Darling Ingredients Inc (DAR) 2013 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Darling International conference call to discuss the Company's fiscal second-quarter 2013 financial results. With us today are Mr. Randall C. Stuewe, Chairman and Chief Executive Officer of Darling International, and Mr. Colin Stevenson, Executive Vice President and Chief Financial Officer.

After the speakers' opening remarks there will be a question-and-answer period and instructions to ask a question will be given at that time. This call is being recorded and your participation implies consent to our recording this call. If you do not agree with these terms simply drop off the line.

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

Thank you, Sue.

Good morning. Thank you for joining us to review Darling's second-quarter 2013 earnings results. Randy Stuewe, our Chairman and CEO, will begin today's call with an overview of our second-quarter operating performance and discuss some of the trends that impacted our results. Colin Stevenson, Executive Vice President and Chief Financial Officer, will then provide you with additional details about our financial results. Randy will conclude the prepared portion of the call with some general remarks about the business, after which time we will be happy to answer your questions.

Before we begin, I need to remind everyone that this conference call will contain certain forward-looking statements regarding the business and operations of Darling International 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 on 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, commodity, stock markets and climate conditions. A decline in consumer confidence and discretionary spending, a general performance of the US and global economies, global demands for biofuels and grain and oil feed commodity which have exhibited volatility and can impact the cost of feed for cattle, hogs and poultry, thus affecting available renewing feedstock. Risks associated with the renewable diesel plant in Louisiana, owned and operated by a joint venture between Darling International and Valero Energy Incorporation, including possible unanticipated operating disruptions. Risk related to possible third party claims of intellectual property infringement. Risks associated with the development of competitive sources of alternative renewable diesel or comparable fuel, challenges associated with the Company's ongoing enterprise resource planning project. Economic disruptions resulting from the European debt crisis and continued or escalated conflict in the Middle East, North Korea or elsewhere, each of which could cause actual results to differ materially from those projected in such forward-looking statements.

Other risks and uncertainties regarding Darling, its business and the industry in which it operates are referenced from time to time in the Company's filings with the Securities and Exchange Commission. Darling is under no obligation to, and expressly disclaims any obligations to update or author its forward-looking statements whether as a result of new information, future events or otherwise.

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

Thanks, Melissa. Good morning everyone. Thanks for joining us.

It's my pleasure to welcome you to the Darling International earnings call to discuss our financial results for the Company's second quarter that ended on June 29. While our second-quarter performance moderated slightly from our performance in the first quarter of 2013, the variances are fairly easy to explain. There were three significant contributors to this performance.

First off, we saw our value-added premiums for our pet food grade proteins narrow. This was a result of a typical seasonal slowdown in the pet food market. Usually though this is offset by a pickup in the aquaculture industry but cooler spring temperatures have created a temporary gap in demand. Secondly, we reached a significant milestone in the mechanical completion and production startup of Diamond Green Diesel in very late June. Preparing for startup we shipped a substantial amount of various feedstocks to our new joint venture. The crowning treatment for these shipments is reflected as an inner Company transfer and thus we have deferred over $2 million of earnings for the quarter. Finally, our SG&A increases reflect higher medical costs, acquisition related costs, and the install of our new Oracle system.

Overall, we were pleased with the quarter but let me provide a little more specific color. Rendering prices were mixed sequentially from the first quarter 2013. We saw gains in fats and greases offset by a significant decline of almost 14% in pet food grade poultry meal. Additionally, large stocks of palm oil and soybean oil negatively influenced the global fat markets when compared to last year. Meat and bone meal declined during the quarter but recovered sharply toward the end of the quarter as tight soybean stocks drove pricing along with another glimmer of hope for the Indonesian market to reopen. This should ultimately positively impact our West Coast markets in the future. Exports of fat have continued to be slow but while Diamond Green Diesel ramps up, this should help to offset any impact of the lower exports.

From a raw material perspective our volumes in the second quarter tempered a little bit but were still up year-over-year. Volumes trended lower in the quarter for rendering materials while cooking oil volumes showed their normal seasonal improvement and showed signs that our modified go to market strategies are truly beginning to work. Poultry volumes were down during the quarter but are starting to show signs of life with beef volumes holding steady, although we saw very limited dead stock during the quarter due to good weather. Additionally, the BSE reclassification should open more doors in the future for US beef.

Our bakery business segment delivered good but slightly lower earnings for the second quarter 2013 on a sequential basis due to choppy corn prices that trended lower and impacted finished product prices for our cooking meal. Volumes remained steady on a sequential quarterly basis but improved year-over-year. As we discussed in our first quarter call, we have established a derivatives position for the balance of the year that should help offset or at least in part any additional declines in the corn market and the relative profitability of the segment.

