Darling Ingredients Inc (DAR) 2014 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Darling Ingredients Inc. conference call to discuss the Company's fiscal first-quarter 2014 financial results. With us today are Mr. Randall Stuewe, Chairman and Chief Executive Officer of Darling Ingredients; and Mr. Colin Stevenson, Executive Vice President, Global Finance and Administration.

(Operator Instructions)

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 Melissa Gaither, Director of Investor Relations for Darling Ingredients. Please go ahead.

Thank you, Denise. Good morning. Thank you for joining us to review Darling's first-quarter 2014 earnings results, and our very first earnings call under our new corporate name of Darling Ingredients Inc.

Randall 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. Colin Stevenson, Executive Vice President, Global Finance and Administration, will then provide you with additional details about our financial results. Randy will then 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.

This conference call will contain forward-looking statements regarding Darling Ingredients' business, its opportunities, and anticipated results of operations. Please bear in mind that forward-looking information is subject to many risks and uncertainties, and actual results may differ materially from projected. Many of these risks and uncertainties are described in Darling's annual report on form 10-K, for the year ending December 28, 2013, our recent press release announced yesterday, and other filings with the SEC. Forward-looking statements in this conference call are based on our current expectations and beliefs, and we do not undertake any duty to update any of the forward-looking statements made in this conference call or otherwise.

I would like to also highlight the non-GAAP metrics that were included in yesterday's press release. The Company believes that by excluding certain recurring and non-recurring adjustments from comparable GAAP measures, investors have an additional meaningful measurement of the Company's performance. As a result, this call will include a discussion of certain non-GAAP financial measures. The Company has provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures in yesterday's press release. The press release is available on the Company's website, and was filed with the SEC in a form 8-K on May 8, 2014.

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

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

Before we review our financial results for the first quarter that ended on March 29, I would like to comment on our recently announced new Company name, Darling Ingredients. Today marks the starting point for our new Company. Our new identity will help to synthesize our new global platform, focused on the creation of sustainable food, feed and fuel ingredients for a growing population. It will help us better align our focus around our global brands and sustainable ingredients portfolio.

Now, for our first-quarter review. As we discussed in our 10-K conference call in late February, we outlined several one-time significant charges that will flow through and negatively impact our earnings in Q1, due to non-operational costs associated with our recent VION and Rothsay acquisitions. Additionally, we outlined the forward feed-stock position Diamond Green Diesel had to work through before regaining what we believe to be is its true market earnings power.

We have attempted to detail these charges, and the impact to both EBITDA and net earnings, in our earnings release last night. Colin will spend a little more time outlining the related impact, and what you can expect to follow on in Q2.

Most importantly for this call, I want to focus on the true operating strength of our core segments in the feed, food and fuel. At the operating level, adjusted for the non-operational costs associated with our recent acquisitions, we delivered an adjusted EBITDA of approximately $140 million. This was lower than consensus, but easily explainable. I will attempt to reconcile the performance for you.

First, in the global feed segment, earnings were a little lighter than anticipated, but they gained significant momentum during March, and carried good velocity into Q2. As many ingredient and ag product-based public companies have said in their earnings announcements, severe Winter weather hindered operations in North America. While trying not to sound like a broken record to other announcements, in the Midwest and Canada, we lost a significant number of operating days to extreme cold weather and natural gas curtailments. This led to higher operating costs and directly impacted earnings, both in the USA and Canada. Given the structure of our raw material formulas, we expect to claw back some of these costs in Q2.

From a volume and demand perspective, raw material volumes across the globe were steady to modestly higher. Finished ingredient prices for proteins increased throughout the quarter, and pet food demand gained momentum after a slow start to the year. Fat prices globally were down significantly compared to last year, driven by continued uncertainty regarding the RFS in the US. Even Europe experienced lower fat prices, due to slow demand from the biofuel sector and continued tensions in Russia. All said, during the last part of Q1, and into Q2, fat prices have recovered nicely and demand remains excellent across the globe.

Most notably, though, on a year-over-year basis, the bakery feeds business delivered significantly lower earnings, as its finished product is priced in tandem with corn. Year over year, it was down nearly $2.50 per bushel, reducing bakery's contribution by nearly $12 million. So, in summary, if we eliminate the noise in the numbers from the one-time acquisition-related charges and costs, the feed ingredient segment shortfall largely explains our divergence from consensus. For Q2, we have improved fat prices globally, and significantly higher protein prices, along with improved corn prices for bakery feeds and favorable raw material volumes.

Now let's move on to the food ingredients segment. The food ingredients sector includes our Rousselot gelatin business, our edible and packaged fats business, and our sausage casings business. Globally, demand for our products remains strong.

Rousselot, a global leader in gelatin and functional protein production, delivered good results. Volumes were up modestly; however, pricing lagged the prior year. This has been anticipated after three strong years, and was duly considered during our due diligence in purchasing VION Ingredients. However, from a pricing perspective, we anticipate increasing prices in Q3 and Q4 in our North American gelatin business, due to both good demand and tightening raw material availability related to the lower pork slaughter as a result of PED and its effect on hog supply.

As we noted in the feed segment for Q1, fats and oil prices were significantly lower on a year-over-year basis. This spilled over into our edible and technical fats business within the food segment. In this part of the segment, we refine and package fats for food and technical use, primarily in Europe. Demand remained good, but slaughter volumes were strong on the continent and provided for more than ample supply to be sold.

Our casings business, which processes, sorts and sells both hog and sheep casings to the food processors, was marginally lower. It was impacted by reduced runner availability as a result of slightly lower hog slaughter volumes.

And finally, earnings in our fuel ingredients segment moderated during the quarter, as the biofuels market is essentially on hold due to the EPA's indecisiveness relative to its RFS 2-mandated RBO volume for 2014. Our biodiesel plants in Butler, Kentucky, and Montreal, Quebec, operated near capacity, but at reduced margins as a result in Q1, due to low RIN pricing and the uncertain marketplace related to the possible extension of the Blenders Tax Credit.

