Darling Ingredients Inc (DAR) 2006 Q4 法說會逐字稿

Good morning, and welcome to the Darling International Conference Call, to discuss the company's fiscal fourth quarter and full year 2006 financial results. With us today are Randall Stuewe, Chairman and Chief Executive Officer of Darling International, and John Muse, Executive Vice President, Administrator and Finance.

[OPERATOR INSTRUCTIONS]

This call is being recorded, and 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 call over to Brad Phillips, Treasurer of Darling International. Please go ahead, sir.

Thank you, Sierra. Good morning, ladies and gentlemen. Thank you for joining us to review Darling's fourth quarter and full fiscal 2006 earnings results. Randy Stuewe, our Chairman and Chief Executive Officer, will begin today's call with an overview of our fourth quarter and full year financial performance, and some of the trends that impacted our results.

John Muse, Executive Vice President, 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 may have.

Before we begin, I need to remind everyone that this conference call will contain certain forward-looking statements regarding the business operations of Darling and the industry in which it operates. These statements are identified by words such as may, will, begin, look forward, expect, believe, intend, anticipate, should, estimate, continue, and other words referring to events to occur 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 risk and uncertainties beyond its control, including business and economic conditions in its existing markets that could cause actual results to differ materially from those projected in such forward-looking statements.

Other risk 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 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, and thanks for joining us today. Let me start out by saying that we are pleased with our results for the fourth quarter of 2006. The fourth quarter was one of our largest EBITDA quarters ever, and we reported earnings per share of 7% on a -- $0.07 on a fully diluted basis. As noted in our press release, our fourth quarter results reflected higher finished product prices, lower energy costs and improved raw material tonnage.

Collectively, these factors created a favorable operating environment during the quarter. Also during the quarter, Darling began to realize the benefits from the integration of National By-Products. I will talk more about this in detail later in the call. For the first three quarters of 2006, we faced historically low and declining finished product prices, significantly higher energy costs, and moderately lower raw material volumes. By October, the tide was changing and we started to see some momentum beginning to build.

During the fourth quarter we experienced a sharp price increase to our finished products, driven predominantly be a global anticipation of renewable fuels demands on both feed grains and oils. Our finished product prices rallied, and we saw tallow prices climb from $0.175 to $0.215. Yellow grease moved from $0.13 to $0.18, and our protein values jumped from $125 a ton to $185 per ton.

Our raw material volumes improved modestly year-over-year, and improved during the quarter. For the most part, demand remains strong for all consumer proteins, and we saw the benefits of improved finished meat economics, and the return of some export markets for these products.

In the Midwest, we saw the onslaught of Circovirus, which affects the [Hopkin Fineman] operations. This has provided some improved dead stock tonnage for some of our plants in the Midwest. On the West Coast, our tonnage remained strong during the quarter, driven predominantly by strong consumer demand for finished meat products.

Energy costs continued near historical highs for most of 2006 for both natural gas and diesel fuel, and as you know, these are significant inputs for Darling. We've employed several strategies to combat these sustained increases in operating expenses.

First, we have added energy surcharges to nearly all of our route customers. Second, we have increased our collection fees and charges where appropriate. And third, we are mitigating some of the increase in natural gas expense by burning alternative biofuels in our plant boilers when environmentally feasible to do so.

Last quarter, we informed you of a positive development on the energy front, and I'd like to take a brief moment to provide you with an update. On October 1 of 2006, the IRS approved the alternative fuel mixture credit. This credit is set to expire at the end of September in 2009. This is a tax rebate from the IRS in the form of $0.50 per gallon, or roughly $0.068 per pound, to users that substitute an improved biofuel for a natural gas. In our case, we are using either yellow grease or animal fats.

During the fourth quarter, we had the opportunity to burn animal fats at several plants, and we began to apply and receive our rebate checks. To date, we have applied for nearly 500,000 in rebates. You should note though, that until specific guidance from the IRS has developed, we will reserve all these credits on our balance sheets and will not recognize these credits as income until proper guidance is published by the IRS.

While we are on the subject of biofuel, we continue to explore various alternative in regards to use of our end products in biofuel or renewable energies. To date we have evaluated three potential options. The first is fatty acid methyl esters, or more commonly known as bio-diesel.

Darling's feedstock is a unique blend of animal fats, and requires us to develop a special pretreatment in order to sufficiently adhere to both ASDM and European standard requirements for bio-diesel. We have completed the evaluation of potential technologies available to process our feedstock, and have narrowed down the technology providers who possess the capability to handle our feedstock.

The second option is synthetic fuels, or the use of petroleum refining technology to process animal fats into high quality fuel enhancers. This is commonly referred to as hydrocracking. From a capital standpoint, this option is more expensive than conventional processing, but clearly the quality of products and the potential markets this product would serve are superior. This is both a fascinating and a feasible alternative.

The third option we have been evaluating is green electric generation. With the increasing mandates of 20% of our electricity to come from green or renewable sources by 2020, momentum is building in the US for alternative supplies of electricity from renewable sources. We will continue to update you on our progress and will communicate our future strategy with regards to renewable energies as we finalize our details.

Before I turn the call over to John, I'd like to provide a little more detail on where we are in the fourth quarter and how we made significant progress on completing the integration of NBP, and to show some of the successes we have from the combination.

