Darling Ingredients Inc (DAR) 2012 Q1 法說會逐字稿

Good morning everyone, and welcome to the Darling International conference call to discuss the Company's first quarter 2012 financial results. With us today are Mr. Randall Stuewe, Chairman and Chief Executive Officer of Darling International, and Mr. John Muse, Executive Vice President, Financial Administration. After the speakers opening remarks, there will be a Q&A period, and instructions to ask a question will be given at that time. This call is being recorded, and your participation implies consent to our recording this call. If you do not agree to these terms, simply drop off the line.

I would now like to turn the call over to Mrs. Melissa Gaither, Director of Investor Relations for Darling International. Please go ahead, ma'am.

Thank you, Emily. Good morning. Thank you for joining us to review Darling's first quarter 2012 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 Administration, will then provide you with additional details about our financial outcome. 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 your questions.

Before we begin, I need to remind everyone that this conference call will contain certain forward-looking statements regarding the business operations of Darling and the industry in which it operates. These statements are identified by words such as may, will, begin, look forward, expect, believe, intend, anticipate, should, estimate, continue, momentum, and other words referring to events to occur in the future. These statements reflect Darling's current view of future events, and are based on its assessment of and are subject to a variety of risks and uncertainties beyond its control,including disturbances in world financial credit commodities and stock markets, a decline in consumer confidence in its discretionary spending, the general performance of the US and global economy, global demands for biofuels, grains, and oil seed commodities, which have exhibited volatility and can impact cost of feed for cattle, hogs, and poultry, thus affecting available rendering feedstocks.

Risks include future expenditures relating to Darling's joint venture with Valero Energy Corporation to construct and complete a renewable diesel plant in Norco, Louisiana, and possible difficulties completing and obtaining operational viability with the plant, economic disruptions resulting from the European debt crisis, and continued or escalated conflict in the Middle East,each of which to cause actual results to differ materially from those projected in such forward-looking statements.

Our 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 a result of new information, future events, or otherwise.

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

Thanks, Melissa. Good morning everyone, and thanks for joining us. It is my pleasure to welcome you to the Darling International earnings call to discuss our financial results for the Company's first quarter. As most of you know by now, our first quarter was one marked with volatility. Volumes improved and then fell off, prices declined, then recovered rapidly. While we were out of the gate in 2012 a little weaker than most anticipated, our business remains strong, and the underlying fundamentals remain favorable.

For first quarter 2012, our key indicators of volume, finished product prices, and energy, can easily explain our performance. From a volume perspective, we operated at a comparable rate to fourth quarter 2011, but significantly lower than the first quarter of 2011. The poultry cut back is clearly evident as our input volumes are off approximately 5% year-over-year. The beef side while lower year-over-year is more attributable to a mild winter that resulted in lower dead stock volumes than lower slaughter volumes.

Our bakery feed segment felt significantly lower volumes for year-over-year, and on a sequential quarter basis. We attribute most of this to commercial bakery maintenance shutdowns, and the possible influence of a slower economy affecting discretionary spending. On the finished product side, sequentially prices were relatively flat for proteins and fats on average. However, one must dig deeper to realize prices declined further from fourth quarter before rallying sharply in March. As many of our shareholders know, price volatility at the magnitude felt in the first quarter can impact earnings due to the lag effect in our formula business. Additionally, the Company built significant fat inventories alt our coastal plants in hope of better export markets and prices. Overall, protein demand remains solid due to anticipated short crops in South America, and our pet food business remains solid, as well.

On the fat side, seasonal reductions in biofuel feedstock demand, along with significantly lower export demand predominantly from Europe, influenced price and performance. On the energy front, historically low natural gas prices helped to offset the lower prices and volumes felt by us during the quarter.

As we discussed last quarter, Diamond Green diesel project should offer us an opportunity to offset some of the impact felt from declining and volatile fat prices. To put this in perspective, if Diamond Green diesel had been operating at planned capacity in the 2012 first quarter, and assuming feedstock costs equivalent to our selling price of fat delivered to the Norco, Louisiana site, and a selling price of ultra low sulfur diesel at the Gulf minus $0.10 per gallon, plus adding back the full rim value, our earnings per share would have been approximately $0.12 to $0.14 higher in the quarter, and potentially $0.48 to $0.50 higher on an annualized basis.

On Tuesday I visited the construction site, and can report we are approximately 50% complete with a significant amount of steel being put up, the tank farm nearing completion, and about one-fourth of the equipment set. Our major pieces of equipment are nearing port, and should be delivered on the site within the next couple of weeks. Our construction and operations team is doing a fabulous job, and we have accumulated an outstanding safety record thus far. Start-up for the facility is still in flux, but we are assuming a very late fourth quarter to early first quarter commissioning.

With that, I would like to turn the call over to John Muse for our financial review. After John concludes, I will wrap up with a few comments before going to Q&A. John?

Thanks, Randy. Please note that Griffin Industries results are now fully consolidated with Darling, and we are no longer breaking out the Griffin contribution. For the 2012 first quarter, the Company reported net sales of $387 million compared to the $439 million for the year ago period. The $52.8 million decrease in sales, primarily resulted from lower selling prices of our finished products, and lower raw material volumes. As Randy mentioned, during the first quarter of 2012 as compared to the first quarter of 2011, fat and protein prices declined more than 4.3% to 6% respectively, primarily due to lower export demand for European biodiesel, milder winter weather reducing feed demand, and softening demand for protein meal as a cut back by the poultry producers.