Our Diamond Green Diesel joint venture operated near nameplate capacity during the first quarter, and worked through its long high-priced raw material position, carried over from fourth-quarter 2013. And by early March, held a market price ownership position in its raw material supply chain. Diamond Green Diesel continued to prove out the technology, and we expect its margin structure should return to anticipated levels upon the finalization of the EPA's mandate decision.

Overall, the integration of our new acquisitions remain on track, with the new operating segments positioned to perform well in Q2, in a more normalized weather condition, and with improved finished ingredient product markets.

With that, I will now turn the call over to Colin for his financial review. After Colin concludes, I've got a few closing remarks, and then we will go to Q&A. Colin?

Thanks, Randy. I would like to begin by briefly commenting on the change to the presentation of our results in our press release issued yesterday afternoon. Given our new three-operating-segment structure, we will now provide what I believe is a more robust business segment footnote disclosure. And our MD&A will address segment operating income, segment income inclusive of our DGD joint venture, gross margin percentage, and foreign currency impacts. We believe these additional metrics better reflect our focus on profitability, and the way Randy and I view and manage the new Darling business.

As Randy indicated, our first quarter included a significant amount of non-operational noise related to the acquisitions and the associated financings. Thus, for the first-quarter 2014, we reported a net loss of $52.8 million, or a loss of $0.32 per diluted share, compared to net income of $32.4 million, or $0.27 per diluted share, in the 2013 first quarter.

The after-tax cost of these non-operational items, which were detailed in our press release, include: $31.4 million, or $0.19 per diluted share, related to the non-cash inventory step-up associated with the purchase accounting for VION Ingredients; $20.2 million, or $0.13 per diluted share, associated with the redemption premium and write-off of deferred loan costs, with the retirement of the Company's 8.5% senior notes; $12.7 million, or $0.08 per diluted share, in acquisition and integration costs for Rothsay and VION; $8 million, or $0.05 per diluted share, related to the foreign currency exchange position to effectuate the VION Ingredients acquisition; and discrete tax items of $5.2 million, or $0.03 per diluted share, principally related to VION Ingredients.

Without these items, first-quarter 2014 net income and diluted earnings per share would have been $24.6 million and $0.15 per diluted share, respectively. Compared to the first quarter of 2013, this represents a net reduction in income of $7.8 million, and a 44% decline in diluted earnings per share.

While we generally do not provide guidance, and do not expect to do so in the future, I would like to acknowledge a couple of items that I expect to impact the Q2 operating results. Approximately $6 million related to the non-cash inventory step-up associated with purchase accounting, which should effectively represent the remaining balance of that adjustment. And then approximately $2.5 million to $4.5 million of acquisition- and integration-related costs.

Additionally, we have outlined adjusted EBITDA measures on our form 10-Q, which we believe better evaluates our performance. As noted in our press release, adjusted EBITDA of $65.1 million for the first quarter includes costs of the $44.8 million associated with the inventory step-up, and $15.9 million of acquisition- and integration-related costs for Rothsay and VION. And includes our share of adjusted EBITDA for the DGD joint venture, which, for the first quarter, totaled $9.1 million. Note that the DGD joint venture has not yet made any distributions.

Additionally, I would like to point out that the first-quarter 2014 results from our new Darling Ingredients International only reflects 12 weeks in the quarter, rather than a full 13-week quarter. Had Darling Ingredients International been owned for the entire quarter, adjusted EBITDA would have been increased by approximately $4.1 million. And thus, we would have generated $139.1 million on a pro forma adjusted EBITDA basis in the first quarter.

In addition, on a go-forward basis, we will also be providing a cash EPS figure, which is also a non-GAAP measure. For the first quarter of 2014, cash EPS was a loss of $0.19 per diluted share, as compared to $0.51 per share in the year-ago period.

Now for the quarterly financial review: For the first quarter, the Company reported net sales of $931.4 million, compared to $445.4 million in the year-ago period. The 109% increase in net sales was primarily attributable to the inclusion of the Company's international operations, and improved raw material volumes in the feed ingredient segment, when compared to the first quarter of 2013. However, these volume increases were largely offset by significant reductions in finished fat prices within our non-formula business.

The bakery feeds business experienced a sharp decline in finished product pricing, driven by the substantial reduction in corn pricing, year over year. Segment operating income for the first quarter was $29.5 million, as compared to $68.2 million for the first quarter of 2013. Once again, excluding the impact of the non-cash inventory step-up, segment operating income would have been $74.3 million.

Turning to each of our operating segments: Feed ingredients operating income decreased by $32.2 million, from $68 million to $35.8 million. These results include $12.7 million related to the non-cash inventory step-up associated with the purchase accounting for the VION Ingredients acquisition. Adjusting for this charge, feed ingredients operating income was $48.5 million, or $19.5 million lower than the first quarter of 2013. On an adjusted basis, feed segment earnings were lower in the US, while operations in Europe, Canada, China and South America were as expected. Factors negatively impacting this segment included reduced margins in the bakery feeds business, the severe Winter weather in North America, and the non-formula business, which was impacted by significantly lower finished product prices for competing agricultural-based alternatives.

The food ingredients segment reported an operating loss of $8.5 million for the first-quarter 2014. We did not have a food ingredients segment in the year-ago first quarter to provide comparability. Food ingredients results for the first quarter include $31.9 million of non-cash inventory step-up related to purchase accounting. On an adjusted basis, the food ingredients operating income was $23.4 million.

Fuel ingredients operating income increased by $2 million, to income of $2.2 million, exclusive of the DGD joint venture. Including DGD, fuel ingredients segment income was $6.9 million. As Randy mentioned, the fuel ingredients segment operating results were impacted by lower RIN values, due to regulatory uncertainty and the possible extension of the Blenders Tax Credit.

