Darling Ingredients Inc (DAR) 2008 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Darling International conference call to discuss the Company's fiscal fourth-quarter and full-year 2008 financial results. With us today are Mr. Randy Stuewe, Chairman and Chief Executive Officer of Darling International, and Mr. John Muse, Executive Vice President, Administration and Finance.

After the speakers' opening remarks, there will be a question and answer session period. (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 Mr. Brad Phillips, Treasurer of Darling International. Please go ahead, sir.

Good morning, ladies and gentlemen. Thank you for joining us to review Darling's fourth-quarter and fiscal 2008 earnings results. Randy Stuewe, our Chairman and CEO, will begin today's call with an overview of our fourth-quarter and full-year financial performance and discuss some of the trends that impacted our results. John Muse, Executive Vice President, Finance and Administration, will then provide you with 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, momentum and other words referring to events to occur in the future. These statements reflect Darling's current view of future events and are based on its assessments of and are subject to a variety of risks and uncertainties beyond its control, including unprecedented turmoil existing in world financial, credit, commodities and stock markets; a decline in consumer confidence and discretionary spending; the general performance of the US economy; and global demands for grains and oilseed commodities, which have exhibited volatility, and biofuels, that can cause actual results to differ materially from those projected 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 (technical difficulty) 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, everybody, and thanks for joining us today. It is my pleasure to welcome you to the Darling International conference call to discuss our recently released financial results for our fourth quarter and our fiscal year.

Let me begin by saying that 2008 was a historic and record-setting year for Darling International. We're very pleased to report that the Company achieved a record $54.6 million or $0.66 per share net income for the full fiscal year compared to $45.5 million or $0.56 per share in 2007, an increase of $9.1 million or $0.10 per share.

EBITDA increased 28% and nearly doubled that of any prior year during our 126-year history. We were able to build on the momentum created in 2007 and saw significant customer growth in both our rendering and restaurant services for the first part of the year. Increased commodity prices and better than expected tonnage were key contributors to a strong start to 2008.

The Company benefited from significantly higher finished product prices as commodity prices remained strong throughout the first three quarters of the year. These higher prices resulted from tightening grain and oilseed supplies, driven primarily by a combination of three things -- new demand for biofuels, growing consumption from China and India and weather-related issues, which adversely affected various grain and oilseed processing in producing regions throughout the world.

In addition to record earnings performance, we had a number of other key highlights in 2008, which I would like to take a minute to address. First off, we safely completed the expansion and modernization project of our Turlock, California rendering facility. This was a significant project for our Company as we continuously operated our existing facility while we completely renovated and modernized the location.

Secondly, we completed three acquisitions in 2008 and early 2009, which enabled us to expand geographically and strengthen our national footprint in both rendering and restaurant services. API Recycling, a division of American Proteins, Inc., operated or operates to reuse cooking oil collection and processing facilities in Georgia and services the surrounding states. J&R Rendering, New York metro area's largest independent rendering collection company. And most recently we completed Boca Industries, a leading provider of grease trap services in Georgia and the Southeast. Combined, these three strategic acquisitions added in excess of 9,000 new customers, bringing our customer base now the more than 120,000.

Additionally, we are pleased to have secured three top tier national accounts -- McDonald's, Costco and Burger King Corporate, complementing our growing roster of top tier customers.

Throughout 2008, we discussed potential opportunities that exist for Darling in renewable energy. We continue to make progress with our renewable energy strategy, which involves creating additional markets for our feedstock while adding long-term value to our business model. During 2008, we made significant progress with our green fuel recycling initiatives, and partnered with the City of San Francisco to develop a closed-loop recycling and biofuels system at our San Francisco plant. We completed or have completed high-level engineering cost analysis, product stability and pre-treatment testing, and have now entered into the equipment design phase. Permits are expected later this spring, with targeted startup anticipated in mid-2010. We're excited about this concept which utilizes both existing and developing technologies in the alternative fuels industry. Overall, we are enthusiastic about the opportunities to develop a sustainable model not only for the City of San Francisco, but for other large metropolitan areas.

In the renewable or green diesel arena, we continue to work with potential partners on furthering our understanding of this transformational business opportunity. We remain patient and steadfast in our approach to the prospects of this developing business.

Regarding the BSE Feed Rule, the Company has made the necessary capital expenditures and implemented new processes and procedures to bring our facilities into compliance when the Rule becomes effective on April 27, 2009.

And perhaps what we are most proud of in 2008 is that Darling International recorded its best safety record in history. We take our dedication to employee safety seriously. And through internal safety programs, fiscal 2008 was the best safety record in the Company's long history.

Now I would like to turn to the fourth quarter and discussed some key issues that impacted our results. While Darling International experienced record earnings performance in fiscal 2008, the year will undoubtedly be remembered for the global economic downturn experienced during the last three months of the year. A tightening credit supply, continuously decreasing consumer confidence and significant decreases in consumer spending have vastly impacted virtually every sector in the economy and ours is no exception.

Improved global crop outlooks, coupled with considerably lower demand caused by global economic uncertainty and volatile financial markets, weighed heavily on our fourth-quarter results.

A few other key areas which impacted our fourth quarter were, first and foremost, a considerable decline in tonnage due to the loss or curtailment of several accounts, which ultimately led to the impairment write-off of goodwill at one of our locations.

