Darling Ingredients Inc (DAR) 2009 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Darling International conference call to discuss the Company's fiscal fourth-quarter and full-year 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 and instructions to ask a question will be given at that time.

This call is being recorded and your participation implies consent to our recording this call. (Operator Instructions). I would now like to turn the call over to Mr. Brad Phillips, Treasurer of Darling International. Please go ahead, sir.

Good morning, ladies and gentlemen. Thank you for joining us to review Darling's fourth-quarter and fiscal 2009 earnings results. Randy Stuewe, our Chairman and CEO, will begin today's call with an overview of our fourth quarter and full-year financial performance and discuss some of the trends that impacted our results.

John Muse, Executive Vice President Finance and Administration, will then provide you with additional details about our financial results. Randy will conclude the prepared portion of the call with some general remarks about the business after which time we will be happy to answer any questions you may have.

Before we begin I need to remind everyone that this conference call will contain certain forward-looking statements regarding the business operations of Darling and the industry in which it operates. These statements are identified by words such as may, will, began, 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 continued 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 demand 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 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's my pleasure to welcome you to the Darling International earnings call to discuss our financial results for the Company's fourth-quarter and our fiscal year that ended on January 2, 2010.

Let me begin by saying 2009 was a very good year for Darling International. While it began a little slow for us in the first quarter, our team continued to realign our business model and make adjustments throughout the year. We are very pleased to report the third best year in our 127-year history and, more importantly, we are very proud of our performance given the numerous challenges the Company faced during the year.

Historically high finished product prices contributed to our success, but also important was our operations team's ability to control and harness in manufacturing and transportation costs given the lower amount of raw material collected throughout the year. In addition, we successfully acquired and integrated two major acquisitions that will not only expand our footprint, but also provide us additional earnings in feedstock potential.

All said 2009 was a very good year, but let me provide some additional details about our performance during this last quarter and some highlights for the year. For the quarter let me reconcile a couple items to help you better understand our performance. First, we encountered a higher than anticipated reduction in raw material volume during the fourth quarter driven by the severe weather we faced throughout most of the country, especially during the second half of December.

The winter weather from the Great Lakes to the Northeast and even in the Southeast prohibited us from running routes for many days at a time. This affected all segments of our business along with the fact that our meat processing suppliers were forced to curtail hours and scale back operations because of winter logistics. The net impact to our business was a major curtailment in tonnage processed during the last half of December. January results are showing a normalization of tonnage as winter logistics and consumer demand improve.

Secondly, we noted and as I noted we completed the Sanimax Great Lakes acquisition during the quarter and continued developing and negotiating on our renewable fuel opportunity with Valero, which hopefully will receive financing assistance from the DOE. We have incurred significant legal and engineering expenses associated with these deals. Accounting rules now dictate that these costs are no longer capitalized and must be expensed during the period in which they are occurred. This is reflected in our fourth-quarter results.

Now turning to the year. Raw material volumes compared to 2008 declined significantly; the overall decline was primarily driven by lower cattle, hog and poultry slaughters and was impacted by the closure, curtailment and production cutbacks of both small and large integrated meat processors. General economic sluggishness and continued tight credit markets are the predominant reason, but we have also seen some structural changes within the meat packing industry. Cattle slaughter was the lowest since 2005 and several hog processing operations have closed their doors.

In our restaurant services segment we continue to fill lower volumes as well. We believe this was primarily driven by continued economic sluggishness in the US resulting in a decline of dining away from home, but we also saw a fundamental change in behavior. It would appear that restaurants are using the fryer oil longer as they try to combat higher ingredient costs and lower traffic through their restaurants.

Our grease trap maintenance business enjoyed a record performance and continues to perform above expectations. The ability to bundle our offerings along with our national approach has made for a nice growth opportunity for us. As noted earlier, during 2009 we continued to benefit from historically high finished product values while year over year they were significantly lower.

Tallow, yellow grease and meat and bone meal prices are all well above their five-year averages. Strong export demand driven by a lower US dollar and developing global mandates for biofuels appear to be the key drivers. Overall demand for our products remains strong and we should see seasonal improvement while our prices continue to track with other competing ingredients.

From an operations perspective our team did a nice job in 2009. Reacting to lower raw material volumes our team effectively reduced our operating costs. Helping this were lower input costs for diesel and natural gas, but our effort went well beyond these items. Reduced labor, routing efficiency and lower insurance costs all contributed. We continue to look for areas to improve our efficiency and are working to capture these savings.