Net income for 2012 first quarter decreased to $28.6 million, or $0.24 a share on a fully diluted basis, as compared to net income of $46.6 million, or $0.43 per share for the 2011 comparable period. As noted in our press release, the $18 million decrease in net income for the first quarter resulted primarily from lower raw material volumes and lower finished product prices. 2012 first quarter net income compared to the 2011 fourth quarter was relatively flat, as finished product prices continued to decline through most of the quarter with rapidly recovering in March.

As Randy mentioned, the mild winter weather also provide historically low rendering volumes from mortality to our dead stock. In addition to the decrease in pricing, our aggregate expenses for depreciation and SG&A increased in the 2012 first quarter as compared to our prior quarterly average expense. The slight increase in depreciation was primarily due to capitalized capital project expenditures in 2011. SG&A was up approximately $6.7 million to $37.4 million compared to $30.7 million last year, and up $1.5 million over fourth quarter of 2011. wherein the SG&A was $35.9 million.

The increase is primarily due to payroll and related expenses and an increase in expense from a first quarter 2011 accounting contingency gain, not realizing the first quarter of 2012, which was in the amount of $2.6 million. At the segment level, rendering generated sales of $322.3 million for the first quarter 2012, as compared to $371.6 million in the first quarter of 2011. Bakery by-product sales contributed $64.8 million in the first quarter, compared to $68.3 million in the year ago period.

Interest expense was $6.9 million for the 2012 first quarter compared to $14.2 million in the year ago quarter. A decrease of $7.3 million primarily due to a decrease in debt outstanding as a result of prior year and current year payoffs of the Company revolver and term debt facilities, which includes a reduction in deferred loan cost write-offs of approximately $3.5 million when compared to the same period in 2011. Our other expenses was $0.6 million in the first quarter of 2012, which is unchanged to the same period in 2011.

As discussed in the fourth quarter call, we are now separately reporting the Company's investment in the JV with Valero as an investment in the unconsolidated subsidiary of both the statement of operations and the balance sheet. On the balance sheet, we reported an investment of $32.8 million at March 31, 2012, and a statement of operations reported a net loss of $236,000 to the first quarter of 2012. This loss is largely due to noncapitalizable expenses as we proceed through the construction phase.

Now let me provide some additional balance sheet details. On March 31, 2012, the Company had working capital of $90.1 million and its working capital ratio was 1.87 to 1,compared to working capital at $92.4 million, and working capital ratio of 1.73 to 1 on December 31. The decrease in working capital is primarily due to decrease in commodity prices and cash.

At March 31, 2012, the Company had unrestricted cash of $27.6 million, and funds available under the revolving credit agreement of $389 million, as compared to unrestricted cash of $38 million and funds available under the revolving credit of $391 million at December 31, 2011. Going to capital expenditures, our capital expenditures were $24.7 million weremade during 2012's first quarter, as compared to $12.8 million in the 2011 first quarter, an increase of $11.9 million. This resulting from various projects that were begun in the first quarter 2012, due to unseasonably mild weather, as compared to the period a year ago.

I will now turn the call back over to Randy.

Thanks, John. Our first quarter results are now history and we carry some pretty good momentum into second quarter. Prices are firm, volumes are improving, and energy remains very affordable. Our balance sheet and capital structure are strong and we are positioned well for future opportunities. We are excited about the value added opportunities that our protein sales team are developing, and look forward to Diamond Green diesel providing us with that countercyclical hedge we have all anticipated.

Overall our fundamentals are strong, and we look forward to sharing our success with our customers, employees, and shareholders. With that, I would like to take a moment to thank our entire team for the hard work that they continue to provide in helping to make Darling International a world class company.

With that, I would like to open it up to questions and answers here.

Thank you. (Operator Instructions). And our first question will come from Farha Aslam from Stevens. Please go ahead.

Good morning.

Good morning.

First question is, Randy, could you just share with us your thoughts on how volume is going to progress for the rest of the year in your rendering business?

Okay. Yes. Let's look at it. Let's talk about sequentially quarter-over-quarter. As I referenced, rendering was relatively flat quarter-over-quarter from fourth quarter as we looked forward here. In fact, our volumes actually improved overall from where we thought they would be. We didn't get the big dead stock boost, because we didn't have any winter time here. Chances are we will see a little bit of a boost there in the summertime as the animals will have a problem getting through the hot weather again here.

But the poultry volumes, I mean as you guys have been predicting, they tailed off from almost a year ago September. So year-over-year they were down about 5%. We are starting to fill, the smaller poultry companies come back a little bit right now. I don't know that you are seeing it in egg sets and placements there, but we are seeing it in whether they run Saturdays or not. So volumes are starting to improve there.

The beef side remains pretty well as we predicted. The pork side is running strong. In the rendering segment, we also report the as part of that number, is the restaurant services business of used cooking oil collection. Those volumes are off a little bit year-over-year, but we are attributing more of that to theft. In the first quarter last year, we had a lot of cold weather that gave us more casualties, and also makes the oil behind the restaurant in a solid form, and makes theft very difficult. With it being warm this year, we just did not see the theft deterrent that we have had in the past.

I will comment a little bit for you just to stave off questions on the bakery side, that is where we saw volumes off pretty close to the 10% level. From a customer perspective, I can tell you our supplier we didn't lose anybody that I am aware of,it is all downturn and cutbacks in inventory. And the real question there becomes, is it just an anomaly, or is it more reactionary to the economy. If you look at the ingredient costs for producing bakery goods that are highly inverted right now, whether you are talking veg oil, whether you are talking flour, sugar, salt, so it is obviously influencing behavior to make products later in the marketing year, and pull down inventories. But that is probably as we look at Q1 here a little more of a surprise than we would have anticipated in the bakery side moving forward, as to why those volumes were down. The rendering side is pretty explainable, and pretty much understandable.

