Darling Ingredients Inc (DAR) 2011 Q2 法說會逐字稿

(Operator Instructions)

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

Randall Stuewe, our Chairman and CEO, will begin today's call with an overview of our second quarter performance and 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 continue include with general remarks about the business after which time we will be happy to answer any questions you may have.

This conference call will contain 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 that occur in 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 exist not guilty 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 biofuels and grain and oilseed commodities, which have exhibited volatility, and future expenditures related to Darling's joint venture with Valero Energy Corporation to construct and complete a renewal diesel plant in Norco, Louisiana, each of which can cause the 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 like to now turn the call over to Randy.

Thanks Brad. Good morning everyone. Thanks for joining us. It is my pleasure to welcome you to Darling's International's earnings call to discuss our second quarter results.

As noted in our press release yesterday, momentum carried forward from the first quarter and all segments of our business are performing well. Escalating finished product prices for fats, proteins and bakery [by-]products led to a strong top line and bottom line. Resulting in a net income of [$52.2 million] or $0.44 per share. I would like to light a few key areas that impacted our 2011 second quarter.

Rendering volumes were essentially flat for the quarter as compared to both first quarter 2011 and prior year. Surprisingly, poultry tonnage remained strong while mild spring weather in the Midwest reduced the amount of mortalities available for processing. Restaurant grease volumes increased seasonally but we are now beginning to see the impact of significant theft.

Animal fats and grease prices rose 60% versus first quarter. The improving biofuel demand, increasing exports to Europe and a solid feed demand contributed. Protein prices, although moderately stronger than first quarter, declined as the second quarter came to a close. Typical seasonality kicked in for pet food demand and hot summer temperatures started to influence animal feed consumption. Both ruminant and poultry protein prices increased by 20% to 25% versus our first quarter.

The bakery segment made a strong contribution to second quarter results. Increasing corn prices and consistent tonnage led to the increase. From an energy perspective, prices remain fairly consistent compared to last year's second quarter, and we continue to benefit from historically low natural gas prices and favorable forward ownership.

We achieved the significant milestone towards implementing our renewable fuel strategy in this quarter. During the quarter we announced that financing for Diamond Green Diesel will be provided by a subsidiary of Valero Energy Corporation and will no longer require a funding guarantee from the US Department of Energy. Valero's support for this project is critical and their financing commitment further validates the technology and viability of the plant renewable diesel facility. As described previously, the facility will be capable of producing approximately 9,300 barrels per day or 137 million gallons per year of renewable diesel on a site adjacent to Valero's St Charles refinery in Norco, Louisiana. Construction has commenced, and we are on time and on budget with an anticipated completion date sometime during the fourth quarter of 2012.

And finally, I would like to update you on our integration efforts. First off, we have proceeded cautiously and patiently in order to take advantage of the current markets and opportunities. Our first goal is to make every effort to maximize earnings while positioning the company for future growth. To date, we have closed 2 plants and 5 transfer stations, routing and customers in Florida and Georgia have now been optimized. The benefits have included substantial payroll and fleet reductions, along with lower operating costs. At this point, we have nearly completed our southeastern integration efforts.

Operationally, we are now turning our focus toward Texas and the Great Lakes regions, where we believe additional consolidation opportunities exist. Administratively, we have integrated the 2 companies and realigned reporting responsibilities in order to both cross-pollinate and share best practices as long with promoting many individuals to new leadership roles. We believe our strength is our people and the assets they operate. We are please with our projects and believe that we are on track to further strengthen our Company.

With that, I would like to turn the call over to John Muse. John.

Thanks Randy. I would like to point out that the second quarter of 2011 results include a full quarter contribution from Griffin as compared to no contribution in the year-ago quarter. For the second quarter, the Company reported net sales of $470 million, as compared to $166 million in the year-ago period. The $304 million increase in net sales primarily resulted from a 13-week sales contribution of $236 million from the Griffin acquisition, as well as higher finish product prices.

Net income for the 2011 second quarter was $52.2 million or $0.44 per share on a fully diluted basis, as compared to net income of $11.4 million or $0.14 per share for the 2010 comparable period. As noted in our press release, the $40.8 million increase in net income for the second quarter resulted primarily from acquisition of Griffin Industries and higher selling prices for the Company's finished products. Interest expense was $7.7 million during the second quarter, compared to $0.9 million last year, an increase of $6.8 million, and this is primarily due to an increase in debt outstanding as a result of the Griffin acquisition, which was completed in December 2010.