From an overall gross margin perspective for the first-quarter 2014, we reported 18.9%, compared to 27.6% in the year-ago first quarter, a decrease of 8.7 points. Adjusting for the non-cash impact of the $44.8-million inventory step-up, gross margin would have been 23.7%, a decrease of 14.1%.

Turning to segment gross margins: Feed ingredients gross margin was 22%, as compared to 27.6% in the year-ago first quarter, a decrease of 20.3%. Adjusted for the impact of the non-cash $12.7-million inventory step-up, gross margin would have been 24.2%, a decrease of 3.4 points. The decline was attributable to the bakery business and lower finished product selling prices in our non-formula business, as compared to the year-ago quarter, and were only partially offset by increased finished product volumes and lower raw material costs.

In the food ingredients segment, gross margin for 2014 first quarter was 13.2%. Adjusting for the $26.2-million non-cash inventory step-up impact, gross margin would have been 24.9%.

Fuel ingredients gross margin, exclusive of the equity contribution from DGD, was 16.1%. Adjusting for the $0.2-million non-cash inventory step-up impact, gross margin would have been 16.4%, compared to 17% in the year-ago period.

Now, a few observations regarding our corporate activities: SG&A increased by approximately $1.8 million on a year-over-year basis. This increase was principally related to the additional corporate staff to support our new global business platform. Interest expense was $58.9 million in the first quarter of 2014, compared to $5.6 million during the year-ago first quarter, representing an increase of $53.3 million, which was primarily related to the redemption premium paid to retire the Company's 8.5% senior notes, and an increase in interest expense resulting from additional bank debt and the senior notes outstanding, as a result of the VION Ingredients and Rothsay acquisitions.

Relative to the Company's investment in our Diamond Green Diesel joint venture with Valero, on the balance sheet we reported an investment of $119.8 million as of March 29, as compared to $115.1 million at December 28, 2013. The DGD statement of operations reported net income of $5.1 million for the first quarter, compared to a net loss of $1.2 million in the prior-year period. The $6.3-million improvement is a direct result of the commencement of production in June 2013, and the sale of renewable diesel fuel thereafter, as compared to non-capitalized expenses during the construction phase in the prior year.

Let me provide some additional balance sheet detail. On March 29, the Company had working capital of $568.7 million, and its working capital ratio was 2.07 to 1, compared to working capital of $950.7 million, and a working capital ratio of 6.38 to 1 on December 28, 2013. The decrease in working capital is principally due to a decrease in cash and cash equivalents, as a result of funding the VION Ingredients acquisition, net of the additional working capital that was acquired in that transaction.

At the quarter end, the Company had restricted cash of $143.4 million, and funds available under the revolving credit facility of $748.3 million, compared to unrestricted cash of $870.9 million, and funds available under the revolving credit facility of $680.7 million at year end. At March 29, the Company had long-term debt of $2.39 billion, as compared to $886.8 million at year end. During the quarter, the Company repaid long-term debt totaling $67 million.

From a CapEx perspective, we spent $51.4 million during the first-quarter 2014, compared to $26.4 million in the year-ago period, an increase of $25 million. The increase is directly tied to our acquired businesses. The implementation of our new ERP system is ongoing, and we expect to complete the project in 2015.

I will now turn the call back over to Randy.

Thanks, Colin. As you can see, there was no lack of challenges for us in the first quarter. Spring weather conditions are now here, and we expect to see a more normalized operating environment.

Globally, our businesses are healthy and strong. We remain cautious, though, and optimistic about the biofuel arena getting some much-needed clarity from Washington, DC.

Our integration efforts are well underway, and our global teams have identified numerous opportunities for improving and growing our businesses. We believe that our three segments are positioned and poised to improve their performance in Q2, with improved markets and operating conditions, and we look forward to sharing our successes with you in the future.

With that, Denise, let's go ahead and open it up to Q&A.

(Operator Instructions)

The first question will come from Dan Mannes of Avondale Partners.

Good morning, everyone.

Good morning, Dan.

Busy quarter. A couple of questions, as we work our way through the new numbers. The first area I wanted to ask about is the feed segment. When I look at the year-over-year performance, it is down $19 million, ex the inventory step-up.

Could you maybe walk us through how much of that relates to the pricing of bakery in the existing business? Vis-a-vis, how much was actually added through the acquisitions of Vion and Rothsay? Because that is probably the thing that is the hardest to reconcile for us.

Dan, you said food segment or feed segment?

Sorry, feed.

That's what I thought. I was going, okay.

No, food is easy.

Dan, this is Colin.

Of the $19 million, as I think Randy said in his comments, about $12 million of it related to the bakery feed segment. So that was the single biggest factor. Obviously, with the North American operations, principally, going into the feed segment, the old Darling business, if you will, the severe winter weather certainly had an impact on us, from an energy cost perspective, as Randy noted, the lost operating days. And then of course, when you look on a year-over-year basis, with fat prices down almost 25%, that is sort of the delta, if you will, with respect to the non-formula business.

Dan, when we look at the world, Europe was pretty -- was strong relative to where we expected it. Volumes were good. Some impact of the lower fat prices in North America spilled over to Europe, driven, really, by the biofuel business, and Neste being the largest consumer on that side of the ocean. And so, when you sum up, as Colin said, bakery is probably 60%, 70% of it.

And then you got the lower, not what I would call the lower non-formula fat prices in the used cooking oil area. And then a little bit of spillover of lower fat prices in Europe, and that is how it adds up. It is very simple. Those three things, plus a significant amount of additional energy. In the Midwest, we had plants down. We lost operating days in the Midwest of almost 60 days, some of them up in Canada.

Canada had a pretty good performance up there. But when you look at what it should have been, it could have been better, given the amount of energy that was used to try to process material. As -- like we said, we don't want to beat a broken record, but the plants had to run longer, our trucking fleet wasn't big enough to move the material as the roads were really bad. And there is just a significant amount of costs that go away here in second quarter that flew through the operations in Q1 for us here, especially in North America.