Our first goal was to refine -- was to realign the raw material tonnage to the closest and most economical location. For this realignment of raw material tonnage we have been able to reduce our transportation cost, decrease our labor force, lower our plant administrative expenses, and improve our plant throughputs.

From a marketing perspective, we have created one voice to the market on our commodity sales, and this marketing approach is beginning to significantly pay off. Our animal feed is now being standardized and sold for an improved value. Our farm, or feed fat business, has been able to grow, and adopt the branded [quol] fat model. While we have seen an improved selling price, we have also been able to sublet nearly 70 railcars out of our fleet.

While most of our administrative functions were integrated on day one, there is still work to be done. We are currently in the process of consolidating our retirement programs and installing a common financial operating system at both Darling and national locations. We expect this to progress and continue throughout 2007. Overall, we anticipate integration improvements will deliver approximately $5 million in annual benefits.

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 Q&A. John?

Thanks, Randy, and good morning to everyone. Improved finished product prices and lower energy prices in the fourth quarter of 2006 contributed to an increased net income of $6.1 million, or $0.07 per share as compared to net income of $2.1 million, or $0.03 per share for the 2005 comparable period.

The company also reported net sales of $128.1 million for the quarter ended December 30th 2006 as compared to $76.9 million for the fourth quarter of 2005. The majority of the $51.2 million increase in sales is attributable to the acquisition of NBP. Operating income for the fourth quarter 2006 was $11.4 million, as compared to $3.7 million for the fourth quarter of 2005.

At the segment level, rendering generated net sales of $90.5 million for the fourth quarter, as compared to $45.8 million in the fourth quarter of 2005. The restaurant services area generated net sales of $37.6 million as compared to $31.1 million in the fourth quarter of 2005. Now turning to the fiscal year ended December 30th 2006, Darling reported net income of $5.1 million, or $0.07 per share, as compared to net income of $7.7 million or $0.12 per share for the 2005 comparable period.

The $2.6 million decrease in net income for the 2006 year resulted primarily from these areas. $4.5 million in charges relates to prepayment fees and write-off of deferred loan cost, in connection with the termination of Darling's previous subordinated debt and revolving credit facility. Lower prices for finished products and higher legal expenses.

We also reported an increase in net sales of $98.1 million to $407 million for the 2006 year, as compared to $308.9 million for fiscal 2005. The increase in sales, which is partially offset by lower prices of finished products, is attributable to the acquisition of National By-Products

Interest expense was $7.2 million during the -- 2006, compared to $6.2 million during 2005. An increase of $1 million or 16.7%. The increase in interest expense is primarily due to the overall increase in debt as a result of the National transaction. Other expense was -- $4.7 million in 2006, a $5.6 million increase in expense from other income of $0.9 million in 2005. The increase in other expense is primarily due to the write-off of the deferred loan cost and subordinated debt prepayment fees.

At the segment level, rendering generated net sales of $279 million, as compared to $192 million in 2005, an increase of $86.7 million. Restaurant services generated net sales of $127.9 million for 2006, as compared to $116.5 million for 2005. An increase in sales of $11.4 million.

As for the balance sheet, as of December 30th 2006, Darling's cash and cash equivalents totaled $5.3 million, versus $36 million at the end of 2005. On December 30th 2006, the company had working capital of $17.9 million, as compared to working capital of $40.4 million on December 31, 2005. During the fourth quarter the company reduced this long term debt by $10.8 million.

Capital expenditures of $11.8 million were made during 2006, as compared to $21.4 million in 2005, a decrease of $9.6 million. The 2006 decrease is due primarily to less expenditure on two major products at the Fresno, California, and Wahoo, Nebraska facilities that were identified over normal maintenance and compliance capital expenditures in 2005.

Capital expenditures related to compliance with environmental regulations were $0.8 million in '06 compared to $1.9 million in '05. As Randy mentioned earlier, we have begun to realize benefits, both strategic and financial, through our combination with National By-Products. We believe this transaction represents an excellent investment in our excess cash, and it will optimize our capital structure by enhancing our asset and debt mix.

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

Thanks, John. Before we open the call for questions, I'd like to close with a few comments. 2006 was extremely challenging, but I am pleased with our many accomplishments throughout the year, and the significant momentum we carry into 2007. We completed the single largest acquisition in the history of the company. Through the successful integration of their operations we are beginning to feel the benefits, and look forward to continuing to deliver value through this combination.

Next, we continued our financial stewardship to pay down debt. We are proud to boast a strong balance sheet that better positions us to grow or invest in new businesses. And finally, we are led by a strong management team that is committed to improving profitability, growing our earnings stream, and positioning our business to continue to deliver superior shareholder value.

That concludes my prepared remarks. We'd like to now open it up to questions. John and I are available to take questions now. Sierra?

[OPERATOR INSTRUCTIONS]

Your first question is coming from Tyson Bauer, from Wealth Monitors.

Good morning, gentlemen, and an excellent quarter and great anticipation for your results in Q1 with the commodity prices as they are. A couple of quick questions. In regards to the subsidy and the IRS, using as a credit as you accumulate that in the balance sheet, what are the time tables, when you expect to get a decision on how you can run that through to the income statement? And does the subsidy formula today, given the price levels, dictate that it is more plausible to burn natural gas instead of your own byproducts?