In addition to solid earnings performance, we had a number of other key highlights in 2009 which I'd like to take a minute to address. First, on February 3, 2010 the EPA finalized regulations for the National Renewable Fuels Standard, or commonly referred to as [RFS2]. The regulation mandates the domestic use of biomass-based diesel, biodiesel or renewable diesel in the amount of 1.15 billion gallons in 2010, 800 million gallons in 2011 and returning to 1 billion gallons in 2012.

Beyond 2012 these regulations now require 1 billion gallons of biomass-based diesel for each year through the year 2022. Biomass-based diesel also qualifies to fulfill the non-specified portion of the advanced biofuel requirement. In order to qualify as a renewable fuel for each type of fuel, each feedstock is required to lower greenhouse gas emissions by the level specified in the regulation.

The EPA has determined that biofuels, either biodiesel or renewable diesel, produced from waste oils, fats and greases result in an 86% reduction in greenhouse gases, exceeding the 50% requirement established by the new regulation. The net impact of RSF2 should be long-term positive for the consumption of our feedstocks.

Throughout 2009 we discussed potential opportunities that exist for Darling in renewable energy and, as many of you know, in September 2009 the Company announced that it had joined forces with Valero Energy to take initial steps towards the formation of a joint venture to build a new renewable diesel facility in Norco, Louisiana at a site adjacent to Valero's St. Charles refinery.

The proposed facility is expected to convert grease, primarily animal fats and used cooking oil supplied by Darling, into renewable diesel and is expected to produce over 10,000 barrels per day or 135 million gallons annually. Darling 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.

On November 3, 2009 the DOE notified the Company and Valero that it had completed review of the initial application for the joint venture project and approved the project for further evaluation under the DOE loan program. In addition, the DOE informed the Company that the joint venture project may constitute a 1705 eligible project which would entitle the joint venture entity to have certain of its loan costs paid for under the DOE loan program.

Accordingly, Darling and Valero submitted the DOE a more detailed Part 2 submission required and continued in the application process. We have engaged with the DOE on various topics relative to our application and are currently awaiting further direction from the DOE before we move forward with more detailed engineering reports and studies. We anticipate the next phase of the loan approval process may still occur during the first quarter of 2010 and we will keep you posted as more information becomes available.

As to growth during 2009, in addition to the acquisition of Boca Industries in the first quarter of the year, which has exceeded expectation in its first year, the Company also closed on the purchase of a certain portion of Sanimax USA's operations in the Great Lakes region. But this transaction will allow Darling to more effectively service many of its chain accounts as it solidifies its footprint for both rendering and restaurant services in the region. To date our integration and operating plans remain on target.

Finally, our San Francisco biodiesel plant is still making progress. As we've discussed in previous calls, the Company seeks to construct a 10 million gallon biodiesel facility in San Francisco adjacent to our rendering operations. Our commitment to the city remains and we will continue to cooperate with local authorities to resolve any outstanding issues.

Permitting in California is no easy task. Once the permitting and citing issues are resolved we will then make a final determination as to whether this project is feasible.

I'd now like to turn the call over to John. And after John concludes, I'd like to provide some closing remarks and then we'll move on to the Q&A session. John?

Thanks, Randy. For the fourth quarter the Company reported net income of $9.2 million or $0.11 per share on a fully diluted basis as compared to a net loss of $13.9 million or a net loss of $0.17 per share for the 2008 comparable period.

As noted in our press release, a $23.1 million increase in net income for the fourth quarter resulted primarily from -- one, higher finished product prices in the quarter; second, the 2008 impact of a $15.9 million impairment charge and a $3.2 million charge related to a probable mass termination withdrawal liability arising from a multi-employer pension plan; and third, lower energy costs related to natural gas and diesel fuel which was primarily offset by reduced raw material volumes and $1 million in costs related to the Company's potential renewable joint venture on renewable diesel and acquisition related costs.

As Randy mentioned, our fourth-quarter 2009 was impacted by severe weather that existed in certain areas of our operations in the latter part of the quarter. The winter weather from the Great Lakes to the Northeast and even into the Southeast inhibited several days of raw material routes being completed, as well as packers running fewer hours for processing.

The Company reported net sales of $149.6 million for the fourth quarter of 2009 as compared to $148.5 million for the quarter of 2008. Higher finished product prices offset reduced raw material volume and accounted for the $1.1 million increase. At the segment level rendering generated net sales of $114.3 million for the fourth quarter as compared to $112.2 million in the fourth quarter of 2008. The restaurant services area generated net sales of $35.2 million as compared to $36.2 million in the fourth quarter of 2008.