Operating income increased by $73.3 million in the second quarter of 2011, compared to the 2010 second quarter. As Randy mentioned earlier, the increase resulted primarily from the acquisition of Griffin and higher finished product prices. The Company recorded income tax expense of $33.3 million for the 2011 second quarter, as compared to $6.2 million recorded in the year-ago quarter, representing an increase of $24.1 million, due to the increased pre-tax earnings in the second quarter.

At the segment level, rendering generated net sales of $392 million for the second quarter, a $226 million increase, compared to $166 million in the 2010 second quarter. The Griffin acquisition accounted for $158 million rendering net sales as a result of 13 weeks of contribution, and higher finished product prices contributed $67 million to the increase. Keep in mind that our rendering segment includes our used cooking oil, removal collection services and the grease trap services.

Now, as you'll also note that on both the statement of operations and balance sheet, we are now reporting separately the Company's investment in our joint venture with Valero as an investment in an unconsolidated subsidiary. The balance sheet reports the investment of $9.6 million of July 2, 2011 and a statement of operations reports a net loss of $1.2 million. These losses are primarily from the write off of capitalized loan costs relating to the DOE loan discussions that were terminated in favor of a loan agreement with a Valero subsidiary that the JV entered into in May of this year.

Additionally, in the second quarter of 2011, the Company paid approximately $13.8 million for the Company's election under Section 338 H10 of the internal revenue code related to the Griffin acquisition. This tax benefit from the step up to the tax bases of Griffin assets is expected to occur over a period of approximately 15 years. The tax benefit that may be received from the Company's results of this election will have no impact on the Company's earnings, and will impact cash flow only to the extent the Company has taxable income that is offset by depreciation and amortization deduction on the Griffin assets. At a minimum the Company expects to recover the $13.8 million paid for this election.

Over to the bakery. The bakery segment sales accounted for $77.9 million of net sales during the second quarter of 2011, driven by higher finish product prices for bakery by-products. For the 6 months ended July 2, the Company reported net sales of $910 million as compared to $329 million for the 2010 comparable period. The $581 million increase in sales is primarily attributable to the contributions from the Griffin acquisition, higher finish product prices.

The rendering segment generated net sales of $764 million for the first 6 months of 2011 as compared to $329 million in the comparable 2010 period. The Griffin acquisition accounted for $309 million of rendering sales, the results of 26 weeks of contribution, and higher finish product prices contributed $126 million to the increase. The bakery segment generated net sales of $146 million for the first 6 months of 2011, with higher finish product prices for bakery products driving strong net sales.

For the 6 months ended July 2, the Company reported net income of $98.8 million or $0.87 per share, as compared to $22 million or $0.28 per share for the 2010 period. The $75.9 million increase resulted in primarily from contributions from the Griffin acquisition, higher finish product prices and increased volumes, which were partially offset by decreased yields.

Okay. Moving onto the balance sheet, on July 2 the Company had working capital of $60.8 million and our working capital ratio was 1.4 to 1 compared to working capital at $30.8 million and a working capital ratio of 1.2 to 1 as of January 1, 2011. At July 2, the Company had unrestricted cash of $12.8 million and funds available under our revolving credit facility of $371 million, compared to unrestricted cash of $19.2 million and funds available under our revolver of $141 million to January 1.

Capital expenditures of $27.9 million were made during the first 6 months of 2011, compared to $9.8 million in the same period of 2010. The noticeable increase in CapEx was primarily due to previously anticipated capital expenditures by Griffin. Capital expenditures are in line with Management's 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. In summary, we finished another quarter with a solid performance in virtually all aspects of our business. Contributions from the Griffin acquisition and higher finished product prices fueled our forward momentum. Our partnership with Valero is stronger than ever and is further solidified by their decision to internally finance the Diamond Green Diesel product.

Our balance sheet is growing stronger daily and we are positioned to grow the Company. On behalf of senior management, we'd like to thank our employees for all their contributions in helping us deliver a new record quarter to our shareholders.

With that, I would like to now open it up to Q & A. Operator.

(Operator Instructions) Farha Aslam, Stephens Inc.

Hi, good morning. John, first just a quick clarification on 2 items that you highlighted. The charge you took for the capitalized costs on the DOE loan, that is a 1-time? We don't expect Diamond Diesel costs to flow through every quarter?

Well, as far as the DOE loan costs, we think that is the majority of it, Farha. There could be a little bit. The government used several consultants through this period. We think we have identified all of it. There could be maybe a small portion to still come in. It shouldn't be material.