Thanks for that really complete answer. And my one follow-up would be could you just share with us the M&A front if there are opportunities and how you are thinking about acquisitions?

Well, acquisitions for us start with when the phone rings. The phone is ringing. It would appear that any of the businesses that have some attachment to agriculture and commodity cycles as people tend to take a differing view on global agriculture right now. You have seen a couple big trades out there in Viterra and potentially Gavilon now, so the market is becoming a little bit more awash with opportunities, as people look to reposition some of these agriculture businesses. What I can tell you is our cash balances are growing. The balance sheet is strong. And if something makes sense, in a sense it is really driven by what John and I have done historically on it. We are certainly looking to grow again, and I think that is our pledge to our shareholders

Great. Thank you very much.

Our next question comes from the Lindsey Drucker Mann of Goldman Sachs. Please go ahead.

Thanks. Good morning can you guys hear me?

Yes. Good morning, Lindsey.

Just a follow-up on Farha's question. As of the end of the fourth quarter I think we had been looking for something like a 2% to 3% volume decline. Is there a way for you to break out how much of the shortfall in the period for rendering was a function of dead stock, versus a function of the packers slowing down more than expected to balance out their margins? How would you sort of bucket the deltas versus your expectations that you were getting last year?

In the rendering side, a super high percentage of it was dead stock. There just wasn't any. Our packers remember, the majority if you break it into beef, 20-something percent of our tonnage is beef, 20-something percentage of our tonnage is poultry. The poultry side has really been steady for many months. The beef side usually gets the winter bump. So at the end of the day, it was all very, John and I are making eye contact, a very high percentage of it was moralities that just didn't come due to really no extreme winter weather.

Can you help us put some understanding around what that impact is to your bottom line? Because clearly that is sort of a one-off that we should think about as getting better on a normal weather basis?

Yes. Clearly as the team on the call here starts to analyze and you guys do a really nice job of trying to model the business, it is a simple business with volume, finished product, price, energy, but then there are a ton of moving parts underneath each one of those metrics. And under the volume side, the weather, remember dead stock, there are two things attached to it. One, you charge somebody to haul away the animal, and two, it is not tied to any formula pricing so there is no profit sharing in most cases on that. So that stuff falls straight to the bottom line. And given where protein and fat prices are, dead stock is very profitable. The tonnage wasn't there. So that is probably the biggest key.

Our packers on the beef side ran as expected. A few Saturdays that they didn't run, or most Saturdays they didn't run, given the high price of cattle. That is an all formula business. And the same with the poultry side. Very few Saturdays there, but it has been that way for quite a while. The big uptick that we get on the poultry side whether we are running is the pet grade products that we make out of that, and the ingredients for the pet food industry. That business was fairly steady. Those prices, both never really reacted down, nor did they react up here during first quarter.

So the poultry side was steady. The beef packer side was fairly steady, and then it was the earnings impact was mostly attributable to the dead stock side. Also point out that remember a lower portion of in the rendering segment is the used cooking oil side, and that volume was off more than we had anticipated both year-over-year and quarter-over-quarter. And with that not being on formula and remember that the prices came off in yellow grease pretty dramatically, that hit the bottom line. That is the one that will highly be offset or have the best counter hedge in Diamond Green Diesel.

The other piece that I would add to help connect the dots here is that our export plants in LA, Tacoma, San Francisco, Newark, Tampa, New Orleans, Houston, when you are having issues on biofuels, meaning they kept changing the rules on double counting and really the regulatory arbitrage that was going on, it all but shut off yellow grease exports out of this country. And that was really felt in first quarter here. So all of the coastal plants that buy their location and position get those premiums for just being an export position built inventories. Best you saw on the balance sheet, you saw that the growth there of inventories, which is related to well it wasn't obvious to some, it should be because volumes grew substantially while price went down. So the dollars looked like they were relatively unchanged, but the volumes are in store right now, and being moved out of position now back at a higher price.

Okay. Thanks. That is helpful. So you mentioned we had this nice pricing lift towards the end of the quarter but that didn't really flow through the first quarter. It will probably flow through the second. Can you help us quantify the impact?

No. I think it is pretty dramatic. Although at the end of the day remember, there is no dead stock. So the main impact would be the yellow grease lift on the nonformula business. And then you saw, but you have also seen protein, you saw the fats dip down. Although Jacobson was reporting in January, yellow grease at $0.35, we saw trades as low, in the low-30s below that on the coastal plants that didn't have export positions.

So you have seen yellow grease move up into the mid-40s and you have seen at the end of the day you have seen the proteins move up and the meat and bone meal ruminant side 275, to material trading on the East Coast at 500. I do want to comment a little bit and make sure everybody understands that when the case of Mad Cow happened, it did disrupt the export trade for meat and bone meal closing the Indonesian market. That is the bad news. The good news was the US needed more protein, and so at the end of the day, we were able to kind of reverse logistics with minimal impact back into the interior.

Just back to my understanding for your fixed cost contracts, so the ones where you are taking sort of a fixed margin. In the event of a rapid moving commodity prices towards the end of the period, you tend to have a lag effect. So you will go ahead and pay the price on the Jacobson. And then when you turn around to finally go sell the product, you may have a higher price to actually sell it for. And so that will be a short term margin benefit which seems to me like it is potentially going to flow through your second quarter because of the timing of the commodity price inflation. Is that true? And if so, would you expect to see some sort of benefit in the second quarter as a result?