Now turning to our results for the full year which ended January 2, 2010, [Dargon] reported net income of $41.8 million or $0.51 per share as compared to $54.6 million or $0.66 per share for the 2008 comparable period. The $12.8 million decrease in net income for 2009 resulted primarily from decreases in both volume and yield of raw material and lower finished product prices which were partially impacted by a $27.8 million decrease in energy costs related to natural gas and diesel fuel, and the 2008 impact of a $15.9 million goodwill impairment charge and a $3.2 million charge related to the probable mass termination withdrawal liability arising from a multi-employee pension plan.

Interest expense was $3.1 million during 2009 compared to $3 million during 2008, an increase of $100,000, primarily due to an increase in fees from the amended credit agreement which was partially offset by a decrease in outstanding balance related to the Company's debt. Other expense was $1 million in 2009, a $1.3 million increase from other income of $300,000 in 2008.

At the segment level rendering generated net sales of $458 million in 2009 as compared to $585 million in the comparable 2008 period. Restaurant Services generated net sales of $139 million for 2009 as compared to $222 million for 2008.

Now moving on to the balance sheet -- as of January 2, 2010 Darling's cash and cash equivalents totaled $68.2 million versus $50.8 million at the end of 2008. On January 2 the Company had working capital of $75.1 million and its working capital ratio was 2.05 to 1 compared to the working capital of $67.8 million and a working capital ratio of 1.95 to 1 on January 3, 2009. The increase in working capital is primarily due to the increase in cash.

Capital expenditures of $23.6 million were made in 2009 as compared to $31 million in 2008. The decrease of $7.4 million was primarily due to a reduction in spending on a major modernization project at our Turlock, California plant which was started in 2008 and completed in 2009. Also, acquisitions in 2009 totaled $34.4 million as compared to $15.9 million in 2008. I will now turn the call back over to Randy.

Thanks, John and thank you, everyone. In wrapping up, let me reiterate that we are all proud of our results this year. All in all 2009 was a good year for Darling International. We were able to deliver a historically good year from an earnings standpoint, our strategic acquisitions have exceeded expectations, our renewable fuels initiative is moving forward and our core business is as strong as ever. We were able to achieve all of this while operating in one of the worst economic environments in the history of our country and the world.

While the future economic landscape remains uncertain we believe we have made necessary adjustments to our operating model without inhibiting our ability to compete and create value for long-term for the shareholder. Our balance sheet remains extremely strong and we are positioned very nicely moving forward into 2010. We will continue to look at ways to improve profitability, grow our earnings stream and position our business to continue to deliver enhanced shareholder value.

With that I'd like to thank you for your participation in this call and we'd like to now open it up to questions. Operator?

(Operator Instructions). Farha Aslam, Stephens Incorporated. Farha Aslam, your line is now open. I apologize, that line is not coming through. Stephen Share, Wisco Research.

Good morning. I wanted to talk a little bit more about the volume decline specifically in the quarter my math suggested rendering was down about 16% and restaurant services was down 10%. Now you mentioned the weather impact and I was wondering, could you maybe put some more meat on that as far as how much of the decline in revenue was due to weather? And then also, did you see any -- did you lose any customers? Were there any other issues there besides weather?

No, I think you said it well -- put a little meat on it, that's what was kind of missing on the trucks here. But the reality is it is a trucking and route business and just all over the country there were numerous days where we didn't run in the last half -- in December. It was a significant and substantial volume loss that we had seen in the business in recent history.

The reality is it doesn't mean the byproduct wasn't there, it meant that we couldn't get to it. This is the time of the year in winter where the mortality or the dead stock business is a significant driver of our tonnage, at least in the Midwest. That tonnage was, if you will, refrigerated and carried over until January here. As were the grease bins that were under 50 inch snowdrifts in the Midwest.

So what we're trying to explain to the investor, the analyst, the shareholder here is that the tonnage didn't disappear there in any dramatic fashion, it just shifted throughout the last half of the month of December in pretty significant fashion. So I hope that helps.

Yes. So is it fair to assume that we should see a more positive -- we should see a positive volume environment in the first quarter? (multiple speakers) we should see some makeup, right?

Right. I mean -- yes, I mean there are two answers to that. One is, yes, the refrigerated dead stock has now been brought in and processed for us. And January tonnage numbers show that we were able to collect quite a bit of that. I mean, the other piece that we did talk about in our earnings release here in our conference call was that we did see some of the slaughterhouses have to curtail production because they physically couldn't get labor to work or they couldn't get the cattle in or the hogs in during some of the major snowstorms.

