Darling Ingredients Inc (DAR) 2009 Q1 法說會逐字稿

Good morning everyone. Welcome to the Darling International conference call to discuss the Company's first-quarter 2009 financial results.

With us today are Mr. Randall Stuewe, Chairman and Chief Executive Officer of Darling International; and Mr. John Muse, Executive Vice President, Administration and Finance. After the speakers' opening remarks, there will be a question-and-answer session.

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 first-quarter 2009 earnings results. Randy Stuewe, our Chairman and CEO, will begin today's call with an overview of our first-quarter 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 grain and oilseed commodities which have exhibited volatility in 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 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 turn the call over to Randy.

Thanks Brad. Good morning everyone and thanks for joining us today. It is my pleasure to welcome you to the Darling International call to discuss our quarterly financial results for the Company's first quarter of 2009 which ended on April 4 of this year.

As with past calls, our primary objective is to provide additional insight and understanding of our Company's operating performance. I would like to begin by saying that we are pleased with our results and are encouraged to be off to a good start in 2009.

While comparisons of first-quarter 2009 to first quarter of 2008 are relevant, it is probably more realistic to focus on improvements that have been executed and achieved versus fourth-quarter 2008. Once again we have experienced a quarter with extreme price volatility similar to what was experienced in fourth-quarter 2008.

The good news is that most of our business influencers are positive with the exception of raw material volume. There were several highlights both positive and negative that impacted our quarter which I would like to address.

First, we saw unprecedented declines in raw material volume as general economic conditions deteriorated both in the US and in foreign markets. Import bans, currency swings, plant curtailments due to financing difficulty, swine flu and a globally weak economy all weighed on the availability of raw material tonnage. Tonnage remained sluggish but seasonally, cattle slaughter is improving along with some optimism that meat production and consumption will improve.

Finished product prices were quite volatile during the first quarter of 2009. Although prices for fats and greases improved from fourth quarter, they essentially peaked in mid-January and continued to decline to near fourth-quarter levels by late March.

The protein side was a different story as prices continued to improve throughout the quarter driven by strong global demand for proteins. Prices have improved substantially since the end of the quarter driven by a tightening global supply of soybeans.

Our restaurant services segment got off to a challenging start. However, this was isolated to just couple of locations. The primary factor driving this performance was several low-priced yellow grease sales that were made for inventory management purposes.

Overall, the Company experienced lower raw material volumes related to seasonality and general economic deterioration. Competition remains stiff in this segment primarily as a result of increasing demand from the biofuel sector.

The Company is currently adjusting its pricing and collection fees where appropriate to compensate for these challenges. On a positive note, our grease trap maintenance business enjoyed a record quarter and our new acquisitions performed extremely well as we are in process of fully integrating these new acquisitions.

As mentioned on previous calls, energy prices are a key component of our operating cost and this quarter was no different. While natural gas prices declined rapidly, our forward ownership prohibited us from fully recognizing these lower prices in the quarter.

The forward ownership -- this forward ownership rolls off completely in the quarter. On the diesel front, we enjoyed favorable ownership throughout the quarter. Now I would like to take a minute to discuss a recent regulatory development.

As many of you have seen, the Environmental Protection Agency has recently proposed revisions to the National Renewable Fuel Standard which are potentially favorable towards waste greases which include animal fats and used cooking oil. On May 5, 2009 the US EPA released its proposed rule in which it determined biodiesel or renewable diesel made from animal fat or used cooking oil results in an 80% reduction from carbon emissions versus petroleum diesel.

That is the highest level of carbon reduction available from any commercially ready fuel. The EPA also determined that biodiesel and renewable diesel from vegetable oils including soybean oil only results in a 22% carbon reduction. The EPA findings are consistent with the findings of California which reflected a 95% carbon reduction for waste greases and the European Union which calculated an 83% carbon reduction for animal fats and used cooking oils.

Under the proposed rule, in order to meet the renewable fuels standard or the RFS, required usage of biodiesel and renewable diesel for the 2009-2010 period, the use of animal fats and cooking oil most likely will be required in order to achieve these objectives. Soybean oil based biodiesel renewable diesel plants will most likely not meet the revised renewable fuel standard minimum of 40% reduction of carbon emissions without significant blending of used cooking oil, animal fats or waste greases.

Essentially, as proposed, the revised RFS will require producers of biodiesel or advanced biofuels to use a significant portion of animal fats to meet the greenhouse gas threshold value necessary for compliance with the RFS. These proposed revisions to the RFS will be published in the Federal Register after which they will be subject to a 60 day comment period.

The EPA is hopeful that the revised RFS will be finalized in late 2009 with the new standards becoming effective January 1 of 2010. While additional interpretation is needed, it is our feeling that this could be a positive development for Darling as ultimately our feedstocks could be mandated for use. We will continue to monitor this closely as the developments grow here and as related to the proposed rule and determine the ultimate impact to Darling.

