Darling Ingredients Inc (DAR) 2011 Q1 法說會逐字稿

Good morning, everyone. Welcome to the Darling International conference call to discuss the Company's first quarter 2011 financial results. With us today are Mr. Randall Stuewe, Chairman and Chief Executive Officer of Darling International, and Mr. John Muse, Executive Vice President, Finance and Administration. After the speaker's opening remarks there will be a question-and-answer period. This call is being recorded and your participation implies consent to our recording this call. If you do not agree to these terms, simply drop off the line.

I would now like to turn the call over to Mr. Brad Phillips, Treasurer of Darling International. Please go ahead, sir.

Good morning, ladies and gentlemen. Thank you for joining to us review Darling's first quarter 2011 earnings results.

Randy Stuewe, our Chairman and CEO, will begin today's call with an overview of our first quarter financial performance and discuss some of the trends that impacted our results. John Muse, Executive Vice President, Finance and Administration, will then provide with you 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 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 disturbances and world financial credit, commodities and stock markets, a decline in consumer confidence and discretionary spending, the general performance of the US economy, global demands for bio fuels, and grain and oil seed commodities, which have exhibited volatility, and future expenditures relating to Darling's joint venture with Valero Energy Corporation to construct and complete a renewable diesel plant in Norco, Louisiana, 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 expressing 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.

It is my pleasure to welcome to you Darling International's earnings call to discuss our financial results for the Company's 2011 first quarter. Coming off a strong finish to a solid fiscal 2010, we're pleased to report an all-time record quarter with the inclusion of Griffin Industries operations.

During the quarter, we completed our road show and follow-on offering, amended our credit agreement by adding both capacity and improved pricing, and we received the conditional commitment from the Department of Energy to fund our joint venture with Valero. Furthermore with commodity winds at our back, and strong raw material tonnage, we posted stellar results on many fronts. The 13-week contribution from the Griffin acquisition, coupled with higher finish prices for fats and bakery products, propelled net income to $46.6 million, or $0.43 per share, on sales of approximately $439.9 million. Our integration strategy is also progressing well, which I will cover in more detail later here in my comments.

A number of positive factors led to this record performance, so let's dive into some highlights that impacted our results. From a raw material perspective, we experienced a strong quarter for both fat and bone and used cooking oil volumes. Winter weather provided additional rendering volumes from moralities but ultimately impeded our ability to service many of our suppliers caught along snowstorm routes. While beef volumes were higher, poultry volumes tailed off by mid-March in the southeast as higher corn costs negatively impacted profitability for the producer. We saw nice improvement in used cooking oil volumes even with tough winter weather. Additionally, improving US economic conditions provided a nice up-lift to the bakery segment raw material volumes as compared to last year.

Finished product prices for fats improved significantly from the first quarter last year, up almost 60% to 70% and continued to escalate throughout the quarter. Domestic biofuel demand and strong European exports, partially due to a weaker dollar, are the primary source of the strength.

On the protein side, meat and bone meal was up 13% and continued to move up sharply during the quarter, which was somewhat offset by lower feed grade and pet food grade poultry meal prices. The Bakery segment made a significant contribution to first quarter 2011 results. Volumes were consistent with traditional seasonality trends, although winter weather challenged collection efforts during January and March. However, Bakery segment earnings benefited from significantly improved cooking meal prices, which consistently tracked the rising corn market. Our new north Baltimore Ohio facility continues to make progress and is the primary driver of our increased volumes. From an energy perspective, we continue to benefit from historically low natural gas prices and favorable forward ownership.

Now, turning to our strategic joint venture project with of Valero. We were very pleased to announce that on January 20, the US Department of Energy formally offered a $241 million conditional loan commitment to build the renewable diesel facility to be located in Norco, Louisiana, adjacent to Valero's St. Charles refinery. As we have described in the past, Diamond Green Diesel is expected to convert fats, primarily animal fats and used cooking oils, supplied by Darling, into renewable diesel. The facility is expected to produce over 9,300 barrels per day, or 137 million gallons annually. We continue to negotiate the final loan documents, and anticipate finalizing these agreements in the near future.

On the integration front, we are tracking nicely with Griffin, taking a slow and steady approach in order to maximize earnings, protect our supplier relationships, and provide great service to our customers. We're discovering the synergy opportunities are somewhat better than expected as we work through maximizing efficiencies. We have completed our integration efforts in Florida, and are now focusing our energy on our Georgia operations, which will be followed by the Great Lakes region and Texas. Administratively, our integration efforts continue as planned.

