Darling Ingredients Inc (DAR) 2009 Q3 法說會逐字稿

Good morning, everyone. Welcome to the Darling International conference call to discuss the Company's third 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 of 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 review Darling's fiscal 2009 third quarter earnings results.

Randy Stuewe, our Chairman and CEO, will begin today's call with an overview of our third quarter financial performance and some of the trends that impacted our results. John Muse, 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 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 biofuels, and grain and oilseed commodities, which have exhibited volatility, each of which could 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 to 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 Darling International's conference call to discuss earnings from the Company's third quarter, which ended on October 3, 2009.

As with past calls, our primary objective is to provide additional color and understanding of our Company's operational performance. I would like to begin by saying we are very pleased to have delivered another very solid quarter, as we've been able to sustain the momentum created throughout the first part of the year.

While our earnings were lower compared to our record-setting third quarter of 2008, we have seen continuous sequential improvement in our business since the start of the year. Earnings for the third quarter of fiscal 2009 were higher than the second quarter of 2009, primarily driven by higher selling prices for our finished products, lowering of inventories, and improved operating costs.

I'd like to take a minute to address each of these items along with a few other key areas that impacted our third quarter.

Raw material volumes have remained stable since the first quarter of 2009, but were lower compared to the third quarter of 2008. For most of 2009, lower volumes continue to be a result of consumer sluggishness along with challenging economic conditions across the meatpacking sector. Year-over-year, we've experienced several small and mid-size packer plant closures and curtailments, along with less overrun volume by the large integrated slaughterhouse.

Mild summer weather for our third quarter also resulted in lower dead stock availability. Finished product prices for tallow, yellow grease, and meat and bone meal improved over the second quarter, but on a blended basis, was significantly lower when compared with third quarter 2008. Overall, our historically favorable finished product pricing during the quarter was driven by improving corn prices, rising crude oil values, and a tight global soybean supply and demand.

Most interesting was that we saw significant demand improvement from the chemical and biofuel industries during the quarter. Operationally, the Company experienced lower costs in the third quarter of 2009 versus the third quarter of 2008.

Lower energy costs contributed to our favorable results, but we were also successful in reducing other general operating costs, even in light of lower volumes, higher pension costs, and multiple acquisition costs that were not reflected in third quarter 2008 results. For our operations team, third quarter was a nice performance.

Our Restaurant Services segment had a positive quarter. Overall, margins continued to improve in the quarter. Recycled cooking oil volumes still haven't returned to pre-recession levels, but lower diesel fuel costs more than offset this volume decline. Our national accounts approach continues to show promise and our grease trap maintenance business continues to perform nicely. Additionally, our acquisition of Boca Industries is performing as expected.

Now let's turn to renewable fuels. In September 2009, the Company announced that it has joined with Valero Energy Corporation to take initial steps towards the formation of a joint venture company to build a green diesel facility. It is anticipated the facility will be capable of producing more than 10,000 barrels per day, or 135 million gallons per year, on a site adjacent to Valero's St. Charles refinery near Norco, Louisiana.

The proposed facility will convert grease, primarily animal fats and used cooking oil supplied by Darling, and potentially other feedstocks that become economically and commercially viable for use in producing renewable diesel. The Company and Valero have applied for and are jointly seeking a loan guarantee from the US Department of Energy under the Energy Policy Act of 2005, which makes $8.5 billion of debt financing guarantees available for projects that employ innovative energy efficiency, renewable energy, and advanced transmission and distribution technologies.

On November 3, 2009, the Department of Energy notified us that it had completed its review of our initial application for the project, and has approved our project for further evaluation under the program. In addition, the Department of Energy informed us the project may constitute a 1705-eligible project, which designation would entitle the joint venture company to have certain of its loan costs paid for by the DOE loan program.

Accordingly, the Company and Valero intend to submit the more detailed Part Two submission required to continue its application process. We intend to submit this on or before December 3, the December 3 due date. Pending that submission, we expect to be notified after the first of the year as to whether the project will be selected for the DOE loan program. At that time, and as more details become available, we will keep you informed.