Yes, Tyson, it's John. The IRS guidance that is out there today is more suited for tucking operations than for the use in a boiler, even though the understanding of the subsidy is for it to be burned in both trucks and for use in a boiler. The IRS guidance is not clear as to the mixture and so forth, so we're going to hold back on bringing that in until we get guidance.

We're hoping to have guidance by mid-year, and at that time, we would bring that back in. We have submitted to the IRS a clarification language to the alternative tax credit so that we can bring that back in.

Your second part of your question, in today's environment with where fat prices and where natural gas prices are, if you look at burning fat today and even giving the credit to the alternative tax credit, it is -- it works out to be almost exactly where natural gas is today. So what you're saying is correct. Going forward, at least today and looking at April's prices in the gas market, you could burn natural gas straight out without getting the fuel credit and be ahead.

Okay. Jump to a couple of other quick topics here. NBP and the cost savings, you outlined in your K what you expect in the integration savings. How -- as a percentage, how much of that have you recouped -- or couped basically going forward? And when do you think you'll get the remaining portion in '07, be at that full 5 million in annual savings going forward?

I think -- fair question, Tyson, and I think -- we're still building momentum, but we believe that the 5 million is a sustainable run rate of the synergies that are now in our current run rate. Hopefully as we continue to look under the stones, we'll find more, but we've -- if you will, found the low hanging fruit and put the companies together, and the identified synergies are what we've discussed here.

And Randy, MBM also made a nice move, which may seemingly be counterintuitive if you read the press, but the whole DDGs coming on board with soy oil becoming the main driver as opposed to soy bean meal. What have you seen, or what can you offer as an explanation that has really been driving the MBM prices as of the last month - two months?

It really is fascinating, Tyson, to watch what's happened in the protein segment, because if we would have had this call three months ago or even six months ago, I think at the same time we were talking about it being an oil driven market for the production of biofuels, with protein going to be lagging.

There's two things going on. Obviously proteins are competing with the higher corn values to sustain a place in the feed ration. DDG have moved up as you know. They continue to -- they're starting to produce a more standardized product out there. And probably the most significant piece out there, while I don't have perfect statistics on it, is that there appears to be a worldwide shortage of fish meal, and we've seen fish meal prices move up and escalate somewhere up $500 a ton.

And so there's new demand for soy bean meal and other proteins in the world to produce the -- or to replace the shortage of fish meal, and we happen to be caught up in that momentum. So it's kind of a perfect storm, if you will, in the face of higher corn and better fish meal prices.

Okay, and last one for me and I'll get back in queue is, you gave us alternatives for end markets with bio-diesel, with hydrocracking, some of the others that you mentioned. I would assume you're still of the mindset of being a direct participant in one of those markets that you choose.

Two, you've been reviewing this now for a considerable timetable. Give us kind of that checklist that you're going through at the board level, so the investors have a better sense of when you should be ready, or what you need to see to finally pull the trigger on one of those options.

Well, I think what we wanted to do to the -- to our shareholders, and inform our shareholders here, was to let them know that there was more than a mono-strategy being studied and analyzed within Darling today. And while bio-diesel on the surface is getting a lot of press.

And we truly view it as an opportunity for Darling to potentially invest in, we also have studied, and are continue to study the other two alternatives, synthetic fuel and electric generation, or in our case, the benefits of cogeneration at the plant level by putting a turbine on site that is powered by animal fats.

And so what we're doing as a board is trying to lay out what fits across the country with our footprint from coast to coast and a heavy concentration in the Midwest, and yet some metropolitan plants. What I'm trying to tell you is that there isn't one strategy that fits all. And so, what we're trying to do here over the next quarter or so is to figure out which one of these we want to continue to invest in, and where we'll be placing our bet if -- I hope that answers it.

Okay. So by the summer you think you'll have a decision?

I would hope that we can give more guidance by then.

All right. Thanks a lot, gentlemen.

Thank you. Your next question is coming from Dan Mannes, from Avondale Partners.

Hey guys. First of all, thanks for giving us some incremental information, both on the synergy front, as well as talking a little bit more about some of the alternative fuels. I certainly appreciate that. And I'll also, thank Tyson for taking most of my questions. But I do want to follow up on a couple of those issues.

First, as we look at Q4 on the commodity price side, clearly we saw an uptick in pricing and we know that happened mid to late in the quarter. I guess one thing that surprised me is you put up what looked to be a really nice rebound quarter with only a modest impact from commodity pricing.

Can you talk at all about maybe -- without going into to much detail on the commodity leverage, and what the timing impact is on some of those prices hitting -- sort of hitting your bottom line?

Yes, Dan, this is Randy. I mean -- I think you've read through the tea leaves. I mean if you look at tallow, starting at 17 -- a little over $0.175 in October and finishing off in $0.215 in December to a big move in meat and bone meal, and then a pretty good move in yellow grease. I mean, I think what you find in this business is that, as we all know, the three products we make aren't hedgeable.

There really aren't futures markets for them, so they're sold into the cash commodity markets, which -- the liquidity in those are somewhere between three weeks and six weeks out. And so for the most part, you're continuing to move some of your production. So in up markets there is what always seem to be a pretty significant lag as you pick up momentum in a price movement or a price uptick.

