Darling Ingredients Inc (DAR) 2009 Q2 法說會逐字稿

Good morning everyone and welcome to the Darling International conference call to discuss the Company's second-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 period. 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 conference 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 did review Darling's second quarter 2009 earnings results. Randy Stuewe, our Chairman and CEO, will begin today's call with an overview of our second 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 some additional details about our financial results. Randy will conclude the prepared portion of the call with some general remarks about the business, after which time we will be happy to answer any questions you may have.

Before we begin, I need to remind everyone that this conference call will contain certain forward-looking statements regarding the business operations of Darling and the industry in which it operates. These statements are identified by words such as may, will, begin, look forward, expect, believe, intend, anticipate, should, estimate, continue, 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 general economic conditions existing at 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 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 can be referenced from time to time in the Company's filings with the Securities and Exchange Commission.

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

Thanks Brad. Good morning everybody and thanks for joining us today.

As you may have already seen from our press release issued yesterday, we saw a sizable but predictable improvement in our business from first quarter of this year. Driving this improvement was higher finished product prices and lower energy costs coupled with solid execution by our operations group.

Our operating environment continues to be challenging and volatile. I will highlight a number of key areas that impacted our second quarter.

First, we saw a continuation of reduced raw material volumes during the quarter primarily due to the general economic decline in the domestic and international markets as well as a weaker overall slaughter volumes in the meat processing industry. Clearly, meat production economics remain challenged across all segments for the foreseeable future.

Secondly, finished product prices for fats and yellow grease rebounded from the first quarter 2009 as global demand remained strong and values for alternative ingredients increased. While we also saw significant improvement on the protein side from the first quarter of 2009, on a year-over-year basis our weighted average prices for all three products were lower.

Operationally, we experienced lower costs. While a significant portion of this was due to lower natural gas and diesel cost, it should be noted that we were able to modestly reduce our cost in light of lower volumes, higher pension expenses and integration of multiple acquisitions in Georgia.

Our restaurant services segment saw solid earnings improvement quarter over quarter as both volumes and price rebounded. Seasonally, we saw a modest improvement but price remained the primary driver of this improvement. Our grease trap maintenance business continues to exceed plan and we are pleased with its performance.

Overall the restaurant segment in the US remains challenged due to overall economic decline. It would appear from our view that restaurant closures have slowed but eating out occasions remain reduced year-over-year.

During our first quarter conference call, we discussed what we consider to be a potentially significant development with regard to the EPA's proposed revisions to the national renewable fuel standard which we view to be very favorable towards animal fats and used cooking oil and what was termed waste greases. As a reminder, or for those who may have not been on our last call, the EPA revised requirements specified volumes of biofuel or renewable fuel that must be used in transportation fuel each year and their renewable fuel must meet a minimum threshold of a 40% reduction in carbon emissions.

Additionally in the proposed revisions, the EPA determined that the use of biodiesel or renewable diesel made from animal fat or used oils, waste greases, reflects an 80% reduction in carbon emissions versus petroleum diesel. The EPA also determined in the proposed revisions that biodiesel or renewable diesel from vegetable oils including soybean oil results in a 22% carbon reduction.

The proposed revisions were subject to a comment period that was to expire on July 29, 2009. However, because of the complexity of the models and the procedures used to determine overall carbon reductions, the EPA extended public comment until September 25, 2009. The EPA is hopeful that the revised RFS will be finalized in late 2009 with new standards becoming effective in early 2010.

Additionally on July 29, the US Department of Energy announced a loan guarantee solicitation. Essentially this program makes $8.5 billion in federal loan guarantees available for projects that employ innovative energy efficiency, renewable energy and advanced transmission and distribution technology.

At this time, we believe our green diesel initiative meets the criteria described by this program and intend to apply for consideration. The initial part one application is due by September 14 with part two being submitted by November 13, 2009.

Decisions on awardees are due in early 2010. The significance of this program is that it allows developing technologies to be project financed with government guaranteed funding.

As we understand it today, up to 80% of a project may be packed by guarantee. We will continue to monitor this closely and as new developments arise, we will assess it and ultimately report back to the impact to Darling.