Now I'd like to take a minute and gave you an update on Darling's involvement with the City of San Francisco. As we've discussed in previous calls, the Company seeks to construct a 10 million gallon biodiesel facility in San Francisco adjacent to its rendering plant. Our commitment to the City remains, and we will continue to cooperate with local authorities to resolve any outstanding issues. Once the permitting and citing issues are resolved, we will then make a final determination as to whether the project is feasible.

I'll now turn the call over to John for a more detailed review of the third quarter financial results. After John concludes, I'd like to provide some closing remarks and then we'll move on to Q&A. John?

Thanks, Randy, and good morning to everyone. During the third quarter, the Company reported net sales of $159 million as compared to $236 million during the third quarter of 2008. The $76 million increase (sic - see Press Release) in net sales was primarily driven -- was due to lower prices for finished products and lower raw material volume.

Net income for the third quarter of 2009 was $16.1 million or $0.19 per share compared to $23 million or $0.28 per share for the 2008 comparable period. The $6.9 million decrease in net income from third quarter 2008 resulted primarily from reduced raw material volume and lower finished product prices, which was partially offset by lower energy costs related to natural gas and diesel fuel.

During the quarter, interest expense was $700,000 in both the third quarters of 2009 and 2008, respectively. The Company recorded net tax expense of $8.7 million for the third quarter of 2009 compared to $13.7 million recorded in the prior-year third quarter. The decrease of $5 million is attributable to lower pretax earnings in the third quarter of 2009.

At that segment level, rendering generated net sales of $121 million for the third quarter of 2009 as compared to $168 million in the third quarter of 2008. A $47 million decrease in rendering sales was due primarily to decreases in meat and bone meal, and tallow finished product prices, and lower raw material volume.

Our Restaurant Services business generated net sales of $38.9 million during the third quarter of 2009 as compared to $68 million for this same period in 2008. The $29 million decrease in Restaurant Services sales was primarily due to a 34.6% decrease in yellow grease prices as compared to the same period in 2008.

Our balance sheet remains healthy, and on October 30, 2009, the Company had working capital of $84.4 million and a working capital ratio of 2.19 to 1.00 as compared to working capital of $67.4 million and a working capital ratio of 1.9 to 1.00 on January 3, 2009. This increase is primarily due to an increase in our cash.

For the nine months ended October 3, 2009, the Company reported net sales of $448 million as compared to $659 million for the 2008 comparable period. The $210 million decrease in sales is primarily attributable to lower finished product prices and reduced raw material volume.

For the nine-month period ended October 3, 2009, the Company reported net income of $32.6 million or $0.40 per share as compared to $68.5 million or $0.83 per share for the 2008 comparable period. The $35.9 million decrease resulted primarily from reduced raw material volume and lower finished product prices, which were partially offset by lower energy costs related to, again, natural gas and diesel [fuel].

The Company's cash position increased by $12.9 million from the second quarter of 2009 to $70.7 million at October 3. The Company had funds available under its revolving credit facility of $109 million. This compares to unrestricted cash of $50.8 million or $108 million funds available under the revolver at January 3, 2009.

The Company has made capital expenditures of $14.1 million during the first nine months of 2009, compared to capital expenditures of $21 million during the first nine months of 2008, for a decrease of $6.9 million. The decrease is due primarily to a reduction in spending on a major modernization project started in 2008, and it completed in 2009 at our Turlock, California plant. The Company has also spent $1.4 million year-to-date related to our final BSE rule.

Additionally, in order to comply with the Pension Protection Act funding requirements, the Company also contributed $14.1 million to its defined benefit plans during the third quarter of 2009.

And finally, on September 30, the Company entered into an amendment with its bank lending group, which -- one, extended the maturity date of our revolving credit facility from April 7, 2011 to April 7, 2013 -- a two-year extension. This revised the pricing schedule and also permits the issuance of an additional $150 million of new unsecured indebtedness, among other things.

I will now turn the call back over to Randy.

Thanks, John. Before we open up to questions, I'd like to close with a few comments.

This is our third consecutive quarter of improved financial results, and while our numbers are down in comparison to our record-setting 2008, I'd like to stress that we are seeing improvements across all aspects of our business since the beginning of the year. Our balance sheet is strong; the fundamentals of our industry and our business model are fully intact; and we are in the midst of some exciting new initiatives in alternative fuels.