With that I'd like to turn the call over to John Muse for a quick financial review, and when John concludes, we'll open up with questions and answers. John?

Thanks, Randy.

Before I begin, I would like to point out that as a result of the Griffin acquisition, the Company's business operations were reorganized into two new segments; Rendering and Bakery, in order to better align our business with the underlying markets and customers that the Company serves. The first quarter of 2011 results include a full quarter contribution from Griffin as compared to no contribution in the year-ago quarter.

For the first quarter, the Company recorded net sales of $439.9 million, compared to $162.8 million in the year-ago period. The $277 million increase in net sales primarily resulted from a 13-week sales contribution of $219 million from the Griffin acquisition, higher finished product prices and improved raw material volumes in the Bakery segment. Net income for the 2011 first quarter was $46.6 million, or $0.43 per share, on a fully diluted basis, as compared to a net income of $11.5 million, or $0.14 per share, for the 2010 comparable period. As noted in our press release, the $35.1 million increase in net income for the first quarter resulted primarily from the Griffin acquisition in mid-December and higher prices for our finished product.

Interest expense was $14.2 million during the quarter compared to $900,000 last year, an increase of $13.3 million, primarily due to an increase in debt outstanding as a result of the Griffin acquisition completed in December of 2010, as well as an accelerated recognition of approximately $4.2 million of deferred loan costs due to the term loan facility debt reduction, primarily from the proceeds of the secondary stock issuance.

Operating income increased by $68.5 million in the first quarter of 2011 compared to 2010 first quarter. As Randy mentioned earlier, the increase resulted primarily from higher finished product prices and contributions from acquisition of Griffin Industries. The Company recorded income taxes of $26.8 million for the 2010 first quarter compared to $6.7 million recorded in the year-ago quarter, representing an increase of $20.1 million due to the increased pre tax earnings in the first quarter of 2011.

Going to the segment level, rendering generated net sales of $371.6 million for the first quarter, a $208 million increase compared to $162 million in the 2010 first quarter. The Griffin acquisition accounted for $151 million of rendering sales as a result of the 13-weeks of contribution, and higher finished product prices contributed $58.7 million to the increase. As noted earlier, our Rendering segment now includes our grease trap and used cooking oil removable collection services. Bakery segment sales accounted for $68.3 million of net sales during the first quarter, driven by higher finished product prices for bakery by-products.

Moving on to the balance sheet; on April 2 the Company had working capital of $45.1 million and our working capital ratio was 1.26 to 1, compared to working capital of $30.8 million and a working capital ratio of 1.2 to 1 at January 1. At April 2, the Company had unrestricted cash of $38 million and funds available under our revolving credit facility of $331 million, compared to unrestricted cash of $19 million and funds available under the revolver of $141 million at the beginning of the year. On February 2, the secondary offering by the Company of 24.2 million shares of common stock successfully settled with net proceeds to the Company of $292.7 million. Proceeds were utilized to reduce debt on both our revolver and our term B facility. On March 25, we amended our revolving credit facility for more favorable terms, specifically to increase the loan amount under revolver from $325 million to $415 million, and to benefit from a more favorable credit market by improving interest rate spreads at a lower leverage rate.

Capital expenditures were $12.8 million during the first three months of 2011 compared to $4.6 million for the same period in 2010. The noticeable increase in CapEx was primarily due to previously anticipated capital expenditures by Griffin. Capital expenditures are in line with our expectations in order to maintain facilities and equipment for both efficiency and compliance purposes.

I will now turn the call back over to Randy.

Thanks, John.

To wrap up, let me reiterate that our first quarter was by far the best quarter in the Company's 129-year history. We have done a lot of heavy lifting in terms of executing our strategic growth plan to bring value-added opportunities to our customers, partners, and shareholders. There is still more work to be done, but we are well positioned and complimented by a strong balance sheet to realize our long-term growth objectives. On behalf of management we'd like to thank all of our employees, both on the Darling and Griffin sides, for helping to make this one of the most successful quarters in the Company's history.

I'd like to now open it up to questions and answers. Amy?

(Operator Instructions)

Farha Aslam of Stephens, Inc.

Looking at your end product pricing, it's actually strengthened post the quarter close. I was, Randy, hoping that you could comment on the drivers of that very strong pricing.