What you will see going forward, though, as we have started the construction phase, there is work being done for the JV under agreements with Valero so the JV will be being charged a nominal amount for cost of record keeping and everything going forward. You will start seeing some small -- but you are correct, nothing like what you saw at the end of the second quarter.

Okay. Then I just want to understand that $13.8 million tax. Did you take that as a charge during the quarter in your cost of goods sold?

No.

I just didn't understand how that accounting works.

The accounting on that is -- when the acquisition was done, we made an estimate of what that payment could have been or would be if the election was made, and we provided for that in the set up of the acquisition. It was fairly close to what we had provided but any variance of that would go into the intangible value to the Company so there was no P&L impact to that.

Under 338(h)(10) election, you will not see any effective tax rate changes or anything. This is strictly a cash flow. So the only place you'll see any impact of this would be over on the cash flow schedule and a reduction of cash taxes. That is the only impact you are going to see to that over the years.

Thank you for that clarification. On to business trends. Randy, in your 10-Q, you seem to say that restaurant services were really solid in the quarter and you had increases year over year. Could you just give us some color how they are trending sequentially, and if you expect them to continue in the third quarter?

Yes. What you typically see in that business is, as we've said, you come out of winter time to a degree, weather will influence whether you can really run the routes or not and whether people eat out. And when the ballpark's open you typically see a pretty little nice pickup between April and end of October, trending down a little bit after everybody goes back to school here just a little.

We did see the seasonal pickup. I think that we've referenced here. It was kind of amazing. We had a really strong January and then it tailed off a little bit in February, March, but gave us a good first quarter. As April came on, it became stronger as you would expect. What we did reference here a little bit was that we are staring to see theft in a pretty significant form, and it's all the way from Iowa to Los Angeles to New York to Florida. We are starting to try to deal with theft in the sense here.

So overall, the business is stronger. Sequentially, and year over year, very typical with the time of the year. As it's pointed out by my operations guys, as the grease gets liquid in those bins away from winter, they are very easy to vacuum out or to pump off. Theft, Farha, we are bringing to the forefront here a little bit. It is an industry issue and it is truly starting to impact the industry.

Thank you. My final question is on your poultry volume. It seems to imply that year-over-year poultry volumes were down. Is that right?

No, I would say they are flat. I think the comment that they are flat, maybe new account here, a lost account there. There were several plants out there that changed hands during the first half of the year here that to a degree. Some of the Townsend plants that changed hands, they powered down and then powered back up. Overall, I would say it is flat year-over-year but in no shape is it reflecting the rhetoric that you have heard or may have heard that we have listened to and I know you have participated in on the poultry calls today. We have not seen the downturn in our poultry tonnage at least for second quarter.

Okay. How about third quarter so far?

Well, July is in the bank, typically we don't comment on that. Volumes look to be pretty typical of what we saw so far in second quarter.

Right. Thank you very much.

John Quealy, Canaccord.

Hi, good morning guys. To the G&A line if we could. The $34 million, that is up about 10% sequentially. Can you talk about or characterize how much is integration-related activities, and how much is underlying business? Or give us some sense of what's going on there, if you could? Hello?

Oh, sorry. He gave a real good answer there.

Exactly. You want me to repeat that question?

During the acquisition, because of a provisions in the acquisition agreement, there is a portion of a true-up on the stock price at the end. So the Company did provide for a liability on that. In the first quarter, because of where the share price was, we brought in about $2.8 million in the first quarter as a credit so that was a reduction in the first quarter SG&A. We had about an $800,000 credit there, so about a $2 million swing there, up from first quarter to second quarter. But you are right, we've got expenses related to the Valero. As you saw, the costs, it ran through, and the deferred loan -- the loan costs that was related to the DOE.

We had our own costs related to that as well so we were up a little bit there. I would say from an SG&A standpoint, if you take out that $2.8 million in the first period and the $0.8 million this time, you should be looking in that $33 million to $34 million range, going forward, by taking those 2 big credits out, and some increased costs that we had from the writing off of some of the expenses related to the JV.

Then my last question on the rendering business, as it pertains to downstream in the biodiesel market. Can you folks comment on trends that you are seeing there as you closed out Q2 into Q3, in terms of activity? Whether it's ring credits still driving some volumes or what you think accounts for the resiliency there?

Kind of we operate a small biofuel plant in Butler, Kentucky and it is running at capacity and running very profitably right now. Rens have traded very volatile during the quarter, $1.30, $1.40 is where they are at right now last time I checked. Volume remains strong, I think, through the first half of the year. The industry ran about 441 million gallons on an 800 million mandate. We are seeing 2 things in the US here or 2 things that affect our business.