With that, I'd like to turn it over now to the Operator and let's begin our Q&A session.

(Operator Instructions). Farha Aslam, Stephens Inc.

A couple of questions. One, terrific execution in the quarter. When you were looking at your inventory positions and what you sold out of your inventory, was there a significant benefit in terms of the high values going up in the quarter that benefited you?

Not really in the third quarter. During this year, we've been bringing our inventory levels down all year, but we've also seen high prices continue to slide a little bit during the year. Starting in this fourth quarter, we have seen a little bit of improvement, but our inventory levels are much lower, mainly because of the reduced dead stock that we've seen through the summer months.

Okay. And so the spread between your sales and the prices you have to pay for your raw materials just looks really nice this quarter. I'm trying to figure out is it because you were able to sell cheaper inventory you bought when prices were lower in the second -- first and second quarter? Or is it really that your pricing formulas are working very well right now?

There's a couple of things there. Actually, because we have limited storage, so to carry inventory from the first to the third quarter isn't really physically possible within our infrastructure.

The pricing between second and third quarter was relatively flat. Now we did, as we said, lower inventories in third as prices moved up and some of the relationships, especially in the protein level, felt very good to us.

The reality is, as you know, when you bridge this thing out -- and, obviously, you're trying to bridge what's the difference in the sales, the revenue line, still a big piece of it is related to the high values that we're receiving. I mean, they are still 50% to 70% lower and even greater in some grades than they were a year ago.

The third quarter of 2008 was still a pretty good performance across all segments. And then about late October, it really fell out of favor here. So that's really a big portion of the driver. And then a lot of it is just truly execution from the standpoint of margin widening, and to a degree, as you picked up, using the formulas and lowering what we were paying for some of the raw materials.

Okay. And when you look at your formulas, is it still sort of 55% of your rendering and 10% to 15% of your Restaurant Services is on formula pricing? Or is that (multiple speakers) --?

Yes, the number we make public is it's 58% of our total volume is on formula. And it is -- you are correct, directionally within a greater portion of it is in the rendering segment, where there are larger volume suppliers.

And my final question is on energy. Were you basically at market during the quarter in terms of natural gas and diesel?

Yes. As we -- this was the one we actually got right this time on the energy side, so we didn't have any of John's forward ownership here.

Okay, great. And then going forward, can we just basically expect you to be on the market for natural gas and diesel?

I don't give guidance on that.

Okay, thank you very much.

Tyson Bauer, Wealth Monitors Inc.

A great quarter. It would appear that -- obviously, you mentioned dead stocks were lower; I would assume that meant your product quality was significantly better than years past in Q3, when we have a lot of heat-related deaths and diminished quality of the raw materials coming into your facilities. Does that imply that we won't see as big a difference as we have in the past margin-wise between Q3 and Q4, because we've taken out that seasonal blimp in volume and reduced quality?

Kind of hard to say. And then the reason I would say it's -- you're right; we didn't see the typical hot summer weather that gives us the big push, both on the West Coast and in the Midwest on dead stock. And as you've followed the model for years now, results in the downgrading of the animal fat product and the discounting into the marketplace. So, yes, you're right, we got some benefit there.

As far as how it translates year-over-year and quarter-over-quarter, you've seen some extreme volatility between September and now, mid-November already, where prices have rebounded $0.04 and $0.05 a pound on the fats, and the proteins dipped and then they're coming back strongly now. So, I would tell you it's probably -- it would be hard to pick out and very transparent if you could right now.

Okay, I'm going to tag on to what you just said. October, obviously, you had a pricing situation that just kind of fell off the cliff and now has bounced back, as you said in November. Was there anything unique? Or do you just view it as a hiccough in the pricing in October? Or did the USDA rules being implemented create a push ahead of deadline? Or what's your rationale why that pricing took place as it did?

Well, there's really probably three or four things, and you hit on most of them there. Number one, you had a strong biofuel pull during the summer of at least at the higher-quality fats that were out there, as they could actually blend them, starting basically in about the May/June/July/August period. They had to unwind their tallow methyl ester pulls during the late third quarter here.