Okay. I guess maybe the weakness in North America masks the addition of Europe. It's hard to see where Europe plays in, other than on the revenue line.

Right.

Okay. And then transitioning over to the food segment real quick, since this is all brand new. When we look at this segment, how much seasonality is there in this business? And is this marginal, once you've concluded the inventory step-up? Is this a normal rate? Or is this business maybe even a little bit more profitable, as we move through the year?

I think a couple things. One, the -- we're still learning the business, so I take a little bit of a honeymoon approach to that. But when you look at it, the Rousselot business is a food ingredient business for the production of gelatin and other functional proteins. It has a little bit of seasonality to it, much in sync with the food industry in the world. But a high portion of that also ends up in pharmaceutical that is pretty linear.

The fat melting business, or the edible fat melting and packaging, refining business, you have some of the similar seasonalities that you have in the US in the vegetable oil business. And the casings business is pretty much a linear business. So not a lot of movement into that.

As we talked about in the earnings script here, we have seen some tightening of raw material supplies, driven by PED, in the US especially, and the lower availability of hogs. And we anticipate putting out a price increase to maintain the margins in the Rousselot gelatin business in North America for Q3 and Q4 here. And that, we're setting up and positioning right now.

So hopefully we will have a -- we will be able to maintain margins and grow margins there. And additionally, as we share -- as we acquired the Rousselot business, and then we did the significant diligence on learning that business globally, it had come through a period of some really significant margin and price increases over the last three years.

We shared the view of -- with management, of the Vion, or our international team, that those margins probably couldn't be sustained; they were too good. And so, as we factored in our purchase, we believe they back off. They have backed off to the level that they thought they would, but it is still a very good business for us.

Got it. And then the last one, on the fuel segment, I was pretty pleased with what you did at Green Diesel, and it certainly looks like any operational issues you had, you've worked your way through. But can you talk about maybe where margins are right now on a spot basis, given the uncertainty? And two, what does your current crystal ball tell you, in terms of timing from the EPA and what they might come out with?

Yes. I think, obviously, we have got a pretty good supply chain that has to feed the monster down in New Orleans. It is running at or above nameplate capacity now. We are maintaining that position, and going to run it through the second quarter here. The optionality that is built underneath this thing right now, it has a tremendous return relative to our asset portfolio. If $1 a gallon comes back in, it is just a ginormous windfall for us.

Our belief is that right now, that -- as we shared with our board, that the signs are fairly positive out at DC, but I'm not sure what that gets you anymore. But we're hearing that the RVO will get some clarity here towards June, end of June. Our belief, from our side of the table is that they do modestly increase it from the 1.28 to the 1.4, 1.5 type number, and maybe a little more in 2015. And then the $1 a gallon, anybody's guess. I think as we describe to our board, once they give that, it seems hard to not give it back, or take it away from us, but it probably would be after the midterms in November.

Relative to performance in Q2, replacement margins are pretty tough in that business right now. We've got some pretty decent forward ownership running into the quarter. But as for the late May/June period, replacement margins are somewhere just above breakeven right now. What we have proven in that business is, we are the low cost provider and processor in the world today, in that business. And I anticipate we will have profitability in second quarter, both at the entity and at the JV level for us here, and then hopefully we will get some better news.

Our belief is, is that if you look at it, relative to our cost structure, and we know what our performance is, and then we have seen several results out there, for REG and for Neste. We understand our cost position, and we also operate multiple bio-diesel plants, so we know what those margins are. RINs have to come up here at some point in time, or the industry will not be able to run through the summer here. We've seen diesel come up pretty sharply here in the last week, while RINs have come down, but feed stock prices remain up. Something has to give there for the industry to meet the mandated level here.

Got it. Thanks for all the color, Randy.

You bet.

The next question will come from Ken Zaslow of BMO Capital Markets.

Good morning, everyone.

Good morning, Ken.

I just want to figure out some -- what actually happened during the quarter in a couple of respects. One is, if I exclude -- how much was the operating data taking out, the natural gas issues, and the poor hedges on DGD? Can you break those out to see exactly what the underlying operating profit would have been?

So ask the question again, Ken. I'm not sure where (multiple speakers) -- because those are things we don't disclose, so I'm trying to understand what you're asking for, and I will see if I can give you some color around it.

Okay. Because you said during the quarter, there was a number of operating days that you were out. You also said there were a number of -- you also said that natural gas prices had spiked, and you had some charges associated with that. So to me, that is not part of going forward operations. You said it is back to a normal environment. So how much was attributed to those two things?

And then my understanding from last quarter, you said that you had higher input costs related to DGD, where you hedged earlier than you thought, and I am assuming those hedges are off. So I want to take out those three to figure out the $139 million of EBITDA, what it really meant for the quarter? I guess that is my starting point.

No, I think that is fair. We haven't released what the natural gas level was around North America, but it is safe to say it was a material amount that was out there for us. The thing is, is that the formulas that we buy raw material from both in the USA and Canada, allow us to make adjustments and claw back or recover, in most cases, most of that in Q2. What we saw was that we had forward ownership in the NYMEX. We did not have the basis ownership or the distribution side, and especially from an interruptible level at many of the plants. And so we have not traditionally released what our portion or what our earnings or what our energy piece of our cost structure has been.

So I will leave it at that. Diamond Green Diesel, it wasn't related to a hedge position. It was related to a forward purchase of flat-priced fats and oils delivered to the facility that were bought in the fall of last year, and then when the plant had its metallurgical and operating issues, we carried that flat price position forward. It was run out in about late February. Obviously, the EBITDA, we reported about $9 million. A lot of that, if not most of it, was made in the month of March, as we work through that higher position.

So if I were to put this together, I guess you're not really helping that much on this. So the $139 million, if the normal operating environment is happening, the $139 million would translate to at least $150 million to $160 million? Is that a fair number? I'm just trying to figure out, because it seems like unless you think that the weather is going to keep your operating days short, and you have already worked past the high-priced inputs, is there a normal number that you could give us for the quarter?