Absolutely. I mean the hardest thing is that you, in this business, you have to stay sold in front of it anywhere from three to four weeks just for logistics. And so as we got into that rapidly escalating March, we were upside-down both on our forward sales and our formulas there. So you will see that flow through April, May, June quarter.

Okay. Any way to quantify that or no?

You would love me to, but no.

I am working it. Okay. And then just lastly, I was hoping to go through the math on Diamond Green Diesel, because as we talked about before, I think there are two different ways to talk about potential revenue per gallon for renewable diesel, and I believe you guys mentioned low sulfur diesel plus the RIN value, if you were to look at it just looking at the B100 list price, because there has been some disconnect as of late, and then adjusting for the appropriate RIN number, does that change your expected profitability in the quarter?

Yes. That would have attributed about $0.08 to $0.10. If you would have taken the B100 and then just the RIN multiplier, the 1.5 to the 1.7 adjustment, that would have given you about $0.08. From our perspective and we just keep getting smarter and smarter about it as we look at the product, as it moves in the pipelines, and as we talk to customers, we are more comfortable talking from a perspective that we are really not competing in that biodiesel bucket. But at the end of the day from a conservative standpoint, we have no problem talking to you from the B100 or the ULSD plus the RIN value minus a small freight discount down at the Gulf. One method gives you $0.08, one method gives you $0.12. It is a 50% delta, I understand, and hopefully it will be somewhere there. The other thing Lindsey I know you are a student of following this, we think that when we started to look at the facility, that ultimately, you have got to look at where the product may flow to, and given the change from a legal perspective in the low carbon fuel standard in California, this stuff may end up in California, and I can't even begin to tell what you it may be worth there.

Okay. Thanks. I will pass it along.

You bet.

Next question from Ken Zaslow, Bank of Montreal, please go ahead.

Good morning everyone. If I look at the last two quarters your earnings run rate would be almost like a dollar earnings is that how you guys expect your earnings to be going forward, or is that kind of a trough look at how you think about it?Can you give us some color on that?

Ken, number one, I have never made a habit of trying to put guidance o n this business. I mean but what you do see out here, and I will comment on it is there was some really good momentum going into second quarter here. First quarter, as I said, you can look at and you can check the box and say lower mortalities, a little less grease, a lot less bakery, declining prices upside-down against the formulas, offset by good energy costs. Second quarter we have got prices that are off the charts, still volatile, so there is some lag that happens there in the formulas. But the prices are very, very favorable in the second quarter. You have got a soybean market that seems to say it doesn't have enough soybeans here and south of here. You have got a corn market that says we are going to grow a really big pile of stuff as long as weather permits.

I can tell you I have never seen this business where we have had too many or no soybeans and too much corn. So the impact on what is going to happen in the back half of the year is one that I think is unchartered waters for us. I think it is fairly safe to assume that second quarter is very solid, provided volumes maintain where they are running today and even improve a little bit.

Third quarter will be a swing depending on how the crop progresses. I think you are a very good student. I have been reading your writing as of late. Your read on that is pretty right on to my opinion. And then in that fourth quarter, it is a complete toss-up. And the question will be what is the value of a calorie, meaning yellow grease or tallow in an animal feed ration, if you do have corn back off to 4.50 to 5.50 a bushel here. And while you have proteins at $400 a ton, and soybean oil in the mid-50s. So the question is can that spread get really too far out of whack, and I don't know that I want to speculate on that today, other than to say I can't wait for Diamond Green Diesel to come up to be there to offset that risk.

Okay. Fair enough. The buildup of the inventory, does that not sell through in this quarter?

As long as the boys can get it out of the tanks and get it sold, exports have picked up a little bit. But it is moving out at a higher price but not at a higher pace.

But eventually it will move out

But it is dropping, Yes, absolutely. I mean we are moving the product out. It will flow through, and you will see that delta, or that change flow through in the second quarter.

Is that part of the kind of shortfall is really just a timing issue, somehow it is going to get through in this year. It's not a point of okay, the inventory will go?

It was a big inventory adjustment for the quarter as we wrote it down to lower of cost or market.

Okay. And then I am not 100% sure. Why was payroll so high?

I got a raise.

Yes. We saw.

In looking at SG&A and when you look at first quarter of a year ago, there are some credits that flow through there from the acquisition of Griffin. One of them alone was $2.6 million that was a contingency that we booked at the end of the year as to the share value of what was being guaranteed price. You have to really look at the SG&A from third quarter, fourth quarter forward. And in fourth quarter our SG&A was $35.8 million, third quarter $35.5 million. And this quarter, we were at $37.4 million. $1.6 million of that is a one-time adjustment that when we close the books at the end of 2011, the incentive comp program was moved more heavily to a stock incentive for management.

And when we closed the books at the end of the year, the share price was around $13.30. When those shares were issued in March, the share price was over $17.00. So we had to book in the first quarter $1.4 million, a little over well, almost $1.6 million to account for that price increase, and that hit us in the first quarter for incentive that was accrued at the end of the year. So if you take that off, that is a one-time charge in first quarter, that brings the SG&A back to $35.8 million, which is exactly the same as it was in fourth quarter and third quarter

So when we look forward--?

I would use $35.5 million to $36 million as the SG&A number. That is correct.

And then also, that is also when I look at corporate expense excluding the taxes on your divisional, it was inflated by about $2 million as well, so we should take that down as well?That is the link between the two?

Yes. That is correct. What I gave you is the link between that. That is correct.

Okay. The other question I have is 5% decline in bakery volume leads to 25% decline in profits. Can you talk about that? Honestly of all the things that happened in the quarter I think that is the only surprise we really saw.