Secondly, the overall collapse in commodity prices, coupled with rising inventories, led to a significant write-down in the fourth quarter.

Third, we experienced customer default and contract cancellations at record levels as commodity prices collapsed, which ultimately resulted in another write-down.

Fourth, we accrued $3.2 million for a critical status multi-employer pension plan, for which the Company believes a mass withdrawal termination is possible.

Looking ahead, we believe the general economic conditions will continue to put pressure on our suppliers and ultimately our tonnage. However, over the last 20 years, our volume routinely shifts from state to state, particularly in our rendering business, and we expect to see some realignment before returning to more normal levels. We have consistently approached our business with a conservative yet opportunistic strategy, and as market challenges surfaced during the fourth quarter, we took appropriate steps, adjusting our business model and realigning our operating costs. We implemented corresponding headcount reductions where tonnages declined, reduced workweek schedules and employed more efficient energy usage, among several measures.

Before I turn the call over to John, I want to take a minute to talk about energy and the impact it had on our 2008 business. Energy prices for natural gas and diesel fuel reached unprecedented highs in 2008, declining rapidly to significantly lower prices during the fourth quarter. For the most part, we fell victim to both the rapid price escalation, and then the dramatic collapse.

As in the past, we attempted to mitigate this exposure to these volatile energy prices by burning our own fats and greases where possible. During 2008, the government subsidy to encourage the use of non-fossil fuels, called the Alternative Fuel Mixture Tax Credit, was extended now until December 31, 2009.

And more importantly, we have recently learned about a potential new program that will allow us to substitute animal fats and used cooking oil for boiler fuel, and receive a $1.00 per gallon credit. Clearly, energy prices are lower today, which should have some favorable impact on 2009.

I'll now turn the call over to John Muse, and after John concludes, I'd like to provide a few closing comments before opening it up to question and answers.

Thanks, Randy. For the fourth quarter, the Company reported a net loss of $13.9 million, or $0.17 per share on a fully diluted basis as compared to net income of $14.4 million for the 2007 comparable period. As noted in our press release, the $28.3 million decrease in net income for the fourth quarter resulted primarily from one, a $15.9 million goodwill impairment charge related to a single reporting unit; second, significantly lower prices for finished products; a $3.2 million charge related to a probable mass termination withdrawal liability arising from a multi-employer pension plan. Additionally, decreases in both volume and yield of raw material, and market value write-down on product inventories and on customer nonperformance of finished product sales contracts, and lastly, higher energy prices.

The Company reported net sales of $145 million for the fourth quarter of 2008 as compared to $175 million for the fourth quarter of 2007. Lower finished product prices, reduced purchases of finished products for resale, and decreased raw material volume accounted for the majority of the $26.9 million decrease.

At the segment level, rendering generated net sales of $112.2 million for the fourth quarter as compared to $128.9 million in the fourth quarter of 2007. The restaurant services area generated net sales of $36.2 million as compared to $46.8 million in the fourth quarter of 2007.

Now, turning to the full-year results, which ended January 3, 2009, Darling reported net income of $54.6 million or $0.66 per share as compared to $45.5 million or $0.56 per share for the 2007 period. The $9.1 million increase in net income for 2008 resulted primarily from higher finished product prices which were partially impacted by a $16.6 million increase in energy costs related to natural gas and diesel fuel; a $15.9 million goodwill impairment charge related to a single reporting unit; and decreases in both volume and yield of raw material.

Interest expense was $3 million during 2008, as compared to $5 million during the 2007 period, a decrease of $2 million or 40%. The decrease in interest expense is primarily due to a decrease in rates and outstanding balances related to the Company's outstanding debt.

Other income was $0.3 million in 2008, a $0.9 million increase from other expenses -- $0.6 million in 2007.

At the segment level, rendering generated net sales of $585.1 million, in 2008 as compared to $464.5 million in the comparable 2007 period, which is an increase of $120.6 million. Restaurant services generated net sales of $222.4 million for 2008 as compared to $180.8 million for 2007, an increase in sales of $41.6 million.

Now, moving on to the balance sheet, as of January 3, 2009, Darling's cash and cash equivalents totaled $50.8 million versus $16.3 million at end of 2007. On January 3, the Company had a working capital of $66.2 million and a working capital ratio of 1.9 to 1, compared to the working capital of $30.4 million in 2007. The increase in working capital is primarily due to the increase in cash.

At January 3, 2009, the Company had unrestricted cash of $50.8 million and funds available under the revolving credit facility of $108.6 million compared to unrestricted cash of $16.3 million and funds available under the revolving credit facility of $106.1 million at December 29, 2007.

Capital expenditures in 2008 were $31 million as compared to $15.6 million in 2007. The increase of $15.4 million was primarily due to a major modernization projects at the Turlock, California plant and expenditures related to compliance with environmental regulations, both of which Randy touched on earlier in the call.

And finally, as noted in yesterday's press release, the Company recorded a goodwill impairment of $15.9 million in the fourth quarter of 2008 as a result of our annual impairment test. The impairment charges related to one reporting unit that experienced a loss of raw material suppliers in our fourth quarter. The charge did not affect our cash position, cash flows from operations or availability or compliance under our credit facility. I'll now turn the call back over to Randy.