I think -- let's back into it a different way. If the feed segment was off, what, $19 million, and we said $12 million of it was bakery feeds, we have seen bakery feeds come back quite a bit. Corn averaged in the mid low fours, $4.30, $4.40 in first quarter; we are going to be up over $5 in second quarter. So you are going to get some lift there.

The Delta between the $19 million and the $12 million, most of that is energy. That is going to come back. And Diamond Green Diesel, it carried in good ownership now into April and a portion of May. But at the end of that, the margins have come down. So I would expect Diamond Green Diesel to operate similar, maybe a little better than it did in Q1.

Okay. And then going bigger picture questions. You said on the prepared remarks that you saw numerous -- you guys are talking about numerous opportunities to improve the operations. Can you give us where you are in terms of accepting them? What the potential opportunity would be? And when we can start to see you reaching milestones?

And I think we will -- Ken, we will be laying -- we are going to attempt to lay out a portion of that when we do the spring conferences here, starting with your show. We're still trying to figure out how to articulate that and put it into a make-sense form here.

But from our perspective, we would qualify -- there is some low-level synergies that are being developed in Canada, mainly from the operations standpoint. We have taken out SG&A up there. And we found that -- we're showing the Rothsay team how we do it in the USA. And hopefully, there is -- we can glean some operational improvements up there, on both the costs to operate the plants and how we trade and market finished products. So that has been accomplished.

The same thing is being looked at in Europe. We are getting one view of the world now. Our marketing teams are working together to identify common customers. And then, if you will, optimize logistics, product moving from -- that was proving from one destination to another destination that has a cheaper origin to come out of.

It just takes time to get plants approved, and that should happen very soon. The second piece is, is we continue to make progress with our nutrient recovery technology down in Hampton, Florida. The plant is operational now. It is proving out that we do have the ability to recover proteins and fats from waste water streams. We are working diligently now to understand the economics of that plant. And looking for a site both in North America, or -- and I would say the lower 48, and then one in Canada, that should happen over the next year or two.

We're working with to grow with several of our raw material suppliers. We're optimistic. The poultry side is growing, and we're working with our suppliers there to grow. There has been some mentioned or noted expansions out there, and we're part of them, so we're excited about that going forward.

And then as we start to look at the world, we're seeing numerous opportunities that, by bringing the two companies together, that give us a chance to grow through both small acquisitions and potentially larger acquisitions around the world. To solidify our footprint in Europe, to enter the rendering business in South America, and to continue to grow our portfolio of businesses in China. So I think it is a combination of what I would say is the synergies, organic expansion, product line expansion, and then acquisition opportunities within the portfolio that will continue to grow the business for us.

Okay. And my final question is -- and I guess I would have to ask this -- what surprises, good or bad, have you found now that you have both these operations under your belt? Is there anything on the upside or the down side that is taking you a little bit by surprise?

Not really. I'm making eye contact at Colin. I wouldn't say that we have been surprised. I think the European team, led by Dirk Kloosterboer and group, and has been tremendous to work with.

It is interesting that we share a common vision of continuing to grow the business. I think the greatest difference we look at between the operating businesses between here and the continent, that probably surprised me more than I understood, is the differential cost of energy to process raw material in Europe versus here.

We make a lot of investments in Europe to produce electricity, to reduce our natural gas consumption, to outsource our transportation function over there, that we take for granted over here. I think it's -- I think when I look at it, at the highest level, energy costs, not at the aggregate level, are about 3 times higher in Europe than they are here.

And I would say that's the biggest surprise. So when we get to looking at margins around the world, and saying, what can we do to normalize, grow, and standardize margins? The big challenge is energy recovery as a portion of the margin within the European portfolio.

They do a marvelous job of pricing their raw material, same as we do in Canada. But that's probably the biggest surprise out of it. The Rousselot business has really got a lot of opportunity in it. Adding that ingredients piece to our business in the food side just opens up a really large portfolio of additional businesses and products we can make and develop over the long term. There is just -- to me, there is unlimited growth in that business, globally, for a long time to come.

Great. I appreciate it.

The next question will come from John Quealy of Canaccord Genuity.

Hello, good morning, folks. Randy, back on Rousselot or gelatin, you said maybe some price increases in North America, back half of the year. Can you just comment, the mix of gelatin North America/Europe? And then also, can you do anything in the European side to help price? Or are you just a market taker on price in Europe?

Yes, we try to keep our portfolio of production close to the vest here. It is a very competitive business out there. We operate two plants in North America, here in Dubuque, Iowa, which is a pigskin gelatin business. And then you've got a bone gelatin business in Peabody, Massachusetts.

The pigskin side is the one that is affected. A lot of that moves into the food industry. And as you see the hog slaughter back off that was -- or potentially back off, I think it was referenced pretty sharply in the Tyson earnings call. We just anticipate that there will be a little more competition for pig skins, for raw material to make gelatin. And if the pigskin price moves up, then at the end of the day, in order to maintain the margin, we've got to move up the finished product price.

Historically, the Rousselot business, with tighter raw material supplies around the world, has done better. The margin contraction that has happened after 3 years of price increases has come through the increased slaughter we have seen around the world, in the last 14 to 18 months. And so now it is -- once again, it is tightening up. And as our leadership team in the Rousselot business anticipates, trying to move forward with some price increase here in North America.

Now, North America also imports gelatin from Europe, gelatin from South America, to balance the different customers' needs. So we look at the world as one giant arbitrage for the different types of products and applications that we make in the Rousselot business, but North America is a critical part to it.

Okay. And then the second question, clearly, corn in bakery, in a dollar perspective, hits you from an underlying organic perspective. I know pre-Vion, we had always looked at different input or reference commodity prices for Darling performance. And what is your take, now that you've got a quarter of Vion underneath? Are we still generally corn-sensitive on a dollar basis? Or -- it certainly seemed that way this quarter. But how should we think about that, moving forward?