Now I would like to take a minute to give you an update on Darling's involvement with the City of San Francisco to develop a closed loop recycling and biofuel system at our San Francisco plant. We continue to cooperate with the city and its staff to navigate through the challenges.

We've completed one public hearing and next week we will attend another to address any last objections. As we've indicated, once the permitting issues have been resolved and we finalize details with the city, we will hopefully begin construction. With that, I would like to turn it over to John Muse and after John concludes, I'd like to provide some closing remarks and then we will move on to Q&A. John?

Thanks Randy and good morning to everyone. For the second quarter of 2009, net sales were $155.3 million as compared to $220.9 million for the second quarter of 2008. The $65 million decrease in net sales was primarily due to lower finished good prices and lower raw material volume.

Net income for the second quarter 2009 decreased to $11.7 million or $0.14 per share compared to $24.1 million or $0.29 per share for the 2008 comparable period. The $12.4 million decrease in net income for the second quarter resulted primarily from reduced raw material volume and lower finished process prices which were partially offset by lower energy costs related to natural gas and diesel fuels.

Interest expense was $800,000 in both the second quarters of 2009 and 2008. The Company recorded income tax expense of $7.6 million for the second quarter of 2009 compared to $15 million recorded in the prior year second quarter. The decrease of $7.4 million is attributable to lower pretax earnings in our 2009 quarter.

At the segment level, (inaudible) generating net sales of $119 million for the second quarter of 2009 as compared to $157 million in second quarter of 2008. Restaurant services generated net sales of $35.7 million during the second quarter of 2009 as compared to $63.8 million for the same period in 2008.

Our balance sheet remains healthy and on July 4, the Company had working capital of $78.7 million and its working capital ratio was 2.19 to 1 compared to working capital of $67.4 million and a working capital ratio of 1.95 to 1 at year-end. This increase is primarily due to increasing cash and commodity prices.

For the six months ended July 4, 2009 the Company reported net sales of $288 million as compared to $422 million for the 2008 comparable period. The $134 million decrease in sales is primarily attributable to lower finished product prices and reduced raw material volume.

For the six months ended July 4, 2009 the Company reported net income of $16.5 million for $0.20 per share as compared to $45.5 million or $0.55 per share for 2008. The $29 million decrease in net income for the six months ended July 4, 2009 resulted primarily from reduced raw material volume and lower finished product prices, both of which were partially offset by lower energy costs related to natural gas and diesel fuel.

Our cash position increased by $19.6 million for the quarter to $57.8 million at July 4, 2009 and funds available under the revolving credit facility of 109 compared to unrestricted cash of $50.8 million and $108 million of funds available under the revolving credit facility at January 2009. Finally, the Company had capital expenditures of $4.2 million during the quarter ended July 4 compared to capital expenditures of $8.8 million in the same quarterly period last year. The decrease is primarily due to a reduction in spending on a major modernization project that was completed during 2009 first quarter at [Turlock] which was identified as normal maintenance and compliance CapEx.

Additionally, the Company also spent approximately $[1.0] million year-to-date related to the [BSE] rule and we expect to spend approximately $0.4 million in the remainder of '09. I will now turn the call back over to over to Randy.

Thanks John. This is certainly one of the most challenging operating environments we have experienced and we are approaching modest improvements cautiously, adjusting to volume and price fluctuations, while managing our costs prudently. We are monitoring controllable aspects of our business and seeking ways to strategically expand our footprint in the renewable fuels area in addition to broadening our geographic reach. While the stability of our raw material volumes remains a concern, we believe we have a solid capital structure and overall strong fundamentals to adjust to the changing market conditions.

There are growth opportunities for Darling and its core products. The renewable fuel standard could certainly prove to be a positive development and we are monitoring this initiative very closely.

As I've mentioned before, under the proposed rule, fuel derived from Darling's products has been established by the EPA as the most carbon friendly fuel of the existing technically established fuels. In closing, I want to applaud the efforts of the entire Darling team for their continued dedication and for consistently striving for operating improvements and efficiencies during these demanding economic conditions.