Thanks, John. In wrapping up, let me reiterate that we are all proud of our results for this year. All in all, 2008 was an exceptional year for Darling and its employees. We believe that we have made the necessary adjustments to our operating model without impairing our ability to compete or create value in the long term.

As I mentioned, we're seeing signs of improving market metrics. Significantly lower energy prices in late 2008 and early 2009 now should have a positive effect on earnings late in first quarter. Also, tonnage has improved from November and December, and commodity prices have recovered from their near historical lows to more traditional levels. While we are encouraged by these things, we must approach these extraordinary times with a mix of caution and optimism.

Our balance sheet remains extremely strong as the impairment charges had no impact on the Company's cash balance. We conserve and generated in excess of $50 million cash in 2008, which has positioned us very nicely moving forward into 2009. We will continue to look for ways to improve profitability, grow our earnings stream and position our business to continue enhanced shareholder value. Our financial position serves as a solid foundation, enabling us to effectively navigate through these challenging times.

While we are uncertain of what the future economic landscape will look like, we are preparing for sustained economic weakness and will continue to manage our business prudently and position Darling for a successful future. With that I'd like to open it up for questions and answers. Rosa?

(Operator Instructions). John Quealy, Canaccord Adams.

Good morning, folks. A couple questions. Randy, on the international business, obviously, we had a lot of credit market dislocation in Q4. Can you talk about how that impacted the export business and how the customers have weathered the storm thus far in Q1?

Sure, I think that's a good question, John. Anytime the commodity prices, or in this case in inverse, collapses to the magnitude that it did, in the sense of, where you have tallow in the mid-40's range, and then reaching a low and trading to the $0.10, $0.12, $0.13-level range in fourth quarter, you systemically shut down demand.

Not only did the credit constrictions that happened in the US, they hit globally, and we saw our export volume, which has ranged anywhere from 25% to 50% of Darling's total revenue, drop off substantially to around 15%, 16%. The trade flows have been massively disrupted, and that's true on the greases, on the proteins and in our high-trade business.

First quarter, I would say in January, there was very little change of that. But now coming on through February and March, we've started to see credit needs; Mexico entered the market; some of the Pac Rim countries start to come back in, and we're starting to see a more normalization of those values.

The values, as we said, we touched on lows of $0.10, $0.12, $0.13 for the greases in fourth quarter and those have now returned to $0.16 grease, $0.18, $0.19, $0.20 tallow, and protein is kind of the shining star out there, ranging from -- depending on where you're at in the country, $250.00 to $300.00 a ton.

Switching gears on the rendering side, it looks like a big chunk of that goodwill write-off was on the rendering side. Can you give us a little bit more detail on that? Was it a supplier collapse, or what exactly was going on to write that business down then?

Yes, the process is pretty well known that when you -- as a result, when you do assign goodwill out there, you end up assigning it to facilities. Anytime that you have changing supplier bases -- and what we saw during fourth quarter was as a result of the commodities; when I mean commodities, feeding price commodities, corn and the other inputs running up in Q2, Q3 with $7.00 corn -- you started to see some of the meat processing companies reevaluate what I call marginal capacity. And at one of our facilities, we had experienced a closure of not only one, but two of those two marginal locations, or suppliers to it, which ultimately, when we do the impairment checks each quarter as required by GAAP and the SEC, it showed that we had an impairment charge on one of our locations. And that's basically how it goes together, John.

And just two more questions. One, in terms of the mix of business between fixed-price or fixed margin, if you will, how are customers reacting? And obviously with the commodity prices collapsing, is competition at some of these "suppliers" a little bit easier? Or how are the mom-and-pops guys dealing with this the last quarter or two?

Well I mean it is to a degree the wild, wild West out here in the sense of people trying to understand what the vitality and livelihood of their business is.

What I would tell you is kind of to look at the business model as we put in place here over time, we have put a lot of our businesses on -- as you called it, formula or pull-processing type of arrangements that mitigate the risk.

What you saw was such a significant and dramatic collapse in the commodity markets, was that the way those formulas or those agreements are priced, you're buying at last week's price and you're trying to sell at the new lower price the following week. And you saw that sustained for almost 90 days.

So in a sense, you've got all the tonnage still coming at you with the price collapsing, as you brought up earlier, with the exports not there, and what do you get? Well you overpay for the raw material, the product goes into inventory and then you keep writing it down.

Overall, the customer health, I think is pretty good out there. And at the end of the day, I mean it's just a complete realignment of the food system that's happening.

Last question, Randy, I think mentioned on the last call about on the renewable diesel side, how to work with those petroleum companies now that oil is setting into this $40 range or what have you. What's the tone there, and what is your strategy and timeline there, where you think you can make tangible progress over the coming year or two?

I'm very -- actually, I am very encouraged on two fronts here. One is if you model the renewable fuels alternatives, whether it's biodiesel or green diesel, the margin structure in that business, whether oil was at $147 or oil was $40, had sustained. And it is sustained as we have been kind of trying to educate and preach for some time, because it follows the price of corn; and corn is ultimately priced via ethanol, and ethanol is priced via crude oil. So it's actually stayed very attractive. It's actually been a much easier story to share now as we've been in front of oil companies and trying to identify that ultimate partner. So we're encouraged there.