Whether that tonnage gets made up here in first quarter or delayed until later on and, as we call barbecue season, we will see. The reality is when you look at the meat business in general you would notice, if you look back into fourth quarter, that the cold storage reports that were saying how much tonnage or finished product, consumer product is in the freezer, exports were really, really strong and the cold storage amounts or quantities that are out there are historically on the lower side now.

So it would suggest that the meat packing industry probably need to run a little stronger than maybe some have anticipated, although it will hinge upon, as you probably read this morning, Russia and other countries reopening borders to whether it's pork or chicken and trying to more normalize the global export trade.

Sure. And then the last thing I wanted to ask about is Sanimax, could you -- what kind of revenue run rate did they have last year?

Stephen, we do not break out revenues or raw materials that we'll be receiving from any of our acquisitions. That acquisition is from raw material picked up in the Ohio market and the Indiana market and all that material is being funneled into our Coldwater, Michigan facility where we will get benefits from tonnage going into that facility. But we do not break that out.

Okay, thanks.

John Quealy, Canaccord.

Hi, good morning, this is Mark Sigal for John. Just following up on some of your prior commentary on international markets. Could you give us (technical difficulty) more color there, what you're seeing, if you're seeing any opening in those markets or what your outlook might be internationally say through the first half of 2010?

Okay, Mark, this is Randy. I guess from -- I'll speak from a couple of sectors here. Predominately the one that we're most familiar with is our finished product markets for the fats and oils and the proteins. Our protein demand from the Pacific rim countries remains extremely strong. And that's reflected in the values that we continue to see relative to meat and bone meal as a competing ingredient to soybean meal. On a cash basis we're trading at a small premium and did for most of 2009 relative to soybean meal.

Historically we haven't been there, we've kind of traded, if you will, in the unders. But now that the export side has researched and reopened its doors to us for our protein we are gleaning the full value of that product now around the world, so that's really helped us out.

On the fats and oils side, I think you've got to start with a couple things. One is the -- and also true on the protein side, but whether you call it the attractive dollar or the weak dollar just depends on your perspective of it for you. The attractive value of the US dollar is making our ingredients cheep around the world. You couple that with these global biofuel mandates and we are shipping more of our product offshore now and probably returning to a more 2003-2004 historical shipping pattern than in the past.

What's probably notable within the patterns of our tonnage moving offshore, at least on the greases side, the yellow grease is that we are shipping them back into Europe now to make biofuels, which is something that has kind of been on and off for a while, but it is very strong now. Tallow to date out of the US does not move back into Europe. So it's really strong demand for yellow grease versus tallow.

On the meatpacking side, I mean you guys are probably as good of experts as I am there. Obviously they continue to have a little bit of disruption around the world, as I said, with pork into Russia, chicken into Russia, and the beef exports continue to be what appear to be fairly strong. Hog business should pick up a little bit here. So I think overall the outlook is driven by the dollar and I think you have to say recovering global economies seem to lay a pretty good landscape for the business going forward here.

I think the one bumpy spot in the road is we would tell you that we see today is still domestically it doesn't feel that the consumer demand, either at the grocery store or at the restaurant level, has returned to what I'm going to call 2006-2007 levels, still driven by probably the unemployment rate in the mid 10%. So, not sure what's in store for us yet other than some uncertainty here in the US. But globally it feels pretty strong right now.

Okay, that color is very helpful. And then just shifting gears back to RFS2. With the finalization potentially including biodiesel derived from other traditional sources, I was wondering if you guys have a view on what a potential portion of the billion plus gallons that will being up for grab in the out years, what portion animal fat might command there?

You know, I think it's a fairly complicated and, I'm just going to say, highly unknown kind of algorithm right now of the three buckets of cellulosic, biomass and advanced biofuel. And when you add the three columns across they kind of leave you a little bit of a plug figure which we referred to as the unspecified amount.

We think that in the -- that renewable diesel, and the reason we've chosen that technology and process is that not only does it qualify for the biomass, but it also qualifies under the advanced biofuel requirement.

So from our perspective, Mark, we really don't have any idea how this whole thing is going to unfold. All we're trying to bring to the table is low-cost feedstock and conversion technology that should give us one of the most competitive models out there. Or in a sense call it the last man standing type of analysis for the technology in feedstock.

Fair enough. And my last question, just turning towards energy in the front half of this year. Have you guys contemplated any forward purchases or do you expect -- obviously it looks like in Q4 you benefited quite nicely. Just wondering what your thoughts are there for the front half of the year?

