Darling Ingredients Inc (DAR) 2014 Q3 法說會逐字稿

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

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 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, Kate. Good morning. Thank you for joining us to review Darling's third-quarter 2014 earnings results. We hope you had a chance to review our earnings press release that was issued yesterday afternoon.

Randall Stuewe, our Chairman and CEO, will begin today's call with an overview of our third-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 result of operations. Please bear in mind that forward-looking information is subject to many risks and uncertainties and actual results may differ materially from what is 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, and our recent press release announced yesterday and our 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'd like to also highlight the non-GAAP metrics that are included in yesterday's press release. The Company believes that excluding certain recurring and nonrecurring 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 and the most directly comparable GAAP measures in yesterday's press release. The press releases is available on the Company's website and was filed with the SEC in a Form 8-K on November 6, 2014. With that, I would like to turn the call over to Randy.

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

We faced several challenges during the third quarter, specifically related to the rapid global resetting of ingredient prices and coupled with the unplanned shutdown at our Diamond Green Diesel facility. As anticipated, record crop production in the USA started to put pressure on ingredient prices late in the quarter.

This coupled with the unexpected and sudden downtime and Diamond Green Diesel accelerated a fairly significant price resetting on used cooking oil and animal fats in the USA feed segment, and to a lesser extent in our European rendering business. With DGD down for nearly half the quarter, the sudden interruption in our supply chain forced us to divert, delay, and discount our fats and grease supplies into alternative markets. The good news is we were able to roll our August and September sales to Diamond Green Diesel forward at existing contract prices.

For the most part our USA procurement formula has worked. As discussed in the past, about 75% of our fat and bone rendering agreements are on some type of margin protection formula, and to a lesser extent about 50% of our used cooking oil agreements.

Our European rendering business felt similar margin pressures from our lower fat prices driven by a global biofuel slowdown. But Management has made some progress to adjust raw material values in order to normalize margins. In Canada our rendering business performed well, and navigated through a difficult finished product value market.

Our food segment, led by Rousselot, one of the leading producers and marketers of gelatin in the world, also felt the pressure of slowing economies in both China and South America. During the quarter the fuel segment remained plagued by USA government ambiguity on biofuel programs. Overall our tonnage remained steady globally, and we completed the acquisition on custom blenders, which is an excellent fit with our bakery feeds group.

Now at the operating level, pro forma adjusted EBITDA was $122.3 million, when compared to $89.5 million as reported in the in second quarter 2013. The increase reflects full contributions from our newly acquired global operations and more than offset the decrease in earnings from Diamond Green Diesel and the reduction in acquisition and integration expenses, which Colin will address later in the call here.

Now let's take a closer look at our food, feed, and fuel segment operating performance, and later I'll give you a little more detail on Diamond Green Diesel. Our food ingredients segment was mixed with gelatin business, showing marginally lower earnings related to the softness in Chinese demand and margin pressure related to the increase in raw material pricing in South America. Our European edible fats business normalized sequentially, but our casings business weakened a bit due to lower seasonal demand.

The global feed segment delivered a disappointing earnings performance, with EBITDA down 26.6% on a sequential basis. As I mentioned earlier, the bulk of the decline came from significantly lower earnings in the USA, related to non-formula business, as fat and used cooking oil prices felt the impact from the down time at Diamond Green Diesel.

Our non-formula business coupled with the lag effect from our USA formula price raw material procurement agreements put a drag on operating income in this segment. Canada had a solid performance, and China performed generally as expected, while Europe was moderately below expectations due to some price pressure in the C3 rendering category related to declining fat prices and a delay in reducing raw material cost.

We also experienced unfavorable foreign exchange impacts caused by the strengthening of the US dollar. As expected, on a year-over-year basis the bakery feeds business continued to experience the effects of lower corn pricing and delivered modestly lower earnings.

The addition of the custom blenders acquisition should provide significant synergies to the bakery feeds business as we integrate its customers, routes, equipment into our infrastructure. In general, feed ingredients segment raw material volumes were steady around the glove and we anticipate some recovery in Q4 due to the rolling of the Diamond Green Diesel sales contracts.

And finally, earnings in our fuel ingredients segment, anchored by our Diamond Green Diesel joint venture, reported significantly weaker performance compared to the second quarter, largely due to 47 days of down time at the facility due to a fire incident in early August that limited production during the quarter.