We want to thank you for your participation in this call today and for your continuing interest in Darling International. With that, I would like to go ahead and open it up to Q&A. Operator?

(Operator Instructions) Farha Aslam, Stephens Inc.

Randy, first of all on your comments about the government loan program, does that make Darling more emboldened to go for the green diesel plant more independently? Would you be willing to go it alone?

Yes, I think it is still -- first off on July 29, the program came out from the DOE making loan guarantees available for what are considered to be proven but yet not fully commercialized technologies. The leverage of it can clearly help improve the product and lower the risk.

I don't know that it remotely changes our view on whether or not we need a partner. As we have been open in the past, we're pursuing partners they give us access to both operational and distribution capabilities here.

So I think the short answer is it might, but probably not. What it does do is the fact -- given the tight credit markets that exist out here, bringing a project forward of that magnitude and risk in today's tight credit markets was going to be challenging. With government backing and support and guarantees, hopefully it can help us move that project forward at a more rapid pace here. Lots of details to work through but I think it is encouraging.

That's very helpful. Thank you. And now when we just turn to your rendering business, your volumes reduced sales by about 10, 11%. That is more than cattle and hog slaughter is down. Is there a particular reason for volumes being softer in that segment?

The answer is yes. I mean volumes, we refer to it as volume stabilizing. We weren't sure what the precise word was to describe that.

We had a number, as we reported in the K call, the annual call, we talked about a number of closures. We took an impairment charge against a facility that had multiple closures.

We have seen a couple more of the lower capitalized or undercapitalized small packers lose some footing here. We've seen some furloughing of capacity, some curtailment of capacity of the non-integrated guys.

We have seen it basically across the whole spectrum of the Midwest. I mean while we would say our volumes are down, when you're doing comparables, you've got to keep in mind that in 2008, the weekly cattle slaughter of 685,000 a week was kind of the all-time high in the last five years.

So I think when you net out the closures that we experienced and the curtailments that went on, we're pretty much on track with what the industry showing here. For the number of years, we have been somewhat historically insulated from a lot of volatility here but we have just seen reductions across the board at every plant with the exception of the West Coast.

Last year we kind of reported that the West Coast was the weak one out there. The West Coast now remains strong and the Midwest seems to be curtailed back both on beef and pork now and of course we don't have a large chicken base in poultry base in our mix.

Do you think the West Coast is strong right now because of dairy cattle slaughter?

You know, I think -- I guess when I look back and I saw your comments and I went back and kind of checked the CWT program, while we saw a small influx there of some additional kills there, it really wasn't as great as everybody predicted.

And when you're looking at your finished good product pricing and rendering, it was down -- reduced sales by about 14, 15%. Was the mix more towards tallow versus meat and bone meal in the quarter in terms of sales?

Volume-wise they are very similar in volume as far as the product mix coming out. But tallow during the quarter averaged $0.25 a [hundredweight] which is approximately 500 -- is right at $500 a ton where meat and bone meal averaged for the quarter $395 a ton. So from a -- this is the first time we have had protein prices to the level that they have been in quite some time in relationship to the tallow. Tallow prices are still higher than the protein.

And we're just trying to figure out -- because it looked like tallow prices were down roughly 25, 30% and meat and bone meal pricing was up roughly 25, 30%. So we would have thought that finished goods product pricing would have been not down 15 if both were sold kind of in equal form. So we're just trying to figure out where maybe the sales number was impacted more by finished goods pricing, year-over-year.

One of the -- its' in our -- and total sales for rendering also includes a portion that is hides. The amount of -- with protein prices moving to the level they were during the quarter and with hide prices being depressed as they have been, we did quit pulling hides during the quarter and started grinding the hides in with our meat and bone meal. So that is -- when you're seeing that decrease in sales and other, that is a reduction in hides but it kind of moves back up into the protein side as far as sales are concerned.

But you are correct from a percentage standpoint. Last year in the second quarter, you've got to look at tallow was at $0.41 where this time we're at $0.21, protein was 367 where this time is 395. So protein was up a little bit but the tallow was way down.