Let's turn our discussion now to Diamond Green Diesel. As I mentioned earlier, startup began in late June and the joint venture is currently running at the anticipated name plate capacity of 9,300-barrels per day. We are currently on track for full volume ramp up during our third quarter. We like to give a little bit of a pro forma snapshot perspective so if Diamond Green Diesel had been operating at planned capacity during the second quarter, and of course, based on average raw material costs and finished product prices, our pro forma EPS would have been approximately $0.10 to $0.12 a share higher. As a reminder the facility will consume nearly 1.2 billion pounds of fat and produce 137 million-gallons of renewable diesel annually. Both Darling and Valero's teams have done an outstanding job bringing this facility online, and although we are still in shake down phase, the technology is currently performing as expected in both pretreatment and the echo finding unit.

Lastly we are excited about the recent announcement of our Definitive Agreement to acquire the industrial residuals and foodservice operations at Terra Renewal Services, a longstanding company we have been eying for years to acquire. TRS is a leading provider of essential environmental services and has nine used cooking oil collection locations. We anticipate these routes from these stations will be integrated seamlessly into our Darling system. Most notably, we have acquired an industrial residuals business that operates in over 24 states. Industrial residuals is a term used to describe wastewater streams from the food processing and slaughter industry.

Today these waste streams are predominantly land applied. As we have discussed on previous calls, our Hampton, Florida plant, which is an in house developed proprietary technology for converting waste streams, will use these types of streams to create high value protein and fat ingredients. Hampton has underwent some modification since our first quarter call and is now going to commence startup this week.

The acquisition of TRS creates new linkages to our existing raw material supply base along with securing critical supply chain for the expansion and buildout of our waste recovery extraction business. We are excited about this opportunity and want to welcome the TRS employees to our family. The acquisition is expected to close by the end of August.

With that I'd like to turn the call over to Colin for a financial review. After Colin's comments I'll finish up with a few comments and we'll open it up to Q&A. Colin?

Thanks, Randy.

For the 2013 second quarter, the Company reported net sales of $423.6 million compared to $436.7 million in the year ago period. The $13.1 million decrease in sales primarily resulted from lower finished product prices for fats. Raw material volumes improved year-over-year but were partially offset by yield declines due to product mix. On a year-over-year basis, lower prices in the overall commodity markets for the oil seed complex and decreased biofuels demand largely drove the decline in fat prices. The decrease was slightly offset by an increase in raw material volumes in both the rendering and bakery segments. Net income for the fiscal 2013 second quarter decreased to $26.4 million or $0.22 per share on a fully diluted basis as compared to net income of $36.2 million or $0.31 per share for the 2012 comparable period.

As noted in our press release the $9.8 million decrease in net income for the second quarter resulted primarily from several factors. Product mix within the rendering segment, lower finished product selling prices, higher SG&A expenses related to medical costs, acquisition related expenses and implementation expenses related to our Oracle ERP platform, and Diamond Green Diesel startup expenses. As Randy mentioned, we deferred approximately $2 million in profit on the sale of fats and greases shipped to Diamond Green Diesel. Applicable accounting standards require us to defer these profits until the feedstock is converted into finished diesel fuel and sold to an unrelated party. While this typically occurs on a 30 day lag, we would expect to have a deferred profit balance of approximately $2.5 million to $3 million at all times, based on our expectations of the feedstock that Darling will supply to DGD.

At the segment level, rendering generated net sales of $350.6 million for the second quarter 2013 as compared to $371.5 million in the second quarter of 2012. Bakery segment sales contributed $73 million to the second quarter compared to $65.2 million in the year ago period. This is primarily due to higher commodity market prices and improved volumes during the second quarter for our bakery segment. Our aggregate expenses for depreciation and SG&A increased in the 2013 second quarter compared to our prior quarter average expenses. The SG&A increase reflects increased medical costs, planned for increases in payroll to grow our used cooking oil business as well as support our new ERP platform, the rationalization of our benefits and incentive compensation plans for the former Griffin employees, and as Randy previously mentioned, acquisition related costs.

The increase in depreciation expense was primarily due to general increases in capital expenditures. Interest expense was $5.7 million for the 2013 second quarter compared to $5.8 million in the year ago quarter, a decrease of $0.1 million. Other expenses were $0.4 million in the second quarter 2013 compared to income of $0.3 million in the second quarter 2012. This increase is primarily due to less insurance recoveries and casualty losses in fiscal 2013 compared to the same period last year. Relative to the Company's investment in our joint venture with Valero, on the balance sheet we reported an investment of $104.3 million at June 29, 2013 as compared to $62.5 million on December 29, 2012.

On the statement of operations, we reported a net loss of $2 million for the second quarter of 2013. This loss is largely due to an increase in non-capitalized expenses as the project reached construction completion and commenced operations. For the six months ended June 29, 2013, the Company reported net sales of $869 million compared to $823.8 million for the 2012 comparable period. The $45.2 million increase is primarily attributable to higher finished product selling prices for meat and bone meal and poultry meal and our higher volumes, partially offset by a decrease in yield due to a change in product mix.

For the six-month period the Company reported net income of $58.8 million or $0.50 per share as compared to $64.8 million or $0.55 per share for the 2012 period. The $6 million decrease in net income resulted primarily from higher SG&A expenses, lower yields related to product mix, the deferred profit on fats and greases sold to the joint venture, and startup expenses at the Diamond Green Diesel level. Higher poultry and pork raw material volumes along with increased protein prices favorably impacted our operating income.