Fortunately, no one was injured and the DGD team seized the opportunity to proceed with a planned expansion, increasing our nameplate capacity by 10%, or now to 11,000 barrels per day of feed stock. While DGD restarted successfully on September 18th, it should be noted our biofuel operations in North America continue to be adversely impacted by stalled government policy surrounding the RVO mandates and the blender's tax credit.

Canada's biodiesel margins were still nominally at breakeven during most of the quarter. With DGD now back online and operating at the expanded capacity, we expect improved performance, but need to point out that carryover of the higher priced feed stock from August and September contract roll-forwards that will ultimately impact Q4 profitability.

Our Ecoson plant in Son, Netherlands is now online and contributed nicely to our fuel ingredients segment with a steady performance also from Rendac, our disposal rendering business in Europe. With that, I'd like to turn the call over to Colin for our financial review. And after that I'll provide some closing comments before we go to Q&A. Colin?

Thanks, Randy. Since we are now providing a greater amount of segment detail, I will focus my comments on our third-quarter performance and direct you to our press release and SEC filings for our 9-month comparisons. Let's take a look at our third-quarter 2014 financial highlights.

For the quarter we reported net income of $14.3 million, or $0.09 per diluted share, compared to $27.7 million, or $0.2 per diluted share in the same period in 2013. Excluding $1.4 million of after tax integration-related expenses associated with the Rothsay and Vion Ingredients acquisitions, pro forma adjusted net income and earnings per diluted share were $15.7 million and $0.10 respectively.

Net sales for the third quarter 2014 were $955.8 million as compared to $425.8 million in the same period in 2013. In the current quarter operating income increased by $8.3 million to $49.9 million, which was attributable to the newly acquired operations.

Including the Company's share of net loss in the DGD joint venture, segment income was $48.9 million, or $4.7 million lower than the same period in 2013. Additionally we have outlined adjusted EBITDA measures on our form 10-Q, which we believe provides a meaningful analytic to evaluate performance.

As noted in our press release, third quarter adjusted EBITDA was $117.2 million, compared to $64.8 million in the same period last year. As Randy indicated, on a pro forma adjusted EBITDA basis, the Company would have generated $122.3 million in the third quarter compared to a pro forma adjusted EBITDA of $89.5 million in the 2013 third quarter.

The pro forma adjusted EBITDA figures include the Company's share of EBITDA from the DGD joint venture. However, it should be noted that the joint venture has not yet made any distributions to its partners.

For the third quarter 2014 we reported an overall gross margin of 24.1% compared to 27.2% in the year-ago third quarter, a decrease of 3.1 points, or 11.4%. The decline in gross margin percent results from the Vion acquisition and moderately lower margins in the feed ingredients segment.

We had strong cash generation in the third quarter of 2014, with $138.8 million of cash flow from operations, or cash EPS of $0.84 per diluted share, as compared to $39.5 million in cash EPS of $0.33 per diluted share in the same period in 2013. For the nine months ended September 27, 2014, the Company has generated $179.3 million of cash flow from operations, or cash EPS of $1.09 per diluted share, as compared to $168.7 million of cash flow from operations, or cash EPS of $1.42 per diluted share for the nine months ended September 28, 2013.

Now turning to each of our operating segments. Food ingredients reported segment operating income of $14 million for the third quarter of 2014.

As a reminder we did not have the food ingredient segment in the year-ago third quarter to provide comparability. On an adjusted sequential basis, operating income decreased by $0.7 million from $14.7 million primarily related to softness and demand in China as a result of recent food safety and pharmaceutical scandals, increasing raw material prices, and competitive pressures in South America, and general economic slow downs in China and Brazil.

On an adjusted sequential basis, exclusive of the non-cash inventory step up, gross margins increased by a modest 1.5 points or 6.4%. However, net sales were down $28 million, or 8.5%.

Feed ingredients reported segment operating income of $46.3 million, or a decrease of $12.5 million compared to the year-ago period. On an adjusted sequential quarter basis, exclusive of the non-cash inventory step up, segment operating income decreased by $29.7 million from $76 million.

Gross margins were 23.5% as compared to an adjusted gross margin of 28.3% in the second quarter of 2014. On a sequential basis feed ingredients earnings in the US were impacted by the significant decline in fat and used cooking oil finished product prices, attributable to an overall lower feed ingredient price environment resulting from the record grain production.

Also the unplanned shutdown of DGD caused us to move finished fats and greases into alternative markets on a spot basis, which had the impact of pressuring prices even further. As expected, the raw material processing formulas utilized in the United States operated appropriately as the finished fat markets moved lower.