Yes, I think we saw -- the fats have run up pretty substantially from first quarter and then continued to move on up in first quarter here to where you had 48 at the end of the quarter, $0.48 tallow, $0.42 yellow grease, we now see $0.52 tallow, and $0.45 - $0.46 yellow grease out there. The meat and bone meal has moved from the low to mid 3's to where we're in the mid 4's now, and poultry meals have some spikes up and down, but it has also followed up, as has bakery byproduct meal as it's tracked to rising corn prices. Really, at the end of the day, on the fats side, we're starting to see the inclusion of fats into the biofuel programs. RFS 2 has a mandated volume of around 800 million gallons this year.

I think, March the industry made about 70 million gallons, which was a pretty big number from what it's been in the past, so you're starting to see more and more fat move into biofuel. We had strong European demand for yellow grease also during the quarter. So I would say it's biofuel and European on the fat side. The protein side for meat and bone meal, it's kind of amazing; you went from a $50, $60 a ton discount for soybean meal now to a $50, $60, $70a ton premium, or what we would call a fair value to soy bean meal, driven by both exports and strong domestic demand here.

And then if you look at your volume expectations going forward, do you see anything seasonal or particular with the slaughter levels in the second and third quarters going forward for you?

You know, there's a little bit of a jump ball there, Farha. If we break it down and we talk about going forward here a little bit; beef, chicken, used cooking oil volumes, and then the bakery by-product side. On the beef front in first quarter, the slaughter plants were running at high volumes. I think you just saw the March exports for beef were up 48% year-over-year. We just had strong volumes on the beef side all across the country, and then it was complimented by a pretty substantial amount of moralities from the crazy winter we had. And so the beef volumes were up substantially in first quarter.

Chicken volumes ran -- or poultry volumes ran pretty strong on the first half of the quarter, and then the back half started to tail off as you know many of the people you write on started to have a little bit of bumpiness in their earnings given the kind of the feed cost economics for poultry. The yellow grease volumes were surprisingly stronger both year over year and stronger over fourth quarter. Traditionally we have not seen those types of volumes in first quarter just out of general seasonality, but we saw good volume all across the country, increasing volumes, as people I think returned to eating out more. But what's interesting is, as those volumes were even up in lieu of us not being able to get out and run lots of routes during January a March, which also suggests that people didn't go out to eat. A pretty stellar quarter there from a restaurant grease volume.

On the bakery front, what you're going to see there is pretty typical seasonality from second quarter on through third quarter stronger, and then after the fall bake-off, it weakens up. So I'd anticipate bakery volumes to be up a little bit in second quarter over first quarter here just off traditional seasonality. I would anticipate that yellow grease volumes, if they follow history, will either maintain or be up a little bit. Beef volumes, we lose the moralities here in second quarter, so those will be off a little bit. But the poultry side appears to have dealt with the bad tornadic activity in the southeast. Some volumes got moved around, and looks to be coming back pretty good here in mid-May for us.

So overall, I think, volumes on the beef side down a little bit, poultry stable, and then grease up and bakery up due to seasonality.

Great, thank you. And my final question is on -- you commented on your very strong balance sheet, and it looks like it will be improving as the year goes through because of your solid results. What do you plan to do with the cash, and otheracquisition opportunities that you see?

It's an amazing balance sheet to look at, before and after in December and now for us. Obviously, there's some high yield notes out there that have non-call provisions on it. There's a little bit of term B out there. Given the amount of capital that's going to go into Valero this year, along with some other capital projects that we're doing, we should, provided that the markets hold here, have at least a small cash build to a cash neutral position by year end. So I think what we said all along and what we've come out of our board meeting with is, steady as we go maximize earnings, and if something opportunistically comes up in a geography, then we'll take advantage of it.

I think as we continue to still get to know each other's companies, probably the most interesting thing that we have seen, and have identified as an opportunity, is the chance to value-add some of our raw material streams and make different products. Not sure what kind of capital that will take, but at the end of the day it's an area that we're going focus, so I guess I'd answer your question shortly by saying, slow and steady and put a little extra cash in the cigar box here for opportunities that may come.

Thank you very much.

Ken Zaslow with BMO Capital Markets.

My first question is the spread between poultry pet food and poultry feed grade continues to expand well beyond what we would have expected, and you didn't address that. I'm just trying to figure out, is it -- is what I'm seeing actually right, and can you give us a reason for why it's happening, and do you think it's sustainable? It just sounds pretty good.