The second thing, which is probably even more important, was the chemical industry powered up to replenish the inventories that have pulled down between fourth quarter last year and first quarter this year. And they -- and whether that was related to Cash for Clunkers and all of that, I don't know. But the chemical industry powered up very heavily and was a strong demand pull on top of the biofuel kind of just seasonal pull that hit there. And that all stopped towards mid-September.

And then at the end of the [day], that's when the feeding business is at its weakest time. So basically, all those three things hit all at the same time, and just caused -- and the packers ran a pretty good rate and put a little more product onto the market. And we got basically the supply push again that happens so often in this business, that took us down for about three weeks.

And now the demand is resurging. It's cooling down; feeding economics are improving; and I would say it's a pretty typical fall now right now.

Okay. And the last topic for me -- through the first six weeks here in Q4, we're almost mirroring surprisingly very close to '08 pricing; obviously, a little bit of directional difference. So the biggest difference looks like it's going to be in energy costs. And then the operating costs that you've been able to take out, I'm guessing through logistics and other execution means that you've done.

Can you quantify -- are you willing to quantify, I should ask, given the labor or what those operating costs that you've taken out that will not reoccur, that are not just solely related to energy cost reductions?

You know, I won't quantify them, but I think it's good that you're picking up on it because it isn't solely energy. I mean, the operations team -- we had to look at this as you guys have picked up, and try to understand the relationship of volume and revenue. And basically, the general economy is still very, very sluggish out there.

And whether it's meat being eaten in the restaurant or whether it's fat being generated from the French fry cooker, it's still relatively slow out there across all states for us, whether it's East Coast or West Coast. And I'd suggest it's probably pretty true for the industry.

And so what it's done is forced us to look at our business model, both from a collection and an operating plant basis, and look at it and say, how do we drive less miles? Or you take the trucks off the road one day a week and you try to keep the plants dark one day a week, until the volume comes back.

So, our operations team has done a very nice job and I anticipate that's going to carry forward here. I don't see anything that will change the way we've had to tighten our belts and modify our behavior since the fourth quarter of last year.

That sounds great. Keep it up, guys.

William Bremmer, Maxim Group.

Very nice quarter, gentlemen. Tyson hit on a bunch of my questions. Let's stay with the operating costs a little bit. Can you quantify how much of -- is the initiative still occurring in terms of taking costs out? Is there more to come on that front?

You know -- I'd have to say, yes, the initiatives continue. I mean, this is a -- this, to a degree, is a mature business in the sense of radical cost-cutting; so that's not in the cards in my world. But trying to find additional efficiencies in here from the standpoint and predominantly in the trucking side of our business are very much underway.

We're working hard with different -- both behavioral management tools, software, and some GPS systems to try to take out route miles out of this business and trying to better understand our customer behaviors. And you know, it's -- when you've always assumed that a restaurant is putting out or filling up a grease bin every six to eight weeks, and now it's moving from eight to 10, that's a pretty large hurdle or thing to move within your business model, and it just takes time.

So I think we're getting better on the collection side, hopefully, every quarter here, obviously, being helped by diesel fuel; but as we've looked at our wages and our overtime, there's a concerted effort on our management team's part to make sure that we're getting the labor out of it also. So hopefully, we'll keep going. That's our goal, Bill.

Great. Thanks, Randy. Now on to the renewable green diesel front. Can you just give us a ballpark in terms of if all the stars align correctly, what could be the minimum CapEx needed for this plant and what would be the maximum?

Well, as we've said, the DOE loan program allows you to apply for up to 80% leverage on that loan. We have not completed our final engineering on that. And really at this time, we're not willing to release a capital number.

We're willing to share that we were very, very excited to learn on November 3, we received the email and the phone call from the Department of Energy telling us that we had been selected to move to round two, and that they had moved back. Instead of actually today being the round two or Phase 2 application, they moved it back about 2.5 weeks to December 3. So it's still progressing.

As we get those documents in, those documents will be in the near-1,000 pages, will include engineering estimates, cost estimates and all the business tactics that we're working on with Valero to build a successful entity; but those aren't completed yet, Bill.