But the lag in the formulas in a resetting market resulted in margin compression. Europe felt similar margin pressure with its finished fats portfolio as global biofuels demand softened, with major producers taking extended turnarounds.

Finally, fuel ingredients reported segment operating income of $2.9 million, which reflects an increase of $2.5 million over the same period in 2013. Including the DGD joint venture, fuel ingredient segment income was $1.4 million, or $10.9 million lower than the year-ago period.

On a sequential quarter basis, segment income decreased by $5.5 million. As Randy mentioned, the fuel ingredients segment operating results were negatively impacted by the shutdown of the DGD facility and regulatory uncertainty with regards to biofuel policy in the United States.

Gross margins increased by 4.4 points on a sequential quarter basis. However, this was partially offset by a reduction in net sales of $6.5 million, or 8.3%.

The inclusion of our European disposal rendering, green energy, and biophosphate operations contributed to margin improvement, while our North American biofuels operations continued to be challenged by the regulatory uncertainty related to the RVO and blender's tax credits.

Finally, on a sequential quarter basis, the strength in the US dollar presented a headwind in the third quarter of 2014. On a translated basis, this represented a $1.9 million reduction in operating income primarily attributable to Euro functional currency earnings.

Now we will review our corporate activities. As you can see, the Company had networking capital of $599.1 million, and its working capital ratio was 2.1 to 1 compared to working capital of $950.7 million and a working capital ratio of 6.4 to 1 at December 28, 2013. The decrease is primarily due to reduction of cash and cash equivalents used to fund the Vion acquisition.

At September 27, 2014, the Company had unrestricted cash of $193.4 million and funds available under the revolving credit facility at $786.9 million, compared to unrestricted cash of $870.9 million and funds available under the revolving credit facility of $680.7 million at December 28, 2013. As of September 27, 2014, the Company had long-term debt of $2.3 billion as compared to $886.9 million at year end.

During the quarter the Company repaid long-term debt totaling $28.8 million. Corporate SG&A increased by approximately $1.4 million to $8.8 million, from $7.4 million in the year-ago period. The increase was principally related to the additional corporate staff to support the new global business.

Interest expense was $25.4 million in the third quarter 2014 compared to $5.3 million during the year-ago third quarter, representing an increase of $20.1 million, which was primarily related to the increase in debt outstanding as a result of the Vion Ingredients and Rothsay acquisitions.

Relative to the Company's investment in the DGD joint venture with Valero, on the balance sheet we reported a net investment in the venture of $119.8 million as of September 27, 2014, as compared to $115.1 million as of December 28, 2013. From a CapEx perspective we spent $154 million during the first nine months of the year, compared to $85.7 million during the year-ago comparable period. The net increase of $68.3 million is directly attributable to our newly acquired businesses.

I will now turn the call back over to Randy.

Thanks, Colin. We've now worked through a turbulent and volatile quarter with our new global business. Our integration is ongoing and proceeding as planned, as we transform Darling into a global leader in the production of sustainable, organic ingredients for a growing population.

We anticipate a more normalized fourth quarter from our platform. And with that, I'd like to go ahead and open it up to Q&A.

We will now begin the question-and-answer session.

(Operator Instructions)

Chip Moore, Canaccord.

Randy, maybe first you can talk about what you're seeing thus far this quarter with formulas catching up and DGD now up and running?

Obviously DGD became quite the twister for us in the third quarter here. Number one, it is a hard quarter to compare sequentially and to try to understand the impact.

We're going to try to do our best today to help people understand it. What was involved here was the perfect storm of conditions. Meaning that you had buyers of finished product anticipating lower prices due to the larger global ingredient and crops available around the world. And then all of the sudden you shut down our largest customer in the world for the Darling system, Diamond Green Diesel, suddenly.

And so the impact of that was very difficult for us to calculate while it was happening to us. But as the fire broke out and the decision on the next morning, or Monday morning, was to divert the whole pipeline, we had to significantly discount the product to move it to markets that hadn't been doing business with us in quite a while.

So in a classic sense we had to buy our way back into a market. That's kind of the perfect storm on top of then the typical lag.

And I know we've talked about this for many, many years, that as prices move down you adjust your raw material prices, whether it's in Europe we do it on a 30- or a 60-day basis, Canada a 90-day, and in the USA in the used cooking oil business it's a 30-day look back. And in the rendering or the fat and bone side it could be week to week or prior week or two weeks.