One, there is a small portion of off-take now that is from the yellow grease business that gets diverted into a blend in biodiesel. You are seeing the ethanol business divert some of their corn oil now into the biodiesel business. But more importantly to our business at least for the Darling portfolio is the strong European demand for our fats and oils. The US is running at mandated levels. Europe, with its increased influence in how they give it a greenhouse gas multiplier effect, is a very strong driver and I expect probably next year for animal fats to even start to move into Europe in some fashion, which it's been a long time since that's really happened.

Thank you, folks.

Stephen Share, Morgan Joseph.

Good morning, congratulations on a strong quarter.

Thank you.

I wanted to talk a little bit about your decision to not go with the DOE loan. I guess I was under the assumption that you were going to get such a favorable rate from the DOE. Maybe you could talk about how that decision was made and why it was made.

Steve, this is Randy. The issue for us -- there were multiple things. There was the cost of the financing and the terms of the financing. Then there was the overall process of finalizing the financing. The process, as you know, continued on for numbers of years here and just to bring it to a highlight and not take any shots at anybody here -- part of the joint process with Valero was to negotiate with our attorneys, their attorneys and the Department of Energy. We negotiated a 70-page terms sheet in order to turn it into a loan document.

You would have thought the effort spending it on the front end in order to shorten the time to take that to documentation and final OMB credit scoring and approval would have been a pretty solid strategy. What it entailed, or it turned out was that essentially we got a brand new -- once you completed the term sheet, it all started over again and within the loan document became terms neither Company could live in. I don't really care to go into the detail of them. But under both of them it potentially would have put either Company's credit facilities in jeopardy and in turn, possibly been in breach. It wasn't anything that we could live with going forward.

So at the end of the day, we -- Valero and Darling looked at the value of the project and the neat thing about it was, while the time was dragging on, it gave Valero a longer and longer period to evaluate the project and get comfortable with the returns. There's some very volatile markets, and their CEO, Bill Klesse became very, very enamored with the project, and he said okay, let's go ahead and do it and move forward, and that's what we did.

It was just a point in time where we said -- number 1, we want to get the project under construction because we want to be in position to produce against the billion gallon mandated level that's now going to looks like it is potentially going it move to 1.28 billion gallons. It's been a very profitable project on a pro-forma look back and even in a spot here looking at it. It just made economic sense to put away what would appear to be cheap financing but it had terms we couldn't live with.

What are the terms of the current loan? Have you disclosed that had or can you disclose that?

No. We -- under the terms of the loan, with the subsidiary -- one of the subsidiaries of Valero, we cannot discuss the terms of the loan.

Okay. And then my second question. I just wanted to get a handle on, as I'm sure you know it's been real hot and real dry in the southwest. There is some speculation about that might impact liquidations in the cattle market. Could you speak to that? On the 1 hand it seems like that could be maybe a volume boost for you and on the other hand it is so hot that maybe the weight of the product's down and you get less. Could you maybe just -- how should we think about that when we model out the volumes the remainder of the year?

It is interesting, Steve, when you sit there and I was looking at some of the questions as I have seen them come in and people say well what about your operating costs in the second quarter? And I think it is kind of fun to highlight that only about 120 days ago, we were dealing with record snows in the Midwest and we couldn't get to our grease bins and nor could we fix our plants. In the second quarter, from an operating perspective, you spend a few more dollars on maintenance trying to play catch up maintenance during the time of the year when everything is thawed out and then we had to deal with floods.

The raw material side that gets talked about, yes. I think yesterday we missed our 41st record day of over 105 in Texas here. We have limited assets in some of the areas that it's been hot. We are so diversified. Raw materials streams have been very consistent throughout the United States. We are seeing -- you would expect this time of the year, for the weights on the animals to be lower because they wouldn't be finishing them out, but weights have been a little bit lighter but fairly consistent. Really, as we finished our board meetings and looked at raw material streams, they looked to be fairly consistent through the third and fourth quarter here. We don't see any big, big changes in what's going on out there.

I think admittedly, we would share some of the caution that the market expresses about the long lead raw material, which would be the beef inputs. It certainly looks like the cattle slaughter numbers have been very strong without new animals being put into pasture here. But we've watched it for 30 years here and it always seems to find a way to meet the demand here. Overall, I think our view going forward for the balance of the year is, steady as she goes and we'll see what happens.