Fantastic. Can't wait for that. And then finally, just a housekeeping question, John. Tax rate [35 spot 2]. What do you advise us to use going forward? It's sort of been fluctuating here the last couple quarters.

I would continue to look at basically for the remainder of the year, the year-to-date rate that's there for the end of the third quarter, because we -- using the rate at the end of the third quarter, you estimate what you think your annual rate is going to be. So, just continue to use that rate at the year-to-date number for third quarter.

Okay. Thank you, gentlemen. Appreciate it.

Dan Mannes, Avondale.

I'm going to follow-up on some of the topics already brought up, particularly on the Restaurant Services side. I mean, on rendering, we know you have a significant amount under formula. We assume when prices slip year-over-year, you're going to recover at least two-thirds or so of that through the formula arrangement. So, you did a little bit better there.

But Restaurant Services was a little bit more stark. I mean, you recovered almost 80% of the change in pricing through costs.

I guess my question there is -- was there any change in competition that enabled you to change the pricing under contracts? Have you shifted the formula? What's going on there that enables this? And is this going to have any impact going forward if prices recover?

Can I answer that with one giant yes?

So all of the above.

Yes, Dan, let me kind of walk you through it. You're right. What you have to do -- remember, you're comparing yourself to third quarter a year ago, when yellow grease prices were averaged $0.345 and this quarter were averaged $0.225.

We had -- last year through the third quarter, we had gone through the first six -- nine months, really, a very strong yellow grease prices. When prices got up to that level, even customers that were not on formula, we started giving some of that higher-priced grease price back to them.

And that's why you're seeing, at the end of the third quarter this year and quarter-over-quarter comparison, that reduction, the relationship to what we normally have under formula; and compared to last year, there was a little more paid out because we had seen prices up considerably.

The other thing you're seeing there is also a growth in the trap business with the acquisition of Boca. And for -- this is second full quarter that we've had them onboard. The first quarter that we had them onboard, which was second quarter, for our due diligence process, we knew we had quite a bit of some upgrades to truck, maintenance costs and everything.

That's behind us now, so that acquisition is doing very well. And we've looked at the margin structure in trap, and your annual increases and trap charges came into play during the second and third quarters. So it's a combination of a lot of items there.

But on -- so, but on trap, you actually would run that through change in price or volume? In the way you disclose in your 10-Q?

I said that's -- we don't report volume on trap.

Okay, so theoretically, that would just run through price and any changes there.

Right.

Is it fair to say, though, if you are sharing a little bit more on the -- it sounds like maybe you shifted your mix a little bit on the Restaurant Services side on formula. If we assume yellow grease prices are going to recover, can we assume it's not -- you're not going to exactly flip back in the lower formula levels; we would assume you would share some more on the way up as well?

Well, yes, it would depend on the level it goes up -- you know, $0.22 versus $0.34 -- there's quite a bit of difference there.

And the other point -- and it's in that cost number and Randy covered it -- the Restaurant Service side, the Operations group did an outstanding job of pulling back, doing routes four days a week and everything, and cost reduction in the driver and the collection process. That is absolutely showing up as well.

But again, you actually report that as change in cost due to price, when you have -- when you're reducing your route miles, rather than --? I guess I'm just wondering, from a disclosure standpoint, why you would run that through the change in cost or price?

It's not in price; it's in -- and it's in cost. It's in the cost of sales.

Right, in the cost of -- but, in the way you disclose in your 10-Q, you have the change in cost from change from lower pricing.

Correct.

And that's the line item, that $14 million -- I think it was a $14 million savings year-over-year that I'm really trying to dig in on, because that was a much higher percentage of the change in revenue from price that had been historically. And I certainly understand the formula side; that makes a ton of sense. I'm just trying to see if there were any other contributing factors.

No.

No, not really.

Okay. And then the competition on the Restaurant Services side, has that abated much, given the lower yellow grease pricing? And what about any initiatives you've had for theft? Have those started to benefit at all?

The competition remains the same, although what I call the bio thieves that were out there that were trying to make fuel out of it for themselves, have abated a little bit. That's -- as you've seen in the biodiesel industry, it's pretty challenging for the small operator. So we've seen a little less in that area.