Yes. It's something that we're still getting comfortable with and finding the proper way to describe it. As we talked about, as we merge with Griffin Industries, one of the deliverables that they have been so successful at, is structuring their plants in order to make an upgrade, standard feed grade product to pet-grade products. Most of that stuff's on contract, as you can image, not flat-price, but relationship-wise to the pet food companies. Yes, we saw that it narrowed in first quarter here, but we've seen it widen back out as the poultry slaughter has scaled back in different parts of the country.

So, yes, I think, is it sustainable? Maybe not at where it's at right now, but it is -- it has been a strong contributor and will be a strong contributor in second quarter to us.

Okay. And then in terms of the integration, you alluded to it, you didn't hammer it home, but just making sure. The cost synergies; sounds like it's coming in above $20 million. How much did you get in the current quarter, and is there more to come? How do I think about it?

Well, you think about that it we closed the floor to operations, a little bit of route savings there, and other than that, there's been some minor job eliminations here and there, but really in the first quarter I would tell you there was very, very minor contribution from that. So I think it's safe to say if we're successful, the best is yet to come.

Great. And then on the revenue side, can you talk about -- and I'll probably be asking this for long, long time, I hope. Can you give at least anecdotal pieces where you are, has there been any inroads on it? I know it's still early days, but it kind of leads to a 2012-2013 kind of outlook. Obviously, this year looks good, but what about the synergies? Have you gotten a little bit more granularity to that?

I think -- and I'm not sure I understand totally your full question here. From a revenue perspective, clearly we're just benefiting right now on the front end from the lift in fat prices and protein prices in relationship to the corn and soybean complex. You can look at the Board of Trade as well I can.

The synergies between you and --

The synergies, Ken, as I had commented earlier were just out of the blocks here. Really, I'm not prepared to talk any more than what we've done is close a couple of Florida operations. We have our Georgia operations are now being rerouted into the overlapping plants in the Georgia-Florida area; there's about 12,000 customers that are being routed right now. We should complete that by second quarter here so we'll have a better feel then. Administratively, we have basically completed all the target jobs and how we were going to move things around here.

So it's just going to take time, and I'm just not prepared to throw a number at to you say where we're at or what is yet to come.

And my last question is; what do you consider the profitability on the renewable diesel plant at this point, and to what extent can we start to think about that? I know it's really early days, but is it still north of $100 million contribution to you guys? How do you calculate it, and how do you see it?

The green diesel project, or Diamond Green diesel is one that we continued to share with the board, we continue to look at it on three fronts here; one is a 10-year look back that would say that the 10-year history would say that it has $100 million to $110 million of profitability in it. On a spot basis, you've got to start to differentiate between the green premium and the price of ultra low sulfur diesel; B-100 is trading out there for $5.40 - $5.50 a gallon that implies [rim] values in the $1.20 - $1.80 level. So depending on what green premium you attach on the selling price of it, if you sell it at ultra low sulfur diesel, it trades close to that $100 million mark that's very consistent with history, even with the run-up in fat prices, and if you look at it on a Jan-April basis, given the green premium that's out there right now, if that held, it would be north of $200 million.

So it's still a very, very attractive project even with the run-up in fat prices here. So the board remains very optimistic and is waiting for us to complete our loan guarantee with the government.

Great, thank you.

Stephen Share at Morgan Joseph.

Wanted to start on Griffin, the revenue of $219 million. Could you give us an idea? My guess is, did that increase kind of 40%, 50%? If we had those numbers from last year?

Well, the Darling increase, if you look at the Q, our shares were 163 million, last year. We're up 157 million so we're up around 35%. Their's is basically in that line, in that 35% to 40% range.

So on the rendering side, would it look pretty similar as far as kind of the dynamics where pricing --

That's correct. The bakery is where you would have seen the larger increase in the sales, as you looked at the pricing of the finished product, it almost doubled from a year ago.

Okay, that was almost a double year-over-year. And was that -- was that mainly on the price side? Was there some volume in that increase as well?

Yes, there's a little bit of volume there that we're up from the start-up of our north Baltimore, Ohio facility.

Okay, great. So I'm guessing pricing there went up 60% year over year so we can kind of think pricing was 60%, 70% of increase, then you maybe add a 10%, 20% number in volume?

We don't give out volumes here. You can back into the volume here, though.