Clearly, we acknowledge the stress that a lot of our suppliers are under, especially in the poultry area. They are cutting back. I think you have seen the egg sets. But relative, because of the diversification of our footprint and the number of plants out there, we just haven't seen a material or significant impact to our input streams.

I see, thanks a lot.

Kenneth Zaslow at BMO Capital Markets.

Hi everyone. Can you talk about the product mix opportunities you are taking on? Will there be any benefit in 2012 for some of the mix opportunities, putting beef or chicken into aquaculture? Things like that. Could you just talk about any incremental benefits that we might be seeing in 2012 or '13?

Yes, I would characterize it, Ken, as we've operationally realigned the Company and kind of aligned the reporting structure, too. In a practical sense, we gave some of the Darling guys Griffin plants and some of the Griffin guys Darling plants, and have started to cross-pollinate the management structure and the marketing structure of how we create products. And do you make what you sell or sell what you make, and trying to find that mid-point now.

Both the operating group and the marketing group have identified a series of plants across the United States that can make what we are going to call species-specific products for specific markets. I don't know how else to say it, whether it was aquaculture or pet food. Whether it is a poultry-grade product out of some of our western plants to all porcine products in the Midwest to pet food grade products and several of our packer oriented plants.

I think the value that the Griffin merger brings us is the knowledge of how to structure our facilities, our operations and our marketing. By the way, they've got the contacts to help us learn to make and sell that product. I think it is pretty steady as you go here. But I think overall as we showed the Board here over the last couple of days, we talked about and identified the opportunities and our time line is, in 2012, to watch that start to come home.

It is going to require a little bit of capital, minimal in several of the plants and others it will take a pretty good portion of capital. It really, to me, as I think through it and if I was sitting in your chair, it is probably a back-half 2012-type of when it starts to flow through and you should see it.

Do you think though -- that's on top of your cost savings opportunities purely from Darling -- from Griffin, is that a fair statement? Is it in the order of magnitude of $5 million to $10 million?

I think that is fair. When you look at the scale as you step back of this thing, and you look at whether it is market share or quantity produced of the products, it doesn't take a very large increase in price, meaning whether it's $5 a ton or $10 a ton to become very, very meaningful across the divisor.

Can you give us an update on the integration on the cost savings, where you are on your targets, how much are you exceeding them by at this point?

Well as we didn't really ever release targets out there, but I will tell you that the Florida and Georgia operations have delivered about 2 times what we thought they would. Texas and the Great Lakes are just starting out now, with closing of transfer stations, re-routing of customers. As always, it takes a little longer.

You have got to get the information systems to talk to each other, and move customers and get it all done. It is coming in ahead of where we thought it would be, but relative to what John and I believe is out there, we are right on target. So I think it is what we have talked about and I think there is still more to come.

And do you think they're more going to be -- I'm assuming they will accelerate through the back half and into 2012. Is that -- the degree to which you've actually received any dollars down to the bottom line is probably relatively minimal, would you say that? And they are probably going to be building over the next couple of quarters. Is that a fair statement?

Yes, I think it's fair but I think it's also -- you have to step back and say as we talked about putting the companies together, the limited overlap geographically lent itself to limited operational synergies. The short-term synergies are starting to flow through right now, but when you are operating at an operating rate of 400 plus EBITDA, and the markets talk to whether it is 5 million, 10 million or 20 million synergies, the 5% [adder] here kind of gets lost in the big dance here.

So, I want you to be little careful there. I think long-term though for -- going forward there is a structural way of how we run our business and the products we produce, and then we think that will be -- could be and will be material to us moving forward but it is just going to take a little longer to deliver as we start to make those products.

My last question is on the bakery volume. Is the acceleration related to the pickup in supply of product or because of the new plant? And do you see this volume accelerating meaningfully going forward?

The bakery's seasonality is really kind of a spring forward type of pick up. We see the summer months of June, July, August, September, October, all the way up until about 2 weeks before Thanksgiving, the fall bake-off as they call it, stays really strong and then it backs off. You are going to see volumes, I suspect if they're typical with seasonality here, in third quarter will be stronger than in second.

Great. Thank you.

WiIliam Bremer, Maxim Group

Good morning Randy, John, Brad. Good quarter. Now looking over all the plants you have embedding with the Griffin acquisition, are there any plants or facilities that you foresee needing a large scale, say, maintenance or CapEx needed in any of the plants that we should be aware of?

I think the answer is the plants are in very good shape around the horn. Both of us have had a plan that to keep reinvesting in the plants. The answer is yes. In a lot of cases, we are going to move some different technologies around that help us deal with wastewater and some of the other operating attributes, and the operating secrets that each of us held. I think the answer is pretty steady as we go, but could be.