Conversely, it works the other way also. So as we come out, the tonnage was pretty solid for us in fourth quarter. It wasn't at all plants, it was from plant to plant it was better. And we saw the movement going into first quarter here, that is -- if we look at first quarter prices now, we're holding $0.215 tallow. Protein has moved on up to around the 210, 215 mark, and yellow grease is sustaining around $0.19, maybe a little more here and there.

And so, it's a very strong market that we've moved into. The marketplace seems to be wanting to anticipate what the acreage is going to be for corn and soy beans that will be released on March 30th. And so, it looks like we got a -- we got some pretty good momentum going forward here.

Also in fourth quarter, which I think you pointed out, was we started to build a momentum of the synergies coming home of the how we're going to market, we're selling our products, how are plants are processing. The team really came together, and it's always hard to quantify exactly where those dollars come from. They are truly there, and we're starting to feel the benefits.

Okay. That's actually a good lean in to my next question, which is really on the volume side, is -- we saw pretty much across the year you've been picking up some volume. I mean part of that is clearly the industry, we're seeing increasing slaughter rates over prior year. But can you comment on how much of that is -- is it the industry on a whole, versus how much, if any, is coming really at the expense of your competitors, and maybe through some of the benefits you've gotten from the consolidation?

And number two, I guess, the further question is, with the strong finished goods market we're having, are you seeing more competition in terms of raw materials because of the fact that margins - that finished products are so strong?

Well, I think first of all let's make sure we break the business down into the rendering and the restaurant services segment. The rendering side had a very strong fourth quarter. We talked about some -- there is a virus issue in Iowa that's affecting the Hopkin Fineman [lot]. We had some pretty good tonnage there.

We had some early season snowstorms. We had a massive snowstorm out in the Colorado, Kansas panhandle area that provided substantial tonnage here fourth quarter and into first quarter here, with a significant amount. Our dead stock business has been extremely strong during the winter months here for us.

The restaurant services segment continues to plod along. It's doing quite well. We continue to grow our customer base. The competition out there is in the biofuels area for production of bio-diesel. I wouldn't say there's a significant influx of competition there, but there are a lot of smaller startups that want to go out and experiment. We're trying to drive around from restaurant to restaurant and collect the tonnage.

We do view it as a threat, but to date, we would give the example that we may lose 100 restaurants in a large metropolitan city in the course of a quarter, but we'll pick them up the next quarter from a standpoint that these folks that are trying to do this haven't realized or recognized the significant capital, time and effort it takes to run a waste management business.

Okay. The last question, I guess, there wouldn't be any [other] questions but one about the biofuel opportunity. I certainly appreciate the fact that you're looking at the widest possible number of opportunities. Clearly, I've spent most of my time on the bio-diesel opportunity.

Can you talk for a second on the hydrocracking front though? This is a little bit new. I'm wondering is this more -- when you say hydrocracking, is this more similar to the process that some of the Europeans are doing? People like [NESTA], or with the hydrogenation of the oil to get it -- sort of a more -- a higher quality product though admittedly a much more expensive process?

Yes, I think that's a pretty good handle on it. What I would comment to you is classic bio-diesel production for Darling is one that we spent a significant amount of time and capital studying, because we have to be able to handle the wide variety of feedstock quality that we produce from wintertime to summertime, from chicken fat to tallow to pork fats to different mixed meat blends.

It takes in order to make and to gain the subsidy from the government, you have to be able to produce ASTM quality. Our goal has been to produce a higher quality product to meet the European standards, which we think the ASTM will eventually move to. And the challenges underneath our products are our sulfur and phosphorus, which require a different level of refining, both on the front end and the back end to ensure that you make that product.

Those are processes that are commercially out there, but ones that have not ever been bolted up together in a like combination in order to achieve that quality. So we had to do a substantial amount of testing to ensure that. While we were studying that, we have studied the NESTA. There's a couple other processes out there.

I believe the Brazilians are running a process by Petrobras that injects animal fats into or post the hydrocracking [secture] to split it into paraffins, as you have discussed. It is more expensive from a capital standpoint. Apparently from an operating standpoint it has similar operating costs with potentially better yields, and a substantially enhanced product.It's really not a methyl ester when it's done. It's truly an enhancer. That product -- that is being studied for us also.

What -- the third piece that -- and not to be a broken record, that we've studied, is probably the lowest one on the totem pole in the sense of technology, in the sense of using what -- like we're doing in our boilers today, but using the animal fats or yellow grease in an electric generation system to produce both electricity, and then take the bleed steam back into our rendering plants to produce - well to produce steam for cooking the product.

So those are the three that we're evaluating, and what we're trying to come up with is the right mix of both the risk and the locations, both of quantity and -- that we have available of feedstock to support these.

The last question I'll leave you with, and then I'll hop back in the queue as well. When you look at [this] and also given the fact you spent some time paying down debt, you're building a very strong balance sheet. You're generating what looks to be a significant amount of cash over the year.

How do you think about the risk reward there in terms of putting capital in or -- and I know this is a little bit early, but broadly speaking, can you talk about how you would fund such an operation?

Well I think first of all, in -- I think for the series of shareholders that have followed us over the last several years, the -- we've had a very conservative approach to balance sheet management. We know from history that too much leverage in this business is very dangerous given the commodity cyclicality that you can endure.