But competition still remains stiff. For our team, it's about making sure we're aligned with the right customers that take protecting their feedstock to us seriously. So that's helped out too, as we've kind of moved our customer base to the tier 1 accounts.

Got it. I think calling biodiesel challenging is an understatement.

Lastly, just on the volumes on the rendering side, you're probably, in your third quarter now, is let's call it, 10% year-over-year comps down. You sort of indicated things are stabilizing, so we'll assume the same for Q4, or in that ballpark.

As we look forward to next year, I mean, what signs do you see, positive or negative, that could shift that? I mean, how economically sensitive is it? And how much do you think you either -- your specific suppliers lag or lead sort of the broader slaughter trends?

Well, that's hard to answer. I don't know. The only thing I can comment on is we've gone through and started to see volumes here in fourth quarter, I think it's a fair read that they're pretty similar; although we have seen the integrated slaughter plants and some of our large slaughterers run a few Saturdays here to replenish the holiday inventories into the distribution system.

Traditionally, you see a late summer push on dead stock and then it kind of evaporates. And then depending on when we get the winter time here and the weather changes, we'll see whether or not that will actually have a traditional or a moderate impact on our volumes here. So I don't want to say we're optimistic or negative on it. It looks pretty reasonable right now with a few Saturdays being run by a few of the slaughterhouses.

Got it. No, that's great color. Thanks, guys.

Jinming Liu, Ardour Capital.

Can you give me more color on the San Francisco biodiesel facility? It looks like you guys [have stock] in the permitting process.

A little color may take this call into the next hour. But San Francisco -- first off, permitting any type of new facility in California is very much a task. It's not if you're going to get the permit; it's when you're going to get the permit.

We have to categorize or characterize our process in California. We have cooperated with the City of San Francisco. We jointly would like to build this facility for their benefit and for our shareholders.

We're working through some issues in the neighborhood surrounding the San Francisco plant on safety, environmental, odor, and best available control technologies. We've been holding multiple public hearings attended -- well attended by both the City and the neighborhoods. And we're continuing to work through that process.

We have the Mayor's office support, the Port of San Francisco's support. And as I said in our call, as soon as we clear those hurdles, which I can't even make tangible for you, they're making sure that the neighbors are satisfied; that the technology that's going to be employed here is safe for them.

Then we'll look at the final capital that's going to be required to meet those demands of the neighborhood, and the Port and the City. And we'll decide whether the economics work to build that facility.

I think what we do want to share is that we believe that a fuel strategy for this Company is something we would like to embark on, on the West Coast. California has been a leader in establishing the low carbon fuel standard. And as we know, animal fats have been designated an 80% greenhouse gas reduction feedstock.

So we are the largest guy on the West Coast. We have a significant amount of animal fats and we're looking for a solution to value-add to those animal fats. We're hoping that San Francisco is the place; but as we all know, we have several other locations back in the Valley of California that may become viable if this one's not over time.

Okay. Another question is really to your cash balance. Right now you guys have over $70 million on the balance sheet. Are you guys looking at other potential acquisitions?

Well, I think our behavior as a management team and a company over the last seven years for me has been fairly predictable. We continue to build cash in good times in order to weather any change in the business, and we'll use that cash to fill out our footprint when an acquisition becomes available.

The credit agreement still allows us for dividends or buybacks if those make more sense. But I think, given the announcement that we've made on the Valero joint venture, I think it's clear to say that we're going to continue to build cash in order to fund our equity requirement and the working capital needs to establish that facility.

We have strategically made us a decision to explore that opportunity. And provided the financing comes through and that all the assumptions that we've built in our spreadsheets are validated, then we're going to need a significant amount of financing in the form of either cash or external financing to fulfill that. And right now, cash seems to be the most affordable type of financing that's available out there.

Okay, thanks a lot.

[Roman Kanetsa], Gates Capital.

Yes, it's actually Jeff and Roman.

How come Dan gets to go before me? (multiple speakers) We own more shares than he does.

Good point. We'll move you up next time.

I'm wondering actually -- let's say that 135 million gallon per year renewable diesel plant goes forward. How much of your finished products would that take up, number one? And number two, would you then enlarge your trading operation to supply the folks who use these finished products or increase your trading logistics operation to continue to serve those customers?