Okay and then your volumes in restaurant services were reduced sales roughly 4%. Does that include the benefit from acquisitions?

Absolutely. The Georgia acquisitions from the API Recycling definitely had an impact there as well as having Boca in for a full quarter.

So when you look at your core volumes, do you think your core volumes excluding acquisitions are trending in line with the decline in food service sales or do you think they are more or less? Because it sounds like restaurants are reporting same store sales down up in the mid single digits but your volumes would imply that your core volumes are down more than that.

I think we would dispute as to what the data is whether we are credible or not, what the restaurants are showing. Our sampling of 100 and whatever -- 115,000, 116,000 food service locations would tell you that they are down a lot more than they are reporting today.

My final question -- and then I'll pass it on -- is it looks like your recovery in what you paid for finished goods was much, much better relative to pricing and rendering versus restaurant services. Is there something in the contracts that we should think about between the two segments?

Well on the MD&A is what you are referring to. As Randy had said, the volume that we are down is on the packer side and that is a higher percentage of formula.

So those sales decreases you would have a -- pretty much a one-to-one relationship in reduction in cost of sales as well. Where on the restaurant service side, the larger accounts which are under formula or [metrics] pricing, that volume was not down as much as the single locations or the mom-and-pop type restaurants where that is not under formula and you're seeing that relationship there as you pointed out.

Tyson Bauer, Wealth Monitors Inc.

(inaudible) way to hit the numbers.

That was a positive comment?

It was, indeed.

Okay, thank you.

We're doing well. All right. A couple of quick ones here.

We saw in January when the industrial buying base got into the -- especially the tallow market, we saw an increase in pricing there. But then it started to fade away.

We're starting to see the oleochemical guys back in the market now driving up some of those tallow prices. Do you think that's just another spurt that we're getting or something that's a little more sustainable as we go forward?

Tyson, I mean the first thing you have to highlight is the extreme volatility that is going on out here. To see tallow trade down in the quarter to $0.21 and trade up to $0.32 in the same quarter is pretty much unprecedented.

It appears to be driven off of a resurgence of the oleochemical industry. I know several of the splitters are now showing positive margins out there. They appear to be replenishing inventories and part of it is driven by a little bit of a manufacturing resurgence that we're seeing here from the automobile industry.

It feels more sustainable than not, at least in the short-term here, as inventories are replenished and couple out with the lower availability of what I call better quality product this summer. With lower -- we said on our volumes that a lot of it is the packers which would be our better quality product.

The good quality product for sale in the market is much lower than it has been in other quarters and especially this summer. So as long as the fatty acid guys are there and the soapers are there, I think it feels pretty good here for at least the balance of the quarter.

Do you think that's also why we're seeing a little greater than historical spread between yellow grease and tallow is because you're just not seeing a lot of progression on the animal feed side to follow suit with that industrial base?

Yes, you've got a little bit of a dynamic developing here in a three tier market where you've got good quality animal fats going to the oleochemical and soap industry, you've got the high acid animal fats trying to find a home and then yellow grease has pretty much to a degree with corn where it's at kind of priced its way out of a lot of feed rations but has found its way into summer biodiesel blends.

Okay, let's jump over to the slaughter side of this. We're seeing a market increase in swine slaughter here recently, 2.1 to 2.2 projected weeks for those guys. And that's coming off a year where we supposedly saw each a huge amount of culling in the breeding herd yet this year up to this point, there's a 15% decrease in sow slaughter.

Is the government just off on their numbers and their expectations from what you're actually seeing in the hard data numbers? And where do we go forward on that segment?

On top of that on the beef side, we're seeing heavier weights and what appears to be a lot of animals still in the feed lots that are just waiting for better pricing. Are we going to see what we've seen thus far in the year with the lower percentages in slaughter or will there be much change going forward?

It appears -- and I think you said it pretty well -- it appears that there's more talk than there's action here and whether it's the cattle or the hog side. I mean the hog side, clearly the [producer's] challenged and we have seen that back into the country here. But yet people have to remember that the run rate of the hog slaughter industry is still pretty darn high relative to the past three to five years.