I would tell you there's nothing imminent, but we're also starting to see people realize that the new administration is not going to eliminate the renewable fuels standard. There's some very, very positive developments in the carbon world in lifecycle analysis and land use. And animal fats are turning out to be at the top of the list here as a very, very carbon-friendly fuel of the future. And the oil companies and the distributors are starting to recognize that. So I think, overall, I am very optimistic that there is something there, but it's not imminent at this time, John.

Appreciate it, guys.

Farha Aslem, Stephens, Inc.

Good morning. Could you just give us some more color about the facility and the goodwill impairment? Was it related to a hog processor, a chicken processor, etc.?

If you look back at our balance sheet, and when we have made some acquisitions, especially back in 2006, there was around a little over $90 million of goodwill that was associated with the acquisition. And then that goodwill was assigned to multiple reporting units. Within that, one of those multiple type reporting units did have a decrease in volume, because of loss of customers in the fourth quarter.

And as Randy said, we test this on a quarterly basis. At end of the third quarter, the prices were still high, but during the mid fourth quarter, one of the larger ones did shut down. That was a turkey processor, was one, and then a beef processor was the other customer.

Okay. With some of the increased announced plant shutdowns in the protein space, do you anticipate further write-downs?

No. I assume you're referring to the Pilgrim's Pride announcements and some of the others? No, that doesn't -- at least at this time, we haven't identified any of those that would impact us.

And then related to your comments on energy, you were talking about how energy was higher in the fourth quarter year over year. Was that related at all to an energy hedge that you had?

I guess you would refer to it more as a forward purchase of energy than a hedge.

John bought the energy.

You notice I spoke up. In looking at the energy prices that we ran into during second and third quarter, there was a lot of concern among our sales as to where natural gas was going to go. So we did have coverage on our fuel in the fourth quarter that after -- then the markets started dropping. So we did get hit during the fourth quarter for some higher ownership than if we had remained in the spot market. That is correct.

Okay. Did you have to mark those positions to market at the end of the period, or it's a --?

They weren't derivatives. They were forward cash contracts. So we took ownership of all of that natural gas that -- we burned it that we had purchased.

And that's your comments that it's going to still impact part of the first quarter.

Yes.

Obviously, traditionally carrying energy into first quarter without ownership hadn't been a good thing. And our advisors had convinced us that energy in that August, September, October period was the time to take forward ownership for the balance of the fourth quarter and a portion of the first quarter. And we executed, and the history has proven us that was not a good decision.

That's the same for a lot of companies. And then when you look at your cost of goods sold versus your sales, was a lot of high-priced inventory flowing through your cost of goods sold, so that hurt the margins that you realized in the quarter?

Yes, and as we've said, over 55% of our businesses on formula with a significantly higher portion of that in the rendering sides on formula. And when you're buying some of the formulas and many of the formulas are structured on either look-back purchases, where you're taking ownership on a prior week's price, and then you're hoping you can sell it the next week at least for the same price. And as you know when tallow went from $0.47 to $0.14, the formulas did not work very well from that standpoint.

So not only were we buying our cost of goods sold or our cost of raw material was significantly higher in the adjustment period there, it was going to a tank or a warehouse, and then ultimately being marked to market at the end of the period, and that led to the write-downs.

Now those inventories exist today, and as we come out of this and if the prices normalize, those inventories exist out there. They are predominantly at our export locations. As John Quealy acknowledged, the world kind of shut down for us. And so those export locations are both positive and negative. At a time when exports are flowing, they're great cash contributors. But when they're not flowing, they can build some pretty significant inventories and ultimately we took the write-down on them.

You have written all your inventory to market, effective kind of the prices as of December 31st or January 31st (multiple speakers)

Oh, yes, absolutely.

Absolutely. We carry lower cost or market on inventories. Obviously during that time period it was market.

About how much was the inventory write-down in the quarter?

We don't answer that.

I can at least ask. And my final question is generally, when we think about your business model, kind of supply coming in, how long is inventory held versus then sold? And how long was it in the fourth quarter and kind of how long is it trending out?

Well, inventory is held about 24 hours before it's processed and inventory is still held from that that we process.

We were still receiving -- during that period, our normal raw material end, and we started putting into storage where we could the fat, because there was just -- the export demand had dried up. We were still servicing our raw material suppliers, picking up the raw material. But having a challenge in moving that finished product.

And ultimately with fat trading at anywhere at the time from $0.15 to $0.20 a pound discount to the alternative of soybean oil, it just made sense from a risk management perspective to put it in store. But the financial pain of showing that write-down is what we are discussing here.

Okay. So now if you were to kind of look at your inventory across yellow grease, across protein, and tallow, are they higher than -- what percentage higher are they versus normal?

The protein levels are fairly consistent where they have been in the past. It's really in the fat area, because more of the protein is really consumed locally. We do export protein, but mostly on the fat side. And they are up substantially over what our historical levels have been.

And they remain up from historical levels?

Well, I mean, obviously, you'll get to see the results of that in first quarter. But as I mentioned earlier, not trying to connect the dots here, is that there were very limited exports in January, February and early March now. So showing some signs of credit loosening, if that's a word, around the world, that will hopefully start to help trade flows.

Okay, so those inventories are continuing to build in the first quarter?

No.

Not what we said.

No, not continuing to build.

Because we don't have any more room.