On a trailing 12, it was in the pro formas out there, you've got a portfolio of a $600 million plus EBITDA business that is out there now, with -- as the detailed plans that I just gave to grow it. Bakery is a small portion of it. Last year, bakery put up in the mid-50s, with a pretty good hedge position or derivatives position, the margin locking it. We came into the year telling investors that you got to compare $6.89 or $7 corn against $4.30, $4.50 corn, and earnings were going to drop down to around that $30 million number. It is pretty straightforward.

So a $20 million delta on a $600 million portfolio, corn is not a significant driver in that business for -- in our business portfolio now. When you also -- and the second part of that is, is that we have seen a -- pretty much a decoupling of our used cooking oil business here in the US, as it moves now, as we are the largest consumer of it at Diamond Green Diesel. And we have seen those prices move up substantially above what their corn equivalent is, which was the thesis for the construction of Diamond Green Diesel for us.

Yes, and that actually leads to my next question. So the mix right now at Diamond Green, are you more animal fats? Or how are you looking right now, for raws in Diamond? Thanks, guys.

It moves around. I would say it is still a significant portion of it, is used cooking oil, and then the high acid yellow grease is, it is the lowest cost feed stock. It is the reason we have the profitability we have down there.

And then we do work in some corn oil down there, although corn oil has become more expensive, as it is being exported around the world. So I would say it is probably -- it is a pretty good split today, 50/50, between our products that are coming out of the rendering industry and the -- and corn oil.

Our next question will come from Adam Samuelson of Goldman Sachs.

Yes, thanks, good morning, everyone. And Randy, I think you've covered this in some detail, but I want to just make sure we're clear to understand how your outlook for the base and acquired businesses? And if you could do those separately, it is probably helpful. Has changed, if at all, today versus the start of the year? And as you think about the timing of layering in some of those potential synergies, if that timing has changed at all?

I think we have been clear, and we articulated in the 10-K call, we came into the portfolio -- we now look at it as a portfolio of businesses. I'm not going to break core/noncore businesses out here. We have talked in the pro formas of what the trailing 12 and the EBITDA run rates, and then you've got to normalize it for the downturn in the bakery side. Clearly, Diamond Green Diesel isn't contributing at the level that we thought of going into the year.

We saw margins coming into the year, and believing that we would see $1, $1.10 a gallon. They're half of that. Still a great return on our investment, and I would build another one at those types of returns. But from where we saw the year coming in, Diamond Green Diesel is going to have to pick up some momentum for this to be a great year for us. And we think we are going to get that in the June-October period, and especially if they lift the mandate, we will get some incredible momentum there.

The bakery business came into the year at about $4.30 a bushel. We're now up now over $5. That will start to come through. Volumes have been good in that business. Volumes in the Darling -- or the North American rendering between Rothsay, Darling, and then the Rendac, Sonac business in Europe are very strong.

Protein prices have improved tremendously in the first quarter, to levels, at some points, that we have never seen before in some of the products. Fats and oils started out the quarter very, very week in Jan/Feb, and have improved tremendously again. I think it is pretty easy to take the bread crumbs and say, you've got an uptick in the bakery, the core rendering business is getting stronger, Rousselot is performing as we expected, we're going to attempt to take a price increase in that arena.

Diamond Green Diesel has to get some momentum here, because the industry is operating at red, with the exception of us. And so I think, from our perspective, it feels pretty good to sit in my chair today for the next couple of quarters, as we go forward.

All right. That's very helpful. And then maybe some modeling cleanup for Colin. Is the $95 million SG&A run rate in the quarter -- is that a reasonable expectation for SG&A for the Company? And in that number, how much is the RP? And how long do you think that takes before it rolls off?

Hello, Adam. You said something about the RP?

ERP. So $95 million of SG&A, and is that sustainable, or is that a reasonable run rate? And in that, how much is the ERP expense?

Adam, the ERP expense is in the $95 million. We don't break out the expense piece, but it is more than a few nickels. I think that is a reasonable run rate to think about, as we move into Q2.

Okay. And then, on the balance sheet, I was surprised to see you end the quarter with over $140 million of cash, and just help us think about what you're comfortable with running the cash balance at? And the amount of debt pay-down that we should be contemplating over the balance of the year?

I think coming into this, trying to get our arms around the new global business, Randy and I made a decision to keep a little bit more cash on the balance sheet than we would have ordinarily.

We like cash, Adam. (laughter)

So we are going to run a little higher cash balance. I would tell you at least into Q3. And then reassess after we have figured out the rhythms that are necessary for the acquired businesses.

All right. That's very helpful. Thanks very much.

The next question will come from Jeff Gates of Gates Capital Management.

I had a couple questions. The first one is, in the past, during the road show, you have talked about the core earnings power of the Company. I am just wondering if your view of that has changed since the road show? And by the various building blocks of that, that you talked about?

Secondly, you had an investment in unconsolidated subsidiary of $149 million, which is up about $35 million from the end of the year. Can you tell me what that is? I assume it is something that you picked up with Vion.

And then can you talk -- third, can you talk about the working capital of the Vion business? And if I look at that March balance sheet, how much working capital do you think you will be able to take out of Vion over the course of the next year?

Look, Jeff, I think I talked -- this is Randy, and then Colin will take the working capital and other question there. The -- when we went to the Street and talked about the business, I think we have been clear, the way we saw the business roll up on a trailing 12 with $600 million-ish type numbers. And that was through, I believe, September. So as it weakened a little bit, and the earnings power in OMD, you could normalize it there. We -- our view on it hasn't changed. In fact, we see, as I just spoke with Adam there, I'm really optimistic on the go-forward earning power, and the growth potential for the business. I know that we have never sat here and outlined giant synergies.

I don't -- there aren't, that we see today. The businesses have a lot of water between them. We have been able to capture some pretty good synergies up in Canada, with lower SG&A and then some operating improvements we see going on up there. But from our perspective, when you look at the businesses around the world, which is really the core rendering activities, the Rousselot business, and then the energy business, we continue to feel very optimistic about those for the balance of 2014.