I'm going to take that -- is that a recommendation from you that we should be extending our ownership of natural gas in diesel? No, we've had, from our perspective, just at a high level and we've acquired some additional expertise in this area and I will say we've done a much nicer job of our energy management here in 2009 and I'm pretty confident that 2010 we've got a pretty good program in place.

But fundamentally we remain pretty bearish, natural gas not far from the current levels here. So we do like the ownership with a four in it, at least at the NYMEX level. We are bullish long-term diesel fuel. And so we do have pretty good ownership and we'll report in our derivatives the ownership of diesel fuel.

So fundamentally we're kind of neutral to bearish natural gas driven by unemployment and the economy here. But also just because of the -- if you're not going to be driving as many unleaded cars on the road, you're not going to be making as much diesel fuel out there either and I think we can have a pretty firm diesel fuel price here this summer.

Great, thanks very much.

Tyson Bauer, Wealth Monitors.

Good morning, gentlemen. Would you expect 2010 volumes on the rendering side to follow more closely with slaughter rates, [you're saying the lag] in 2009, and would you expect better hide contribution in the front half of 2010?

Yes and yes.

That makes it easy. On the restaurant side, it's been a point of frustration all throughout 2009. It seems to be more than just a lack of volume per se because there's a less parsonage at the locations. Was there a change in business model where you were forced to charge less -- limit some of your routes -- anything beyond just the lack of activity at the locations themselves?

Not really. I think you've said it well there. We saw -- if you rewind the movie all the way back to fourth quarter 2008 and then even into the spring of 2008 when corn prices hit $6 and $7, it has started to realign the meat processing industry as to where you were going to produce animals and where you were going to slaughter animals and where you could afford to transport the animals and the raw materials.

So we've seen a structural realignment there. It feels like it's pretty well complete now out there. But the reality is that given that the US is still the major consumer of its own meat processing industry, until our economy picks back up you're going to continue to see some bumpiness in domestic demand and domestic run rates of the meat processing industry.

Structurally what we're referring to there is you're seeing more and more of the hog industry move offshore to China specifically. I mean if you think back more and more that we had some great years in the hog industry that we all got to witness and now we've seen China decide that they'd rather produce the animal over there and buy the ingredient rather than the finished product here. Whether that's a long-term structural thing or a short-term one -- hard to say.

I think China has proven over time that long-term they still don't have the ability to feed all of their people and will return to the US for finished product. And then also if you step back and look at meat production and consumption in the United States, it continues historically to trend up. And it's still the cheapest place in the world to produce finished product for a growing population around the world.

So, I mean I think you've got a little bit of economic bumpiness going on here both domestically and then you've still got some trade barriers. But it should -- I think we're looking at it and saying we don't see any huge downside, at least from the raw material side, in 2010 here, although we're not going to predict a huge return of slaughter rates. If it happens it will probably happen and there are some folks on the call that are closer to it than I am, probably be led by the poultry industry. But we'll just have to see where it comes.

Randy, typically in your 10-K you release restaurant account information, this time I didn't see it if it's in there. Did you face restaurant customer attrition excluding the acquisition pickups in 2009?

Tyson, we've always just given out the total customer data there, we've never broken the customers down by the business segment.

But more specifically, Tyson, when we got to looking at total accounts this year, I mean, we had so many acquisitions in there that where we were buying accounts that -- trying to net it out. We did see -- we saw substantial growth in our trap business. Our restaurant business, we had the divestment of our Little Rock or our Arkansas operations.

Everywhere in the country saw a decline of restaurants. I think the number was that there are 700 or -- I can even remember the stat so I won't give it any more. But we saw probably the biggest decline of restaurants predominately in the Southeast in that I-95 corridor. But otherwise everything else held pretty solid for us.

Okay, last question for me. It's nice that Congress was able to get RFS2 and talk about it; it would be nicer if they could actually get the biodiesel tax extended. Any impacts as we enter into spring and summer if this delay continues where it's more meaningful as far as production volumes in regards to use of yellow grease or tallow here domestically?

Yes, you touched on a couple subjects there. One is we share the desire to see the tax credit put back in place. And I suspect somewhere in the jobs bill, somewhere here we're going to get a little bit of hope and change and get that returned to us. I know the industry associations are lobbying heavily for that.

I think it's also fascinating to watch the industry, being in the biodiesel industry, try to operate without the subsidy but with the mandate. What it lends itself to long-term is that the strongest players with working capital availability for both feedstock and financing finished product are going to probably have a better chance of success.