But you get caught in this vacuum of prices moving down quicker than what you can forward sell. And typically what happens in a situation where prices are moving down, buyers will wait. You build inventories and you end up selling a lot more high price product at lower prices here. And if you think about it, the formulas typically take around 30 days to work their way through the system before they normalize again.

So we anticipate, Chip, in October here, which is now we're in November, we're seeing that impact come back to us in the sense of more normalized pricing. We're seeing prices on fats and greases and tallow actually in the USA move back up $0.01 to $0.02 a pound here in the last couple days. You're seeing proteins hold steady as the pipeline for protein around the world remains pretty tight.

And then also as I pointed out, our largest customer is Diamond Green Diesel. We worked with them. They worked with us. And we moved all of the August, September sales forward at that time to the October, November period.

So we're going to have some benefit from that. The good news is that benefits the core rendering business. The bad news is a little bit of that's offset within the Diamond Green Diesel system itself.

Okay. That's helpful. And then if we move over to feed, maybe you can just -- I know it's early on 2015, but your thoughts given some macro issues at least in Asia and Brazil, and how you're thinking about spreads for Rousselot and the gelatin market?

Well, in the feed and the food and the fuel segment you've got a major global resetting that's pretty interesting to watch. As we still are beginning to learn our new platform, as we said, we've got lower feed prices all around the world right now.

So we're adjusting and normalizing margins there. That will level out here in Q4, Q1. My personal opinion is that the lows in the marketplace are probably in now. As I look to the Chicago Board of Trade and use it as my barometer, the market is in a carry.

The market seems to like $4 corn for the balance of the year here. We're at all-time lows in the USA on soybean oil stocks. We're seeing palm oil improve a little bit.

So the marketplace is set up in the feed segment and really kind of awaiting what happens in Washington relative to the biofuel mandates. It's kind of unbelievable to be talking about or thinking about Washington still trying to set a 2014 biofuel mandate when there's only 45 days left.

So now you become kind of hopeful that they issue a 2015 guidance and also give us the blender's credit. If you get an increase in whether it's ethanol, advanced, or biomass, that should be fairly supportive of the market for the balance of the year and that will help the feed segment.

In the food segment, as we said and Colin spoke, the softness as we look at it, we have a four pillar business anchored in Europe, North America, China, and South America. North America and Europe continue to perform fairly nicely, as expected.

China felt the pressures of the, as Colin referred to, some pharmaceutical and consumer scandals that continue to plague Western companies over there. And South America felt the tightening of the hide market where we make hide gelatin in South America.

The reduction in the USA cattle herd has caused the price of hides to move up. And hides ultimately in South America had increased in price, and that gives us a chance to move prices up in South America. But it just takes a little bit of time.

Conversely, Chip, if you think about it the Russian border closure has caused some of the fattier cuts of meat that typically left the continent for Russia to back up on the continent. And that's helped the availability of pig skin and the pricing of pig skin, which translates to improved margins within the gelatin business on the continent today. So little bit of balancing going on there, arbitrage opportunity.

And obviously the fuel segment for us, you're still awaiting, as we said, very similar to the feed segment the RVO mandates. Canada operating at breakeven. Europe felt the impact of the biofuel slowdown in Germany that's typically very seasonal this time of year.

Plus Neste, the other big renewable diesel provider, had some turnarounds scheduled around the world that caused a little bit of fat to back up in Europe during the quarter while it was -- and that's the impact we felt. So I hope that helps you a little bit.

Yes, that's helpful. To your point on the regulatory vacuum, post mid-terms any updated thoughts on does that help get something done here or still wait and see?

I'm probably as frustrated as you are. I suspect it's a little bit of wait and see.

Obviously the dollar tax credit means a lot to both Valero and Darling. And for Darling it takes a good year, and will make it a really good year if we can get that.

The question is, does Congress take up a tax extenders package? The word we're believing is we thought it would happen here between the 12th and Thanksgiving, and now we're hearing between Thanksgiving and Christmas. So we'll see and we'll keep our fingers crossed.

Okay. Appreciate it. Thanks.

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

Thanks. Good morning.

Maybe you already answered this in a couple different ways, but maybe I'm going to try to narrow it down. If you can help me out just in sort of the walk from the second quarter of 2014 to the third quarter of 2014 on the feed segment. We're showing a drop in operating income in the mid-$30 million range.