So as we said early on, our first goal in life was to get National By-Products as part of our team and get the cultures put together, get the machine turned on here and get the printing presses moving and paying down debt. I think that our performance indicates that we're pretty well intact there.

The pricing that you're seeing out here for first quarter, if it continues to hold, the -- I mean there's no doubt that this will continue to provide a substantial cash flow off of its existing operations.

With that then whether we use a combination of debt, equity, and cash, or select another operating partner to join us and share the risk, none of those decisions have been made today, and they're probably going to be different, whether you are going to do it as a fatty acid methyl ester plant or a straight bio-diesel plant or whether you get a synfuel plant, or if you decided to do your own cogeneration.

I would see each investment decision having to stand on its own, and potentially one could be internal funded and one could be split up as a potential venture of some type.

Understood. Thanks so much, guys.

Thanks, Dan.

Thank you. Your next question is coming from [Michael Lau], from Morgan Stanley.

Hi guys, this is [Steve Lenner]. Can you just give us a sense of what percentage of your product you would contemplate creating -- call it alternative distribution channels for?

I'm not sure I understand your question. What's an alternative -

Well, I mean I view bio-diesel or hydrocracking or electric generation as just being another channel to -- in which to send your product, as opposed to selling it into a spot market. Do you have sort of a target mix between captive consumption and spot market sales?

I don't know that there's a perfect formula for that. I think if you went to our website and looked at our -- the plant location maps, and you could get out and draw some circles there, you would see that we had a significant concentration of volume in the Midwest that predominantly goes to animal feed and to the oleochemical business today, and then we have an East Coast West Coast presence, which would support another business, and then we kind of have a mid-South Midwest -- lower Midwest business that could operate on its own also.

So when we chart it out geographically, there's potentially some combination of those four regional businesses that could develop into a renewable fuels, or a renewable fuels/continuing branded feed business for us.

In assuming a second quarter or mid-year decision on this, would you envision rolling out some pilot facilities followed by a broader investment? Or, how are you thinking about timing things?

That hasn't been decided by any means. I mean, we view collectively at the board the renewable fuel sector as an opportunity for Darling to participate in. How we do that? I guess I'm not willing to step out, and tell you how we're going to stage that today and where it's going to be.

Are your investments -- can you characterize them all as being brownfield, or would you need to acquire additional sites and acreage to do what you're contemplating?

No, I think -- at least what's contemplated today, given the 40 something locations we operate on, a lot of them have significant acreage around them for good reason, that may or may not -- could house one of these facilities.

Each one of the businesses I talked about has a completely different footprint and would require a different amount of acreage. So, it would just depend on where we decide to do what business.

Okay. On the -- what's your outlook for volumes for the year?

Volume's something that we don't even dare try to predict here. I mean the only thing that we look back is historically, if you look back over the years, the fourth quarter volume was fairly strong for its [inaudible] are improving, and hopefully export markets stay open or continue to open up further and we can continue to enjoy the volumes we enjoyed going forward.

Okay. Well congratulations on a great '06, and looking forward to better things in '07.

Thank you.

Thank you. Your next question is coming from Jeff Feinberg from JLF Asset Management.

Thank you very much. Congratulations on the great results. The question I had was just to try to understand the lagged impact that you discussed in your prepared remarks. To keep it simple, just assuming current volumes and assuming the current spot market prices, can you give us a sense what that would mean for your bottom line if the current spot market prices were to hold?

Jeff, this is John. In Randy's discussions he pointed out that there is reduced [sell] forward from three to six weeks in certain markets, because we're in export markets for fat and so forth, the markets have gone up. You also have to remember that we as a company have increased our amount of formula business that we have to protect us during downturns of market.

So as the commodity price goes up, and has gone up, remember that on approximately half of our business that we've got, there will not be a significant impact on the company as it does to price. Consequently, obviously, when the prices are lower, it has no impact as well. So we have taken out some of the upside to protect us for the downside. So you have to factor that in. About -- like I say, about 50%.

Okay. That being the case understood, I was familiar with that and I think it's wonderful to reward people with the stability on the downside, but if the stock market prices hold and we factor in, let's just call it the [half] hedge, what would that mean in terms of profitability for the corporation overall, just to understand that element?

Yes, this is Randy. There's too many moving parts there to remotely try to put a figure to that, and that's just not something we have traditionally done. Like we said, you're calling it the half hedge, we enjoy 50% of it on formula and 50% floats, and we'll just wait and see.

Okay. I mean, I think it's fair -- just so people can understand the element that as the comments -- I think you indicated that throughout the last six months the prices have continued to move up, so the results that you posted here with regard to the December time period don't fully reflect the benefits. The benefits have not flown through. Is that a fair way to understand the dynamic?

I think that's a fair assessment of it.

Okay. Okay, thank you very much.

Thanks, Jeff.

Thank you. Your next question is coming from Michael Chapman, from [Inarasi].

Yes. Nice quarter, gentlemen. A follow up question with regard to the last question, the 50% ratio where you do sell forward. Has that changed sequentially by any significant amount?