So we're seeing the price of biodiesel ultimately reflect the true cost of production, but it lends itself to the strong player only to produce it. So what you're also seeing is, and I think I saw the fourth-quarter numbers recently, somewhere between 25% and 45% of the buyer diesel out there now had some blend of an animal or a waste grease product blended into it.

So the marketplace is learning how to find the right economics to make it work. It would be much easier if the blender's credit returned, but right now they are fulfilling the needs of the obligated parties.

Thank you.

Dan Mannes, Avondale.

Good morning, guys. Just a couple of follow-up questions. First on volume, you sort of saw a spillover given the late Q4 nasty weather which is pushing volume into Q1. Unfortunately we've seen, at least in the Northeast, a rash of even uglier weather in February. Do we have risk that you pick up from Q4 and you have the same spillover impact or because it's in February you at least have March to sort of recover that and maybe Q1 is a step up and then you normalize again?

Yes, I mean, January tonnage obviously showed that we brought some out of organic cold storage called mother nature out there. February, you're right, routes were tough to run again. Our books just closed here or were starting to close in February. Obviously we've got the month of March and hopefully there's 31 days to get it right there.

Got it, unless we get another -- unless we get nor'easter number 12 it feels like.

Exactly.

Quickly on the pricing side, and this is something that I guess is a little bit complicated is given the drop in the biodiesel tax credit and a reduction, we understand at least, in biodiesel production in the US, we continue to see pricing move even higher. I'm just wondering outside of the export markets that you talked about, is there any stockpiling or is there anything else going on that could be driving this especially as it relates to RFS2? Or are you seeing maybe some of the traditional demand drivers come back to the market at all?

You know, -- yes, first off, I'm just going to say it's complicated and to a degree very speculative here. But if you look at the -- when the RFS2 came on it allowed them to roll forward the 2009 obligation to the 2010 which made 1.15 billion gallons of demand or obligations of which I think 20% of that can then be rolled forward again to 2011. And what you're seeing here is there was a little bit of stockpiling made up before the subsidy went away, and then you've also got a stockpile, if you will, or a bank of rims out there that are trading.

But everybody is trying to support out. I mean, we've seen rims move up from $0.09 to $0.10 to in the mid 30s now trading to try to fulfill the obligation here. The rims will be obviously the barometer of how much production was made or how much people are willing to make. We'll just have to see.

Traditionally what we're seeing and what our commodities guys are trading out here is we're seeing used cooking oil move off to the EU now in pretty significant style as it becomes a more attractive feedstock relative to using rapeseed oil or soybean oil. So we're seeing improved demand there; we're seeing strong feed demand from South America along with normal, pretty normal demand is what I'd call it here in the US.

So if you drop the slaughter rates a little bit because of winter interruptions you've made tallow jump back up to $0.30, and yellow grease moving off or cooking oil moving off to Europe is firm there.

The other thing you've just got to look at is if you start to run the numbers on biofuel mandates, whether you're in the EU, North America, South America or Asia Pacific, I want to say that the [additionality] between 2009 and 2010 is roughly around I want to say a little over 6 million tons, roughly about another 13 billion pounds, 13.5 billion pounds of fats and oils and greases that are going to the shuttled into that industry globally.

So, I think you're seeing that being reflected in the higher soybean values that are out there now. Whether those get tempered by what I'm going to call the super crops in South America we will see. But pretty much everybody understands the macro side of the supply out of South America yet, at least on the oils. And we'll see what happens. But right now it feels very firm and I'd just say it's value of the dollar and mandate normalization here.

Right, and looking forward, and we've obviously spent a lot of time talking about this specific biomass-based diesel mandate, which is 650 this year plus 500 last year going out (technical difficulty). But can you touch again on the advanced biofuel side? My understanding is there a limited number of fuels will actually meet it. I guess the three categories would be cellulose [gas ethanol] which has its own mandate and is behind schedule to some degree.

You have sugarcane ethanol out of Brazil, which would qualify, but has its constraints given both high sugar prices and limited availability, and then biomass-based diesel. So, it seems to me that maybe the domestic story might even be a bit better than we previously thought given the way the RFS2 is written right now.

Well, I mean I kind of feel the same way, but I just really can't say any more than you said right there, because we look at it that way and say we don't understand how that's all going to work. The language isn't perfectly clear as to what specifically qualifies at least in our interpretation. And it tends to lend itself to be -- probably even being more friendly than people interpret right now.

Just last thing on RFS2 implementation -- my understand is there are some levels waiting for finalization at the refinery level and maybe even from the smaller blenders are seeing the ability to delay. Can you maybe give us an update on how that's playing out from a compliance standpoint? Is there actually active compliance among the blenders right now or is that something that's maybe a little bit farther off in 2010?