Now I would like to take a minute to give you an update on Darling's involvement in alternative fuels. Throughout 2008, we discussed potential opportunities that exist for Darling in renewable energy and we are continuing to make progress on this front.

During 2008, we announced that we were partnering with the City of San Francisco to develop a closed loop recycling and biofuel system at our existing San Francisco plant. As the media has reported, the permits necessary for construction of this plant have been challenged.

We are cooperating with the city and we remain confident that this issue will be resolved in a timely fashion. We are optimistic that construction will commence once the permitting process is completed.

In the renewable or green diesel arena, we continue to work with potential partners on furthering our understanding on this transformational business opportunity. We have developed a thorough understanding of this opportunity and remain patient and steadfast in our approach to the prospects of this developing business. We will keep you updated as developments occur.

Turning to acquisitions, I am pleased to announce that in February we completed the acquisition of Boca Industries, a leading provider of grease trap services in Georgia and the Southeast. As we mentioned, this not only improves our footprint, but it improves our integration and transaction with American proteins grease recycling business. That completes my comments and I'll turn this over to John now for his comments.

Thanks Randy and good morning to everyone. For the first quarter of 2009, Darling's net sales were $133 million as compared to $202 million for the first quarter of 2008. The $69 million increase in sales is primarily due to lower fixed product prices and decreases in raw material volume.

Net income for the first quarter 2009 was $4.8 million or $0.06 per share as compared to $21.5 million or $0.26 per share for the same period last year. Interest expense was $700,000 during the first quarter of fiscal 2009 as compared to $800,000 during the first quarter of 2008. This was a decrease of $100,000 primarily due to the decrease in outstanding debt.

Operating income decreased by $26.4 million in the first-quarter 2009 as compared to the first quarter of 2008. As Randy mentioned earlier in the call, the $26.4 million decrease in operating income for the first quarter resulted primarily from lower finished product prices and decreases in both volume and yield of raw material which were partially offset by lower energy costs related to natural gas and diesel fuel.

The Company recorded income tax expense of $3.1 million for the first quarter of 2009 compared to income tax expense of $13 million recorded in the first quarter of 2008. This accounts for a decrease of $9.9 million which is attributable to the decreased pre-tax earnings of the Company for the first quarter 2009.

At the segment level, rendering generated net sales of $103.5 million for the (technical difficulty) quarter of 2009 as compared to $47.6 million in 2008. Restaurant services generated net sales of $29.5 million for the first three months of 2009 as compared to $54.4 million for the same period in 2008.

On April 4, 2009 the Company had working capital of $63 million and its working capital ratio was 2.06 to 1 compared to working capital of $67.4 million and a working capital ratio of 1.95 to 1 on January 3, 2009. At April 4, 2009 the Company had unrestricted cash of $38.2 million in funds available under the revolving credit facility of $108.7 million compared to unrestricted cash of $50.8 million and funds available under the revolving credit facility of $108.6 million at January 3, 2009. The decrease in cash was primarily due to the acquisition of Boca in 2009.

And finally, the Company made capital expenditures of $6.1 million during the first three months of 2009 compared to $4.7 million of capital expenditures during the same period of 2008. This accounts for a net increase of $1.4 million which was primarily due to the contingent modernization product at our plant in Turlock, California which was identified over normal maintenance and compliance capital expenditures.

Additionally, the Company spent approximately $0.8 million in the first three months of 2009 related to the final BSE rule along with $0.1 million related to environmental regulations which is the same amount that we spent in the last quarter of last year. Now I'll turn the call back over to Randy.

Thanks John. In closing, we are off to a good start in 2009. There were many positives in the first quarter along with many things we're working on to improve.

Raw material availability remains a concern but overall, our fundamentals remain strong and we have built a resilient business model that has the flexibility to adapt to changing market conditions. Our balance sheet remains strong and I believe we are all well positioned to capitalize on the growth opportunities ahead as we navigate through these challenging economic times.

As mentioned, the revised RFS could be a positive development for Darling. Under the proposed rule, fuel derived from Darling's products has been established by the EPA as the most carbon-friendly fuel of the currently technically established fuels.

That is true whether Darling's feedstock is converted into biodiesel or into [cleaning] diesel. What it will mean in terms of value for the fuel and subsequently for the value of the Darling feedstock has not yet been established and I believe it will take some time for this to be fully understood.

We want to thank you for participation in this call and your continuing support of Darling International and I would like to now open it up to questions.

(Operator Instructions) Farha Aslam, Stephens Inc.

A couple questions. Starting out with your rendering division, your volumes came in below our expectations. Was it driven by turkey, cattle? Can you give us some color around that number?