Yes, I think that's a fair analysis. I can't tell you that anything has been committed to paper that would say it's one way or another. I mean, the reality is 135 million gallons is roughly 1 billion pounds and roughly 65% to 70% of our supply. Norco, Louisiana is in the central part of the country here, although in the very south, and so our plants in the Midwest work nicely to that.

But that's not to say that the freight economics and the way the market trades depending on exports, whether it's Pacific Rim exports or the South American exports -- Newark and our West Coast facilities work nicely into the location too. So, we're kind of looking at it as a global solution, Jeff, to our fat supply.

And ultimately, yes, you're right -- we will enhance our trading operation to, if you will, not abandon our value-added customers that we have out there -- we have some branded products we want to produce -- but our commitment to the Valero relationship is that we will be the origination arm and the backstop for that facility. And that can take many forms -- from domestic, from third-party supplier to import feedstocks, to fulfill and run that facility profitably.

Okay. The second question is regarding the DOE program. Are those currently structured or contemplated structure as non-recourse loans directly from the government? Or do you go to a bank and then you get a guarantee on it or --? And is it completely non-recourse to the parent company?

You know, I can give you a little bit of color on that but I think it's safe to say we really don't know right now the specifics of it. It will be defined when it comes in the form, if we get to that level in the term sheet. Our willingness to participate in this venture is that it's non-recourse.

Now, non-recourse can take many, many forms before it goes non-recourse. And in the past, we have seen the government in -- I'm not going to say similar projects, but in other ventures in other industries, require essentially certificates of completion and process guarantees, meaning that what you've represented to them as a working technology, truly performs at some minimum level.

So I suspect -- you know, there's a risk factor here that will have to be quantified when the term sheet comes out. And then at the end of the day, whether it comes from the Federal Funds Bank or whether it's a third-party piece of paper you take to the outside market, has not been determined yet. We'll wait and see.

And in addition to the 80% [to pencil] financing that might be available, are there additional tax credits, if it's located in Louisiana, that you could avail yourself of?

The answer is yes and those are being worked on. I can't quantify them or tell you exactly what they are today, but Louisiana has been an extremely friendly state towards job creation and additional investment. And we have the Senators and the Governor's support from both the state of Louisiana and the state of Texas towards helping both Valero and Darling grow this business.

And lastly, on the RFS Program finalization, when do you expect to see it? And could you just kind of post us on what's going on there.

Jeff, I didn't understand the first part of your question. What was it again?

The RFS Program -- the Program rules finalization. When do you expect to see it and --?

(multiple speakers) Are you saying RFS?

Yes.

Oh. Right now there's still a lot of moving pieces there and I can't really tell you. I mean, one of the -- relative to the RFS tube that drives this business for us, we anticipate that some time here in fourth quarter, and we're obviously down to about 46 days and probably less with holidays, there's going to have to be an extension made of the biodiesel tax credit.

There is still lots of consternation on the indirect land use and all the carbon issues that surround it and climate change, but I think what you're going to see is you'll see the tax credit extended for one year, and then 2010 will be a year of finalization.

Now all said, we could see some type of clarity on the RFS sometime in first quarter, with all of the mandates beginning to kick in truly in second quarter. I think as we've looked at the mandates, the mandates are critical, not only here, but you're seeing mandate improvement in a lot of geographies around the world. And ultimately, that's typically what's driving the soybean oil price and the palm oil prices around the world right now.

Okay. And just two housekeeping questions, if I could. The current pension underfunding after the payments and the estimated expense for '09, and what that would look like going into next year?

The required funding levels was to reach 94%, which the $14 million did. And the pension expense, depending on where the discount rates are, that's really a moving target. Our old valuation date was October 1; now they've got everyone on December 31. So we won't know until we get there.

We looked at a snapshot this last week and where the discount rates were, and it's almost the same as it was for 2009. But again, we won't know what that is going to be until we get to the end of the year and see what the discount rate is going to be. That's a new valuation point.

So you're saying that it's only about $5 million underfunded at the end of October now?

Well, where the markets are today, we're probably in the 98% funded range.