And what type of CapEx should we be modeling for the full year here?

Bill, the number we had given out on normalized CapEx that we'd looked at was in the 60 to 65 range. As Randy says, as we have identified a few locations here that may go to single species, we may need to make some changes in the receiving area for separation of raw material, but we don't see anything major there. In that 65 range plus or minus right now is still a pretty good number. We could be on the upper end of the 60s, depending on what we see as we get into some of these other areas but nothing materially different from that.

My last question just deals with pricing. Can you just talk about pricing for some of your finished products right now? What has surprised you, what hasn't, with your finished products?

Second quarter we saw the what I called just a very significant run up in the fats and greases, biofuel demand here, abroad, and pretty solid feeding economics coming off the strong winter. The fats have backed off here in the third quarter, especially the Darling fats and it is because of quality of the raw material coming in. There's been some pretty significant heat, as was pointed out and the amount of mortalities in the Midwest has been more than challenging.

At the end of the day, as I remind people, as part of the rationale underneath the Valero Diamond Green Diesel investment was to have a market for these high acid fats that we produce for anywhere from 3 to 5 months a year. We are feeling the pressure of the high acid fats in the third quarter, and typically, that is very seasonal and very typical of what we've done here for the last 9 years that I have been around.

On the protein side, we have had very solid exports to Indonesia on the meat and bone meal side. I don't see much changing there. Lots of volatility as the different, -- as you eat less when it is hot out, so do animals. So you see a little bit of supply push and movement there, so we have seen some volatility and a little bit of trending down in the protein. But it seems to run historically on the upper end right now.

The poultry proteins, like we said, we had a strong poultry input during the second quarter and they remain fairly strong here in the third quarter. What you typically see is, we upgrade our feed grade material, the pet grade. You see the pet food pack kind of slow off in the summer seasonality. It kicks in and then aquaculture picks up. There is a little bit of lag. We felt a little bit of compression in the spread between pet and feed in the second -- at the end of the second quarter, but it's widened back out here in third quarter. Overall those products look pretty strong. Obviously you have seen corn have a major volatility move here with opinions on crop size and carry outs. But at the end of the day, $7 corn makes that bakery by-products business look pretty strong.

Very true, Randy. Thanks for the color.

Lindsay Drucker Mann, Goldman Sachs.

Thanks, good morning everyone. I was hoping first -- I was wondering if you could put some numbers around this whole -- the demand for your fats and greases for the biofuel market. I think you always refer to something like a 10 billion-pound pool. How much of that do you think today is being used for biodiesel or renewable diesel?

Yes, it's really hard to say Lindsay. We are going to pull a rabbit and a number out of a hat here. The marketplace can -- we describe the fats, waste fats and greases as about a $10 billion marketplace. The 800 million-gallon biofuel market or the biodiesel or biomass space diesel markets times a little under 8 pounds a gallon, so you have got roughly, I don't know, 6 billion, 6.5 billion pounds of fat that's got to go into it.

I suspect somewhere between 900 million and 1 billion, 2 billion, 3 billion animal fats and greases are going into that right now. You are seeing, as more and more of these ethanol plants come online, with the corn germ de-fatting process on them, you're seeing a little more what I call high wax corn oil move into that biofuel blend that is out there.

Are you seeing any of the consumers of these -- of your by products or (inaudible) producers of biodisesel move to active -- proactively incorporate more animal by products into the mix?

You see a little of it as it warms up here but not really. As we have said all along with the Darling and Griffin mixture of fats, our acids are too high. They don't have the technology to handle it. Yes, they'll try to tweak in 3%, 4%, 5% but you just can't do much more than that. They talk about flexible or mixed-feed stocks or multi-feed stocks but the reality is a super-high majority of the biofuels made in this country are made out of refined bleached soybean oil.

Just going on. I know you guys don't give explicit guidance but thinking about the pace of growth for the back half of the year. First of all you mentioned some of the issues of heat degrading product, but you faced that last year in the third quarter. Would you expect the magnitude of impact to be similar this quarter versus what you experienced last year?

Yes, I'm watching around the table here and heads are nodding. So yes, I can't quantify it but we are really making some nice crap out there right now.

Then just thinking about your earnings trajectory into the back half of the year. That obviously would be a dampener on the third quarter. But given what we are seeing with crop prices and post the [Wassi] report, do you think the momentum that you are -- number 1, how much of the improvement in by-product prices flow through your second quarter? Sometimes things operate on a lag. Can we see some extra tail winds in the third, if there was delayed realization of that price improvement? And secondly, just generally how do you assess your earnings momentum in the back half relative to the first half?