If you can kind of break down for me how much of that is the pure price move on the non-formula business, which obviously is a function of corn and fats and meat and bone meal, versus how much was really the lag impact that you hope to get back over the next couple quarters? Is there any way you can separate that out for us?

Number one, I think it's pretty difficult to do that. I mean, we do know with the pipeline we had shipping down to Diamond Green Diesel. We've traditionally not released that as it can move around dramatically, depending on whether or not the clay can -- what you can originate from other suppliers.

In the case of August and September, it was a significant portion of our production. Both of our used cooking oil and of some higher asset fats that come out of the system in the summertime. So that's a pretty significant impact.

If you look at the price, if you go back, Dan, and you start to think that stuff that you made in July ships really in August, you had $0.32, $0.33 type of FOB fat numbers that were -- in order to move that product back into the market during the month was discounted to $0.24 to $0.26 a pound. So there's was a $0.07 to $0.09 a pound move and that's taken not only -- you were buying the raw material at $0.32.

You're now selling the finished product at $0.24, $0.25. That's a substantial portion of it. You'll get a lot of that back here in October, November as we do ship it out. And then the other piece is, as you can -- as I've tried to describe to people over time, you can do the change in the USA of the 75% or the 25% that's not on formula within the rendering segment and try to do a look forward of that.

When I've kind just penciled it roughly, I think that probably about one-half of it has led to that right now. There's just a lot of variables in that. When you get this type of volatility and this type of sudden movement, there's just a lot of things that happen before the ship normalizes. As I said, we anticipate that to level off here in Q4.

The margin compression was a couple points and I understand that, and 100% of that is related to the compression of fats within the formulas here. Proteins have held steady. Premiums on our different proteins have held steady.

As we look forward, and this is back to Chip's question, we anticipate pet food prices to remain steady if not increase this year, because fish meal has now gone to near all-time highs at $2,000 a ton. And that's the aquaculture driver in the world. And we're seeing aquaculture people already start to take positions in chicken proteins in order to augment their inventory and to support their position for next spring.

So lot of good things happening in proteins. 90% of the impact here was all related to the sudden drop in fat prices. As we've said, Diamond Green Diesel is back up with its pipeline rebuilding right now, and I think things should improve.

So if I can just clarify, so again as I try to break this out, clearly there is a direct impact on the non-formula business. You said maybe half of the total, give or take, but tough to tease out.

The Diamond Green impact, this may well have been a product that you sourced under formula, but because you sourced under formula when pricing was at $0.33, $0.34, and then you were forced to sell it at $0.24, $0.25. I don't want to say the formula is broke, the formula worked. But the contract is broke so to speak. So that seems -- just to clarify that is the transitory issue that we're talking about now?

Dan, that's correct. It was the forward book disappeared on us.

Right. So there's no -- the formulas work, it's just the formulas were tied to a forward price which no longer held.

Correct. Because we rolled the contracts.

Got it.

Then you're going into a spot market and as Randy said, buyers were shortening up what they were buying for the belief that the price was going to be continuing to move down.

When you move, Dan, from a dedicated customer that's just turning rail cars, and all of a sudden you have to go compete with the price of corn or the export market, that became very, very challenging. And ultimately you built inventories too.

Is this at all analogous with maybe what you saw in 2008, 2009 when prices fell and some of your export contracts were cancelled on you?

I wouldn't say we had anything cancel. You're seeing the same volatility impact as in last year fourth quarter a little bit. And then, as I reminded Colin and he wasn't here at the time, but it was what we saw flow through in 2008 when everything moved so rapidly.

Okay. And then secondly, you did build some inventory it sounds like.

Any mark-to-market, lower cost of market on your inventory. I know you don't give us that number, but is that part of the equation as well or no?

Go ahead, Colin.

Nothing material, Dan. Little bit but nothing material to speak of.

Okay. And then the last thing is on the food business. You were down sequential. The second quarter if I remember right you were obviously getting hit pretty hard from Eastern Europe and you expected that to turn around. Did that turn around and that was offset by China and South America? Or did that remain a challenge as well?

Our European team, the good news was they had more tonnage coming out. And the bad news was they were having to move it into the market at lower prices. And so then they had to adjust their raw material values to normalize their margins. Jan was very successful in doing that.

What you see in the food segment was the pressure that we're feeling in the gelatin business right now. That business, as we expected, came off of three very good years, and at the end of the day we've got two -- it's a fairly concentrated market with five or six leading companies out there.

And the Chinese slowdown is I think impacting all of us. I've read all of our releases around the world, and China is the majority of the slowdown for us, along with a little bit of South America margin pressure that should normalize.