My next question was on SG&A; you came in $30.7 million. Is that -- and we still have some synergies. You said you're just scratching the surface there. So should I kind of view that as a -- kind of the high end of what SG&A should be here, taking into account that obviously fourth quarter we usually have some seasonality there in SG&A, but is kind of $30 million, $31 million a good run rate, then we'll be able to work that down a little bit? Is that the way I should be able to look at that?

I would say our forecast, when we were going through our diligence and doing our forecasting, we were that in low $30 million range, and that's where we would expect to see this during '11.

That's fantastic. Then the last thing I wanted to ask you is, dig in a little bit deeper on the renewable diesel side. You said the green premium, the rims were kind of 120 to 180. This last quarter, Tyson, I know, they sold about 25 million of renewable diesel. Do you know if that's the kind of premium that they realized? Other players, I'm sure you know about other players besides Tyson. I'm curious, is that kind of the premium to diesel that was seen in the market right now?

You know, I can't comment, Stephen, about anything that Tyson does. II have not followed that. What we do have, is we have a small biodiesel plant in Butler, Kentucky, that we produce some product for both external customers and internal for our own trucking fleet, and the B-100 price that we were able to sell in first quarter was pretty close to that $5.40 a gallon. So if you go back and look at ultra low sulfur diesel that was out there, that's how you back into the green premium there.

Okay. Great. I'll pass it along. Congratulations again.

Lindsay Mann with Goldman Sachs.

Just a quick one on -- you talked about one of the reasons why you're seeing such strong pressure on your by byproduct, the fat and grease side is the increased demand for biodiesel and also on the export side. Can you quantify in terms of pounds, what the industry incrementally is drawing on pool of fats and greases?

I don't know that I've seen any numbers there to comment. Very little of our material moves into biofuels because of the purity or characteristics of it. We have shipped a little bit to a couple companies here. I think the maximum that you will see move into the classic biodiesel industry may be 20% to 25% of their blends, and not sure that will be at all plants, because of the glycerin issues that happened for them, making non kosher glycerin. We've started to see a resurgence; we had a tough winter so there was a lot of feeding of our product, a lot of reformulation, Lindsay, in the animal feed business as people tried to find something less expensive or more palatable and profitable to feed animals with the run-up in corn. So traditionally a lot of it was due to just the run-up in corn; a little bit of it's due to the surging biofuel demand, and then with the value or the weak dollar, it's very affordable both for animal feed and biofuel, whether biofuel in Europe or animal feed in South America and Mexico.

Great, that's helpful. Next on the integration process; did you incur any meaningful one-time charges in the quarter related to the Griffin acquisition?

In the first quarter, they weren't meaningful. It was our Florida operations, which were more just grease and trap operations that we have shut down, but that was less than $1 million write-down on those assets to market value.

Okay. And then, one more, and I'll pass it along. When I look at the rate of change your first quarter, really obviously very strong results, and just thinking about how momentum is trending into the second quarter. Is there any reason to believe, based on what we know today that your second quarter rate of change would not be as solid or in the ballpark of as solid at least, as we saw in the first quarter?

We're just starting to finish up the April books. I want to be careful what I comment here, but traditionally you are going to see a little bit of seasonality downturn in the volume side of the rendering side. In first quarter we had big beef volumes as I said. With big beef volumes comes a lot of animal hides; the hide prices were up substantially as China renewed their buying interest in the hide business. So when volumes go down, mortalitys go down in the second quarter because of mild weather here, I think you need to be careful from a volume perspective on the rendering side. The poultry side, we're cautiously optimistic that those volumes are going to stabilize and return a little bit; it's still one of the more favorable meats, or proteins, in the world to export. As we said, we saw, I want to say beef exports in March up 48% year-over-year. Pork was up 31% or 38%, and poultry was only modestly up, and so I think if we can get some stronger poultry volumes that will support us.

Ken Zaslow pointed out spread between pet grade and feed grade has widened again a little bit here, so that will provide a little bit of support. Seasonality, the grease side, collections side of the business, continues to do very well. Typically, Lindsay, as you see ball parks open, those volumes do improve a little bit, so that should be good. We've seen the bakery by-product -- had, I want to say had an average price of around $219, $220 a ton. In first quarter we're seeing those prices move up to around $295 to $300. So I think we're set up pretty nicely for second quarter. The yellow button that I would hit here is the volume side on the rendering and on the fat and bone side, probably won't equal what we saw in first quarter just due to mortalitys and a traditional -- a little bit of a slowness in the sluggishness on the poultry side.