No, Michael. This is Randy again. The -- don't confuse -- there's a couple things here. The -- we have, over the course of the last four years, tried to move more and more of our business to formula oriented agreements, and that would be with the largest customer, whereby we actually share the upside and share the downside with them.

It's traditionally -- and as we've updated our end of year statistics here, we hang around that 50% mark, plus or minus a few percent from region to region on where that is. More of it is in the rendering segment on formula, than on the restaurant services segment.

On the comment of the price movement, the -- we sell forward to a degree because we have to, because the plants never seem to shut down, and so traditionally what you end up doing is ending up with a forward sales position at most plants of anywhere from three weeks to six weeks.

The plants that are on the coast [and] more export oriented, could be even a little longer than that, as you end up having to make export sales, because of limited storage, possible at times when -- aren't as beneficial as you'd like them to be. But overall we look at the business, and we measure our risk management position in weeks sold forward, and on average we're somewhere between that three to six.

So roughly about half the quarter -- of the fourth quarter, you were forward sold. So nominally you've got momentum from that moving into first quarter. Collectively, as I always caution people, it always seems like you lag on the way up, but for some reason you never feel that same lag on the way down, as most commodity markets work that way.

It's my recollection that the pricing changed for most of your commodities on the rendering side mid-quarter in Q4, and the ratio where you're forward sold has remained roughly constant at around 50%. So could we extrapolate that basic trend to determine your margins here in the March quarter?

We don't utilize --

This is, John. We can't give any guidance as to what the markets are going to do or what our earnings are going to do for the first quarter. I think, as you're saying, if you look at the December prices and going into that period, we would be going into the quarter with a much higher based forward sales on than what we came into the fourth quarter, and that's about all we can -- tell you.

There's just too many variables that also impact it. Natural gas and so forth has an impact on that, as does diesel fuel. There are many other factors. Any change in volume of [keels] out in the marketplace. All of those are factors that can impact what will happen during the quarter.

And I wanted to shift gears back over to the biofuels marketplace. I've been a shareholder now for roughly six months, and I'm wondering how far back the analysis began on various of the biofuel options. How long have the analytical studies been going on here, and when would you anticipate first capital expenditures -- equipment or land, etcetera, for this opportunity?

Well Michael, I think we've been very open. It's something that we've been studying for -- coming up on a year and a half, two years. It's one that we characterized that using our feedstock to do these processes is not something that's commonly been done anywhere in the world.

Darling has a significant position in mixed meat feedstocks throughout the United States with varying qualities, and it is something we're -- we had to go to both existing and developmental companies and work with them to convince ourselves that this feedstock could be turned into a saleable ASTM quality product.

We're comfortable that we're there. Now, collectively said, why -- in verbage to you was why has it taken so long? That is -- it's purely from our decision point is we wanted to make sure that we had the National By-Products acquisition well digested and make sure that the balance sheet was back under control within this company.

Now I understand from different perspectives out there that there's different degrees of risk and leverage that our shareholders would like us to take, and we do listen to that. The reality is, we wanted to make sure we wanted to get debt down, and then get our cash position coming back to the point of where we have enough availability that when we decide and where we decide to enter the business here, that we're ready to go.

And so therefore, your hesitation doesn't really relate to ROE analysis or [floors on] ROEs you expect?

No, I -- from a standpoint of margin analysis, the margin for bio-diesel out of animal fats today, I mean it is ranging from $0.50 to $0.70 a gallon. It truly does look like a pretty substantial opportunity. So the ROE analysis is not something that has held us up. It has been a technology comfort and a balance sheet management in making sure that we stick to our knitting first and get one puck in the net before we move on to the next one.

Thank you.

Thank you. Your next question is coming from [Keith Kudos] from [Brandpoint Capital].

Yes, hi. Thanks for the color on the synergies related to NBP. I had a question on that. It seems like most of the items you break out are on the up running expense related, but in the K it looks as if the cost of goods sold related to NBP is a couple hundred of basis points -- 500 basis points or so higher than what you guys have traditionally been at. And I was just curious if there -- what was the reason for that?

And if there's any opportunity there on purchasing, or if they had any contracts that were kind of a higher price point than what you guys are normally at, if there's any opportunity there?

In the cost of sales area, as far as expenses, the cost within National, if you go back and look at the S-1 and their cost structure and our cost structure were very similar, the -- you've got -- we're rolling in the SG&A portion into it, which as you can see is running in the nine to ten range on an annualized basis on the operations side.

What we're looking at is, as Randy indicated, is from the collection side, and working with that to reduce our collection expense, which is the -- one of the -- is the largest aspect of our cost of sales within the P&L. But there is -- there's not a significant different in the two operations as far as cost is concerned.

There would be a little bit of a difference, but National is more of a rendering in the relationship, we're two-thirds -- one-third really rendering, versus restaurant services, where National is a much higher percentage rendering, and that could distort a little bit of the relationship that you're looking at.

Okay. I appreciate that. And is there any --- how do we think about seasonality in your business for someone that's fairly new to the story on a quarterly basis. Does that play a factor here?

Yes. There is a small seasonality swing, and first we've got to kind of break both businesses -- rendering, restaurant services out. And let's go with the restaurant services, because it's a little easier to understand.