Got it. Thanks for all the color.

The next question is from Adam Samuelson of Goldman Sachs. Please go ahead.

Thanks. Good morning, everyone. Maybe just to ask the question on the feed segment a different way.

And I understand the dynamic with Diamond Green shutting down and then the contracts break and you end up selling the product into a lower priced market. Why wouldn't that show up in the revenue line?

Your revenue -- your ASPs in, I mean your volumes were pretty flat sequentially in feed, and the average selling price per ton really didn't change. Your revenues only declined $16 million.

Presumably if you were seeing a sharp drop in selling prices because you had to sell into different markets, why didn't that show up in the top line? I think that's where I'm getting -- I'm still not getting full clarity.

Well, a couple things, Adam. As I referenced the protein values remain very, very good for us around the world.

Also you get into the seasonality of the sales in China, of the blood or the hemoglobin business for aquaculture, and that's the time that we liquidate a lot of the inventory in the summer. The protein and the hemoglobin business more than offset or helped offset a significant portion of the fat price impact.

Okay. All right. So maybe just looking forward a little bit, clearly 2014 had some impacts, both we had the 1Q weather.

You had obviously all the integration with Vion, you've had some of the gelatin softness, obviously the issues in feed this quarter. You're kind of still undergoing ERP implementation.

Can you help us think about some of the discrete items that have impacted the P&L on the profit line in 2014 that maybe shouldn't repeat? And I would imagine ERP, stock comp, 1Q weather, some of this feed price normalization -- fat price normalization in 3Q with the DGD shutdown. Help us tease out some of the things that you wouldn't put into the base plan for 2015 that for why the 2014 EBITDA base maybe is a little bit artificially low?

You gave me a pretty bad report card there, but I think you answered your own question.

Pretty good list.

Pretty good list. Obviously DGD had its issues and hopefully that's behind us. Clearly since September 18 has been running at record operating rates. Colin continues to move forward with the implementation of the ERP system here. We continue to try to implement our ERP system up in Canada in the Rothsay acquisition.

Those expenses should be tailing off as we are doing it now with our people, the consultants are out of here.

When I look at it, you can't predict weather here, but at the end of the day we had a lot of headwind in the early part of the year with bad weather, and then we had a pretty good -- a really pretty nice second quarter. And then to have the DGD. So as I said, I kind of anticipate things more normalizing.

We're seeing the integration come together. We've got some great opportunities for 2015 with some new plants that we anticipate putting under construction here around the world. We're optimistic on the gelatin business growing again next year, and overall the rendering business around the world looks pretty darn good to us.

Meat supplies look favorable about on every continent, and I think that once we get -- adjust to the new margin structure and you sit there and say what's the new margin structure, it looks like soybean meal's at $350 a ton for most of the year. It looks like vegetable oil seems to like somewhere around $0.30 to $0.35 a pound. I think you'll see the structure start to normalize as we get through some of these events that hit us this year.

But no way thinking about some of the discrete earnings impacts, some of those charges and events and helping us build a bridge to 2015 at this point? You don't want to put a finer point on some of those numbers?

No, not at all.

Maybe just a clarification question for Colin on the balance sheet. Looks like there was -- did something get reclassified from accounts payable to accrued expenses? Seems like those numbers flipped pretty sharply sequentially. And I want to make sure I understand what happened there.

There was a mapping issue, Adam, with the roll-up from Europe. So we had an account mapped one way that should have gone another way, so we corrected for it. If you look at the total between the two, really didn't move a whole heck of a lot.

Thanks very much.

Next question is from Ken Zaslow, BMO Capital Markets. Please go ahead.

Hey, good morning everyone. Just a couple cleanup questions. I think most of these have been answered. So 2015, anything that happened in this quarter has no impact and does not impact your view on 2015. Is that fair?

That's a fair statement.

Okay. What gives you confidence that the global resetting is going to be finished in the fourth quarter?

It's already leveled off as I can see. You're seeing proteins move a little bit around right now.

We're in -- for the pet food ingredient side globally, you're in the annual contracting time here. Those feel pretty steady to trying to widen margins there this year because of fish meal.

Really the unknown underneath the business today really is will we get some type of stability in the fats and greases area, which is tied pretty much to global biofuel demand, which has still been the wild card here for six to nine months. And I think in my world it's pretty simple.