Great, thanks. Just to clarify, on bakery; because much of that business is fixed price does, the move higher in cooking meal matter that much to your P&L?

The formula -- the difference here is there is profit sharing mechanisms we share with the supplier as the price moves up, so, yes, a portion of that does fall to our bottom line.

Great, thank you.

Carla Casella with JP Morgan.

Did you say what Griffin's revenue or EBITDA was in the last year's quarter, comparable quarter?

No, we haven't broken that out, Carla. The only thing we can give you is that on the rendering side in the first quarter, Griffin's EBITDA was $44.8 million and Darling's was $46 million. Then the bakery was the $17 million which gives you the $107.8 million. Our first quarter, Darling's first quarter, as you go back and look in 2010, was $23.2 million, and so we were up 84% quarter-over-quarter, and the pricing and everything, Darling is a little less formula than Griffin is, so we picked up maybe a little bit higher percentage of pickup there.

Okay, great. Then we look at percentage formula now. Are you at a stable level, and where would you say you are, or is there still more movement there, as you complete the integration?

You know, it's dynamic, and it's customer related, Carla. As we talked about overall the rendering segment, 65%, 70%, in that rendering segment, is the used grease collection business, which is around 40% to 45%, and then the -- as we said the bakery side, the procurement of the bakery waste material is 100% on formula, but has a margin sharing arrangement with the supplier.

Okay, great, thanks a lot.

John Quealy with Canaccord Genuity.

It's Mark Segal for John. Just in light of all the color that you've given about volume expectations in Q2, that aside, given the integration of Griffin, do you feel like visibility is more or less variable pre-acquisition? Just curious your take there.

As in all mergers and acquisitions, Mark, you hope as you go down the road you don't find any skeletons as you start to lock and learn the business a little better than as did you your diligence. I'm very pleased with the diligence that both our team did and then the cooperation of the Griffins in helping us put the two companies together. I think as we get to know each other and we get to know each other's operations, we've had several integration meetings and kickoffs and suarez with both operations and procurement and sales folks. I think as we get to know each other closer and closer, our cultures are more similar than we probably originally understood, and our views of how to operate businesses are very similar. We have probably -- would say that we view more opportunities now that we're together than what we originally thought; our ability to deliver that is the challenge for our shareholders. We see a lot of opportunity in value-adding products, predominantly in the protein, consolidating our trading deck of fats and oils, transferring best practices in how you run a plant from waste water management, to hours that you run a plant, speeds that you run a plant.

So overall we're very excited and I guess there's no disappointments yet; there's a lot of optimism and a lot of energy and excitement being shared by the groups.

Okay. And then just secondly, my math suggests in the legacy, Darling gross margins north of 28% and Griffin coming in somewhere in the mid-30%s. Given all the color that you've given us about Q2, do you see these levels as sustainable going forward in the next quarter or 2?

Yes, as I described it to Carla, yes. I feel that as long as we don't see a blow-out in the corner soybean market, the year is set up pretty nicely here going forward. I think as Farha says, and she follows the protein companies out there, these are uncharted waters for many of these protein companies, and as they adjust consumer pricing, do we have any demand destruction? But overall I think we're set up pretty nicely as long as the input volumes hold.

Great. Thanks for all the color.

Jinming Liu with Ardour capital.

My question is related to your finished products prices. Those praises are at or close to historical highs, but if you compare it with corn or soy price, where they are -- they are not even close to the historic high. You mentioned something about the supply and demand here, but can you clarify what make this your finished product space at this high level, and whether you think these high prices are sustainable?

What we've seen is, we've seen a narrowing of the soybean or vegetable oil, animal fat spread, waste grease complex here. That is something that we had predicted a while back as people started to incorporate small amounts of this product into the biofuel formulas, both here and abroad. So, is it sustainable?

I believe so as long as soybean oil prices maintain where they're at right now. As I've said all along, my goal is to get animal fats to even money with soybean, and still got a lot of work to do. On the protein side, that's truly a driven by a supply and demand; meat and bone meal is a higher protein product than soybean meal. It should trade at a premium but some of -- it's a very supply push driven market, and you can get some real anomalies in the market, Jinming, where if the packers run a Saturday or a couple Saturdays in a row, they'll push unsold product into the market and distort some of those relationships. We've seen a resurgence of export demand for that product again as people around the world look to formulate alternative ingredients to corn around the world.

