Darling Ingredients Inc (DAR) 2014 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Darling Ingredients Inc. conference call to discuss the Company's fourth-quarter and FY14 financial results. With us today are Mr Randall Stuewe, Chairman and Chief Executive Officer of Darling Ingredients, and Mr John Muse, Executive Vice President and Chief Financial Officer.

After the speakers opening remarks, there will be a question-and-answer, and instructions 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 conference over to Ms Melissa Gaither, Director of Investor Relations for Darling Ingredients. Please go ahead.

Thank you, Dan. Good morning. Thank you for joining us to review Darling's fourth-quarter and FY14 earnings results.

For this earnings call and future calls, we are providing a slide presentation to augment management's formal presentation, which is posted in the presentation section of our IR website. Randy Stuewe, our Chairman and CEO, will begin today's call with an overview of our fourth-quarter and full-year financial performance and discuss some of the trends that impacted our outcome. John Muse, Executive Vice President and Chief Financial Officer, will then provide you with additional details about our financial results.

Additionally, as noted in our press release yesterday, we included adjusted diluted net earnings per share, based on adding back non-cash amortization charges and excluding from adjusted EPS special nonoperating items, including those related to large acquisitions. Please see the full disclosure of our non-US GAAP measures in both our earnings release and on slide 12 of the slide presentation. John will discuss this further in his comments.

Finally, Randy will conclude the prepared portions of the call with some general remarks about the business. After which time, we will be happy to answer your questions.

Now for the Safe Harbor. This conference call will contain forward-looking statements regarding Darling Ingredients' business 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 what is projected. Many of these risks and uncertainties are described in Darling's annual report on Form 10-K for the year ending January 3, 2015, 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 take any duty to update any of the forward-looking statements made in this conference call, or otherwise.

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

Thanks, Melissa. Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the Darling Ingredients earnings call to discuss our financial earnings results for the Company's fourth quarter and our fiscal year that ended on January 3.

FY14 was a transformational year for shareholders. It was a year mired with expansive growth. It was also a year of tremendous volatility in many global commodities, which translated into significant price movements in our finished product market.

The Vion Ingredients, Rothsay, and Terra brands and acquisitions are now part of our family. We have successfully leveraged our legacy Darling business and expanded our platform across 5 continents, with a network now of more than 200 locations. We stepped onto the world stage, doubled the size of our Company, and established ourselves as a global leader in the creation of sustainable ingredients.

Growth in this magnitude requires patience and tenacity. Our team navigated many challenges this year and continued to capitalize on many new ways that solidify our foundation for long-term growth.

We have a lot to cover this morning. But before we move onto our detailed review, I'd like to formally welcome back John Muse to his CFO post. John worked closely with our international team through the integration process over the last year, and we are delighted to have him back as part of the executive team.

Additionally, as Melissa mentioned, we've provided a slide deck that summarizes our quarterly and annual financial results to better delineate our three-segment reporting structure and, hopefully, help you better understand our business.

First I'll begin with a review of the fourth-quarter segment operating highlights and our annual performance. And then, provide some general comments on what we are seeing currently, once John details the financials for you.

During the fourth quarter, results were challenged by the impacts of declining global crude oil prices, a continued decline in the fat markets, and a weakening euro and CAD. At the segment level, the feed sector felt the brunt of this decline, as most agricultural inputs declined in relation. Our food segment delivered consistently, and our fuel segment benefited from the reinstatement of the blenders tax credit.

Overall, we did our best or adjust raw material pricing arrangements, manage risks, and offset the marching pressure. Timing is always the challenge, and further improvements will be warranted geographically. Interestingly enough, our global raw material volumes increased nicely.

At the operating level, fourth-quarter pro forma adjusted EBITDA on a translated basis was $111.1 million, compared to $119.4 million in the third quarter of 2014. Foreign-exchange impact over the quarter amounted to approximately $4.4 million of reduced operating cash flow, mainly due from a declining euro.

Now, let's take a look at specific fourth-quarter operating highlights in each segment, and they're noted on slide number 3. Feed segment earnings were pressured by lower finished fat prices.