Yes a couple things went on there. Number one, the volume decline was a little more than that. Pricing was relatively flat of the finished product. But there is a standardization process that we don't spend much time talking about there, where we standardize the calories in the finished feed, and the blending stock that we use to standardize that moved up sharply. So if you will, the cost of our blending stock moved up and offset that.

But the volume, have you seen it leveling off, any worse, or getting better?

In April, would I say that we had the same plants that are part of our system running at their reduced rate, while in May we have seen them fire back up and start to move to more historical levels.

So again, this quarter is somewhat aberrational in terms of what you would see for the profitability for the bakery business?

Typically as we say, when the ball park is open you see the yellow grease pick up, and you see the bakery side pick up, it has been a little slow to pick up this year, which I am not sure I know the answer to that, other than I have a theory that it is more related to the economic pressures being felt in the US than it is anything else.

Great. I appreciate it.

Our next question comes from Tyson Bauer of KC Capital. Please go ahead.

Good morning.

Good morning.

The way you are going, we might as well just have you keep missing numbers and having a better stock price. A couple of quick things. When you talked about the freight discount, how much of a discount is there really when you are an adjacent plant and the product is going directly into a pipeline, as opposed to discounts that are associated with remote plants that are either trucked by rail or other special transportation?That $0.10 is that already adjusted, or is that a number that is being awfully conservative given the format and the location of the plant?

Well, it is one that we try to get smarter and smarter on. I mean, what will happen is a portion of the product will move out of the plant by truck. A portion of it will move out by rail. A portion will move out by barge, a portion will move out by pipeline. The more that can go out the door by pipeline, the better off we will be. So at the end of the day, that is kind of it, throwing a pretty sharp dart at the target here right now, but we keep getting smarter and smarter about it. I mean long term, the question is going to be can we differentiate the product, it fulfills both the biomass and the advanced bucket,where is the final market for it.

More and more interest out of California with the ruling out there on the low carbon fuel standard, clearly the carbon value and then footprint of this product making greenhouse gas remember makes it a very attractive product there, so we will see, Tyson. It' i a moving target. I know it that the track record of whether it is dynamic, or whether it is Nesfe's model on palm oil, isn't exactly stellar. But at the end of the day, certainly this product has a home, and I think we are starting to understand the economics very, or much clearer than we were before.

You touched on this a little bit with the soy complex and the corn dynamic and how that all plays out which we will see during the summer months, and also given what is happening in South America where they may end up becoming a net importer for at least a year next year, when you run the equivalent calorie feed formulas on a 4.50 corn relative to soy oil trading at about 53, you are coming up with about a $0.20 variance from the top end to the bottom end. Have we seen that kind of spread, at least I don't remember in the umpteen years of covering you guys that big of a variance between the top end and the bottom end, where do you think we kind of play in that range?

Yes. That is so well said because that is what I was attempting to articulate. Because if you look at absolute values, that is what the math or the caloric math would tell you. But we have never seen that before. So something has got to give and potentially I think what you are going to see out there is, on the positive side is the European situation is one that I don't know has much clarity today to be able to handicap it. But let's see. They've thrown out Argentine methyl ester, they have thrown out palm oil as a feedstock. What are they going to make biodiesel from? And the question is do you use rape seed oil that is domestically produced, or do you start to bring in the carbon positive used cooking oil that they did that drove cooking oil prices up last year. So our guess is that Europe will probably offset that downturn driven by the lower, or the potentially lower corn prices, but it hasn't materialized yet.

Is there any possible benefit, we are seeing Valero kind of holding back on the converting their ethanol plants to get out the crude corn oil, because of the push back on the lower caloric feed formulas from the DDGs taking the oil out.

Is there some gain that you can actually benefit from, or what is your read on that maybe this isn't the be all end all to take that crude corn oil out of the DGGs, because it is making that much less valuable on a feed formula?

Well, once again, well said. You have done your homework there. I mean what looked like a no-brainer in that business, the market has now adjusted and said that a defatted DDG should be worth less, and it truly is. And so the economics are still compelling, but not to the point that they were to defat DDGs. And I think you are going to see the majority of those dry mill systems convert over to that technology. It is in process. The equipment is ordered. We are fairly close to it. I I mean one of the investment thesis as we went forward with Diamond Green Diesel all along, was that we believed that more and more of the DDGs would be defatted, because it made sense to do that. Gives them more flexibility, more alternatives. That product will not enter the edible chain and is an inedible product, high end waxes. And so it is very challenging at least today, to run into classic biodiesel plants. It is a very attractive feedstock for us at Diamond Green Diesel. And to a degree, it is a lower cost and very attractive feedstock that will help us have even a bigger chance to arbitrage around and maximize the value of our bucket of fat.

Thanks a lot, Randy.

You bet.

Our next question comes from JinMing Liu of Ardour Capital. Please go ahead.

Good morning.

Good morning.

Hi Randy. Can you give us more color on your yellow grease sale for the quarter? If I run my numbers, this decrease looks like a very significant?

Yes. JinMing. There are two things as you run through the yellow grease. There are about three things that I would say. Some are fairly transparent, some aren't. Number one, the majority of our yellow grease traditionally has been exported out of those coastal plants, and they do get some nice position premiums that didn't happen. That would be the first thing. The second thing we absolutely saw yellow grease on the West Coast decline more than it did in the Midwest. And then the third thing is typically what you see is when we process a lot of dead stock, there is a lot of product that gets reclassed as yellow grease. And that didn't happen during the quarter. So those are your primary drivers that happened. Lower exports drove lower price, and then less yellow grease from the dead stock trader, downgrades of animal fat.