Let me provide some additional balance sheet detail. On June 29, 2013, the Company had working capital of $189 million and its working capital ratio was 2.41 to 1 compared to working capital of $158.6 million and a working capital ratio of 2.2 to 1 on December 29, 2012. The increase in working capital is primarily due to the increase in cash and cash equivalents.

At June 29, 2013, the Company had unrestricted cash of $133.6 million and funds available under the revolving credit facility of $382.2 million compared to unrestricted cash of $103.2 million and funds available under the revolving credit facility of $384.9 million at December 29, 2012. For the six-month period the Company incurred capital expenditures of $55.7 million as compared to $53.5 million in the 2012 six-month period for a net increase of $2.2 million. Of our capital expenditures, approximately $11 million relates to the implementation of our new ERP system which is progressing well and is expected to be phased in in late 2014 or early 2015.

I will now turn the call back over to Randy.

Thanks, Colin.

Our plants are running well so far this summer and we are carrying some pretty good positive forward momentum through the third quarter with improved protein prices for all categories along with pretty steady fat prices. The finished product markets will ultimately have to adjust to the replenishment of global crops price but for now, all is well. We are excited about the opportunities to better serve our rendering customers through the strategic acquisition of TRS as we broaden our waste stream extraction business. We have a solid enterprise and capital structure in place that will continue to serve us well and our healthy cash position gives us flexibility to be opportunistic and execute on any growth opportunities that may arise.

With that I'd like to go ahead and open it up to Q&A.

(Operator Instructions)

Dan Mannes of Avondale.

Thanks, good morning and appreciate you letting me hop on and ask the first question. Thanks, Randy.

So first things first, on Diamond Green Diesel, your press release and Q clearly said you're running at name plate capacity, but you made some comments about it being in shake down, so if you can expand on that a little bit and talk about what it's running at now and sort of how its progressed through this third quarter so far?

Yes and when we refer to shake down, obviously you don't bring it up to name plate capacity on day one. It came online in very late June 28, 29, 30 and ran at 50% to 70% of capacity for a few parts of the month of July and then ramped on up to full rates here. So we are at rate now, or name plate capacity. When we talk about shake down we're still getting the renewable diesel gas split and still have to complete the echo finer performance check out with UOP, but as far as any startup that I've ever been involved with in my 30 year career this has been the smoothest, most successful and hats off to the Valero and Darling team for bringing this thing online.

We're shipping product in spec, out by barge, out by pipeline. You just couldn't ask for anymore down there. Anticipate that the plant stays online. Obviously over time, you've got to learn a little bit about what's happening to the catalyst but there's no signs of anything here other than smooth sailing ahead at this time.

That's great news and then from a feedstock perspective, has the pre treatment shown the ability to use all of the different feedstocks you were originally hoping or is that still a work in process?

For the most part, it's met and exceeded our expectations. What we've done is a very rigorous approval process by plant around the country of different feedstocks. It continues to run on a blend of used cooking oil, yellow grease, some animal fats, corn oil and crude begun soybean oil has become competitive now, so you know there's just a lot of different feedstocks that are sitting available to it right now. The one that we're not running in there today is poultry fat and part of the TRS acquisition is that the poultry -- one of the products that we process or land apply out of the poultry industry sometimes ends up in the poultry fat called secondary poultry nutrient, which is full of polymers. And so we've been unable to process poultry fat through the plant at this time.

Okay, one last one on Green Diesel. You know, your commentary on the $0.10 to $0.12 for the quarter, given where we saw RIN prices, I guess we would have assumed it would have been a bit higher than that number. Anything you attribute that to or I guess that just seemed a little lower than we were anticipating.

No, you always get into what's, there's a lot of moving parts in it, Dan. It might have been a little higher than $0.12 but we were using RIN on average for the second quarter of $0.95 so time will tell here. Obviously we've got to get the splits of the gasses and the liquids right. It's very close right now so I think you'll be pleased with what you see.

Sure, and then my final question on the corn hedges. You mentioned and I think your financials basically say you have some hedges going through Q1, and so number one, can you give an indication of what percentage of your bakery business, your hedge for the second half of the year and into Q1 and Q2 within a range kind of what price you're hedged against given what we've seen in the corn market?

About 40% of our product is hedged out there. There's different ways you procure raw material. Some things don't make sense to hedge and so there's a rolling position that's on here that we've been carrying forward for a period of time now as we lift the hedge and we put another one on it, so as the corn market hopefully starts to find bottom here then that position we probably won't -- that position will be all used up.

Got it. Thanks a lot.

You bet.

John Quealy of Canaccord Genuity.

Hi, good morning folks and congratulations on getting Diamond up and running. First, I guess on the accounting side in terms of the permanent deferred that we're going to have to deal with, just first up, the $10 million of sales deferred year-to-date on Diamond Green, and with the 30 day lag on that one, when that comes through that's going to come through as full cost, right? It's not going to be 100% profit; is that correct?

That is correct.