When the ballpark's open, people seem to -- and springtime's around, people seem to eat out a little more, so you consume a little more fried food if you will. Late Winter or post New Year's you're on that diet, and then it seems to continue to pick up until around Thanksgiving time, where it -- then most meals are eaten at home there between the holiday period. So there is some seasonality there.

On the rendering side, you do see a little bit of seasonality from a standpoint of -- if you have a hard winter, you have a significant dead stock piece, and if you have a very hot summer, you also have a significant debt stop piece.

So you can see some pretty good blips in the first quarter and then again in the third quarter as far as dead stock tonnage. For as -- overall the gross restore and packer tonnage, you see the gross restore volume pick up as barbecue season picks up, and that would also be seen for the packer tonnage as we grow out more in the spring.

Okay. And just lastly on the raw material volumes, your comments there. I mean everything we see and read is -- talks about smaller herd sizes and higher beef prices. Why -- it seems like your volumes have started to -- have stabilized and started to tick up, so how can we reconcile that?

I'm not sure that we -- I think, first of all, you've seen the anticipatory discussion on higher feed costs, but the economics for animals today are still positive and we're seeing the benefits of that. I don't want to lead you to believe that there's -- that we're going to fall off a cliff here.

The -- one of the clearly misunderstood pieces of animal economics with corn at over $4 is, there's all kinds of ingredients out there to make animal rations out of, and there's more ingredients to choose from today than ever before. And the science underneath animal nutrition is far more advanced that it's ever been.

So ultimately, you're going to have to see people move to different ingredients, the byproducts, to make up those differences in cost. And if you look at meat and bone meal or you look at soy bean meal, $200 a ton proteins, and -- aren't significantly higher or historically high by any means. The main ingredient that's out there that's higher today is corn, at which -- as most nutritionists will tell you, they have to use a little bit, but they don't have to always use it. So there's lots of opportunity out there, I think to hedge that balance.

Great. Thank you, very much.

Thank you. Your next question is coming from Tyson Bauer from Wealth Monitors.

A couple of quick follow ups. I'm going to follow on to the last question that was just asked. Taking of a step or two down the marketplace, and that is, slaughter rates have been fairly strong, even as high cattle prices seemingly continue to get - stay strong and continue to increase. Are you at all worried that slaughter rates may moderate -- or basically come down in the summer or later this year, that or that cattle prices continue to stay high?

Thank for your question to ask Tys. I mean, traditionally you see basically first quarter would be the lowest slaughter rate of the year, and then it continues to improve through second being one of the higher and third remaining strong and then fourth backing off a little bit.

I don't know that I'm willing to step forward today and say that we're going to see anything different there. I think the margins have to be watched -- remember, for the cattle feeder it still appears to be a pretty good -- a darn good business for him, for the slaughter guy, if you follow the press at all, whether it's a chicken or a hog or a cow, they're all hoping for higher consumer prices to offset the increase in feed costs. If they're successful at winning that at the grocery store, then there would be no reason for it to back off.

Okay. Going back to the question on the seasonality. John, if you could provide us some numbers or range in numbers -- take for instance summer, which was extremely hot and the quality of the product was poor in many cases, especially in the West Coast, what kind of quality improvement pricing did you achieve, say from Q3 to Q4, where you had early storms that came through and gave you much better quality product to sell at the end of your process?

Well prices, Tyson, in the third quarter -- we looked at --. Well let's go back to second quarter, that's between second and third quarter --

John, I'm not so much concerned about prices, as I am -- if you render an animal that's been in the heat, you're going to get more brown grease and lesser commodities as your byproduct. In the winter you're getting far higher quality. So you may have the same volumes, but you may have the benefit of much better quality product that you're able to sell. Give us a sense, numerically, of what that means?

The reason I was going to represent, though, the pricing is in the second, third quarter, we were around $0.145 to $0.16. You're right, during that time period as you -- a dead stock plant, a packer plant, would not be impacted by that, because you're getting fresh product then. But on the West Coast, and plants in the Midwest that are handling a great deal of dead stock, you could be looking at $0.03 and $0.04 discounts to the price of your product.

So if you were averaging $0.14 on the market and you're selling from $0.025 to $0.03 under that, a lot of that product during that time period was being sold at a discount to the market at $0.03 or so. You get into the fourth quarter when the temperature had come up, and we weren't having as much quality problem.

Now we did have a great deal of dead stock, but it was basically frozen when it came in, so it really didn't hurt the quality that much. It's not as high yielding as a product, so you don't get as much product -- finished product, out of the dead stock. But because of the price increases we saw, and with the cooler weather, we got a full impact of that with the prices during the fourth quarter, versus the second and third quarter; when it was lower prices out on the marketplace, and the quality was worse. Not only do you get a lower yield out of the dead stock, but you get a pricing impact, and we did not see that in the fourth quarter.

I'm going to take a shot at this, already somewhat knowing the answer, but are you able to give us a percentage that is affected, say, on your rendering volumes, of what dead stock -- what percentage of the dead stock volume impacted -- your overall rendering volume --?

You [said] you've already answered your question?

Yes, you already know the answer to that. We do not give out a percentage of dead stock as to our volume.

Okay, and the next question, you talked about the situation in Iowa. You had mentioned when you first did the acquisition that you were hoping to do animal specific rendering. Has this facilitated now that you have an influx of greater porcine, as far as porcine blood and meal? Or, did we see part of that in Q4 or going forward where you're able to now do animal specific rendering due to the increased volumes?