If you go look at the soybean oil S&D in the US you went under 1 billion pounds, which is the first time in I don't know how many years, but in my career to be that low. You look at the non -- the other oil seeds around the world and stocks are down 3 to 4 million tons around the world.

You've got a pretty tight S&D that's comfortable but tightening on the oil side if any of the biofuel mandates continue to grow around the world. And for example, if you take it from a 1.28 billion-gallon mandate this year to 1.5 or 1.6 next year, you're going to pick up 2 or 3 billion pounds of new demand out of a tightening situation.

So I think that's a fairly positive outlook for that. I mean, from our perspective the bakery side we've seen corn pretty much hit the low, and it's starting -- we're seeing those prices normalize.

The challenge for us is just getting through the volatility here to where if the prices continue to move down, we will put charges back into a lot of our different business units for the service we provide. But right now, it looks pretty optimistic.

Okay. And then you said European is positive low. Could you tell me about Diamond Green in terms of it is up and running, everything is going as you expected? Is that fair at this point?

Yes, number one as we said, obviously no one ever wants to have an unintended down time or a fire, in this case, and an explosion. Frankly, we were planning to go down at the plant probably about 30 days later to do some of this work that we'd identified, replace some of the metallurgical stuff, improve some of the outbound logistics constraints that we had.

That's all been done. The plant is running very, very well.

The product is -- the facility from a customer demand point is to a degree sold out. It is really, really performing as we'd like.

I mean, obviously it would be a better light if we'd have some clarity on the RVO and put some real margin back in it. But it remains even profitable and will be profitable in fourth quarter even with the higher priced contracts that exist, even with diesel being down $0.50 a gallon, or $0.30 to $0.50 a gallon in the quarter.

You said your biggest customer is obviously Diamond Green Diesel, but there's also a new facility that just came online also. How is that going to be affecting the price outlook?

Does that make a difference or is that too small? How do you think about that?

I read the REG press release or whatever they had, their conference call. I can't tell you if the facility is really running and at what rates.

It looks like they're running about 1,000 to 2,000 barrels a day which is -- that's new demand. Any demand helps.

But obviously that facility is a little bigger than one-third the size of Diamond Green Diesel. So it will help add nameplate capacity.

That facility would use about 600 million pounds of fats and oils. I don't know if it has the capability to utilize the quality of feed stocks we use.

I think it's safe to say that it would prefer a cleaner raw material, which is used cooking oil and now that's the reason that you see used cooking oil prices in the US moving up above yellow grease. I'm hearing used cooking oil is moving up $0.28 to $0.30 now, which is really good for our base business. So we like to see new demand.

Okay. My final question will be you said the fourth quarter is going to be more like a normalized number. What does that mean?

You don't normalize. What does that mean to us?

Did I say that?

I think you did.

No, no, I think what I'm trying to look at is, I mean, we've always talked about watching the business normalize. The impact of Diamond Green, we have always looked at the business, Ken, and we put charts up in our investor presentations where we look at the business without Diamond Green Diesel as normalizing, and our intent is to normalize in that $600 million EBITDA run rate.

And obviously that's got a lot of assumptions in it on tonnage and performance and the gelatin business. The $600 million, we're under a little pressure in the bakery business. But at the end of the day, when we talk normalized we're trying to -- that's where we're starting to try to grow from is the $600 million number.

Great. I appreciate it.

The next question is from Carla Casella from JPMorgan. Please go ahead.

Hi. On the Diamond Green Diesel side, in an ideal quarter in a normal year, how much of your production from the feed ingredient business should go to DGD?

Carla, it moves around. I mean, clearly Darling could fill 100% of the needs of Diamond Green Diesel if it needed to.

We've typically been anywhere 40% to 50% of it. And it just depends on product mix and what we can originate down there, depending on where corn oil is from the ethanol industry, depends on where poultry fats are.

It just moves around from quarter to quarter. As we said, August, September was a big portion of our production headed down there.

And so that's 40% to 50% of the DGD feed stock is coming from your other businesses. But how much of your feed business as a percentage does that represent?

We don't really break that out. We've held that number in house there. I'd say it's pretty similar.

Okay. And then did you give a pro forma number for EBITDA for last year, if you had had Vion in the numbers?

We provide that on a look back pro forma basis with each of our investor decks. And we have an investor conference coming up here that we'll get a deck out very shortly. We'll put it out with an 8-K.

Okay. Thank you.

The next question comes from Kris Keller from Columbia Management. Please go ahead.

Hello. Thanks for taking the questions. Just a follow-up on the question that Carla just asked.