Okay, and then moving forward, we're always going to have that 30 day lag is that right? That's your $2.5 million to $3 million liability on the balance sheet?

Yes, we would always expect that with the percentage of the feedstock that we'll provide the Diamond Green Diesel that will be in this sort of permanent deferral mode on some portion of the used cooking oil, et cetera, that we've sold to the joint venture that remains in their inventory.

Great.

Randy, over to you on the supply side, so now you've got pre treat and the tanks filled. I know it sounded like you raised some prices going out and acquiring that feedstock, on a run rate basis now, what do you think about costing of feedstock, and I'll come back to corn oil in a second.

Well I would caution you on the facility is consuming over 3 million pounds a day, so I'm not sure the market has fully felt the impact of Diamond Green Diesel yet and I'm hesitant to say the tanks are full down there. So we continue to procure whatever is the cheapest down there, and my personal opinion is, I mean it has been a true blessing in disguise and as we've talked to the shareholders over the last 2.5 years that have been incredibly patient with us on this, I mean number one, we delivered the technology and the facility pretty close to what we thought it would cost. It works, we're very proud of it and it is having the impact on being able to absorb a lot of the production in the country right now.

So clearly if you didn't have the facility today, between the pressure from additional corn oil supplies and the lower price of corn at least in the forward months here, you would have yellow grease, used cooking oil down in the mid 20s, so it's a pretty impressive support that its providing to the market today. Now that's not to say that Diamond Green Diesel is solely responsible for that. The biofuel industry is running very strong right now with record profitability. And so at the end of the day it's probably a combination of all of those but clearly having a machine that's taken out 10% of the supply today is a blessing for us.

And Randy, I'm hesitant to ask you this but I think you have good insights in terms of the commodity market here, so with RFS to your last point, EPA clearly giving indications that the blend wall is coming in or ethanol stocks maybe requirements coming down. How does that impact the availability to corn oil? Does it really bleed down to the Diamond Green level or what's your thoughts about that complex?

Well there's a couple things there. First off, I think the EPA ruling or discussion this week was pretty much spot on and frankly, this has never been an issue. I mean RFS2 was law with the EPA administrator having discretion and they showed they had to be flexible given that we've hit the blend wall and the simple fact that no one can competitively make cellulosic biofuel yet. So it, really the law is doing what it intended to do and there really is no reason for Congress to get further involved here, so. I mean obviously between the blend wall and biodiesel, in especially biomass based diesel, we can produce significantly larger quantities today to be that anticipated advanced biofuel standard that's going to -- that we wanted to stay there.

And we expect that the EPA will raise the biomass base diesel 2014 going forward. We worked with Joe Jobe and Ann Stackel of the National Biodiesel Board and they've done an outstanding job to represent biodiesel and renewable diesel and I think the EPA will take that in stride.

Now relative to ethanol, I don't see any big downturn from where they have been running. It will depend a little bit on imports and exports going forward as that advanced category can be filled by renewable diesel and then Brazilian sugar cane ethanol, but yet you still hit the blend wall. So I think the supplies of corn oil will remain pretty much where they're at. Now the other piece that has to be noted relative to corn oil is that it's now being exported out of this country in fairly sizeable quantities to other biofuel producers around the world so that is putting into a pretty much kind of a floor now to corn oil.

Okay.

My last question on the residuals business how much does it impact the P&L? And then secondly, there's been residual players, like Synagro for example, that have been restructured two or three times over 10 years. What is it about this particular business that you like? Thanks, Randy.

Yes, two things on TRS, it's a great management team with a great group of employees, the nine use cooking oil collection stations pretty much fall within the geographic territories that we operate in, so that's a pretty simple integration, we've done it before, same customer base and pretty nice growth in that area for us. The residuals business is something we've always had our eye on and really our focus on it and enthusiasm changed here about six or seven months ago as we started to learn the technology that we were starting up and learning to run down in Hampton, Florida. And really what TRS does in their industrial residuals business is they go around and they collect the wastewater, or as it's called the DAF component, as all their floatation solids out of mainly slaughter plants today, food and slaughter plants, but slaughter plants, predominantly chicken plants, and they take it and land apply it. That is the exact feedstock that we need to support the Hampton extraction business and so we looked at it two things.

Number one it's a very good business with a nice EBITDA. Relative to materiality to our earnings it's really not there, but at the end of the day, it provides us a new source of feedstock such that as we learn to run Hampton and decide we want to build number two, three, or four, we now have that supply chain. And then probably more important to our operations and raw material procurement teams is it just gives us another linkage to our raw material suppliers for providing solutions to them both in the front door and out the back door, so we'll continue to operate the land application business. It's very different than what Synagro was doing on the municipalities. Now Synagro does operate a little bit of a land application business on the West Coast and we've obviously looked around and at the end of the day there is still pretty good opportunity to grow the basic and base model for TRS.

Farha Aslam of Stephens.

Hi good morning.

Now that you have Diamond Green Diesel up and running you guys probably have a great sense of selling prices, so when you look at the selling prices for the diesel, what is it priced off of and how much of a premium does it command because of its blend stock quality?