Okay. Is there any way for you to qualify the volume decrease in yellow grease, because it looks very significant to me?

JinMing, this is John. Again, looking at the year-over-year from first quarter of 2011, we are looking at a 5% to 8% decrease. Fourth quarter to first quarter, that decrease was not nearly as significant. It was down a little bit as Randy had said. Most of it though, we believe was due to theft. Because first quarter 2011, the yellow grease could not be pumped out of the bins by the thieves. This year it could because of the warm weather. So it is kind of hard to tell how much of the restaurant volume, we are seeing where we don't see the theft, but the volume has leveled off from fourth quarter to first quarter

Okay. That is very helpful. Switch to Diamond Green. Once the plant is entering the start off phase, how do you contribute to the start up expense and the future working capital requirements?I mean I'm trying to see whether you budget, did you budget for that for those requirements?

Yes. JinMing, within our commitment to the Diamond Green Diesel JV, it was a $93.2 million investment, yes, that included a working capital line within that. And we did not break that outpublicly to discuss that. But that was to cover almost a month's supply of raw material going there.

Yes, though, when those assumptions were made versus where we are today, prices are a little higher. We will wait and see where those fat prices are whether we get into the November, September, October period when we start having product move in that direction. But we would anticipate seeing some increase in that working capital demand at that time if prices would stay where they are. But we did factor that in where a lot of companies have gotten in trouble with they didn't plan on working capital needs as much. We did. We had large quantities factored into our equity investment. But we will see some increase in that. But we don't see anything substantial over that. We think that we are going to see a little bit of extra working capital need, but we have already had quite a substantial working capital assumption in our investment already.

Okay. Thanks a lot.

The next question comes from Dan Mannes of Avondale. Please go ahead.

Good morning guys

Good morning, Dan.

I want to follow up on a question from one of the other analysts, looking forward to the back half of the year and the potential for diverging performance between soybeans and corn, when you look at your product mix, how do you think you net/net participate in that move? Do you see this as sort a net tail wind, net head wind? How do you think your business performs in that kind of environment based on the moves you have seen in those commodities individually in the past?

Well, if you think of the formula business, there is no impact. I mean lower corn prices will definitely impact the value of a calorie, and the calorie is truly that bakery business. And so that will have impact on the bakery business if corn does decline. The fat prices, as we said, obviously, if on a calorie base, they would have to decline. But at what spread will it widen out to relative to soybean oil or the tight stocks in palm oil around the world? So I don't know that I want to stand in front of you and say it is head wind. If we have in third quarter if we have strong mortalities, mortalities are much heavier in protein than they are fat.

So at the end of the day, the strong protein markets are more beneficial. In the back half or the back quarter of the year as yellow grease volumes typically pick up and then fall off. We will just have to see, Dan. I don't know. As I said, it is uncharted water. I would tend to say it is somewhere between a cross wind and to a degree a tail wind, rather than a head wind.

Sounds good. Two other quick ones. First, we have seen a lot of dialogue obviously on the RIN market and the number of fraudulent RINs out there. How does that play into your thoughts on getting, quote unquote full value, for your renewal diesel vis-a-vis B100 and if you could just sort of walk us through how you see the current RIN market, and how that impacts the value of Diamond Green Diesel?

I don't know if I qualify myself as a RIN expert yet. But clearly, the move is afoot to make sure that whoever is producing the RIN is legitimate. And obviously, the biggest one to follow, I was in Houston the other day, or in the Gulf the other day was pretty amazing. So really, I am not sure how the rest of the year is going to work outas we have to replace the RINs. But at the end of the day, I think it is buyer beware and make sure they are coming from a reputable party, and I think clearly our commercial team down there is already being courted, because they know both the quantity and the producer of the RIN are going to make them marginally I think probably more valuable over time.

So it is fair to say that is one of the reasons you guys seem confident that you will be able to get ULSD plus RIN, rather than the B100 type price?

Absolutely.

Yes.

Okay. And then one last final one. Over the course of the last few months we have had a number of head lines around the beef business, particularly both on pink slime and on mad cow. Can you talk about real tangible impacts of either of those two things, or are they really just complete headline and not really meaningful for you?

A couple of things. On pink slime, I think the pink haze has now passed us. It caused a logistical dislocation as the processors, the meet or the beef processors that had edible systems that were still capable of running, had to restart them up. We benefited from that at our edible plant in Denver, and then essentially we had to go find homes for that product. That product was then going to move back in, meaning product both the finished meat product and the fat product. So really, the impact was where the BPI organization was loading out rail cars of edible and technical grade animal fat, it was now being produced back at a lot of different source that didn't have logistics or rail cars in place, and so that pressured the tallow market a little bit, that has all but passed.

The interesting thing in that business, and I don't remotely claim to be a consumer beef expert, is that the amount of that filler product that was removed from the consumer channels, if the consumer continues to buy that cut of meat in the form of ground beef, it is going to have to be replaced. And where does that come from? It comes from another cut of meat, or additional slaughter that has to happen, so there is still a balancing that has to happen in that business.

The mad cow side, I think to kind of if you will, toot the horn a little bit for the United States, the regulations we had in place clearly worked. The system worked. It caught it before it went either in the rendering chain or the food chain. The US has us test in different locations. I want to say the number is 40,000-ish approximately, brain samples from animals looking for the disease. The old adage if you keep testing eventually you are going to find something whether it is a positive or a false positive. The form that was found was atypical, which means no one really knows where it comes from. And so pretty much it was a nonevent in the sense of disruption domestically.