Global fat prices declined in concert with lower crude oil prices and [a bin] busting global grain supply. The USA feed segment felt most pressure again, as fat prices declined, not only affecting rendering, but also used cooking oil business and our bakery feeds business.

As noted, we are adjusting our procurement strategies to offset and improve margin. This involves putting collection and service feeds back in place in many markets. In Europe, our rendering business was far more insulated, but still, it felt some pressure and will do its best to adjust procurement strategies, especially in Germany.

Protein prices, especially for our value-added proteins, remained quite stable. And demand looks favorable for the near-term. Foreign exchange impacts were significant to the segment and will continue to weigh on our performance.

Earnings were fairly consistent in our food segment, led by Rousselot's global gelatin business. Rousselot performed nicely and rebounded from third-quarter lows.

Europe and North America led the performance, and China continues to show signs of improvement. In South America, we continue to make adjustments offset margin pressure from tight raw material availability, currency headwinds, and higher operating costs.

Our Sonac edible fat processing business made the necessary adjustments in the quarter, and margins have now normalized. Within CTH, our casings business, we believe we have turned the corner, as hog casing margins have improved.

And finally, we are pleased with the results of our fuel segment, which reported a EBITDA of $16.9 million in the fourth quarter. Additionally, Diamond Green Diesel delivered an adjusted EBITDA of $63.7 million to Darling for our fourth quarter.

Diamond Green Diesel delivered record production, running in excess of nameplate capacity of 11 thousand barrels of input feedstock per day. Diamond Green Diesel, as well as our Canadian biodiesel operations, also benefited from the late-year reinstatement of the blenders tax credit.

Rendac, our disease mitigation and disposal for energy rendering business, felt the pressure of the declining energy complex. While earnings moderated accordingly, we anticipate successfully negotiating improved tariffs to offset the majority of the margin compression.

From a world view, we reported an overall strong 2014 fiscal year pro forma adjusted EBITDA of $512.6 million, or adjusted non-GAAP diluted EPS of $1.20 on sales of nearly $4 billion. These results reflect full contributions from our acquired global operations, foreign exchange translation impacts, and the reduction in acquisition and integration expenses, which John will give you a few more details on momentarily.

Additionally, we reduced our long-term outstanding debt by $122 million, all while investing in growth around the world with a capital expense program spending of $229 million. For the year, our global operations performed well in the face of currency and commodity movements, slowing international economies, continued US government ambiguity surrounding the renewable volume obligation mandates, and the RFS ruling.

With that, I'll turn it over to John for his financial review. And after John concludes, I'll give some closing remarks.

Thanks, Randy. And good morning to everyone.

Before I review our results for the fourth-quarter and FY14, I would like to note that we introduced a non-GAAP adjusted EPS as a measure of earnings due to our significant merger- and acquisition-related activity. As Melissa said, we have provided a slide deck detailing the full disclosure around our non-GAAP measures, but these are not intended to be a substitute of our presentation in accordance with GAAP. Reconciliation of net income to non-GAAP adjusted EBITDA and pro forma adjusted figures are included in the press release from our Form 10-K filed yesterday afternoon.

We have also provided segment performance information in the earnings call slide deck, which we will believe will be very helpful in the segment results, going forward. Additionally, 2014 results include a additional week of operation, which occurs every six to seven years.

It is also important to point out that our results for this year included 52 weeks of operations from Vion and 53 weeks for Rothsay, compared to no operations for Vion and 9 weeks from Rothsay in 2013. As such, both years include after-tax acquisitions and integrations costs, which are outlined in the earnings summary on slide 7.

As Randy said, we saw the impact of [lower] finished product pricing, primarily in fats. On a sequential basis for the third quarter of 2014, fat prices declined more than 12% to 16%, primarily due to an oversupply of global crop production and the uncertainty surrounding expectations of RFS to mandated volumes in 2014 and 2015.

Net income for the fourth quarter was $69.9 million, or $0.42 per diluted share, compared to net income of $22.5 million or $0.18 per share for the 2013 comparable period. The $47.4 million increase in net income primarily resulted from the inclusion of the blenders tax credit for Diamond Green Diesel and our newly acquired operations.