Sure, while the cattle slaughter at least as reported was down about 3.5% quarter over quarter, the reality is we started to talk about in fourth quarter and then carrying over to full impact here in the first quarter was the curtailments enclosures of several of the plants that were referenced in our K. The reality is whether it was essentially across all segments, all types of proteins from turkeys to chickens to hogs to cattle to some of the niche players, to the deli meats, to grocery stores, there is just like -- I use the word unprecedented.

We have never seen a kind of a downturn here historically that we saw here in first quarter. Typically first quarter is a little bit bumpy relative to the seasonality of the grease business because people aren't eating out and the ballparks aren't open and it's really not barbecue season and depending on the winter depends on the number of eating out events.

But apparently -- and I guess we are attributing it to the economic situation that most people are facing out there. We just saw a general economic lapse across all raw material suppliers with the exception of the West Coast which the West Coast was regionally strong for us this year.

And when you look at rendering volumes going forward, do you anticipate a recovery and do you think they will be down only like 1 or 2%? Or do you expect similar kind of 9, 10% declines?

Boy, that's a crystal ball question. History would tell you that if you look at this industry over 20 or 30 years, it tends to recover.

There's a lot of moving parts here from the chicken segment (inaudible) exports research there and that industry rebalanced. You had the perception of swine flu hitting the hog side, although that seems to have improved.

The cattle side is clearly related to exports and general economic consumption. By nature of sitting in my chair, I'm an optimist and I tend to believe it will improve here but it still may take some time.

So so far in the second quarter, you haven't seen much improvement?

Not at this time. I mean, it's kind of pretty much status quo of what we are seeing out there. There just isn't -- you're starting to see the cattle slaughter. You're seeing numbers of 126,000 and 127,000 a week pickup there.

I would say that the majority of that is related to the large integrated packer versus our guys yet, they have not started to run. I think we've only run a couple of Saturdays here where a year ago we ran a lot of Saturdays much earlier and ran six day weeks. So it's still very sluggish as I referred to.

And will you benefit from the CWT program? And do you have exposure to dairy cow?

Exposure in the sense that we pick up a lot of mortalities in that industry and with our large presence in California, we did see a significant culling in the early part of January, in late December/January out there. Then it slowed up as the details of the CWT were yet to unfold.

It looks like that has been finalized and I suspect here in later second quarter, maybe early third quarter, we will see a substantial pickup at least in the processing of dairy animals to right-size the heard.

So that could benefit you going forward.

I sure hope so.

Then when you look at finished good pricing, your price realization in the rendering segment was better than what the commodity declines were. Could you highlight for us any changes you're making in terms of how you're selling your product that allows you to get a better mix?

Well, obviously by the silence here we're trying to figure out how to answer that. I don't know that we would highlight any one thing there.

We do a lot of protein blending and upgrading of our proteins. And I think we got a real benefit there this quarter by some different industries that that we are targeting now.

Our feed (inaudible) program which is where we try to value add and sell -- and target fat to an on-farm tank business was very effective in first quarter. So those are really the two major things.

Nothing really sticks out to us a whole bunch. I think what we referred to relative to commodity price in first quarter was essentially the volatility that hit us there.

Okay, so it's not that you have a particular contract in that segment that's going to prevent you from participating from the improvement in meat and bone meal pricing?

Absolutely not. No, I think we are in great shape there.

Okay, then my final question is in terms of inventory. What is making up the majority of your inventory? Is it meat and bone meal, tallow or yellow grease at the end of the quarter?

Our inventories as you saw on the balance sheet were down. The value side of that is still heavily related to that fat, so. John Moose?

So it's mostly fat.

Yes.

And it's mostly related -- it's the export terminal still. Although I think our statistics for Q4 were about 16% of our business went offshore versus typically a 25 to 28%, we saw about a 0.5% improvement in first quarter on export sales. So exports, although I would tell you in second quarter have improved, in first quarter they are still pretty sluggish.

John Quealy, Canaccord Adams.

Thanks. This is Chip Moore for John. Randy, getting back to the export business in Q1, maybe you can just talk about that a little bit more and the trends you're seeing so far in Q2, what kind of signs of improvement you're seeing out there.

Okay, now Chip, as I said in first quarter, I mean there's three primary exports that go out for us. One is the animal hide business which we referenced in the fourth quarter on the K call.

The hide business is for the most part pretty much just shut down right now. Animal hides are related to the production of whether it's car seats, purses, boots, gloves, sofas. We have not seen any type of resurgence in that business yet and we have seen continued economic deterioration or a fancy way of saying prices have continued to slide, especially as the slaughter has picked up here and pressure to find homes for hides. Hides are apparently being stored all over the world right now waiting for the Chinese market to reopen.

On the fats and oils side, we have seen an improvement here in second quarter of shipments related to kind of a general price escalation relative to soybean oil and predominantly palm oil. As the world -- soapers around the world that make soap have started to arbitrage between palm and back to animal fats. And so we have started to see an improvement there.