Yes, we don't have any experience there to give you a comment today, Dan.

Got it. Thanks again.

Roman Kanetsa, Gates Capital.

Yes, it's actually Jeff. I just had a question on the volume underperformance versus the cattle slaughter. I know you talked about the weather, but is there anything else structural that's going on in terms of permanent impairments and volume from input customers that you have that have permanently closed?

No, nothing more than we've already talked about, Jeff. The fourth quarter was just absolute driven by curtailment and weather.

Okay. And so there's no market share loss or permanent impairment in your view?

None.

Okay. And what about -- can you tell us -- can you confirm the numbers as far as the volume drop in rendering versus Restaurant Services for the quarter and for the year?

What do you mean from a confirm standpoint? I mean, they are down.

Right, but what percentage was down? I know the split was, I think if I look at -- total volume for the quarter I think for everything was down about 14.5%, correct?

Right. Yes, you know in the K we break that down and I've got it in total, Jeff. And I apologize here, I don't have that right in front of me. But in the fourth quarter the volume was down $16 million which for the 12 months was down $51 million from an operating income change. 31% of the year's volume decrease happened in the fourth quarter and that was driven by the weather events that took place in that period.

I don't have right here in front of me the exact numbers. But you know better than anyone that you can pull that number right out of the MD&A from the business segment grouping there. But I've got it only in total here in front of me now, I apologize for that.

Okay. And you talked about your pension -- your cash contribution for 2010 for the pension is expected to be about $1 million minimum, correct?

That is correct.

Will you make discretionary contributions above that?

We have in the past. With the market coming back where it is and where we are from a funded ratio with the PPA, they would probably indicate we would only make the required funding requirement because of the funding that we did in 2009 and where the markets have moved -- we are above the required limits for the contribution in 2010 as we stand today.

So you'll make the $1 million. What about the pension expense for 2010?

Pension expense in 2010 -- for 2009 pension expense ran around $6.4 million which was up from the $400,000 in 2008. Pension expense is projected in 2011 to be about $5.7 million to $5.8 million.

For 2010?

Correct.

Okay, thank you.

William Bremer, Maxim Group.

Good morning, gentlemen. Just looking into the first half of fiscal 2010 here, anticipating an increase in volumes coming in from the fourth quarter both on the rendering side as well as the grease side, I'm anticipating more of a percentage increase on the grease side just because of the nature of the business. And there's an assumption that we did $26.5 million of gross margin, I'm anticipating that we'll see an enhanced gross margin going forward. I guess my question here is -- especially for John, the $16 million of SG&A, is that a good run rate that we should be using going forward embedding the two acquisitions?

Yes, Bill, we did make a -- the Sanimax acquisition was done on the last day of the year of 2009, so we had none of that cost in there. And we did have some acquisition-related cost in the fourth quarter as it was related to the renewable diesel and the Sanimax acquisition. In looking at the SG&A in the $15.6 million to $16 million level would probably be a good run rate to being looking at on a quarterly basis.

Great, John. Thank you. The tax rate, a little bit higher than anticipated, at least on my end, 38 spot 3. What should we be using for 2010?

I continue to use that rate. The effective rate is kind of what it is. What we have done, if you'll notice on the cash flow schedule, we deferred a lot of our cash taxes this year; we only paid $2.2 million in cash taxes. So we'll have a little bit of catching up to do there or that will catch up with us a little bit in 2010 and in 2011 going forward. But the effective tax rate isn't going to change a whole lot there.

Okay.

And most of that is driven by state tax, not federal.

Okay. Okay, gentlemen, thank you. The rest of my questions have been answered.

Jinming Liu, Ardour Capital.

Good morning, thanks for taking my question. My first question is really to volume. So far I believe the current projection is that the beef production for 2010 will be another 1% to 2% lower comparing with last year. I believe that will negatively impact your volume. Am I right on that front?

Well I think some of the forecasting services were saying that. Many of those reports were published in the late summer/early fall. And I think what we're saying is while I think that's possible, the fact that cold storage has pretty much been emptied out will lend itself to possibly running maybe a little more than that than what's being bought out there. We're not by any means predicting a solid or a large-scale return to productivity. But we just don't see it probably going much lower here.

Okay. In terms of your rendering business, can you give us more color on the competition between a company like you basically working with smaller meatpackers and against those large vertical integrated meatpackers?

I'm not sure I can give you any color there, Jinming. I'm not sure what the question is.