You don't have any more room. Okay, fair [play]. Thank you for your answers.

Dan Mannes, Avondale.

A couple follow-up questions. I heard you didn't give any detail on the write-down on inventory. Can you talk at all about the -- I guess the customer defaults? Is that something maybe you could give us some more color around?

I guess the follow-up to that would be relative to fourth-quarter results, we know the size of the impairment. But if you exclude both the customer defaults and the write-down, would you guys have actually been [burning] in the fourth quarter I guess is where I am going.

Well, I'll take part of it, and then I'll let John try to answer the rest of it.

The contract defaults and customer cancellations. As I mentioned earlier, rarely in history have we ever seen a collapse in commodity prices as we experienced between third and fourth quarter. And as you can imagine, and I've seen other ag-based processing companies talk about it, the counterparty risk that you have when you export a significant portion of your production was unprecedented. We're talking material that was a float, headed to different regions of the world, namely Pacific Rim countries, and you can guess where. Where the contracts that were in place, the letter of credits that were in place, the cash against documents, processes, simply weren't honored. And that forced us to find new homes for that material, and in some cases, just ultimately negotiate our way out of trying to keep from bringing it back to the mainland. That was a significant piece of our fourth-quarter -- if you will, I don't want to call it an impairment, but it was a significant charge in our business here.

A lot of it happened in our hide business. Predominantly a significant portion -- probably north of 75%, 80% of our hides are exported, predominantly to China and Mexico. And both of those countries essentially wanted to renegotiate the deal as prices collapsed on that side. So there were some decisions made and those charges were incurred in fourth quarter.

Okay. Was John going to give a little follow-up in terms of my question on earnings or --? I guess where I'm really going here is given the average level of commodity prices in the quarter, and you've experienced these levels in the not so distant past. You normally make money in this kind of period. I guess I'm trying to figure out, is this more of a transitory issue that with any stability in pricing, you'll have less of a drag from, for instance, the different -- the timing difference on formula contracts, plus the lack of write-downs and customer defaults, so you'd get more -- I'll call it more earnings stream? Maybe not what you did last year, but a more normal one.

Dan, I think we would concur with how you staged that. As we look at our business today, clearly, the formula business, because of the dramatic collapse, was a significant drain. The write-down of the tanks and the warehouses on inventory at a lower cost or market was a big piece. The cash that was used to reserve for a crew for the mass withdrawal was another piece.

Now you look into first quarter, and traditionally, we don't give guidance but we will give you some optics that we're seeing out there. We're seeing that tonnage has come back on the rendering side slightly from where it experienced in November, December. So that Thanksgiving to Christmas time period kind of became an unprecedented period.

The restaurant trade continues to be quite challenged. That's the bad news. The good news is that most of the kitchen grease or cooking oil that's generated comes from the fast food side, which your lower dollars now are headed there. So from that perspective, I would say that's not -- we're seeing kind of a normalization.

The commodity price, remember as we carried out these huge inventories, we continued to see the commodity prices from December to January. Our tanks were full, our warehouses were full, and we continued to have to move for logistics purposes because we still had raw material coming at us. So you saw that carry forward a little bit into January. And now prices have come back to where $0.16 yellow grease, $0.18 to $0.20 tallow and $300.00 meat and bone meal. If you look back at any 25-year chart will tell you that's a pretty darn good level, and near historical levels for this business. The protein side is actually quite a bit stronger than we had seen in history.

From an energy perspective, you go back to look at the NYMEX now and you've got to go back to 2003, 2004, when the last time you saw natural gas at $4.00. Obviously, we have acknowledged that we've carried forward some gas ownership.

So between tonnage, price and energy as it realigns here in first quarter, I think one can hopefully conclude that this thing should come to some more traditional type of operating performance. However, I just want to be careful and just say that the tonnage -- we sit here with cautious optimism that the world continues to eat proteins and eat out. And right now, the signs are that that is starting to find some balance, but your guess is as good as mine.

No, that's fair enough, and that's exactly what I was looking for. Just one other question on '09. You guys undertook a fairly meaningful capital plan in '08. Ex the biodiesel plant in San Francisco, what are you looking at for CapEx in '09? And then can you talk a little bit about what the current outlook is on the biodiesel plant, not the green diesel, just the biodiesel plant in San Francisco?

You are correct on the CapEx for 2008. We were at $31 million. We have said in the past we were at $18 million to $20 million CapEx for normal maintenance and profit improvement and compliance and safety-type projects. And we don't see anything any different on that going into 2009.

So yes, net of Turlock, it's back to pretty normal levels. I would tell you that from our perspective, we have taken somewhat of a cautious approach, which we traditionally do in first quarter anyway because it's wintertime, and it's kind of hard to fix plants under snow and ice. So we are at a somewhat conservative seasonal constrained rate on CapEx right now, and we're going to continue that caution until we watch things come to some type of normalization.

On San Francisco, we're very much proceeding ahead there. There are several levels of permitting, as many know, that have to happen in California. We have received our acknowledgment that there is no modification to our use permit, and we have received the amendments to our lease for our San Francisco location. And we're in the process of applying for the building permits and for the construction of that facility. An engineering firm has been selected, a technology provider is in process of being selected and negotiated at this time.