Probably the brightest spot in first quarter and turning over to second here has been the Indonesian demand for meat and bone meal. We continue to see strong interest from the Pac Rim countries for meat and bone meal and that is what has kept that commodity at or above historical levels relative to soybean meal. That's kind of the big positive driver there. But overall, I think we will see a resurgence of exports here a little stronger than we saw in fourth quarter for sure and definitely a little better than first quarter and second.

Great, that's helpful. Maybe I could get your take or your view on the feed [ban] being pushed out to October. Are you guys already set to go there? Just what is your outlook on that?

That was both a little surprising and disappointing in the same sentence because we prepared the organization to go live on late April there and had everything in place and the systems all cleaned out. We have maintained that readiness and are working with the government and some of our customers to kind of work through those disposal issues that were referenced in that Federal Register release.

So at this time, we are ready to go and we are compliant and many, many, many if not all of our locations are ready at this time. We will just kind of sit back and wait and see what the federal government does.

But our expectation is that there is I think a go-live date of October 26 and we are operating under the bias that that is a hard line which will mean our business will have to once again be completely compliant and cleaned out and ready for inspection on or about the first week of September.

Okay, great. Moving over to the energy hedges, I think you mentioned that there's still a little natural gas left. Could you just walk us through that and give us your take on those markets moving forward?

That's kind of a good news bad, bad news deal with us. You know, when natural gas hit $13 at the burner tip this summer and you started to look at the NYMEX at $6.00 in fourth quarter and carrying forward $7.00 in first quarter at the time, we made a risk management decision to go ahead and hedge out or forward purchase some of our ownership -- and a majority of our ownership for first quarter at the time.

And that ownership carried through -- it will carry through a substantial portion of second quarter before it falls off. So I mean it was a decision we made where $8.00 at the burner tip looked a whole lot cheaper than $13.00 but now it looks really bad and we are just kind of if you will burning our way through a bad position.

Any I guess future plans for hedging that you can talk about?

Absolutely. We constantly look at that everyday. We have been in the money on our diesel position. If you look at diesel relative to a year ago, nominally it's down $1.50, $1.75. We like diesel at this price.

Natural gas, there's two schools of thought out there. Our Texas advisors think that natural gas has quite a bit more downside to it. And just from the standpoint that storage is full and auto plants are going to be curtailed and general economic woes and some of the new production in the Barnett and Haynesville Shale are much lower cost of production sites than what were originally anticipated.

So there are people down here that are advising us to think gas has downside an then there are people out here that think that we have seen the bottom that we are now fairly priced. What we [wait] Chip is we're looking at it relative to our fats position and both the alternative fuel mixture tax credit and also a potential for a renewable diesel credit that we can have burning at our boilers.

But as you have seen, the conversion of running fats here in your boilers is not really positive right now because if you take $0.28 tallow or $0.22, $0.23 grease, whatever you want to call it out there, times 60%, that kind of puts it somewhere $0.08 and $10.00 at the burner tip and where gas is is basically plus the basis and distribution about six.

So kind of the decision point out here for us is where do we think fats and oil prices are going for this summer relative to the Chicago Board of Trade and palm oil and the potential of the RFS starting to have some influence into the biofuel arena. It would say that we're probably going to be burning natural gas and we do have some ownership out here going forward and are looking at it every day.

Last one for me on the restaurant serves aside. I guess specifically looking closer at margins, can you just talk about how much more cost optimization you think you can get out of there?

I think our cost optimization was across the whole system and our operations team did a marvelous job in first quarter of recognizing the reduction of inputs or raw material and getting people and energy and maintenance costs and operating cost back out of plant. So I wouldn't say it was isolated to the restaurant services segment or the rendering segment.

It was generally across all lines. Although we would say in the restaurant services segment that we have to do an improved job of routing if the tonnage is going to be reduced or if the eating out occasions are not going to increase out there. Because ultimately if you've got to slow down the number of times you're picking up a stop if they're not producing as much and that's a very complex optimization in a very large system here. But overall, I think we're in pretty good shape there and the guys are working hard.

Jinming Lui, Ardour Capital.

My question is related (technical difficulty) to your rendering (inaudible). The (inaudible) decreased a lot in the first quarter but if I remember correctly, the volume from your rendering segment has been declining at least in the past four quarters.

Can you give me more color on that?

If you look back to 2008 was kind of in late 2007 commodity input prices, feed prices, corn, soybean meal and other ingredients, vitamins, minerals all started to move up substantially in price. That has put pressure on the whole meat complex and thus meat production has cut back substantially across all segments.

As we referenced in fourth quarter when we took the impairment charge, we saw several plant closures that we reflected at the time. We have continued to not see plant closures but we have seen slowing of production at many of our locations.