No, nothing really materialized that would make economic sense there today. That's just -- this is just an ongoing animal health issue that started out as being fairly small, to one that is something to take note of right now for us. It hasn't led to any additional processing opportunities yet.

Are you anticipating being able to do that, where you can take some of the NBP facilities and make them swine only?

We have a couple facilities identified that are potentially capable of doing that. We do not have the raw material supplies and the right locations with the right freight economics today to make that happen, but it is something that's always on the radar screen.

And the last question, so I don't have to answer it when people ask me, to get you on record, what is the effect of the trans fat being eliminated as we've see in the press in New York city and some others? Just give your response to those who are worried about that domino effect, and more people getting rid of the trans fats in their --.

A couple of comments for you. Number one, I couldn't tell you if there's an impact on our business today or not, because it's not readily identifiable. The reality is the low trans/no trans product, there's only a limited quantity out there to be bought by the different restaurants today around the country. And of course, your branded restaurants out there that can pay more are going to get the first shot at that tonnage from the [Bungees], [ADMs] and [Kardeels] and [Venturas] of the world.

Now, what it does mean is where there has been legislation passed for no trans, it suggests to me that the restaurants can no longer use a hydrogenated product to fry in. One must remember that hydrogenated fats -- why do you hydrogenate? You hydrogenate for two things.

One, you hydrogenate for stability in [frying] applications, and two, you hydrogenate for different functionality in food products -- baking specifically. So if you don't hydrogenate, what's it mean? It means that you can go and choose an alternative oil, whether it's corn oil, sun oil, canola oil or soy bean oil, you can add different additives to it.

But what it ultimately means is, that the fry life or the shelf life of that product is potentially reduced from using hydrogenation, where hydrogenation helped to extend and make more stable the frying oil. So theoretically, if you wanted to get our calculator, I suppose you could come up with some type of impact there [that will say] people will ultimately have to change out their fryer more often.

I'm not ready to go there today, I'm not ready to tell you that I've seen any impact, because I tend to believe that fryer management that's anything other than very specialized branded restaurants is not exactly on the radar screen and a very important issue for most restaurants.

So you would say the whole legislation on trans fat is immaterial at this point to Darling?

I think at this point it is very immaterial. I hope not, but I guess I'm going to tell you I think it is.

All right. Thank you.

Thank you. Your next question is coming from Dean Haskell from Morgan Joseph.

Good morning, gentlemen. Congratulations on a great quarter.

Thank you.

I wanted to clarify. You said something to the Chapman fellow, $0.50 to $0.70 per gallon. Is that your cost out the door delivered to another buyer, a wholesaler of biofuel?

No, what I'm representing there Dean is simply if you take $0.20 or animal fat or $0.21 whatever you want to call it -- $0.20 animal fat, 7.5 pounds a gallon, you have $1.50 in feedstock cost. The marketplace prescribes the $0.50 a gallon to produce it, so you got $2 net into it. Take away the $1 a gallon from the government, you got $1 [FOB] to doors as a true cost.

The marketplace has been trading somewhere between $1.55 for heating oil and $1.70, so net at the wholesale level you got somewhere between a $0.50 and a $0.70 margin, excluding any additional value you could get from glycerin.

Okay. Glycerin. We haven't talked much about the export market. Of course, '04 export market was down considerably with the late '03 bovine problems. And of course '05, '06 kind of -- I'm sorry, '05 was flattish. How does the '06 export market look compared to '05?

'06 we have seen for the fats -- yellow grease continues to be exported to the -- South America in pretty significant quantities. We saw some tallow exports resume around the world, although I would say we're probably back to 30% of normal there. We're now seeing for '07 -- we're seeing yellow grease, or what we're -- what's being put on a bill of lading is called recycled cooking oil, being exported to the European Union for the production of bio-diesel, so that's a new market.

We traditionally haven't done business with the Europeans for a number of years. On the protein side, we continue to see limited exports. There is a significant movement of tonnage now starting of meat and bone meal to move back into Indonesia, and Indonesia was one of the largest buyers of our product pre-BSE in 2003. What we've seen as far as Darling for benefit from that is, that's predominantly a West Coast origination point, and that's taken off some of the pressure off of our protein pricing on the West Coast.

Okay. What do you think is going on in the fish meal market. Is it a lack of supply, is it just an increased demand, what's going on there to your knowledge?

I have very limited knowledge there, other than to tell you that there was -- it was a limited production or catch this year and more and more countries are regulating the amount of tonnage of the Manhattan fish that can be pulled out for the production of fish meal, and fish meal prices have escalated pretty substantially.

So you get back into what's the impact -- fish meal was the predominant protein source for the production of aqua culture or aquaculture operations. Aquaculture operations for shrimp and tilapia and other fish are having to go back to other protein sources to replace the fish meal that they were being fed.

Will that primarily move to Indonesia and then to the other aquaculture firms, say in Vietnam, etctera?

I really don't know, but that would be my guess with you on that.

Okay. Thank you very much, and again, a great quarter. Congrats.

Thank you, sir.

Thank you. There are no further questions at this time. This concludes today's teleconference. You may now disconnect your lines at this time, and have a wonderful day.