And more importantly, the offtake agreements are being developed, and the concept of the business model is still progressing. We have not really to a degree slowed that down. The process itself is somewhat limiting in the sense that doing business in California takes a lot of i-dotting and t-crossing. But we would say that we're very much on target to bring that plant online, and we're very excited about the opportunity.

Great, thanks.

JinMing Liu, Ardour Capital.

Good morning, gentlemen. I have a question related to your demand for your products. First, I noticed very recently there has been news about the general public consumes less beef but more on some cheaper meat. Will that have an impact on your raw material stream? That's my first question.

My second question is -- a few days -- actually two days ago, Europe decided to put a tariff on the US biodiesel export to Europe. And also we observed other US biodiesel producers tracking down production. Whether that will hurt your demand for your animal fat increases?

I'll comment a little bit about the raw material supply. As I said earlier, we saw January return to a more traditional level of raw material supply after the holidays. However, we would tell you that if you compare fourth-quarter cattle slaughter, you would see that we averaged about 609,000 head a week compared to 660,000 head, almost a 10% drop from third quarter to fourth quarter. That traditional drop is usually between 3% and 5%.

We have seen some improvement from fourth quarter to first quarter here, but it's predominantly geared at the dairy herd that exists out there as milk economics have continued to come under some pressure. So we're seeing an increase in slaughter here, but predominantly from the cow side.

The poultry side, which is a very small piece of the Darling mix, is followed out there. And clearly with the reduction of the Pilgrim's plants and some lower turkey production, I think the poultry side is going to be quite a bit off.

The pork production side remains somewhat of a bright spot out there, as there continues to be some exports in that area. But overall it's going to depend on ultimately how confident the consumer gets or regains their confidence and starts spending discretionary dollars outside the house.

The fourth-quarter numbers that are showing out there is the consumer spending in the area of food away from home was down about 14% in fourth quarter. So time is going to tell whether or not the consumer drives or pulls that production.

And the second piece is will exports resurge on the meat side? The US is still the cheapest place to produce protein, and the world needs to eat. Hopefully, they have pulled inventories down and at some point in time, this will kind of normalize.

On the biodiesel side, you're specifically referring to the change in European rules which will challenge the import of US biodiesel here towards mid-March. Very little of Darling's product today ends up into a biodiesel producer. So I see it as limited impact on it. But the argument can be made, well then that would put other product back into the market to compete in the feed chain.

I think you're going to see the export side of our business improve a little bit, and probably offset that reduction in offtake; and coupled with kind of already experienced the reduction in animal slaughter. So I think it's going to pretty much balance itself.

Okay. My last question, can you remind me of the capacity you all do for the San Francisco biodiesel plant.

It's going to be a 10 million gallon unit expandable, but initially at 10 million gallons.

Okay, thanks.

You're welcome.

Tyson Bauer, Wealth Monitors.

A couple quick questions. You already touched on a lot of these, but it sounds like Q1 will in part or for a good share be a snapback type quarter of the six items you listed on the front page of your press release. Either all or basically all of them you have addressed that will not occur in Q1, at least as we get toward the latter half of Q1. So that's a positive sign. Will we actually see heavier volumes in Q1 because of the inventory situation, and is that still dependent on how March goes?

Inventories are going to be managed via if the export buyers return. The raw material supply is still coming in and it's either got to be sold or stored. We have tried to maintain our inventory positions and we're going to attempt to bring them down if the price make sense. So for Q1 there's still a lot of history yet to be written for another 25 days, but we will see where it goes.

I think the big risk that still exists out here as we just highlighted with JinMing is still, ultimately, what is the normalization of volume, or tonnage into the facilities.

Okay. And when do you think you'll have a better sense of that?

When we release Q1 earnings. You knew the answer to that.

Well, I'm glad it's that soon.

The inventory write-down, obviously, you won't give us the amount, but you said it was written down to the January 3rd prices at that point in time. At what level were they quoted previously? Was it the September 30th data, or was it a full year back? How does that work, John?

We adjust it monthly when we close the books. We remark our inventories to a lower cost or market on a monthly basis. So we keep our inventory values at market throughout the year.

Obviously, if you look at where prices were at the end of third quarter and so forth, then that normal base stock inventory was hit, plus the accumulated inventory that took place during fourth quarter.

That's what I'm looking at. When you had that 50% decline on market prices on the fat side since September 30th to January, and if we understand that proteins and fates are equally 50-50 split, unless you tell me otherwise, that's a fairly significant write-down on the inventory side that we're not being able to adjust those Q4s and see a true operational effect (multiple speakers)

I can give you -- if you look at the third-quarter MD&A and look at the pricing, we have always stated that our formula-ization and everything is around 55% or whatever or 54% to 55%. If you look at the relationships at the end of the year, they're up higher than that. And that's reflecting the inventory write-downs. You can go right into the MD&A and look at that and look at the change in fourth quarter, on fourth quarter compared to year end and third quarter, and you can see that it was a pretty good impact.

You also have to understand, though, we as a company have limited inventory storage capability. We're not like some of the larger ag companies that have tank farms and everything. We do have storage at some of our export facilities for vessel-type storage. But the write-downs did hit us on the fat, but they're not -- it's not like we've got a month of inventory in supply.

Well I think you operate under the sell it or smell it operation.

That's very true.