So it feels pretty good; I suspect meat and bone meal may have to back off a little bit to come in line with its traditional relationship with soy bean meal. On the pet food, or on the poultry products, we spend a lot of our time trying to make and sell products that really are inelastic relative to the baseline commodity. So a lot of our products are what we would categorize as ingredients on the poultry side versus commodities, in a sense, and they're sold as ingredients on the pet food label. In that case, I think we're pretty well insulated going forward with the margin spread there.

Overall, we feel pretty good. The bakery side, the answer to the majority of the question here is, you tell me where corn's going to be, and we can come up with some historical relationships, which would say where our products should be. So provided we don't have a fallout in corn or soybeans, I think everything's pretty stable here.

Okay, that's good. It's interesting to hear -- actually, I noticed that the tallow price is almost identical to soybean price already. That made me wondering -- tallow, animal fat, is not a ideal feed stock for traditional [bounties] of production, but -- two things that they close to parity relationship was simply driven by the animal feed market or by tallow production [ladels] as well?

Number one, when you compare spot prices, you have to be careful here. A price runs up when somebody is essential sold out. The tallow industry sold a lot of forward product at $0.46, $0.47 , $0.48, and so the majority of it got sold when it was a relationship of $0.10 and $0.12 , $0.13 under soybean before its run-up here, at least on the trade sheets. I would say there's very little trading at these levels. You've also seen soybean oil prices trend down from $0.58, $0.59, back to the $0.56, $0.57 level. So you've got to be careful with those relationships. But at the end of the day, you've got a lot of product that's being exported right now, it's very favorable around the world, and I'd say that's the primary driver.

Thanks a lot.

William Bremer with Maxim Group.

Solid quarter, very nicely done. Let's stay with the international a little bit here, Randy. Can you give us an idea how much you exported as a percent per segment, or what the total dollar was for the quarter?

You know, the amount of exports that the combined companies have done over time, have varied from a low of 10% to a high of 50%. I want to say that it's traditionally -- we're in that 20%, 25% range for the companies, and that's across basically all products right now.

Okay, very nice, thanks. And, John, just on the housekeeping issue, I realize the CapEx increased nicely here. Depreciation, amortization going forward, can you give us a little advisement there on that figure?

The depreciation and amortization was right at the $20 million level for the quarter. Obviously it will move up a little bit as we spend some CapEx for the year, but I think as long as you factor in the depreciation, a large part of that number is amortization tied to the acquisition out there. But it's going to be in that $20 million range per quarter for this year.

Okay, great. Finally, just the shares outstanding. Continue to ramp up this, especially with the Griffin activity?

Yes, I think, Brad, do you remember? I don't remember the exact number of shares. It should be, what $116 million and change?

Factor that in is the average shares outstanding for the next quarter, then that will bring the $106 million, $107 million that was there for the quarter up to a higher level.

Thank you, gentlemen.

Dan Mannes with Avondale Partners.

I want to touch on this; Griffen looks like it came out very well this quarter. And the thing to track Darling in terms of the year over year improvement in EBITDA, maybe a little better than we expected, given the high proportion of formula business. Can you maybe walk us through the commodity leverage embedded in the Griffen model that I can say, was a bit of a surprise, and obviously a pretty positive one, might be in something that was unanticipated here.

Dan, you go back to the formula businesses, we had said earlier when we were trying to give an overview of the Company earlier, that the Griffin model in rendering is 100% formula on the feed grade line. Where the difference comes in is on their formula is when they convert that into a pet food product, and then that is the sharing mechanism on that spread relationship, and that spread has been strong during the first quarter. So you've got that and then, in the merging of the 2 companies, a very good used cooking oil business is also in that rendering operation, and both companies benefited from that run-up in used cooking oil prices, or fat prices, for the quarter. So because that is the lowest percentage formula business that we have still in the Company is only used cooking oil.

Right. Looking at the spread on feed grade verses pet food, it actually looks a little tighter year over year, but be that as it may, certainly with the strength in yellow grease prices I can understand why that added. Would you say a similar situation on the bakery side? Because again, that's 100% formula business, but it sounds you are able to capture some of the upside in pricing given how strong corn and cooking meal pricing has been.