It is just kind of -- essentially peaked out a little bit in a sense. Whether the sow herd gets culled or not, time will tell there. It doesn't feel like it right now.

The cattle side, you're keeping animals out of feed lots a lot longer than traditionally here given the pasture conditions in the Midwest, the greenhouse growing conditions and then the overall cost to finish an animal right now. There's still a lot of uncertainty in the animal production world as to what the value of ingredients will be going forward.

While corn has come down substantially, you've got soybean meal still holding at relatively higher than past historical prices driven predominately off of China's demand to feed their animals. People must always remember that China is probably the largest hog producer and largest cattle producing country in the world.

So those -- you've got protein prices remaining high while you're growing an ultra large corn crop, if you will, out there under perfect conditions. So, the local producer here is still trying to figure out whether animal production economics are favorable long-term and what you see in the ag community is they tend to lag what the spreadsheets tell you you ought to be doing.

So I think there's probably a little bit of a lag here. But overall I think given corn, where it's at, should continue to encourage animal production in this country pretty favorably. You're starting to see that in the poultry cycle come back as the most efficient meat here.

Last one for me real quick on the RFS2. How does that process actually work? Is it the EPA that makes the recommendation and can actually enforce new regulations based on an agency basis or must it get reconciled and included in some form of a bill like the energy bill or otherwise with Congress passing with the President's signature? How exactly does that work and is there any probability that there's some kind of extension of the existing rules and this gets delayed into 2010?

It's a great question. When asked of our Washington contacts and lobbyists and smart people, they would have phrased it just like you and I asked the same question. The answer is that as I understand it, the EPA has the authority to enforce RFS2 starting January 1 if they choose to, although the rules regarding (inaudible) and assignments of numbers there really hadn't been worked out. The details aren't there.

I think the most likely outcome here is that we go forward potentially either with an extension of RFS1 in a sense, we grandfather some capacity or we delay the implementation of RFS2 until somewhere between first quarter and early second quarter. And to a degree, I think the market is starting to tell you that given $0.36 or $0.37 or $0.40 bean oil out there.

So we'll just have to see how this whole thing works out. It would appear that Washington is going to go forward with some form of renewable fuel standard. They're committed to alternative energy but have the details all work out with the environmentalists versus the farm lobbies, too many details to work out to be any more certain.

John Quealy, Canaccord Adams.

It's actually Mark Sigal for John. Just a quick question on the restaurant services side. Do you see this quarter as representative of sustainable revenue and margin levels going forward?

By our silence, I don't know. We don't really did get into trying to predict sustainability on March and revenue here. I think what you're seeing is we have seen yellow grease prices improve here a little bit after dipping back. You're carrying now $0.24, $0.25 yellow grease.

Volumes typically as we have seen the seasonality in the business when the ballpark is open, you see an improvement in second quarter and it runs pretty strong all the way up until when the ballparks close here. The economy feels a little more optimistic but as we have said, I think it is -- right now I don't expect any big changes in that but time will tell.

Okay and then in terms of your ongoing discussions with potential strategic partner for the green diesel facility, is it something that you are still targeting for a potential decision by the end of this year? What does the revised timetable look like?

The timetable will be driven by the partners and as we have openly talked, we have multiple opportunities there and we are screening them to find the right fit. The DOE program driven by the urgency at which you have to apply for that funding along with some other programs that are out there in the form of grants and other regional or geographic financing programs make some type of decision for potential project financing critical to accomplishing that here before year-end.

Okay and then just lastly, have you seen any improvement or easing with regards to the export market or how do things look there?

When we look at measuring exports, I mean we've seen continued strong exports of meat and bone meal around the world here as protein continues to be in somewhat short supply. The greases that we are moving to Europe have kind of slowed but the yellow grease to Mexico has improved.

As we said, the pure animal fats that go out of the country for soap production in emerging markets continue to remain relatively strong. When we look at it on a percentage of our basis, we are still down a little year-over-year even given some of the moving prices here. And predominately it's the hide business that has not recovered although we have seen a resurgence off the low there as the garment industry in China has started to at least restart here.