First quarter of a year ago was to a degree a perfect storm. We had a large cattle slaughter because of increasing commodity prices. We had strong hog and chicken numbers and we ultimately had a lot of mortalities.

And now we have seen a much lower mortality rate out there, lower chicken production, hog production and cattle side here. It's a quarterly trend. You have picked it up. Whether it changes as I referenced to Farha, typically it has over history but it may take some time this time to find the right size.

That's helpful. Moving to the (inaudible) front with the new challenges from the environmentalists, what is the timetable for the (inaudible) San Francisco biodiesel facility?

It's always hard to comment how long a city agency or ordinance is going to take to work through the permits and whether there will be additional legal challenges to those. The initial lawsuit that was filed against the granting of the first permit has been withdrawn.

It was based on a challenge to the process the city used. The city has chosen another process by which to take in outside inputs and comments and we expect that process to wrap up here within three or four months and our target at this time is to bring back to the board for final approval or rediscussion and hopeful approval sometime here in September the approval which will take about 10 months to construct after that if the permits are received.

You mentioned the new EPA proposal for the renewable fuel center. (inaudible) have you observed any pickup in the demand for your products for biofuel fuel usage?

No, that's kind of like we said. It's going to take some time for the market to fully understand what that really means or that potential ruling -- proposed ruling means because it has got a comment period.

And ultimately as you know, they have deferred the mandated levels of the gallons to 2010 here for compliance. So essentially the RFS for 2010 could be interpreted as 1.15 billion gallons of which it must meet the 40% reduction of greenhouse gas threshold.

So, when you look at that, what it can mean next year potentially is somewhere between 300 and 400 million gallons of that RFS if you made it all from soy must be blended with animal fats or a significant portion of that 1.15 billion gallons must be made from animal fats. So it's not hard to do the numbers here.

Whether or not the legislation has proposed holds, time will tell. It's consistent with California. It's consistent with the European Union. Ultimately it's a challenge on the soybean production side of the biodiesel industry to figure out how to blend our feedstocks in. But more importantly, it's a challenge on the customer side and the customer in this case as referred to in the RFS as the obligated party is the oil company or distributor to essentially put in capital or systems to handle tallow methyl ester or as referred to as TME.

It would appear that there's been various announcements out there from Shell and other people that they are retrofitting their systems now to set up to handle biodiesel and tallow methyl ester. So I think there's a pretty good time line here but overall, any time we can have another consumer or customer for our products in this industry, that's got to be a positive thing for us.

Okay, thanks a lot.

Dan Mannes, Avondale Partners.

Good morning guys. A couple of quick follow-up questions and these are sort of building on questions other people had. First just on the volume side on rendering, can you just sort of give us some direction? I mean obviously you're seeing weakness in a lot of your customers but how much really were (inaudible). It did seem like it was a pretty modest winter we went through relative to what we had last year.

Dan, we don't break out the percentage there but as you point out, it was a mild winter and the debt stock volumes across the board at all our plants that we do process dead animals was found quite a debt over first quarter of 2008.

Dan, the other piece there is the first quarter in 2008 was kind of a perfect storm. We had a good slaughter across all segments.

When the slaughterhouses get run in full like they were, they tend to break down the integrated guys. We had some breakdown tonnage as we referenced about one year ago.

We had a ton of mortalities piling up. So we had good slaughter breakdowns and mortalities. This year we had kind of a lower slaughter, no breakdown and less mortalities.

Just generically speaking, you do tend to see sort of peaking on the mortality side Q1, Q3 so it's not like you make this up later in the year but you really can't control the weather that much.

Mortalities come in the winter and they come in the summer. And as you head into second quarter in good weather here, there's very few of them.

Got it. And then just briefly on restaurant services, how common is it for you guys to sell out for a month or two? And when you look at sort of a drag on Q1 on pricing, I mean can you give some frame of reference on how material that was as a drag? I mean were you selling stuff at $0.10, $0.11?

Well I don't like to throw -- our commodities guys do a great job and I don't like to throw them under the bus and that's not the intent. The reality is if you look at how we moved from fourth quarter to first quarter, tanks were full everywhere in the country predominantly in our big export terminals because of the reduction in exports.

And as you look through fourth quarter and you saw that the prices dipped down in fourth quarter extremely low, I mean you saw December down to $0.14, that's basically Chicago which is $0.12 if you will at the plant and then $0.09, $0.10 yellow grease. And so as the raw material kept coming, we had to make forward sales at that time.

And then if you look at first quarter 2009, what happened? We had tallow run on up into the mid-22's, almost $0.23 in January. Yellow grease ran up to $0.18, $0.19. So on your formula business which is as we've said is about 55% plus of Darling, you just got whipsawed by your formulas here against low-priced sales and it was predominately in the yellow grease side, the restaurant services because those are related to our big-city plants on the East Coast and West Coast that had forward sales on.