The answer is that number 1 in second quarter you saw a rising price environment, at least on the fats and greases, a lot of those were under formula. A little bit of a lag there, you carry a little bit of that forward. Now part of that gets offset by the downgrading of the quality of the fats we are making in third quarter here. Protein backed off but is starting to some back again a little bit here. Typically you have referenced the third quarter in a sense has always been a little weaker for us and a little bit of a hard dartboard to throw and pick out what you are actually going to deliver there.

As the weather cools down and seasonality of animal feeding and the quality of the product we make improves, I think the momentum of $7 corn, $13 beans, $350 soybean meal and $0.55, $0.57 soybean oil, makes for -- at least the table's been set for a pretty solid fourth quarter here, as long as there is no dramatic changes in raw material inputs.

Okay. And then just last question, you have talked about some of these individually, but I was hoping you would just go through what the 1-time costs in the quarter were, related to either the renewable diesel facility or some of the merger restructuring efforts, closing facilities. There is that 1 write-off of the loan that's explicitly stated in your P&L, but what else is running through your cogs or SG&A line that as you think about next year you wouldn't have to repeat?

You pointed out, like you say, the $1.1 [million]. That, in itself, is the cost associated with the DOE loan. As we've started up the project there, we will start seeing a monthly expense in that anywhere from $50,000 to $70,000 a month of costs related to the project that is not capitalizable, as we go forward. The new rules on -- GAAP rules and so forth, and IRS rules, as to what can be capitalizes and what has to be expensed from projects like that. So you'll be in that probably 250 or so a quarter on that.

We did have a substantial amount of costs in the second quarter that we did write off as well and our legal expenses here, that was related to the DOE. That was a little less than $1 million, those, but we've always got costs associated with projects and so forth going forward there. The biggest cost was that the 1-time cost related to the DOE, Lindsey. Remember, we will be having costs show up on that unconsolidated subsidiary portion going forward now that everyone will need to take into account.

On the fixed assets, on the transfer stations, we have been writing those down. You'll see a little bit of that in the depreciation expense but there has not been anything substantial there. It's been probably around $1 million over the first 2 quarters that we have marked those down. We have had evaluations done on the transfer stations, and shut down facilities and written those facilities down to a market value that we feel can be moved at those values. As we go forward, there could be a transfer station here or there or a plant that we would have to write down, but again, nothing that we would consider substantial at this time.

Right. Lindsay, this is Randy. I would say from an operating basis, I mean the Florida-Georgia area, there was 20, 25 people mainly drivers as we consolidated routes that have been let go. There were some severances that flowed through but relatively not as most of them were offered positions at 1 of our other locations, if they chose to. Administratively, we are probably 8 or 10 lower salaried/executive salaries that have flowed through but no severances were attached there.

Okay. Thanks.

JinMing Liu, Ardour Capital

Good morning, gentlemen. Just a quick question related to the seasonality in rendering segment. In terms of (inaudible), you mentioned that in your pre-remark that for first 2 quarters the volume has been relatively steady. I'm having some trouble to correlate your comments with the market data like the slaughter rate meat production. So can you help me to understand that?

Yes. I mean in first quarter to second quarter, we saw volumes in the rendering side were on the red -- what I'm going to call the fat and bone side were slightly down. But that was related to lower mortalities, dead stock, because of the gentler spring weather. The offset to us is that as we were out there, and carrying into third quarter is, I think our list includes about 5 or 6 new raw material accounts that are significant in size, or 2 raw material accounts, rather large accounts that we have now added back to the system here.

Overall, what's driving the inputs here is that you have had very, very strong meat exports out there, for all materials, whether it is beef, pork or chicken. I think that is going to continue to drive slaughter, given the value of the dollar. At least, if the world doesn't go up completely upside down here we should have pretty strong meat consumption globally going forward that then dribbles back to our system.

Okay. The next question, that's the recent slight decline in your finished product prices. According to your formula price you may have to, if I understand correctly, you may have to have some slightly higher costs due to the formula pricing because you lock in the price for your suppliers when you take out raw material. But the finished goods price will decline a little bit during the process. Is that correct?

Yes, that's accurate. I would always caveat it by, we saw a market -- a rising market in second quarter, which means you are always forward sold for logistics, so you have a little bit of lag time there. It always seems like then you would -- to counter that would be if you would hope that when it declines the other way but you never have anything sold in a declining market. Sorry, my commodity guy is sitting here just shaking his head at me again so.