In regards to the alternative fuels endeavors, now with the new ren. laws going into effect and being cumulative starting in '10, does that put a little more leverage on your side in negotiations with these petroleum people to try to set some kind of line in the sand to get them to act in 2009 here?

I think it's too early to predict that. It clearly is a reason to have additional discussions. I mean you're starting to get into an area here that I think is going to develop actually through '09 and on into '10 as you start with the European model on intended land use, lifecycle, carbon, and all of that stuff. And then ultimately what is the value of rens going to be?

I think when you sum all those up, it ultimately says in the simplest of worlds it's a make or buy situation. And right now, since the RFS is actually allowing them to defer it to '10, I think at the end of the day it's making for good discussion. But not what I would call increased leverage by any means. Increased interest, yes. Leverage, no.

Obviously in the end of '08 we had huge imbalances on our historical price relationships with palm, corn and soy. Those have come back dramatically. We're still a slight discount to those normal relationships. Is it going to take those export markets operating more smoothly to get back into those ranges that we're accustomed to?

Yes. I mean as we said in Q4, our exports kind of hit an all-time low for the Company. Essentially it's the old argument if you can get 5%, 10%, 15% of your tonnage out of the US, then ultimately the system kind of balances and gives you kind of a less discount, if you will, on the fats and greases to the next best alternative.

So once those -- I would say once we get into exporting a little more product on the fats and greases, we could see those probably narrow a little bit. I think ultimately does ours come up or does soybean oil come down? You're probably going to see a little pressure on soybean oil as the biodiesel export situation shuts down to Europe.

I know you don't give guidance on relation to just prices themselves, and of course we don't know where they're going to go, but on the current pricing situation it looks like we're moving back to our '07 financials. Anything in '09 that would be significantly different than what '07 had? Obviously you've done some acquisitions on some other sites, but you have some lower volumes on the restaurant for your normal collections. Any major differences between if we looked at '09 to '07?

Yes, energy.

While being significantly cheaper.

Yes, that's a major component of our business right now, and we've got diesel fuel ranging from $2.15 a gallon to $2.50 a gallon out there; and $5.00 and $6.00 at the burner tip natural gas; plus the new alternative fuel programs that are out there that potentially we can take advantage of.

So you're fairly optimistic if you're comparing '09 to '07.

I didn't say that, Tyson. I just said the optics are out here that the prices are normalizing, energy is cheaper, and kind of the wild-card is -- what's the tonnage situation going to be throughout '09.

All right. Thanks a lot, gentlemen.

Debra Fiakas, Crystal Energy Research.

Thank you. Most of my questions have been answered. However, I did want to ask, just to go back to the goodwill write-off, whether or not the plant closures were in locations and were accounted for by sufficient volume that it might bring into question the volumes that you could provide to your potential renewable diesel partner. I just wondered if you could give us some perspective on what kind of volumes were involved, and how that relates to your renewable diesel business.

No. From that type of a volume standpoint, it would be very insignificant. Remembering that these were two rendering customers, which half the product is fat, half the product is protein. But that would not have -- really almost no impact at all from that standpoint.

There was a loss and a loss in profitability on that location. The location is still a very profitable location, just not as profitable as it was before. It really goes back to the assignment of the goodwill at the time the purchases were made. And on a historical basis, those suppliers had been there, so it justified a higher allocation of goodwill to that facility at that time, which was based on customer relationships, volumes and so forth.

When that dropped down, and when we got to the end of '08, prices were at a lower level. And when you look at that, you have to take that into account in doing the discounted cash flow model on that facility. As all the other plants were calculated using the same price levels and everything, but we weren't even -- there wasn't an issue with goodwill at any of the other facilities.

Very good. And then I wanted to ask about acquisitions. It seems as though you're almost always in the hunt, looking for acquisitions. You have done, as you detailed in your opening comments, three in the last 13, 14 months or so. And I wondered if you could give us some kind of color on what you're seeing in the market and whether or not this, what is obviously a very tumultuous time, is even better -- presents even better opportunities for acquisitions? And also if you could comment on the trends in valuations for what you're looking at.

Yes. I think you framed it pretty well there. I mean what we feel good about is that we made a conscious decision to continue to put money in our savings account or war chest, because valuations did get out of whack in most of '08.

I'm not sure I can answer where valuations are today in '09. I think it would be safe to guess they're substantially lower. And if you really have to sell, they're significantly lower.

But for the most part, we're going to continue to try to grow our footprint where it makes sense. And obviously the war chest is positioned to help us finish off our San Francisco investment, and then hopefully make progress and be ready to go when we get the right opportunity for the green diesel business here.

Okay. Thank you for mentioning the biodiesel effort in San Francisco. I also wanted ask whether or not you have looked at other locations, or are you waiting until that plant has been brought online before you would begin to consider other locations, other arrangements with other cities?

Well I think the answer is we're very conservative by nature, and we're going to learn to walk before we run and make sure that we get that right. The reality of the answer is that biodiesel is not heavily consumed in the United States yet and especially animal fat or yellow grease-based biodiesel. So we want to get a better understanding. Like we've talked in the past, this is a process and a business we're trying to develop with a customer involved that helps mitigate the risk, and we want to very, very much understand it before we move forward.

But also in the context, we're looking at other cities and seeing if there is the same opportunity to partner with them, because I think it potentially can be a long-term value opportunity for the Company.