But is it fair to assume -- and again without giving guidance -- that your actual sales in Q2 on the yellow grease side should be more similar to average market pricing? You shouldn't see this material a drag as we look at (multiple speakers)

Yes, I would hope that they don't ever sell anything as low as they sold in first quarter.

Understood. Last question. Just a follow-up on the RFS and obviously this looks like a pretty exciting opportunity for you.

When you think about your plan of potentially building a large renewable diesel plant, part of it was that you would be able to capture the value. When you look at the potential that the RFS creates for fats and greases, does this potentially change your thinking? Does it just make more sense just controlling the feedstock rather than actually owning the production if there is going to be that much demand for the finished product?

I don't want to say it makes you take a step back, but I think you have got to once again keep looking at that because I think one of the key pieces here is essentially we don't know what the final comments are going to say and how influential the coin and the soybean farmer and the trade associations are going to be towards influencing indirect land use and some of the calculations that were put in there. The pathway analysis all give tallow and animal fats, waste greases, used cooking oil, whatever you want to refer to them kind of the big thumbs-up.

So you feel pretty positive there. Now the question ultimately becomes is the soybean industry going to retrofit to blend to win if you will or blend to survive? If you look at the soy methyl ester business, it's dominated by -- and dominate is probably not the right word. It's basically produced by the big integrated agriculture plays of Cargill, ADM and Louis Dreyfus.

And then you have got some free-standing plants out there that are probably not as if you will as cost optimum as the integrated play. So the initial question is going to be what is the soy industry going to do to comply. Then kind of the second question and maybe even more important is we have seen the price of [rims] move up substantially here as the trade starts to digest, is what is the value of a [rim] going to be and ultimately what is the consumption of the big oil or the customer, the obligated party going to be?

Traditionally they have been very late to react and adapt and kind of in denial. But I think essentially if the RFS too now is going to hopefully awake and pull them out of denial. So we've kind of got to see all these things line up.

I tend to believe that if you -- as we've reflected in many other presentations, the Darling system is to a degree the oilfield much as the E&P side is to the petroleum industry. The question will be does it make economic sense to put finishing capacity on this.

For Darling as we have talked about in the past, we have studied and looked at biodiesel. We have chosen at this time not to participate in a large scale in biodiesel for two reasons. One was that we didn't see a customer out there for it other than seasonally and because of the cold flow properties of tallow methyl ester; and two, the Darling feedstock supply is quite variable both seasonally and by plant relative to the type of meat being processed and the type of product coming out the back end.

And so ultimately, those two boxes with the major one being the consumer side, meaning we didn't know if there was a customer to buy our product, has kept us from engaging in that business and going down the road of green diesel. Because green diesel as we've talked about is homogenous to the petroleum distribution system and it's impervious to the feedstock stream we would feed it. So it's kind of two a degree ultimately could be viewed as a better or more fungible solution to our system versus biodiesel.

But if the oil companies choose to handle tallow methyl ester or if the soybean industry that's producing the majority of the biodiesel today blends to win, it could ask us to review kind of our focus of who is a partner, what's a partner and what capital we want to put in play.

Tyson Bauer, Wealth Monitors.

A couple quick questions. One, you experienced issues regarding restaurant volumes when the prices really went skyhigh early last year when we did have economic problems. Given the EPA implications of what that may mean with the new energy bill coming up, how do you insulate or protect yourselves from not having similar competitive pressures put on you from a regular Joe at the pumper truck trying to get into that market?

That's a good question. You know, we're doing it regionally and locally with different programs and different customers protecting our large multi-store national chain customers with different agreements.

The competition as I referenced is stiff out there. Ultimately the question is going to be does the small biofuel player continue to exist out there? And I guess I really don't want to comment on that. I don't know.

Theft is real everywhere. Theft always seems to be greater when prices are higher and I intend to believe that with the RFS, prices will probably be higher since both feedstocks now have $1.00 a gallon. But at the end of the day, it will come down to our sales guys making sure that we work with the customer and try to differentiate and position our service.

You talked about exports earlier in the call. Can you just specify what activity you've seen since the middle of March in Europe regarding your fats going to Europe? And also as a side note, did they come out with a new palm oil score as far as the carbon footprint over there in which there was some discussion of where that was going to land?

I haven't -- sorry I can't answer probably either one of those because I really don't know. I haven't seen any big shipments off to Europe. We're seeing the Pac Rim countries and we're seeing South America and Mexico.

We have not seen a complete resurgence of the EU. There's been a few little shipments there. As far as palm oil, I really haven't studied that one yet to comment fairly on it.

But you recognize obviously given the discussions that should palm oil fall below the requirement, same situation in Europe as there is in the US, could be a real boondoggle for animal fats again.