We are going to be bringing on a new bio-gas plant here. I think we start up in September here, late July, it should be finished, and should be up to full rate here shortly. And that's going to bring new EBITDA to the stream. So a lot of things going on there that should help us grow the business here, and you will start to see the growth.

All right, Jeff, the last two questions, the investment in unconsolidated subs, the $149 million, that is really comprised of two things. One, our Diamond Green Diesel joint venture.

However, in the acquisition of Vion, they had a handful of minority interest in a handful of joint ventures. So it is the combination of the two, Jeff, that gets you to the $149 million. And if you simply look at what we have disclosed about Diamond Green being about $119 million of it, you can do the math, and the delta is the other joint ventures.

In terms of networking capital, on the Vion side, as Randy and I spoke on the road show, and talked about it on the K call, clearly, the Vion side carried a much higher level of net working capital. Part of that is in inventory, and part of it is in receivables.

The inventory part is clearly related to the food segment business, and the gelatin and casings business is underneath that segment. They have a longer processing time than our traditional US animal byproducts business. So both in the time in which it takes to process the material, and then as well, on the gelatin business, because of the specific customer requirements for gelatin, we have to maintain some inventories to meet those very specific needs.

So the inventory is going to run a bigger number than what you have seen in the traditional Darling pre-transaction. The receivables, I think one of the things that, as we have looked into that a little closer, and trying to understand, there is clearly a bit of a difference between contract terms in the -- what I would call more feed segment versus what I would call in the food segment. So when dealing with pharma companies and food companies, once again, principally on the gelatin side, they tend to have longer terms.

Do I think there is an opportunity to tighten that up? I do. I don't think we're prepared today to say what that reduction might be. But clearly, it is a focus of the integration team that is working on the financial integration objective.

Just for example, Colin, the receivables are up about $100 million from the pro forma year end number with Vion. And I'm just wondering, is that just a timing difference?

I think it is part a timing difference, Jeff.

There haven't been any changes -- or is that a seasonally high number?

No, I do know that -- we had a decent March, particularly on the food segment business, which would have driven that receivable a bit. And there is no abnormal movement in the aging of those receivables or anything like that, Jeff.

Okay. Thank you.

You're welcome.

The next question will come from Craig Irwin of Wedbush Securities.

Good morning, gentleman, and thank you for taking my question. So over the past couple of quarters, when we saw some significant commodities declines, there was formula slippage that resulted in some slightly lighter profitability than anticipated.

I know at the back end of the first quarter that we actually started to see the strong rebound. But can you maybe discuss whether or not that is something that will now flip? Or where we are going to see some of the catch-up? And if there is potential, maybe, for a small, outsized contribution in the second quarter?

Yes, Craig, this is Randy. I think that is a good catch, and probably something I should have commented on before. Clearly, if you look at the -- in North America, and in -- or in Canada, and in Europe, we take a forward look at raw -- at finished product prices, and then look at the competitive nature on the margins, and establish a raw material price. And so as you get prices moving up, and in the sense, you have to play a little bit of catch-up there. And so we are going to get a benefit in Europe and in Canada here in the second quarter, as prices have moved up, and we have been able to maintain our raw material costs.

In the US, it is indexed predominantly on a weekly basis, and so in several cases, we saw meat and bone meal move to near all time highs here in the mid 500s. We're pretty much upside down all quarter, playing catch-up, meaning the sense that we had sold next week out at a lower price than we were having to buy raw material for the following week. And so you are going to see a lot of catch-up in the sense of that, in through second quarter. We saw a little bit of that happen on the poultry meal side. But the most of it was in the -- was clearly in the fat side and on the beef side, and the meat and bone meal side.

Great. Thank you for that.

And my next question is -- two questions, really, about Diamond Green. And before I ask them, I should say congratulations. You really are the only ones posting solid profitability in the green diesel, bio-diesel industry in North America. So the first question is, with the rising feed stock environment, and the inventory position or forward purchase position you are carrying into the first quarter, was there any contribution from the markup of those commodities during the quarter? As in, did you already have matching sales commitments that neutralized the benefits of that commodities move?

And then the second thing, Randy, you did mention in your prepared remarks, Diamond Green has a lot of blue sky yet to get to where you have been suggesting that it could be. If we run the math on the RINs and everything else, there really has been a discussion about the potential for much greater profitability, even adjusting for the economics of feed stocks and RINs and everything else. Could you maybe mention for us what those deltas are operationally? How you get there? If there is a potential timeline?

I think first thing, relative to Diamond Green, we carried in some high-priced feed stock, as we said, into Q1. March was a tremendous performance. A significant portion of the product down there is an index sale through the pipeline, predominantly through different petroleum companies.

So it has significant operating cost advantages, both on the inbound, the cost of hydrogen, the cost of processing, and the outbound side. And that became very evident to us in March. There aren't any flat-priced forward contracts in that business for us, so it truly is just a conversion business.

As we margined, and as we just play the movie one more time. As we margined the business in the back half of last year, the piece that we were unable to lock in, or the leg, was the RIN value. And that was a risk that, as the team didn't -- we knew we had a little bit of RIN risk, but we didn't think it was 50% type of delta RIN risk.

So we stayed pretty close to home here, running the business, going forward. Obviously, the plant has about a 100-day supply chain pipeline in front of it. It is consuming almost 1,500 tons a day of fat input into it, so you got to keep it in line.

And obviously, as you make the connectivity to the Darling system, it means the Darling system is forward sold further out than we have traditionally been. So while Diamond Green Diesel has its supply chain, the Darling shipping system, or supply chain, has a little more risk to it. And that's probably a little bit different than maybe we would have thought at the current time.

And part of that is related to the overwhelming overload that the railroads have on it today, and a little bit longer turn times throughout the United States. So Diamond Green Diesel, from an operations perspective, the Valero team led by Gary Stuckel down there, has just done a tremendous job.