Number one, I have got to be careful what I can comment about selling price of that product because it is not transparent to the marketplace because it is sold internally here and under supply agreements. But ultimately, the way this product is priced, which is much different than biodiesel is, is that we don't have a blender involved and it's going straight to the pipeline. So it pretty much trades at Gulf wholesale ultra low sulfur diesel plus the full RIN value plus the $1 a gallon, the tax credit, minus the small transportation logistics fee that gets deducted from it, and then we get the full credits for the NAFTA, butane and propane of which we've also received green status or renewable status now on the NAFTA, so we will get RINs on that. So that's how its priced today but you don't have to deal with the blender in there so the profitability of Diamond Green Diesel relative to if you look at it, I know our EG and then Dan O and the guys are doing a great job, released earnings here, if you look at the EBITDA per gallon of that facility or those combination facilities, you're looking at $0.60 to $0.80 a gallon versus when you start to look down at Diamond Green Diesel, you're looking at $1.50 to $1.75 a gallon, so it's taking the blender out of it. It's just a great play for us. And that's the value of being married to Valero and having access to the logistics that they provide.

Thank you. And when you look at the cost of the fuel or the fats coming in, is it running at around $0.35 a pound kind of? You were talking about the different blends of fats coming into Diamond Green Diesel, could you just share with us what is the price that Diamond Green Diesel is buying fats for?

Well that would depend on the blend that's going down there, and obviously we're going to keep that to ourselves. But nominally, freight down there is a little under $0.04 from about between the Rockies and the Appalachians, so dependent on what's available down there, what's available on any given day, it's really whatever the Midwest is plus four is the delivered Diamond Green Diesel value.

Okay, so really clearly this plant is really successful, so now can you push it beyond name plates and could you think about building a second facility?

I think -- let's get through third quarter and then I might answer that question.

Okay and then you have $1.14 of cash on your balance sheet. When will you and the Board consider kind of deploying the cash to really generate shareholder value and what are the options that you're exploring right now.

I think we had $1.14 before TRS, so obviously we're going to pay for TRS with our cash and so at the end of the day I think the cash balance is gone. Relative to how the year finishes up and how Diamond Green Diesel continues to provide cash, as we've talked in the past, given that there are debt repay down covenants and dividend policies within the joint venture, so for year one most of that cash will remain within the joint venture and after that it then can become available here. Obviously, I think the most important part is any future expansion at Diamond Green Diesel can become self-funded by the entity itself. So I don't know that there's much view right now on any of the additional use of the cash and we've used it for Terra renewal right now and then we'll see how Diamond Green Diesel progresses.

Great. Thank you very much.

William Bremer of Maxim Group.

Hi good morning.

Let's go into Terra a little bit. Randy, on the Hampton plant, can you give us an idea, what's the capacity of that plant? You mentioned earlier a possible second or third build depending upon how this works out going forward, what's the cost to build one of these plants?

Number one, Hampton has morphed from what I would call a large bench scale pilot plant now to a full production plant. It will be coming up, we really don't know the capacities today, but at the end of the day we're looking at between 50 and 100 tons per day out of it, relatively small. You've got to remember you're taking high water waste streams, evaporating off the water to condense the solids and then separating the fat from the protein so at the end of the day building something much larger than a couple hundred tons a day is probably going to be challenging given the inbound logistics of the amount of water you have got to handle. Cost to build out this stuff is somewhere between $25 million and $40 million depending on logistics for storage and both for product in and out of the plant and energy sources, so our goal right now is to get Hampton up and get it running continuously.

As I said we put in some additional equipment for Hexane recovery here during the month of July. They anticipate starting to bring it back online and beginning to run it continuously here shortly, and so hopefully here in the third quarter call we can give you a full status update of how we're doing there. As I said I just want to caution people, it is proprietary in house technology. We've developed it. It does work, at least in the batch runs that we've done to date, and now converting it from batch to continuous will be the next challenge and we'll see how it goes.

Well good luck there without a doubt.

My second question, what's the maintenance schedule looking like for Diamond Green Diesel at this time?

The turnaround on that facility is hopefully every couple years. Obviously, everybody has got their fingers crossed and hopefully much of the challenge in this business is to make sure that your pre-treatment unit is running efficiently and removing all of the alkaline metals and other impurities that can poison the catalyst. We are meeting and exceeding any type of performance guarantee that we need to go feed the echo finer and the catalyst today, so we're anticipating that all should be good for a couple years here.

Okay and then one for Colin and then I'm done. The SG&A, was there or can you sort of give us an idea of what were the acquisition costs this quarter and what's a good run rate there now that we pretty much have everything sort of baked in?

I think on the SG&A we've talked about using a $42 million kind of number, $42.5 million as a normal run rate and the acquisition related costs were not a material number, and Bill we're just not going to disclose that today.

Yes, at the end of the day it's just one of those things, Bill where there with about three or four things that added up in there and that's how they were rigged.

Okay, gentlemen, thank you.

You bet.

Carla Casella of JPMorgan.

Hi. I wonder if you have made any decisions with respect to the bonds that are callable in December 2014? Would you consider taking those out early?

