't moved to formula the same way rendering has. And the barriers to entry appear to be fairly low in terms of restaurant services. I mean, just generically speaking, you would sort of expect to see more competition, especially as pricing on yellow grease has gone up. So this sort of goes to your statement this shouldn't have been much of a surprise to see.

No.

One last question on the biodiesel front. You guys have talked about this at length on multiple quarterly calls. So without belaboring it, you guys have noted you've checked the box or checked the necessary boxes on biodiesel. With that said, what is left? I mean, we pretty much know where the market is.

You're comfortable on the technological front. What obstacles remain in making that decision? Is it an extension of the tax credit? Is it cost of construction? I mean, what are sort of the variables out there as you think through the opportunity?

I think it's a really fair question. I think the biggest thing that for myself and our board was we had to get comfortable making sure that the largest acquisition in the history of Darling was consummated and digested.

And I think we're at that point as we're telling you that we are very comfortable with the progress that Mark Myers and the National team have all made in making it a seamless integration. They've done a marvelous job. So I think now we are in the stage now of checking off the boxes that we've repeated in the prior calls. And I guess I'd just like to leave it at that for right now.

All right. Thank you.

Thank you. Our next question is coming from Nader Tavakoli of EagleRock Capital.

Hi, guys. Hi, Randy. Most of the questions were answered. Are you guys planning on going out and visiting with shareholders any time soon?

Yes, I mean, we make trips as we can here. And the answer is yes, we'll be on, we'll be on the streets seeing people over time here.

I mean, it sounds like you're fairly upbeat about the quarter. We had a conference call last time, and it was a relatively upbeat tone to it. And the numbers here are disappointing. I guess, unlike the earlier caller, I'm kind of surprised that the stock actually is trading as high as it is, given the performance. What is the - what's the - some of your large shareholders have been selling out. What's the board's attitude here with respect to the execution of the integration of the merger and otherwise?

Well, I mean, Nader, I think the numbers are, to me, obviously speak for themselves. And it's been a - we've -the good news for us is we've built a model here and put together a balance sheet and a capital structure that could survive the price challenges that have been dealt to this business.

If you look back, I mean, yellow grease year-over-year is down 14%. Meat and bone meal between the Midwest and the West Coast is off 20% year-over-year, quarter-over-quarter. And it's even more dramatic if you look at it from the first quarter. We've endured price declines from the first quarter to the second quarter to the third quarter other than a little bit of bump-up in tallow here, which we said we didn't make. And to have this business produce the cash that it did is very encouraging to me.

And as we go forward, looking to fourth quarter, we have finished out October now with tallow prices averaging north of $17.5, grease prices up almost $0.02 over third quarter and meat and bone meal actually declined again in October to around $125 on average. But we've seen it come back now with the increase in corn prices.

So in our world, it is something where the model's intact. It survived the cyclicality of a commodity business. It got tested pretty sharply here. And I think that's overall to us is something that's both known and, frankly, is encouraging, given where commodities are looking forward.

So tonnage is solid. Energy prices both have declined somewhat. There's programs there to help the business with energy now in the form of subsidies. And overall the commodity outlook looks much stronger than we've seen. So I...

Yes, I don't want to be, I don't want to be overly critical, but there's other ways to play the commodity. I think part of the disappoint here is management execution about - against the environment and against what, in some cases, are predictable price movements and other cases perhaps are surprises and also execution in the integration of the merger, and the efficiencies that could be extracted just aren't happening.

So we can all go play commodities in much, much different ways and many levered ways than with Darling is getting us. And so, it's kind of very surprising to see the lack of execution here and what should be a good story. I guess I'm just surprised. The question I would have is what is the board's attitude and what's the board doing about this right now, to the extent you can say.

The board's attitude is the performance is predictable. The performance was expected. And the commodities have cycled. And the business is well-positioned for the future.

Do you guys have guidance out there? Are you willing to put guidance out right now?

No, just in the form of repeating where October prices have been. I mean, your model should be able to help you understand the business.

Right. And we should assume sort of steady state on the expense side of the business? Because I noticed there don't seem to be much improvement on the SG&A side or the input side of the business, just based on my quick look at the Q right now. We should assume steady state on the expense side of the business?

As far as the SG&A in comparing third quarter this year, last year SG&A we brought in a credit. Our normal SG&A for the company runs around $9.2 million to $9.3 million all of last year. And our SG&A was $8 million last year because we took a credit in the third quarter against accruals for that period. And so, our normal is around $9 million bringing in the National $2.4 million increase.

And when you factor in the higher legal expenses that we've gone through to achieve getting the verdict, the affirmative verdict on the Newark [co-gin] and being able to move forward on that -- so we will be addressing the SG&A as we go forward. But in comparing it, the costs have been fairly flat over the last few years. And we hope we do see some opportunity in the SG&A as we go forward and combining the two operations.