From an international perspective, we saw a reassurance of many of our trading partners. But the Indonesians stepped forward both from a consumer and from an ingredient perspective and shut us down. They allowed us whatever we had in transit with the bill of lading to be delivered, but anything that was being loaded had to be postponed or cancelled, so that caused a little disruption especially on our West Coast plants of material that had to come back into the interior. That has largely been logistically balanced now. Sofor us, the next benefit will be if Indonesia reopens and that material, at least for meat and bone meal and ruminant ingredients can move back that direction.

Okay. Great, thanks for all the color.

Our next question comes from William Bremer of Maxim Group. Please go ahead.

Good morning Randy, good morning John.

Good morning Bill.

Can you give you say update of the Griffin integration?I am trying to get a handle on continued synergies there and whether or not you have been able to fully utilize their expertise in some of the other facilities to your own? Secondly, then if you had to pinpoint Diamond Green Diesel,do you really believe that the underlying production begins in the fourth quarter or do we really feel at this point looking at it it is really a 2013 story from that point on?And then finally, John, if you could just give me a tax rate going forward given the sequential decline and what you are looking for there?

Yes. Let me comment a little bit, Bill. From an integration perspective, we are one team and one dream now. Things are working very nicely. The operations teams have come together. From my perspective it is really going well. Our sales, our solicitation teams, our restaurant services teams are in process of continuing to redefine and realign their efforts. Brian Griffin leads that group and he is doing a really fabulous job for us, as we try to consolidate our offerings from equipment to services, and make some modifications to transfer Best Practices. That is an ongoing thing.

Probably the one that from an integration perspective is our commitment and our focus to trying to find different products or improved ingredients out of the meat and bone meal side. And the Jim Conway side there, has done a really nice job in identifying some customers, markets, and products that we weren't making before out of the ruminant side. So overall, I am very pleased how that is coming together. That is a long term transition there. But every month is a step forward. We have got a couple plants now that are being modified to segregate raw materials to make new ingredients for us. So that is moving forward. What was the question, John, on Diamond Green? I am blank. Bill, what was your question on Diamond Green Diesel?

If you had to take a step back at this time, do you believe that based upon the percentage of a couple of the underlying project, do you believe that we would actually see the production fall in the fourth quarter, or really fall in 2013, say mid-first quarter there?

From a conservative basis, Bill, would I say commissioning, given my almost 30 years around this stuff is I have a huge degree of confidence in the Valero operations team, and Gary Steckel, our Operations manager. But at the end of the day, I am anticipating ramping up very sharply, and really towards second quarter of next year, that I think first quarter, whether we get started up on December 29th or January 13th or February 1st, it is still a learning curve. And so at the end of the day, I would suspect it will be accretive and growing to us in the second quarter going forward.

Okay. Great and then just the housekeeping question for John on the tax rate?

Yes, we finished up last year at an effective rate of 37.7%. First quarter was 36.1%. Would I use 37.0 as that is something we talked to our tax guys, and they feel that should be a good number. That is what we are going to use going forward. So 37.0%.

Thanks. I appreciate it.

Our next question comes from John Quealy of Canaccord please go ahead.

Hey Randy and John, just two quick questions. I think you earlier referenced Diamond Green Diesel, and how maybe you guys are a little different than the biodiesel complex in some respects, can you just flesh that comment out a little bit, in the biodiesel complex we are waiting for the RVO to hit. It looks like volumes are still going to be some of an invisible until we get that Q4 pop, as refiners sort of hit it. Can you talk about how Diamond Green Diesel, is or is not impacted by that vagary of RVO, and then I just have a quick follow-up?

Yes. I mean right now obviously we have been pushing the EPA, as has the National Biodiesel Board, to come up with a 2013 quantity. A little disappointing that everybody else knows how much they get to make except our sector. I think I am optimistic that will grow. There was some opposition to it that was probably unfounded that got listened to for whatever reason. And so I am optimistic that that will get cleaned up here shortly.

From a standpoint of making a product, and time will tell if we are right or wrong with this, but overall when you make a product that is pipeline ready, that has the attributes of the cold flow and the C-tane value, it will disappear in that petroleum complex. It will trade at equivalents to a premium to biodiesel. You just have to find the customers that recognize those attributes. That is what our commercial team, Clay Bryant and the team, and the Valero Services Marketing Corporation are doing right now. So I can't really tell you more because it is in the developing stage.

I would also tell that you we have been a close follower of what Dynamic Fuels has done, and while they have struggled a lit bit operationally with plant design and pretreatment capability, the product that they have made and that is marketed by Mansfield Oil, is really a superior product and they have done a nice job with it. So overall, we are confident in the product. We have now just got to get a plant up and running continuously in making the product.

And then here is a one-off for you. Given the truck fleet that you folks have and your experience of nat gas, would you ever consider doing some vehicles that return to home every night on the nat gas systems, whether it is Boone Pickens and leasing a compressor or does that math not work for you guys? Thank

We are in kindergarten on that. We have asked our fleet manager to prepare us an analysis of that. There are a couple issues there. It is the weight and the heaviness, if you will, of our trucks. And then the question is, can they be compressed or do they have to be liquefied. Most reads on it are that they have to be liquefied, and then the terminals, you start getting into about $40,000 a copy for truck, whether you convert or you order new, and then you have got to come up with a fueling station, which has seven digits in it. So it is something that makes possibly makes some sense on the lighter route trucks in the cities that can go in and out, but we are looking at it.