We've looked at that. The premium to take them out today is pretty significant. It's in the $35 million range so it's something we continue to evaluate. We get to our first call in December of 14 but it is something that we've looked at and evaluated.

Okay, and then you may have answered this. I missed one or two questions but the RINs volatility that we've seen this week, does that affect any of the revenue and profitability forecasts for Diamond Green?

Carla this is Randy.

Obviously with the EPA statement it kind of took a little bit of the edge off of the RIN market here. Yes, it's taken some of the profitability out of it but I would qualify the profitability of where RINs were and the EBITDA underneath Diamond Green Diesel. I mean Diamond Green Diesel was running through second quarter at an annualized rate of about $230 million of EBITDA, probably excessive so it's probably come back a little bit more towards where we thought it would be.

The real challenge in that business is last year about Halloween, I think we hit the fulfillment of the mandate. It doesn't look like we're going to hit that this year. If anything, we could hit it towards the end of the year, but given $1 a gallon I suspect the industry will run pretty strong on through. And then as I said we anticipate next year given that the EPA understands now clearly that the biodiesel and renewable diesel industry can produce probably 2 billion gallons of finished product. They will expand would be our guess the RFS2 mandate for 2014 and hopefully we get some direction by that here in September.

Okay, do you have an outlook for where RINs could stabilize? I've heard that it has been very driven by more hedge fund purchases than overall market supply and demand but do you have any view in terms of where its normalized rate would be for RIN?

I have no idea. Remember that's a mathematical computation related to what's the profitability needed to balance and produce the product, but most importantly it's related to, our RINs are related to the ethanol RINs. So as ethanol RINs go up and they are not available then they chase the D5-D6 RINs. So if ethanol RINs back off then our RINs are going to back off a little bit, but right now it looks like they are going to stay pretty firm through the end of the year.

Okay, great, thank you.

JinMing Liu of Ardour Capital.

Good morning. Thanks for taking my question.

First, regarding Diamond Green Diesel, is that facility is currently running at the cost structure that you previously disclosed?

Yes, that's correct.

Okay.

Secondly, regarding the raw material supply to that facility, do you have to supply the facility the way certain blend raw material like an FFA contents or you just the facility can take whatever that you give them?

Yes, JinMing, the investment into the tank farm at Diamond Green Diesel, as we always talked about, there is really three big components down there. One is the tank farm, two is the pre treatment, and three is the echo finer. The tank farm has the ability to unload and store 100 million pounds of feedstocks in three or four really massive tanks and so yes, we try to isolate the different feedstocks as I said earlier in the call, we have a list of approved plants that are out there, and there's a lot of them. So I don't want anybody to think that we're focused in on one or two types of oil, basically all of the corn oil plants are approved out there, all of Darling's system is approved out there plus many other renderers to feed the plant, as I said it can run on soybean oil, RBD soybean oil, crude to gum soybean oil, corn oil from the distillers industry, yellow grease, animal fat, tallow, and used cooking oil.

So there's no set blend down there, there's no as we call it, there's no cocktail that we have to have and they have proven that out with the ability to clean it up in pre treatment. Pre treatment has exceeded our expectations in the ability to handle whatever we send it. Now that said, we've not shipped any of the really bad dead stock animal fats from Lexington, Nebraska, this summer. I don't know that they are ready for that, but we may have to give them some shortly.

Okay, for the current quarter, should we put in any additional costs associated with the startup process?

I wouldn't think so. I mean obviously I wouldn't assume a full run rate for third quarter just because the month of July was a ramp up month but after that, it should be normalizing out. As always when you do startup facilities of this size you will have expenses flow through during the first 90 days related to startup, the extra consultants that are on site, and then some of the other staffing that goes on while you get it up and get the bugs out of it. But beyond that, it's like I said, we are running at name plate and pretty much at the yields we anticipated going forward now.

Okay, that's all, thanks a lot.

You bet.

Ken Zaslow of Bank of Montreal.

Hi good morning, everyone.

A couple of housekeeping questions. The $0.10 to $0.12 from Diamond Green Diesel, does that include all of the startup, the consultants, all that stuff, or is that like an ongoing number?

No, that's just kind of a snapshot using average, Jacobson fat prices plus $0.04, RINs at $0.95, ultra low sulfur diesel at $2.86, just really the quarterly averages.

Okay, and then just going back to the cash question, so in terms of you used the cash to obviously make the acquisition for Terra and you're not sure, I guess the return on that cash, how do you kind of think about that? Because it sounds like you've, I guess I'm trying to figure out it sounds like you used up the cash more quickly than we actually anticipated on something that may not be as high return as maybe the other opportunities are, pardon the misunderstanding, I want to get your framework for that.

No, I wouldn't categorize it as that. I would say that the acquisition was large enough to use up the cash and but it hasn't closed yet so we're still working through some details there. Obviously the returns that we operate on are we're looking for 15% to 20% returns on gross investment and then we believe that this acquisition will more than exceed that once it's integrated. And if it provides the ability to build out one more Hampton extraction unit, it will well exceed that, it will double it. So it's a very, very exciting acquisition.