Can you talk about how the contracts with DGD or the pricing in there? Are they different than contracts that you have within the rest of your business?

No, not really. I mean, they may have -- number one, Diamond Green Diesel is our number one customer.

They have specific quality needs, and at the end of the day we have lots of our plants within the Darling system that can meet that quality. So really they're no different than any other customer.

The only thing they're different about is they take rail from us. So we sell a lot of rail cars down there, and so there was a lot in transit when we went down in the quarter and a lot to be loaded.

So that's the only difference. And so as we said, when you tie up that many rail cars that were loaded and sitting down there, and then you also have -- now you're used to loading rail cars and you've got to go find either a rail customer or move the stuff to the truck market, the local market, there's just a lot of impact when that facility went down.

But just maybe to clarify, like if that same situation had happened with another large customer where you had to go sell it into the spot market, sell all that product into the spot market, it would have had a similar impact on margins?

There is no customer that even -- this customer is 40 times larger than our nearest customer.

Okay.

Kris, there is just no comparison that when you build a supply chain that is just geared at turning rail cars every two or three weeks and it goes down for 45 days and remember, when we went down we also said that it would be up to 60 days. So we made plans, and then the operations team did a really nice job and brought the facility back up earlier. So we had to scramble then to rework our supply chain to get them back up on time.

So I guess then I would just -- I would ask, given the significance of DGD to Darling then, does Darling have business interruption insurance on if -- in the circumstance that something like this happens again?

Yes. Darling does carry business interruption insurance on its own facilities. This is a joint venture with Valero.

It is a subsidiary here, if you will, or whatever, a joint venture. It does have its own business interruption insurance.

Unfortunately we weren't down long enough for that to kick in. It does have property and casualty insurance with a small deductible that has kicked in to cover the repairs.

And then I know this question has been answered or asked. But you said your contracts are anywhere from a 30- to 90-day lag depending upon the geographic region. So if things stabilize here, can you provide any more color on the positive impact you expect to see in Q4 on operating income within feed?

I think Randy has attempted to already answer that. I think it's important to note that the US rendering contracts do not have that 30-day lag to them.

Those are typically more weekly, biweekly, so there are shorter lag to them. It's really the used cooking oil contracts that have a longer lag. I think earlier in response to one of the questions I think Randy gave out a 50% number.

Yes, but 50% of what, though? That's the question that I don't think -- I don't know that anybody has really a good sense of.

I think it was based on the sequential change.

Okay.

Quarter over quarter.

All right. I appreciate it. Thanks.

The next question comes from William Baldwin with Baldwin Anthony Securities. Please go ahead.

Good morning. Randy, can you offer any color as to where you think quote, normalized, there is such a thing operating margin should be eventually in the food business, the food ingredients business for Darling?

Bill, I think Randy just a second ago tried to address that normalized with this nominal $600 million number, which we haven't really broken out between the three segments, although you would expect the feed to be the largest piece of that.

But I think within the Q itself, I think those margins in the mid-20%s, which they all are, are pretty symbolic of what this business is capable of as it goes forward there. So for us, you can look whether it's food, feed, or fuel, I think clearly the fuel segment has a lot of upside to it related obviously to mandates and tax credits.

But food and feed amazingly are pretty similar. The good news is food doesn't have the raw material procurement volatility that the feed segment has. But that should -- those should normalize from there.

Your gross margins are pretty similar between food and feed, but the SG&A brings the operating margin of feed considerably below the operating margin of food. Food is below feed is what I meant to say.

I'm just wondering, Randy, over time as you put your initiatives in and so forth, do you see those margins equalize? Do you see operating margins potentially in the food area getting up to the 7%, 8%, 9% area? Is there any opportunity for an SG&A expense reduction in the food area also to help out operating margins?

Bill, I think one of the things we have to keep in mind in the food segment is you're selling into a very different market. There's a very different customer touch point profile that exists in the feed business.

There's a great deal more hand holding and what I'll call customer intimacy. I don't think we'll ever on a percentage basis get food SG&A down in the same range as we have feed. It will always be a little higher just from the nature of the business.

And you also have to keep in mind within that food segment is our casings business, which is a considerably lower margin business that averages it down. So there's not complete transparency there.

I see. Okay. Thank you much.

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

Okay. With that, appreciate everybody's input, comments today, and we look forward to talking to you, I believe, about Q4 results the end of February. So have a great holiday season and we'll talk to you then.

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