Debra Fiakas, Crystal Equity Research.

I wondered if you might comment on the acquisition climate and whether or not you are still active as we're going through the summer and into the fall in looking at additional acquisition opportunities?

I think the answer is given the war chest that we have built here of nearly, what, $60 million of cash, clearly puts us in a position that we are going to have to make some decisions and look for right opportunities to invest that whether it comes through broadening our geographic presence or putting that war chest to work into the green diesel initiative. So the answer is we are always looking.

I think the opportunity in some cases is pretty good for doing that. But it all has to be right and timing is critical. Sometimes it's not when you want to buy it, but it's when other people want to sell. So it's just a timing thing.

Understandable. You mentioned in your opening comments that you are moving forward. There are hearings scheduled or meetings scheduled in San Francisco for that project. And I wondered are you looking at other locations? Are you actively out soliciting other opportunities along those lines? Or are you waiting for this particular project to fully get off the ground before you begin trying to replicate it in other locations?

In fairness, I think we chose San Francisco because of the climate and the support we have had from the city and the willingness to embrace a green vision. Given our limited resources and limited resources in this case is people, we think that San Francisco is probably the best opportunity although we are exploring other alternatives on the other large metropolitan areas for a similar type program as they have heard what we're doing in San Francisco and they are asking us to explore that. But I think right now, our focus is on trying to bring to fruition the opportunity in San Francisco.

Okay, and then one last question in regard to CapEx plans in the second half of the year. If you mentioned it earlier, I must have missed it. If you could indicate whether or not you have any major capital spending programs or projects scheduled for the rest of the year (inaudible) the rest of the year.

Our CapEx, we have projected it to be approximately $20 million for the year. First quarter was still a wrapup on the Turlock facility when we reported 6.1. Second quarter dropped to 4.1.

So currently we do not have any other major projects scheduled. So it will be normal maintenance CapEx like that for the remainder of the year. So our projection of around $20 million is still a good number to use.

William Bremer, Maxim Group.

Could you give us a little color on the natural gas [vote] contracts? Looks like you put on some more in July. I was just wondering if you could give us a little color on the percentage of what you are hedged until where in terms of timing.

Well I think the first thing we can comment on there is that I think as you guys were trying to reconcile our numbers for the quarter, if you refer back to first-quarter call, we let you know that we had made some forward purchasing decisions there that had us somewhat out of the money for second quarter. We have worked through those forward ownership positions and then as the market traded down here into the third quarter, as we reported in our Q, we have taken a pretty substantial forward ownership through the third quarter and a portion of the fourth.

We don't want to break that out for competitive reasons, but we like gas in the threes and it's been a long time since this business has seen gas in the threes and low fours. So that will be a positive influence to the overall operating ability. We have seen diesel fuel kind of do the same thing here and that has been a straight pass-through in both second and will be in third here.

Jinming Liu, Ardour Capital.

Just to follow up on the natural gas situation. Have you guys thought about -- put some forward contracts on next year? Because if we checked forward prices for natural gas, next year's prices are right now much higher than current year's.

Yes, it comes down to our risk management and our view and our policy that we have internally. While the absolute flat price of natural gas can look attractive here, really at the end of the day, we try to manage the business a little closer here given that we don't have any forward sales or forward purchase agreements for our raw materials.

So it would be clearly a speculative position. Now that doesn't mean that we won't take forward ownership here. But right now, our view is that the natural gas situation, unless the world economy is truly going to jumpstart and accelerate much faster than it is is that we are going to stay at least in the near term here closer to home than taking forward ownership in that.

That couples also with where we see some government programs that we've talked about in the past on the potential for getting approval to burn greases and fats in our boiler under different programs. And so I think right now where we believe that fats and oils and the alternative programs are, we like natural gas here but not beyond the end of the year.

Also just another follow-up question. Say if you include the couple acquisitions you made, what would be the changes for your restaurant segment for the quarter compared with last year?