Okay, thank you.

Sarah Lester, Sidoti & Company.

Good morning. I wanted to ask about the California plant that you rebuilt. Is that up and running now at full capacity?

Yes. It was commissioned -- we were shooting to bring it up at the end -- in mid-December, but given weather and then holidays there, we opted not to bring it up and it was commissioned about the second week in January. It is up and running at capacity, and we're very, very pleased with it.

Okay. Were there any extra costs associated with that, either in the fourth quarter or do you expect any in the first quarter?

It was all capitalized in the sense of the construction. And obviously the answer is -- and it's a very good question, yes, there were excess costs to a small degree in fourth quarter, because we had to back off some of the tonnage that was going there and ship it to San Francisco and Los Angeles and incurred additional freight charges. So part of the payback of that facility is to eliminate some excess freight that we were incurring out there, but I would say there was more of that. Not really able to quantify the magnitude, but that's clearly gone away now for us in January and February out in Turlock.

Okay. And then in terms of -- you talked about a decrease in yield in the press release. Can you expand on that?

Yes, we have seen, as we go forward, the product mix and so forth has moved around a little bit. But one of the areas that we are seeing in the restaurant services area when we've gone from pricing, where we were paying for product, the bins were full. When you start charging for product, then you start getting a little different mix of product in the bins, I guess I should say.

And then secondly, there is still some theft going on out there for the yellow grease. We are seeing where some people have been skimming the tops of bins, and where -- which grease comes to the top, and we have seen some reduction in yield related to that as well. So (multiple speakers)

Couple it with lower cattle volumes in (multiple speakers) quarter and that will be second to the grease and yielding, and that's the explanation.

The cattle being a yield factor much higher than what pork and chicken is; that's where the volume decrease came down because of the cattle kills, and that impacted the yields.

Okay. On the restaurant services side, is there anything you can do to prevent that extra stuff from getting in there?

No (multiple speakers) that water ends up in there when you start buying grease. The good news is grease prices have backed off to the point where a lot of those matrix or those pricing arrangements that are out there don't encourage it any more.

Okay. There's just less incentive now to do that now?

Right.

Okay. That's all I have, thank you.

Thanks, Sarah.

William Bremer, Maxim Group.

Hi, Randy; Hi, John. First question I have is -- for your larger formula-based pricing suppliers, the indexing of the finished products to raw material -- I was under the assumption it fixes the gross margin on the finished products side to a sustainable and stable pricing level and gives you guys some type of protection on that. Did that get violated in this fourth quarter?

There are some agreements where what you buy is what you sell. So yes, to an answer, we had some protection there. And then you have some agreements that you were establishing a price at which to pay the raw material supplier on, and you were guessing, if you will, what you could sell the raw material for. And as I said before, never in history have you seen a $0.30 collapse in prices in a period of 60 days.

So to a degree, you use the word violate, yes. The formulas weren't efficient enough to catch up to the massive collapse that we saw. If you see $0.01, $0.02 here and there, not a big deal. But $0.20, $0.30, you really feel it.

Okay. And you mentioned your capacity for storage. Are you at full capacity storage right now? Or where are you? Are you at 80%, are you at 95%?

Yes, on fat, I think the fair answer would be we're full.

Okay. And now let's go to the goodwill impairment charge. Is this it for the quarter? Is it all -- are we going to be expecting more of like a series of these potentially in the first and second quarter?

Well I don't know that one can ever predict the future there, but one has to understand what generated the impairment charge before you can say well it happened -- what generated the impairment charge was the closure -- the combination of a closure of two significant raw material suppliers to one of our facilities that had a significant amount of goodwill assigned to it when we did the deal.

And then the second piece that went in there, coupled with it, is you saw a massive decline in price, which drives profitability to a degree in this ag-based processing company. So too much goodwill, lots of volume and a collapse in price was the perfect storm for it.

And provided that none of those three things align again, that would be the criteria for it again. But impairment is something we look at every quarter. So I won't give any guidance beyond that other than to say at this time we're in compliance and all facilities check out.

Right, right, okay. The next two I have are really housekeeping for John. SG&A going forward with the acquisitions, how should we look at that going into '09? As well as if you could give us some guidance on just an overall tax rate we should use.

The SG&A was up a little bit this year, I think $1.6 million. $1 million of that was bad debt reserves. Another portion of that did have to do with the acquisitions that were made during the middle part of the year with API. And also some -- from the benefit side, some health-care cost accruals that we needed to increase a little bit. That's where those were.

If you look at the last two years at SG&A, and take out the bad debt number, we kept that pretty flat. And we continue to try to keep that flat. The benefit side is where we have run into some cost issues as far as health care, but we've tried to do what we can to keep that cost down where we can. So I would -- I do not see where SG&A would go up from where it is. It should remain in basically in that range what you've seen for the last two years.

And how many employees came with the Boca, as well as the API acquisition?

API was approximately 45 employees, and Boca will be around 55 employees.

Okay. And tax rate for us to use for '09?

37.5% to 38%.

Thank you, gentlemen.

That was our last question. Any closing remarks, gentlemen?

Thanks, Rosa. I would just like to conclude by thanking everybody, and we'll talk to you here when first quarter concludes, and thanks, again.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may all disconnect.