Okay, I think I misunderstood it. That's perfect.

In terms of volumes going forward, can you talk about where you think the volumes are going to go for each of the businesses and is there going to be any, I'm assuming probably not, but any impact from the Zilmax announcement?

Yes, the first thing I guess, the beef side, surprisingly that daily slaughter number hangs in there from 122,000 to 126,000 a day, so any shortage of cattle that people thought was going to happen here, maybe we're still killing them all off but we haven't seen the reduction that we thought we would. The Zilmax thing I think is yet to be fought in the media and at the consumer level because you've got Tyson saying one we won't buy any cattle which shot cattle prices up yesterday, and yet Cargill, very consumer conscience said we continue to believe that that is a source of good quality high value protein for our consumers, so we'll see how that sorts itself out.

The poultry side, you've seen the Pilgrims numbers, Bill Lovitt and the guys have done a great job there and the Tyson numbers were outstanding, but you've been around the poultry guys long enough to know that good times are followed by expansion. So we are already starting to see here kind of the signs of additional birds and egg sets being placed out there, so I think the poultry sides are going to see a pretty good turn up here going forward. Pork side continues to be pretty steady. The bakery side, this is probably the last two weeks or the peak seasonality of the summer season and then it tails off a little bit. And then probably the one that we're most excited of is our used cooking oil collection business, we had to get the companies put together, get our marketing strategies put together, get our equipment offerings lined out and we have seen that business start to grow at a rate of 3% to 4% for us, so pretty exciting times there on that.

And then my final question. As the hedges roll off for bakery, is it fair and it looks like the corn prices are exactly where we are and nothing changes one way, is it fair to say that this quarter is a good run rate or would it be a little bit lower, or how do you think about it, or how should we think about that for 2014?

Yes, I mean essentially what we've done is used a series of swaps to collar the profitability of the bakery business. Remember you buy it off of corn, you sell it off of corn, so you truly do have the opportunity to lock in that margin to the degree that your plants operate at the capacity and costs you think and that the blending stock costs you what you think it is. We've pretty much locked it in. It should be relatively close to the second quarter, probably a hint down because prices are coming off pretty hard right now, but nothing catastrophic relative to the replacement economics that you'd say if we didn't have them in place.

Great, I appreciate it. Thanks.

Roman Kuznetsov of Gates Capital.

It's actually Jeff.

A follow up, actually a couple questions. On the corn hedges, can you just review again how much benefit that's going to provide in 2013 to shore up bakery profitability, number one. And number two, the Diamond Green Diesel dividend policy, you talked about the cash is tied up for year 1 but in year 2 there's more flexibility and I'm just wondering what that dividend policy, the allowable dividend policy is beginning in year 2 and how much capital might be required to expand that facility beyond 137 million gallons.

Well let me talk about the corn hedges that are out there, Jeff, I think is pretty safe to look at the second-quarter run rate, probably discount it a little bit because the market was inverted when we put the hedges on, meaning the third quarter was automatically going to be lower than second. But that's a pretty good run rate a little bit from where we were in second quarter here through the balance of the year. Relative to the dividend policy, I'll let Colin comment on that in a minute but the reality of expansion down at Diamond Green Diesel, we honestly don't know the answer to that. As any good operating Company like Valero is with the engineering staff they have, I think, I would be disappointed if we didn't have a little bit of tweak left in the system down there before it required capital to expand, so I guess I want to see it run for 90 days, see what the true incremental operating rate is, and then we'll have a chance to give you a better answer on that.

And Jeff, the dividend policy in the first year for Diamond Green Diesel was driven by a need to get the facility up and running and understand that coupled with the fact that there's a significant tax benefit from the joint venture in the form of bonus depreciation that was allocated to both, or will be allocated to Valero and us, so that produced a very significant cash tax savings for both parties. In the future, we are allowed to take a dividend for our tax costs and then the venture will look at what they need for net working capital, debt repayment at the venture level and then look at their cash position and make a decision accordingly.

And then if I could just follow-up on, I guess the question on the corn hedge was, if you didn't have, I'm just wondering how much benefit to profitability are you getting from the corn hedge because you don't have one next year and so I'm wondering what the profitability of bakery would be without the corn hedge.

Jeff, this is John.

Understanding you're looking at the futures market out there with corn that's down quite a bit, but the cash price of corn is about $2 bases difference between the futures market and the cash market because of the tightness of the corn supply until we get into this bumper crop. So the profitability in bakery is still getting the benefit from the high cash corn prices that are out there in first and second quarter. You're going to get a little bit of that improvement in the third quarter, you're going to still benefit from that.

As Randy said, then when you get into the end of the third quarter, you get into harvest and you start pulling the corn off, we'll see what that does. The impact in the third quarter and fourth quarter, the hedge will help us even more in the fourth quarter as cash prices come down. We're not disclosing exactly what that number is from the standpoint, but you should only see a slight decrease in the third quarter of where we are with that hedge because you've still got some nice cash prices for bakery. Fourth quarter is when you're going to see the cash prices really come down and then that's when you'll get more of the benefit of the hedge out there at that time.