Had we been in Gates Capital, it probably would have been better, right?

Yes, we'd have been a lot better off, I'm sure.

You'd be so over-funded now. (multiple speakers) So, you're saying that the -- that it was minus 36 and now with this contribution and the performance of the portfolio, it's basically -- you're saying it's, like, $5 million or something like that?

The underfunding is a little more than that. But you've got to understand how these rules and these valuations, and the periods they look at as to where the funding has to be. There's a lot of rules under the PPA that you don't really have -- you have to be at a -- you go from 94%, 96%, 98% to 100%.

Our funding requirement that we had to be at, that was at the beginning of this year; but you don't have to make that funding until October of this year. So it's always a look-back. And then, obviously, that look-back, though, is a measurement made at the beginning of this year.

So, where the market has gone since that valuation date that we had to meet the funding requirement, the markets are up essentially. So we have bridged that gap. You're absolutely correct. But we won't know exactly where we are, again, from a standpoint of expense and funding requirements, again, until the end of the year. Because that's the new measurement date again.

Okay. Thank you.

Mark Sigal, Canaccord Adams.

I was wondering if you could just provide us with a little more color on what you're seeing with the export market, if it's thawed out at all, and how things are moving there.

Well, if you start at the raw material side, you're starting to see a little more beef exports. Some of the Pacific Rim countries are continuing to be a little more friendly to both age and whether it's got bone or not. So, hopefully, that -- we'll see exports grow a little bit in 2010 on the beef side.

The pork side remains fairly strong and the chicken side kind of has its up and downs right now. On our finished product side, with the volatility in pricing, Mark, when it -- it's kind of up and down.

The protein side of our business is very, very strong. And I think you're going to see protein demand around the world remain, I think, historically very strong next year. If you look at the different economies of the world, which you're far more an expert at it than I, the -- China and India, and the other Pac Rim countries seem to be doing pretty well recovering from fourth quarter of last year.

And so we're starting to see a lot of protein move back to those countries. We're seeing the fats and oils resurge, both to South America, Mexico, and then some Far Eastern trade start to develop now.

So, overall, I'd tell you it's up slightly, and relative to where it was in fourth quarter last year, it's going to be up exponentially.

Okay, that color helps. And then just one other, with regards to RFS-2. Are there -- is the potential out there for the rule rewrite or rule amend with certain greenhouse gas emissions levels and volumes something that -- levels that you need to see or not to see, to alter the plan or the scope of the project?

Not really. I think if you want to handicap this thing in a most-likely, I think, as we all know, the farm state lobbies of the seven central states in middle America that grow the corn and soybeans, pretty much got the attention of Washington on climate change and have argued against any type of international indirect land use calculation.

You update the calculations on soybean-based methyl ester to take that out and adjust for more efficiency, and put some value back on, or a BTU value back on, for the glycerin molecule that wasn't accounted for. And essentially, you get -- you see that soybean methyl ester can make the 40% to 50% reduction of greenhouse gases.

Senator Grassley and Collin Peterson have been pretty successful in trying to gain support there. So if you ask me to handicap it, I think what they did on ethanol was they grandfathered a lot of the ethanol plants that were already under construction from, I think, last December. I think you'll see probably a grandfathering of methyl ester -- but yet still a recognition that animal fats are a superior feedstock for the calculation, and it is well-documented that they do provide an 80% greenhouse gas reduction.

And I think that's also being supported by the fact that the Department of Energy noted in their acknowledgement to us that we're going to be most likely 1705-eligible, which, if you read the fine print of the language, says that you have to provide an 80% reduction of greenhouse gases to get some of your loan costs paid.

So, we're getting acknowledgement there and it doesn't feel like it's going to go away; but will it be where the original RFS-2 came out and said that, ultimately, this was a superior feedstock to soybean? I don't really see that happening, Mark.

Okay. Thanks a lot.

That concludes today's question-and answer session. At this time, I'd like to turn the conference call back over to management for any closing remarks.

Okay, thanks, everyone. Good questions today, and we'll talk to you after the first of the year if we have any other updates on the Valero venture. Thanks.

That concludes today's conference call. You may now disconnect your telephone lines.