Yes, the bakery side works pretty straightforward, Dan. It's one of those where you agree to buy raw material from the commercial bakery with a built-in margin, and then you share the up side. It's got a floor, and then an up side on it. So a lot of money to hit the bottom line there, and as corp goes higher, we're going to share that with our suppliers in order to keep them happy.

Makes a lot of sense to me. Sounds like it's even a little better than the traditional formula from yours, because you are getting some of the share. When you say it's formula, it's a little bit different than the formula you have in your rendering business.

Yes, exactly. We'll probably need to differentiate going forward on what we call it formula or shared margin pricing.

I was going to say, in this commodity pricing environment it seems like a pretty favorable formula. Lastly on the loan guarantee, I know you already have the conditional from the DOE. Can you touch on real briefly? There have been some concerns about reduction of DOE funding. The fact that you already have the conditional, how much does that insulate you from any issues from that?

I don't know; when the government's involved, it's a coin toss here a little bit. I spent a pretty nice amount of time in Washington, DC during first quarter making sure that everybody that could influence this thing understood the amount of time and money and effort that both companies had put into this project, and as these continuing resolutions were being passed out there, in one case they protected nuclear and took our funding away, and we had to make sure that before it went to a budget amendment here that we would continue the funding.

All signals from Dr. Chu and the Department of Energy and from the Congress people and Senators that support the project are that this is still -- it's still got a green light. The challenge for us and Valero is that it's a very complicated loan agreement. No joking aside, when you put 17 attorneys in the room, it just takes a long time to let everybody word sniff and get their points in. So we're diligently working on it daily with the government in order to try to get a document that both of us can live with that makes us and allows us to run our business and doesn't put us into any type of conflicts with both of our existing credit agreements.

Then just the last thing on that, I know you're hopeful to get that closed pretty soon. There's pretty much a deadline on it; one way or the other this is going to be closed up by September is the way it sounds. I know you'd like to get it sooner than that, but it's not as though there's that long a tail on this opportunity for the loan guarantee.

Yes, I would answer that as, tick-tock, the clock is running here.

Yes, one way or another we should get a resolution on this whether as we get closer to the deadline. There's just not that much time. I imagine DOE would like to show some successes here.

That would be our hope, yes.

Got it, thanks.

Lindsay Drukkerman at Goldman Sachs.

I wanted to press on one area where you've talked about having a bit more vulnerability from a competitive perspective in the restaurant services area where it's a little bit easier to open up a truck and start collection grease, and even stealing grease. I'm just curious with the very strong pricing that we've seen in that part of the market, if you're seeing increased competitive activity and if any of that is sort of on your radar, and how we should think about that as it relates to potential margin compression going forward?

Yes, it's a great question. The used cooking oil collection business, which is part of rendering now, we commented in the past that it is -- the barriers to entree are pretty low in the sense of the collection side, the processing side is a little more challenging. Yes, we're seeing a lot of competition out there, make no mistake. What we tried to do in the past here is, is to re-aim the canon, if you will, a little bit, and make sure that we're doing business with suppliers and customers that also recognize that protecting that raw material is good for us and good for them. I think, Lindsay, it's just not material to the total bucket of volume or earnings here, but it is something that we continue to raise to the law enforcement authorities. I think the national renderer's association, I may not quote the number correctly but I think they estimate that the industry is losing somewhere between 5% and 7% volume out there to thieves right now. So if it was attractive at $0.25 a pound, at $0.45 a pound it even looks better. It's just something we have to deal with and make sure that we run the routes efficiently and get the material out of there quicker.

Even outside of unlawful competition for your -- for used cooking oil, where you do have legitimate businesses that are compete with for the raw material, are you seeing any degree of margin compression or conceding more of your profit back to the customer that we should be thinking about?

Not really. I think that the value -- and I know early on in the call there was lots of questions on synergies and what's your leverage, et cetera. Our leverage is in our raw material procurement side, and our ability to work with customers, put them under service agreements, and provide value to them both in the form of service and in the case where grease is at today in the form of rebate checks. So I think we've got to really solid business offering. The Griffin side brings us a very fundamentally sound go-to-market strategy on used oil collection, and then we're out implementing that now. So, no, the answer is, are we vulnerable? Yes, but I think we've got a defense and an offense strategy here that's very solid.

Great, thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Stuewe for any closing remarks.

Thanks, everybody, appreciate it. Thanks for supporting us, and we'll talk to you again here in August or if something comes up before then we'll set up another call. So, we appreciate it. Thank you.

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