And ultimately that is a huge transition in Europe to go to convert back to -- they've got the class system for different types of rendering products over there and whether they can actually work through that, probably not fair to comment other than to say it will probably take more time than less time.

Interesting, your comments earlier on the call regarding your stats now looking at involvement directly on the biodiesel side of this. Before I was always trying to create the urgency for partners whether it be petro or others as far as that side of the equation, wanting to get involved in working with you.

Does the EPA ruling increase that urgency on their part and now you're taking a step back? Or are you still as interested as you were before and now you've finally got the other parties piquing their interest and knowing hey, they have to do something and you can't just prolong this forever?

Well I think in fairness, there's a few smiles in the room here. But you know, we have been calling on potential partners and customers for two years and standing on these calls and telling you that we're working diligently and trying to get their attention.

And frankly, RFS II will help those discussions. It should depending on how it comes out in its revised form. So yes, in general answer, we become a little more popular than we were a few weeks ago.

So you're answering the phone instead of making the calls?

Yes, you know, when we called, we got the night janitor. Now we actually get to talk to somebody.

Last question for me, just going simple math. If the soy people have to blend it looks like at a 22 and an 80 that you're about 45%, you need to be of that blend. Given the mandates on the RFS going forward and am I correct it's 7.5 pounds per gallon of fat?

Yes, that's close enough.

Okay, those are significantly large numbers as compared to the animal fats that are produced in any given year. Where are we today? I'm guessing it's fairly minimal and how does the market adjust to that increase in demand and with satisfying the oleochemical guys and your existing customers now, how does that play out?

Because it would appear that is similar to what we saw with corn and ethanol in the first go around, there's going to be significant price increases created by this ruling if it goes through even in some form of the current ruling now.

Kind of what I would give as a description on that or an attempted answer for you is that you have to look -- if you nominally say that there's about 10 billion pounds of fats and greases out there in production today, about 70% of it goes to animal feed, about 20% of it goes to the oleochemical business at about 5% of it is edible.

And these are all approximate nominal numbers. If you work from the bottom up, 5% edible, that really doesn't have -- that is what I would call inelastic demand. It's being used to process foods and it's very specialty item out there.

So frankly that has very little input on the issue here. It trades against probably soybean oil, edible soybean oil and other hard fats. The 20% oleochemical, the majority of that is a price arbitrage other than specialty production items against palm oil.

So you kind of use -- build your algorithm and say 5% is against edible soybean oil, 20% is against palm oil or palm styrene, whatever you want a look at; and then the 70% up there is animal feed. And as we've described all along, animal fats and greases that are consumed in the animal feed industry are a caloric enhancer for putting weight on that animal and there are very, very well-known kind of algorithms or conversion numbers that people use out there for saying what the value of fat is in a ration and it can differ on a finishing ration, a grow-out ration, whatever you want to call by specie.

But the nominal number is the price of corn divided by 56 times a multiplier of 3 to 3.5 which would tell you that what the value fat is. So the argument here is if a large portion of animal fats gets mandated into biofuel use for greenhouse gas reduction, what is the price impact on animal fats?

My argument would be that there's plenty of animal fats out there that will be displaced from animal feed because there's substitutability. There's [pure] elasticity in that ration today and we have seen it over history.

If our prices get too high, we get kicked out until we buy our way back in. They use more DDGs, more cotton seed meal, more sunflower meal, more corn gluten feed, more corn. There's hundreds of ingredients that can go in to replace the finishing side or the caloric side of yellow grease.

Yellow grease and animal fats and feed rations are being used because of one thing -- price. And there may be a few rations that use it for other reasons but that would be the majority of it. So it's a purely elastic argument which would then say you would probably reduce exports and ultimately the price impact, it would probably not be as great as if it was a purely inelastic play here. Make sense?

That make sense. I was kind of hoping for a little more inelasticity, but that does make some common sense there. Thanks a lot gentleman.

William Bremer, Maxim Group.

Great color Randy on a lot of different fronts that I had questions on. Just getting back to the hedge, you mentioned that we're going to still see some effects of it into the second quarter. Can you give us sort of a percentage of -- like a percentage of the second quarter that we're going to have the effects and when you really feel as though this hedge is going to completely come off?

We refer to it as a hedge when it's just forward purchasing. We really can't off-lay the finished product side against that. As Randy had indicated, first quarter was a larger impact on the natural gas. We did not have any forward ownership on the diesel and so that did all flow through.

So that portion of it -- and (inaudible) we have seen a bigger impact coming in on that. As we go forward, second quarter had less forward ownership and then we -- as Randy indicated -- third quarter, fourth quarter we do have some forward ownership but that's more in line with the current prices that are out there, that we like those prices today in relationship to where fat prices has gone up to where we would not be burning fat.