Let me just finish by saying we own about 9% of the company, and we're pretty disappointed with the performance. And, I mean, if this simply turns into a play on commodity prices, then I don't think we're going to have much patience for it. Thank you.

Thank you. Our next question is coming from Patrick [Robeson] of [R.R. Sales].

Good morning, gentlemen. I just had a question as a stockholder. Do you anticipate any dividend program in the future Darling will provide for the stockholders?

The answer there is that the credit agreement allows it, and it is something that we will evaluate at year end here. And as the business cycles here and we start to generate cash, it's something that the board looks at each and every time it meets. And so, I guess it is obviously something we hold the flexibility to do and will continue to evaluate it and look both back at our performance and what we expect it to be in the future and make a call from there both at the end of the year and towards the first quarter here.

Okay, thanks a lot, gentlemen. Have a good day.

You bet you.

Thank you. Our next question comes from George Grose of American Capital.

Yes, good morning there, Randy. It's [John]. I guess, like with respect to the National By-Products integration, like you outlined some of your milestones there. But like where do you - like, where would you say you are with respect to like the full integration? What's the timeframe on that?

Well, operationally, George, I think we're very close to complete here. And we continue to move around best practices and get those involved into all the different plants. That takes time.

The easy stuff of redirecting tonnage, of moving accounts and trying to lower the freight bills of moving it around - that's completed. The best practices transfer is an ongoing exercise that probably still has three to six months underneath it as the team goes forward.

Administratively, you're taking a private company, integrating it into a public company here. And John Muse has worked diligently to put accounting systems and educate and train and to get, to get the businesses running properly and together. That piece is very well underway.

The next piece for us that potentially has the savings attached to it is the installation of the new computer system. And that is on target to be installed throughout 2007. And once that's in place, then you've got different kinds of integration opportunities that allow for different configurations of both people and offices. And we'll just work through that in 2007.

Okay. So I guess I'd like - I know initially, I think, in your filings surrounding the acquisition, I mean, you had talked about the savings of, I think, $1 million to $3 million. Now that you're, I guess - it seems like you're pretty far along in the process, I mean, what kind of synergy figures, I mean, do you think like you could be looking at here?

I think that, I think that's a really solid analysis of it. I mean, as we said earlier, we hope to exceed that. And I think we're well on target to delivering that.

Well, I guess well exceed - I mean, or exceed that. I mean, are we talking like five to 10 here? Or...

George, I'm not going to make a guess on that.

Okay. Okay. Okay. And then, I guess, talking about like the restaurant services business here, I mean, how much of the growth here -maybe if you can maybe quantify that. How much was attributable to the, to the national services center?

We don't break that out, George. I mean, we have been successful in landing several large accounts that we've talked about in the past. I believe the service center today handles approximately 83,000 services annually, I think, is the number that we're starting to use. But as far as breaking it out on profitability and contribution, we don't do that at this time.

Well, I guess, like you have seen like growth on - like with the, with the national services office there.

Absolutely. We've seen it as a very solid offering to the food service establishment base. It's one that's gaining momentum. And it's very difficult to compete with for other people on the street today as we do the consolidated bundling of both grease collection, grease trap maintenance and our equipment sales and then do a central management piece for the large chain restaurants and stores out there. It's gaining momentum. And it's a little over a year old. And we're very pleased with how it's progressing.

Did you, did you land any accounts this quarter, I mean, major accounts?

There were several landed, but none that we'll release in order to protect confidentiality on them.

And do you, do you, do you, I guess, foresee a time in the future where you might be able to release some of the, of these names?

Yes, I think so, in the future as it becomes more prevalent and more - being the only public company in this sector is a very difficult one as we don't really care to educate who we're growing with and why we're growing with. While it'd be beneficial to you, we're at the same time trying to protect it from the wolves out there, if you will.

Okay. I guess last question maybe on the, on the acquisition front. I mean, now that you're kind of there with National By-Products, I mean, can you - do you see yourself maybe doing some maybe [tuck] acquisitions here and there?

It's still very much on the radar screen. The credit facility was developed with enough flexibility and room in it for us to be able to do that. And so, I mean, we're always looking. And we're going to continue to try to grow the restaurant services segment. As Dan Mans and everybody has pointed out, obviously we're very deep into the evaluation of the renewable fuels segment as a potential use of our cash. So the answer is yes to all the above.

Okay. And I guess maybe a sub question here. I mean, how much do you have left, and how much do you have available on your credit facility for these types of initiatives?

We've got as of the end of the third quarter, $66.1 million available under the revolver.

Okay. Okay, thank you.

Thank you. At this time, I would like to turn the floor back over to management for any closing remarks.

Well, we appreciate everybody's questions today. And we look forward to coming back and reporting on fourth quarter here for you. And thanks for listening today.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.