The plant is performing, in our opinion, on all facets, as expected and as anticipated. As we said, we can now sustain rates above nameplate capacity. The challenge for us is the margins that are available in the industry today. And largely, that is related to the RIN values. We talk about it as the green premium, the green premium being the combination of the RIN and the $1 a gallon.

And at some point in time, those are going to have to change, or the bio-diesel industry, like I said, that we're very familiar with in Quebec and in Butler, Kentucky, we see the numbers every day. Those are pretty hard to run those plants right now.

Both are doing okay, because of their positioning and their customer base, but things are going to have to improve. When we look back at the model, and then we did this at the board level, our investment into that plant today is $115 million equity. If you take it the fully loaded debt load, or full investment in there is $445 million, whatever it is. And we are still going to put up, even at these lower RIN values, you can sit there and margin the plant. And you can still sit there and put up 20% to 30% returns on both the investment and leaving a little higher returns on the equity piece. So it is doing what we said it would do.

We just didn't -- it is just a very difficult environment to operate in, where you've got this implied optionality that exists out there, with that $1 a gallon out there. If you take our Q1 production and run rate out there, and you say, we are running at, nominally, 140 million gallons, divided it by four, that is 35 million gallons. There is $35 million of tax credit that can come flowing back in here, and then by the end of second quarter, that is $70 million. And so, all of a sudden, you could sit there, depending on what happens, and we have $100 million plus EBITDA type number coming out of that business for the first half of the year, and $200 million for the year.

So we're not writing the system off today; we're just being cautiously optimistic. It has provided a new market for our fats that we have talked to our shareholders about. That is the reason the price of fats are where it's at today, because we're buying 3 million pounds a day from a marketplace today of 12 billion pounds. And so we are a significant use point now for driving value to our core business. So we look at it as just, if you will, we're -- it is an integration play to our system, and it is performing very, very nicely, both operationally and from an earnings perspective. It is going to get better.

Great. And then last one, if I may. A few years ago, you used to talk about Diamond Green maybe being something that could help put a floor on your profitability across the commodity cycle. Given that there is a range in volatility, and that the bio-diesel producers tend to make a lot of money when commodity prices are low, but then when they're high, they're obviously a little bit more constrained. Do you have any updated thoughts there, given that you have operated the facility now, making money, in this quarter, a couple of quarters ago, and have a lot more operating experience with it?

Yes, clearly, with the price of fat down there in the mid 30s or high 30s delivered down there right now, and then you take the price of corn, it is providing a 10% to 15% uplift to our core business today that wasn't there a year ago. So we're pleased with that.

It is providing a new home for the high-acid fats that didn't have a home before. So we feel pretty darn good about what it is doing for us from that perspective. When you look at our Canadian bio-diesel assets, we don't have enough homes for our fat in Canada today without our bio diesel asset up there. It is an integration, if you will, a finished product extension to our offerings up there. So both in Canada and the US, it is doing exactly what we thought it would do.

But all said, we made the investments in both of the plants from the perspective that they could stand on their own and make enough money to support the investment, and they both are. I'm just saying that we believe that we are going to see better earnings out of them here. We have got the low cost asset in Canada, we've got the low cost asset -- operating cost asset in the USA here. And I think are you going to see some pretty significantly improved operating environment here, once the government gives us some clarity. If they don't give us clarity, then it is still a pretty darn good business.

Great. Thanks, again, for taking my questions.

And the next question will come from William Baldwin of Baldwin Anthony Securities. Please go ahead.

Good morning. Just a couple of questions. Randy or Colin, can you offer any color at all at when you look at your all-in feed stock cost into Diamond Diesel, about how much of that is represented by transportation or freight?

Bill, we move it from some many different places. But we look at -- I have always described it as the funnel between the Rocky Mountains and the Appalachians, and then it comes down there. Freight rates have increased from where they were years ago, but I think nominally, you have got $0.03, $0.035 of freight down there now.

And secondly, Randy, can you offer some color as to what is going on out with the carbon credits out there in California, the low carbon credits? Why they are selling where they are? And what you think the outlook might be over the next 12 to -- let's say, the rest of this year?

We have always viewed California as another piece of optionality to Diamond Green Diesel, because of the -- from the carbon perspective, renewable diesel is clearly the preferable item there. We have seen California take an aggressive stance last year, and then they waffled and backed off the step-up of their low carbon fuel standard. So we saw the LCFS drop out there from -- I can't even remember -- $60, $70, $80 a ton down to $25 to $30 a ton now.

For us, we still view it, long term, as a real opportunity. And two-fold, the opportunity for us is to find freight, essentially ocean freight, to go from Norco, Louisiana or St. Charles, on through the Panama Canal and into there. We are working on that; we have been working on it diligently.

As many people on the trading side of the business knows that, if you move from a US port to a US port, it requires a Jones Act vessel or a US flight vessel, so that freight is very difficult to find, but we continue to work on it. We've got some opportunities there that I think will become apparent here shortly.

If the low carbon fuel standard gains the momentum that we think it will, as it gets stepped up here in 2015, 2016, I think we're prepared to move forward with an additional investment out in California, probably in the bio-diesel area. We're the largest producer of fat on the West Coast, and that would be a great value addition or finishing capacity piece for our system out there.

So we remain cautiously optimistic. We have seen an LCFS also being phased in in Canada today, that I think will provide us some nice uplift in the future here.

Climate change is clearly getting some momentum around the globe today. Obviously, on the front of the newspapers here, the last week here. And so I think you are going to see -- the Darling system globally is very, very well positioned to take advantage of carbon credits, climate change, and greenhouse gas credits, emissions, as we go forward.

Thank you for that color, Randy.

All right, thanks, Bill.

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Randall Stuewe for his closing remarks.

Thanks, everyone, for joining us. Thanks for your patience with us, and lots of great questions. And look forward to talking to you here in August and sharing our successes with you. Be safe.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.