Long term I am not exactly various natural gas from these levels, and neither is the market when you look at it, and the LNG terminals that are going to go in, and potentially turning the US into an exporter of natural gas. So I thought a short term view I would love to take advantage it, a long term view by the time you get all of the premiums and the extractions that people want for providing you the service, it is kind of a push.

Thank you.

Our next question comes from the Roman Kuznetsov, Gates Capital Management, please go ahead.

Hey guys, I have got two quick questions for you. One a follow-up to the Griffin integration question. Are you able to quantify at least approximately the amount of synergies that have already been achieved, and are embedded in the run rate, and if there are any more synergies left to achieve there, let's say on the cost side?

No, Roman we are really not going to, it would be just a true guess on my part. I mean the routing is done. the operations team is integrated, the products, the marketing teams have been aligned. So there is still some room to go, but for the most part, it is all in there right now.

Okay. Thanks. And second question, as far as the drop in exports, are you able to provide any more color on what countries and which products were hit the hardest, and what you are seeing there now?

Predominantly, it was yellow grease exports to Europe, Spain, Portugal, none going there, but the price of yellow grease is moving back into the feed rations in South America again, so that is about all we are seeing there. We just have not seen that European pull that we saw a year ago.

Alright. Great. Thanks.

Our next question is a follow-up of Lindsey Drucker Mann of Goldman Sachs.

Thanks guys for the follow-up. Just wanted to quickly touch base on the new plant in Florida, and the opportunities you see for converting alternative waste streams, just any update on timeline, effectiveness, and how you are thinking about that project?

It is a giant pilot plant down there, and a fairly expensive one to say the least. It is running. It has been running products for some pretty significant trial feeding trials of the finished product. What we're doing down there is not give away any Company secrets here, is we are looking at different waste streams, vat streams, sludge streams, that are currently being land applied, to see if we can recover both the fat and some type of usable solids fraction. Hopefully we can call it protein. And the question is does the technology work. The answer is yes.

The development is on the protein sales team. What is the value, what is the digestibility, who are the buyers of that. And so we have kicked off now feeding trials at several universities, in order to see really what the value of that product is. Is it a soybean meal equivalent adjusted for protein, or does it have some type of ingredient premium attached to it? That is a project, Lindsey, where we have kind of got a targeted go/no go on both additional capacity and expansion later this summer.

Okay. So later this summer, you will have a better sense of, A, who wants the product and what you can charge for it, and B, how incremental it could be ultimately to your bottom line, because my sense is that it would essentially be all gravy, getting better conversion out of stuff you are already picking up?

You got it. That is a solid read on it. I mean we are extremely excited about it, but I have got to find a customer for the product.

Okay. And then just lastly, on pet, you talked about how pet food pricing, so poultry protein that goes in the pet food market was more stable in the quarter, my understanding is a lot of this product sold to big pet food manufacturers on contract basis, is the spot market really reflective of what is going on in terms of the actual business dynamics? And then also, do you see this product as stickier in terms of pricing, even in the event we have some bigger swings in protein, the commodity protein prices?

Yes. Really, at the end of the day, as it flows through our operating statements, we trade the product annually to the pet food companies, and it is traded at a premium over the feed grade equivalent. And so those premiums were stable to slightly wider than they were a year ago. The underlying commodity is feed grade poultry meal, and then the premium over. So that was very stable. The one that we do get some volatility around, and some pickup in is feather meal, and feather meal was slow to react in the quarter, and then started to come back.

Conversely, feather meal is a major component in our organic fertilizer business. And if there is a barometer out there of our fertilizer, of the overall economy, our organic fertilizer business really had a pretty solid, well a near record quarter in first quarter. It is not really broken out today for us. But it was more reflective that the economy at least from the turf management area, meaning golf courses, and from the consumer buying organic products, was starting to grow again.

Okay. And do you have any concern that Mad Cow might be a damper on your effort to roll red meat protein, to do the same thing with your beef and pork rendering processes as you have been able to do with poultry? In other words, establishing sort after pet food grade for that type of protein meal?

Clearly it is a concern. Obviously, I think it is a bigger concern whether you are Tyson or Cargill, or National Beef, or JVS, you clearly didn't need another case of Mad Cow out there, telling the consumer after you told them they had pink slime, now they have Mad Cow. It can't be positive to beef consumption. So yes, overall it is a concern but it is one that seems to, you are the first question on Mad Cow we have had in about three weeks.

Okay. Alright. Thanks, guys.

Our next question is a follow-up from Ken Zaslow, Bank of Montreal. Please go ahead.

Just a quick question. In your prepared remarks, you said is the progress, and I should have picked it up early, is the progress in the mix shift in your project, could you talk about, is there to what extent that actually makes a difference, and what year it will make a difference, and if you could quantify some of that, just I was curious because it sounds like it was part of the prepared remarks, but I don't think anybody followed up on it?

Ken, ask the question again I am not sure I understood what you were asking?

I think you said that in your prepared remarks there was progress made in your mix shifts, on your progress to the mix shifts in the portfolio, it sounds like there are some CapEx projects that might be moving more to higher value products, somewhere within that, or maybe I misunderstood, I just want to clarify there was something in your prepared remarks that we should actually have picked up a little clearer than I did?

I don't think so. We have made some capital investments now to segregate raw materials that will hopefully add value down the line here, but those are quite a few months away yet.

Okay. So there is nothing in your prepared remarks you talked about mix shifts or any incremental earnings that we should be thinking about?

No. There was nothing intentionally said that I can remember.

Okay. Cool. Thank you.

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

Thanks everyone. Lots of good questions. We look forward to talking to you after second quarter. Thank you.

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