Okay, all right. Thanks.

Dan Mannes, Avondale.

Good morning guys. I think most of my questions have already been asked and answered. Just a couple of quick follow ups. First, your commentary on volumes looking forward in contrast to the maybe the firm market today is a little bit cautious. Can you give us a little bit of background as to what your real leverage is to come out to volumes? And maybe contrast this with 2009 when we did see some real volume drops and you guys were hit pretty hard.

Kind of hard to answer, Dan. When I look across the country, we've got a seasonal weather exposure to mortalities that may make up 8%, 10% of the mix so not a big move there. You've got a pretty good mix now with the merger to exposure to beef and chicken. Very limited pork in our system today, other than a couple of plants. Then you throw on it, as we commented we have been able to add back some additional slaughterhouses that have come back online, which I think is a little bit of an interesting side bit to what everybody has -- the gloom and doom outlook for the meat industry.

We've seen no less than 3 or 4 of the guys that actually went down in 08-09 come back online now to our system. What's different than 2008 is credit availability and the slaughter margins are out there for these smaller, low cost niche operators, and they have come back online to several of our plants now.

Are the big boys talking about dramatic cutbacks? Yes. At the end of the day, we've not seen that yet. I don't anticipate it as we stay close to our customers. At the end of the day, we think a big swing or the swing that could hit us is 2% or 3% maximum. We kind of saw a little bit of that. We saw a 3% swing in second quarter here but part of it offset by new accounts, getting ready to come back -- to come online again.

Besides the credit also the diversification of your -- across animals and geographies is maybe a little bit of a difference now between what you had in 2008-2009?

Yes. In 2008, 2009, the thing was 2 -- a combination of 2 things. We got margins too wide. We had a couple of slaughterhouses add rendering capacity from an integration standpoint in Iowa. Then we had a couple of accounts consolidate back to their own plants much like -- or back move their plants just like Pilgrims shut their Dallas location and consolidated their production now to 2 or 3 of their other locations.

Got it. Real quick, just 1 other item. Working capital looked like it was negative in the second quarter. Anything going on there or is that a seasonal thing?

It wasn't a little bit negative.

Sorry, I was trying to be nice.

We are down $38 million from the first of the year in working capital funds.

It's pricing, as we have said, and it is timing of collection of shipments and so forth for export. And then the inventory was up from the first of the year. But it's pricing and a little bit of an inventory increase, is what's driving that. But yes, it's up quite a bit from the beginning of the year.

Assuming steady-ish pricing, Q2 to Q3, you think you would recover a chunk of that?

Yes. We would, as we go forward, we may see a little bit of increase in some of the fat inventories as high-fat acid levels increase in third quarter. But then as the -- when we start getting a little cooler weather, then that will work its way down. A lot of that is dependent on the export markets.

You can -- at a point in time on a balance sheet, Dan -- with some of our shipments in the large vessels, we can have a large inventory, then the next day it can go down a few million dollars. That is what that is but it's driven by a little higher inventory levels and the pricing, obviously, had a big, big part of that.

Makes sense, thanks.

Next question from Bill Baldwin at Baldwin and Finney Securities.

Good morning. Looking at the segment data and looking at corporate activities, which is corporate expenses, that was up quite a bit sequentially second quarter versus first, and I know some of that was taxes but it was still up pretty sharply, when you back out your income taxes. I know we have been going at this cost thing from different angles but can you talk about that a little bit, as to what caused the significant increase in corporate expenses on the segment side? Other than taxes?

As you said taxes is a portion of it. Then in the first quarter, Bill, because of the valuation on the liability that was reduced in the first quarter by $2.8 million, we did not have that in the second quarter. As we go forward, that will -- that reserve will go away by the end of the year. It was set up at the time of acquisition with the target price in mind.

As the share price has gone up over that period of time, first quarter we had a big credit, second quarter very small credit. That will become a fairly nominal number. But that was the biggest change there. And secondly, we did have some expenses within Darling, not just within the unconsolidated sub that was related to the DOE loan process as well. Those all included would be as much as $3 million to $4 million.

Okay. John, when you realize some of your cost savings and synergies from integration at Griffin, will it show up in this are here, in this corporate activities area or will it show up or in cost of goods and --?

The bulk will show up in the cost of goods area.

Sales value.

And cost of goods.

Absolutely.

Thank you much.

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

All right, thanks everyone. We'll talk to you I guess here in November when we close out the third quarter. Take care and have a great summer. Thanks.

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