Okay, and then will you file an 8-K when you close the Terra acquisition?

Yes, we will.

Okay, thank you.

Tyson Bauer of Kansas City Capital.

Good morning, gentlemen, and thankfully we've got this DGD odyssey behind us.

What it was just four years of a good dream. All dreams come true, Tyson, come on.

Four years, it has been awhile.

Couple questions. You talked about how diverting some of that supply to run your facility, Diamond has helped support some of the fat prices. Dynamic has not been running and if you take the comments between Tyson and Syntroleum and Nestea it does appear that if a transaction is completed that facility is ready to get up and running later this year with those three players seemingly being the most logical participants. That should take out some more supply out of the marketplace. Does that really provide that solid base with them adding on with Renewable Energy Group starting up a couple of their facilities that we're going to get in a different historical relationship with some of your previous, the corn oil, some of the other products that are out there?

That's the grand debate around here. To see that yellow grease and corn oil and the high $0.30s to $0.40 delivered down there right now, with crude to gum bean oil at $0.43, $0.44 whatever the flat price number is there, to think that we already narrowed it there it's hard to believe that it will happen more. Our products haven't come down because they were the cheapest feedstocks for the biofuel industry. I mean obviously once the biofuel industry gears back, some of them have to gear back because of seasonality of the blend stock for winter weather, so I suspect you're going to see a little bit of pressure on the corn oil/yellow grease, used cooking oil market here as we enter fall. And because relative to animal feeding economics we're a substantial premium to that today and then exports are pretty much non-existent of those products today.

Relative to whether dynamic fuels ever comes back online, we probably have different opinions that we probably aren't in a position to share on that, but that facility isn't running for a reason and a lot of the reasons are mechanical that have to be fixed. And whether the facility is truly sold or stayed down, we aren't part of those discussions but I suspect any new owner is going to be faced with a significant capital infusion into that to make it a redundant and consistent facility.

You've talked about this a little bit before, but my sense in reading the 86 pages from the EPA was that, in general, they are going to take the industry availability to supply product with the demand absorption that exists and that's how they are going to calculate the RVOs as we go forward. That should be a very big positive for the renewable biomass diesel industry in conjunction with lowering the ethanol mandates, which then caps what corn oil supply there will be. And you can only put in so much Brazilian sugar ethanol into a market that can absorb it in the first place. So are you, is it your sense that the advance renewables will maintain or grow and you're just going to take some of the volumes away from the cellulose previous statute mandates?

Well that's obviously what we're lobbying for, essentially you had a biodiesel industry out there and then you had Dynamic Fuels that was either on or off and then you had us, as you said the odyssey plant that was going to run. We brought on 137 million-gallons of new capacity with hopefully some growth in it. The ethanol industry continues to provide cheaper, a nice and economical feedstock in the form of corn oil and so we took those two facts and sat down with the EPA economists and then we showed them that there's adequate feedstock in the waste fats and greases, and capacity for us to more than fulfill a substantial portion of that advanced biofuel bucket that's out there. So, provided they're listening, I think they should allow that number to go up substantially. Will it be enough, who knows in Washington right now, but clearly our anticipation is they've done the right thing by being flexible in the blend wall and cellulosic and the reality is the biomass based diesel side can fulfill a substantial portion of that and hopefully they will let us.

And on a different topic if we look at beef placements, early indications for fall heifer retention, although we get the comments from the poultry manufacturers of much better production going into '14. Are we setting ourselves up that total raw materials probably won't change much, but your percentage of value-added products because of the poultry increase, replacing maybe backfilling some of the beef side, should provide a much more favorable mix as we go through '14 and '15?

I think we're probably pretty status quo where we're at right now. I would highlight a little more that we're spending a lot of time in that beef and pork area of trying to value add there. The poultry side for us is pretty well maxed out. We're running at or near capacity today of those products so at the end of the day I don't know that there's any giant upside there, but on a product mix if beef was to go down certainly it would be a greater percentage. But continuing to find homes for different beef products has been the challenge to Jim Conway's protein team and they've done a pretty good job of it.

Last quick one, typically in Q3 we have product quality issues due to the summer heat. Given the lack of a summer in a big part of the country this year. We've had years 1 out of 10 maybe where we have not had those product quality issues. Is 2013 going to be another year where we do not face those kind of quality issues?

I think we've made, as we said, a lot of capital improvements in the plants to handle essentially the heat, which is really the dead stock plants that have to handle the really tough raw material. So far, as I said, the plants are running well this summer. And ultimately, our goal is to figure out a way to blend and move those feedstocks into higher value markets. They are still continuing to be heavily discounted out there because they are super high asset but at the end of the day the plants are running well this year. Now it's felt like it's been a pretty decent summer up until the last five days in Dallas at over 105 degrees.

You keep that heat down there and thank you, gentlemen.

All right. Thanks, Tyson.

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 for joining us and look forward to providing you an update on Diamond Green Diesel and our base business here at the third-quarter earnings release in November. Have a great day and be safe.

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