I'm just asking you started basically working with an independent renderer. And still working -- mainly working with some smaller, relatively small meatpackers. And there were some large companies that have their own rendering service. My question there is whether the loss in volume is -- that we saw last year mainly -- whether it mainly came from the smaller operations or from those large --.

Okay, I think I understand your question and I think it's a very fair one. Our suppliers -- customers, suppliers, however you want to refer to them, come across the full spectrum. We do business with all the large integrated providers as well as the small meatpackers. And I would tell you that it came across -- that the volume losses were pretty much spread evenly amongst all categories of the suppliers.

I mean, what we didn't see -- what you will see is that we will pick up what we refer to as breakdown tonnage, meaning when the large integrated guy is running beyond their capacity or their capabilities we will pick up their Friday/Saturday access tonnage that they can't process and then bring it in. Given that, at least on the cattle side, that the slaughter ran lower back to 2000 -- near 2005 levels we didn't see as much breakdown tonnage.

So the reality is that we were actually more impacted in certain times of the year by the large integrated guy than our small niche packers. What you'll find over time is the small niche guy exists just for that, for a niche, and he's able to run probably at a higher utilization rate than the big integrated processor that has a multiple scale of supply.

Okay. My last question is related to the biodiesel blender tax credit. In the worst-case scenario if that credit won't get renewed, whether that will impact your decision, both the San Francisco biodiesel facility and also your renewable diesel fuel facility?

I don't know that I'd be willing to tell you will it impact it? It's something that will be analyzed and discussed. I frankly can look at it and talk from both sides here. We made an argument at the management and Board level many times that said, the mandate is just as important as the subsidy. We're actually getting a case study now that's going to prove out that pricing equilibrium.

So frankly for us, this is probably a fairly good deal to not be in the business per se today and to watch the market try to normalize without a subsidy. I'm fairly confident with what we know out of DC that we're going to see that subsidy come back at some point in time here. So, I suspect right now is a good chance to see how it is with just mandate only, but I think going forward we'll see both of them come out and be back in concert.

Okay, thanks.

Eric Gottlieb, Stephens.

Hi, this is Farha Aslam. Sorry about the technical difficulties.

How did you get pushed to the back?

My line wasn't getting in in the front, so that's all right. But we have just a couple of follow-up questions. And it's really on the yellow grease spread right now. It's currently around a $0.04 premium to corn. Do you know what's causing yellow grease to trade at this premium and do you think that's sustainable?

As long as it is the lowest cost feed stock and it's headed to Europe, yes.

So it's really that strong export demand?

It is as strong an export demand as we've seen.

Awesome.

We agree with you that it's overpriced relative to corn, but it's still the cheapest feedstock in the world.

So it's likely to continue to trade at a bit of a premium -- as long as the export demand holds?

As long as exports, we'd agree with that. If exports dry up or policy changes on taking US cooking oil to destination markets changes then obviously it will have to reprice itself.

Okay. And then, Randy, you've spoken in the past that the smaller processors were credit constrained and that actually caused them early 2009 to maybe cut slaughter more than the larger integrated packers. Could you talk about the smaller players' access to credit, their working capital constraints and how their slaughter is progressing now compared to the big integrated?

You know, we've seen what I call our niche players or small regional players pretty much return to normalcy here as far as -- we've seen them have to cut back here or there, maybe we didn't get as many Saturdays as we normally do, but the credit markets seem to be treating them more fairly in the sense of working capital.

We haven't -- I guess from our perspective you'd say, well how do you know that well? We haven't seen, at least top of my head here, we haven't seen anybody close here in the last six or nine months. So, I guess that's a pretty good indication that their business model has been right sized. Additionally, we've seen a couple small slaughterhouses reopen. And while it's not material to our tonnage, it frankly is an indication that the world is improving a little bit.

That's helpful. And then my final question relates to your energy cost. There were opportunities to lock in natural gas at pretty good levels. Could you just talk about your natural gas exposure?

Yes. You know, I've gotten -- actually sitting in here is our natural gas trader, so I've got to be careful what I say. But no, they've done a nice job. We had good ownership here rolling into first quarter, the market ran up on us. Our team convinced me that fundamentals were pretty bearish out there and it looks like we're going to be okay. I think we talked as a team that if we can see this thing return into the mid-fours we're going to continue to extend our ownership on out.

Okay, that's very helpful. Thank you.

We have now reached our allotted time for questions. And I would now like to turn the conference back over to Mr. Randy Stuewe.

I just want to thank everybody and we'll keep you updated here if anything changes with the Department of Energy and we'll talk to you here at the end of first quarter. Thanks for your participation.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.