We don't break that out. The API acquisition and Boca, API came in in third quarter of last year and then Boca came in at the end of first quarter this year. But we do not break those out as relationship to our prior sales and P&L.

Sarah Lester, Sidoti & Co.

Just one quick question. When you apply for funding for the renewable diesel plant, it sounds like you are applying for the funding independently but can you specify a partner at a later date or after you have been approved?

There are multiple ways of doing that and frankly I guess we will give you some color on that when the time is right. Whether or not what you have to display to the government -- we have not filed at this time. We have until September 14 to do that.

Daniel Mannes, Avondale Partners.

A couple of quick follow-ups here. First just on restaurant. Given where pricing are -- I mean $0.24 -- I know '08 obviously set a higher benchmark. But pricing is still attractive on a historical basis. Has that kept competition around? What is the competitive environment like on the restaurant services side right now?

The competitive environment is unbelievably challenging out there. It is challenging operationally in that volumes are reduced at restaurants, so operationally you're picking up less from traditional [route] density types of modeling.

So your costs are challenged there. We are seeing an inordinate amount of theft I think that would be confirmed by most of our competitors in the industry today. We are addressing that.

And then pricing remains challenged as there continues to be what we call biotheft out there in the sense of people that are still trying to take this product and send it back to some of these startup biodiesel programs. So it's a very challenging environment. I would say we're holding our own but at the end of the day, it comes with aligning with the right customers and making sure you're servicing the routes correctly.

Got it. And then briefly just on rendering -- looking at -- on your formula business given lower volumes, do you have any ability to get back some of that through the formula pricing i.e. the pickup charge or something? Is there something embedded in there that gives you more incremental per ton recovery if you have lower volume inputs?

You've got to take the good with the bad. If you look back a year ago in 2008 in January and February, we had record volumes that were unprecedented that we'd never seen and obviously we didn't give any back then. So it's kind of hard to ask now for more.

So the formula is really more sort of the pricing. It doesn't really give you anything on volume.

Right, you sign up for the good, the bad and the ugly.

Got it. Then just lastly on a prior question about M&A, you said $50 million on your balance sheet in cash. But realistically, I mean you're basically at net zero debt given your run rate even of EBITDA on a haircut from now.

It seems to me you have a lot more buying capacity than $60 million. I've got to think it's in the couple hundred million dollar range potentially.

Could you just first of all frame out what you would be comfortable with in terms of sizing, how levered you could get? And then secondly, how broadly can you guys look on the acquisition side? What's sort of the longer-term plan if green diesel doesn't become available as we move to year end and the acquisitions don't avail themselves? Where does the decision-making start leading to as we look to next year?

Well I think clearly we have a lot of capacity given the credit facility that's underneath today, given both the cash and the availability under the revolver. So I mean I don't want to call it unlimited capacity.

But given the run rates we are at today and the behavior that John and I had over the years we've been together here, we are comfortable levering the business up to maximum to 2 to 2.5 to 1 here. So we have a pretty large war chest in capability here. What we don't have is a large set of opportunities that we have seen yet between -- beyond potentially the renewable fuel arena. Obviously that can change overnight, but that's kind of where it's at today, Dan.

We saw a scenario a couple of years ago in advance of the National Byproducts acquisition when you guys were kind of comfortable sitting with excess liquidity, knowing there or believing there was something else out there. Is that a potential scenario here where we look to 2010 and you guys sort of just sit back and wait? Or do you feel any need to put this to work somehow?

I think the answer is if it makes sense and we've proven that time and time again, I mean obviously the Board will have some decisions to make if we continue our run rate here and we have not found some something to do with that cash. I mean clearly our credit agreement allows for dividends, buybacks and other opportunities here. But it's just got to make sense and we are optimistic that something here will come and make sense hopefully here in the near future.

At this time, I'm showing no additional questions and would like to turn the conference back over to management for any closing remarks.

Okay, want to thank everybody and we will see you I think around the first or second week of November to comment on the third quarter. So appreciate everybody's attention and questions today and we'll talk to you later.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your telephone lines.