So you're going to still see a little bit of that impact in the second quarter, but then most of that will roll off and will be more into what you are seeing as current prices out in the marketplace. Then as Randy said, then at that point in time, we will continue to monitor that and we decide what type of decisions or forward ownership we want to have there.

Okay, great. Can you just give us a little more color regarding the pricing adjustments and the collection fees that you are sort of experiencing a little bit in the restaurant services side?

I don't know that I can give you much color there. It's just something we're doing locally and regionally relative to competition. It's a tough time.

The good news is that price of diesel fuel is down to these customers. The bad news is that the amount of traffic in their door is down.

So working with customers right now, saying you want to improve the collection charge or you want to do this or that has become very challenging. So we're doing it very regionally and specific and doing some cost-of-living adjustments here and there to help right-size our model a little bit.

You know, it's predominantly as we said the restaurant services segment was driven by some forward sales. But ultimately the volume side of it out there will show a lot of improvement for us or help us a lot if it does improve.

Jeff Gates, Gates Capital Management.

Yes, a couple questions. One is can you talk about what you are seeing on the acquisition landscape and what your objectives would be for further capital allocation to acquisitions? That's number one and number two, can you tell us the amount of export sales during the quarter versus last year?

Yes, Jeff, I will start probably with the easier one. I want to say that about 17% of our volume went out export versus about 25% a year ago, so about 50% down or 40% down.

On the acquisition front, I think it's kind -- there's really very little I can comment there other than at these run rates and where we are at and our balance sheet, we are continuing to build cash and if an opportunity comes by, we are certainly in position to do something here. I wouldn't say there's anything magical going on out there that would lead us to say there's anything imminent at this time.

And when will you get the tax refund that's on the balance sheet?

(multiple speakers) I knew you would notice that. On the balance sheet, the receivable from the IRS basically has been changed much mainly because in the first quarter, we paid very little in cash taxes.

Because of some tax work that we had done, we were able to defer almost the entire amount of our tax liability in the first quarter out forward. What we will look at is re-look at that and look at our earnings projections and decide whether we will take that in or just apply for the refund or net that against our next tax payment, Jeff, as we go forward on that.

But we were able to get quite a bit of work done with our tax department and working on the outside with some advisers to reduce our taxes quite a bit over what we thought we were going to be able to do during the first quarter this year.

I guess lastly if I can, when do you expect to recapture the restaurant services profitability? Is there anything in that business that you might be considering in terms of changing the structure of how that formula pricing works to help smooth out the business because of what's happened over the last four, five, six months?

You know, ultimately I think as the sales rolled off in first quarter, there should be some improvement for second quarter here. The formula side as we said, strategically about a year or year and half ago, two years ago we started to move towards larger, more complex national accounts -- McDonald's, Burger King, etc.

Those have pricing arrangements in them here that once again more and more in that business moved towards formula which should have smoothed out our earnings there to a degree. But we got whipsawed pretty hard in first quarter with the price run-ups and downs.

So hopefully we are going to see a more normalized position here going forward with the changes we're making in cost efficiencies, routing improvements and we have made some formula improvements out there. So I think hopefully in the second quarter it will be a different discussion.

Bill Baldwin, Baldwin Anthony Securities.

Good morning. Just wanted to see if there was any impact on -- or you think there will be any impact on your animal fat exports as a result of the tariffs imposed by European Union on the importation of B100.

Hard to say yet, Bill. We have not seen any inquiry or any increase in business there yet. Time is going to -- the interesting thing is that Europe basically shut down in their nice polite way the splash and dash or importation of biofuels from non-produced or non-European produced sources.

They are trying to let their industry rationalize and balance out. But yet at the end of the day, that industry is subsidized but maybe not to the same degree as ours and they're going to have to find cheaper feedstocks that ultimately work. Whether or not that will allow in animal fats or additional waste cooking oil and different specifications, time will tell. I'm hoping it will but right now I can't say that it will.

Randy, is there any kind of rough timeframe of what you think we might see what they're going to do over there regarding utilization of our animal fats and cooking oils?

You know, I think everybody's going to stand back and watch and figure out what happens with the RFS yet in the US and see where that all levels out. What's interesting here from a purely academic standpoint is the EPA and the Obama administration have clearly now put the first stepping stone down relative to climate change which is consistent with what the Europeans were starting down the road.

So I mean it's kind of the first step down here. How it all works out and the timing and ultimately the capitalistic reactions on investment that happened over time, it's kind of unknown right now.

Ladies and gentlemen, this concludes today's question-and-answer session. I will now turn the floor back over to his Randall Stuewe for any final remarks.

Okay, just want to say thanks to everyone for participating. Lots of good questions and we look forward to talking to you here again in August. Have a great weekend.

This concludes today's conference. You may disconnect your lines at this time and have a great day.