For the fiscal year, we reported net income of $64.2 million, or $0.39 per diluted share, compared to 2013 net income of $109 million, or $0.91 per diluted share. We have outlined the after-tax transaction-related costs adjustments on slide 6 to show adjusted diluted EPS for both the quarter and annual period.

Without the inventory step up costs, the redemption premium, and deferred [loan] cost write-off associated with the $8.5 million -- 8.5% senior notes, the acquisition and integration costs, and the euro [forward] contract hedge, net income and diluted shares per common share would have been $144.3 million, or $0.88 per diluted share, respectively, for the year ended January 3, 2015, as compared to $115.4 million, or $0.97 per share, for the year ended December 28, 2013. On a pro forma adjusted EBITDA basis, the Company would have generated $512.6 million in 2014, as compared to a pro forma adjusted EBITDA of $291.6 million in the same period of 2013.

Again, this is attributable to the inclusion of our newly acquired acquisitions. You will note that the pro forma adjusted EBITDA does not include Diamond Green Diesel's joint venture adjusted EBITDA.

Moving into the operating segments, a quarterly breakout of each operating ingredient segment is included in the slide deck. As Randy mentioned, our feed ingredients business was largely impacted by lower earnings in the US, primarily as a result of weakness in the bakery feed unit, severe early winter this year, and lower finished fat product prices, mostly tied to our non-formula business.

Additionally, we completed the custom blenders acquisition, one of the leading bakery residual recyclers in the US, further expanding our footprint and synergy opportunities within the bakery feeds unit. As you will recall, we did not have food ingredient operations prior to the Vion acquisition.

Our European specialty ingredient business performed nicely with strong volumes. Although fat supplies grew with the Russian border closure and the US and the dollar strengthening pressured finished product prices, the gelatin business rallied in China, normalizing. And South America raw material supply is improving. Also, our casings business showed improved margins.

Our fuel ingredients business showed significant improvement in the fourth quarter with the restart of Diamond Green Diesels joint venture, which is now running in excess of 11,000 barrels of input of feedstock per day. Results were impacted by the passing of the late-year reinstatement of blenders tax credit, which increased fourth-quarter results by approximately $5.5 million at our US and Canadian plants and by approximately $63 million at Diamond Green Diesel joint venture. Finally, the new Ecoson biogas plant in Son, Netherlands is online and beginning to contribute.

Relative to the Company's investment [in a] joint venture with Valero on the balance sheet, we reported an investment of $202 million as of January 3, 2015, compared to the $115 million at December 28, 2013. In early second-quarter 2015, we're anticipating that Darling will receive a cash dividend from Diamond Green Diesel after required debt payment and working capital needs are determined.

Let me provide some additional balance sheet detail. On January 3, the Company had working capital of $569 million and a working capital ratio of 2.18 to 1, compared to working capital $950 million and a working capital ratio of 6.38 to 1 in December 2013. The decrease in working capital is primarily due to a decrease in cash and cash equivalents and working capital from the Vion acquisition.

During 2014, CapEx increased to $229 million, compared to $118 million in 2013. The increase is related to CapEx incurred by Vion and Rothsay acquisitions for normal compliance replacement and maintenance CapEx.

I have two final notes on would like to cover. First, related to foreign currency exchange, the US dollar has strengthened against both the euro and Canadian dollar in early 2015. If we assume actual results for 2014 and compare the 2014 yearly average FX rates to this spot rate at the end of January 2015, the impact to sales and operating income in 2015 would be approximately $290 million for sales and $31 million on operating income, respectively. I want to point out that our European and Canadian debt is aligned with the functional currencies used by our non-domestic operations.

And lastly, we recorded two re-class adjustments at year end that had no P&L impact. The first was a re-class between sales and cost of sales related to freight, in the amount of $62 million, to achieve a global consistency on the recording of freight cost. And the second adjustment was related to a mapping allocation change between operating costs and SG&A of $48 million.

I will now turn the call back over to Randy.

Thanks, John.

We closed FY14 by laying the groundwork with solid forward momentum for long-term growth. Our business model remains strong and continues to generate significant cash. Adjustments will be made globally, and we have undertaken a formidable construction plan on six new plants.

On a translated basis, the US dollar is expected to post headwinds for many of our international businesses. Protein production, globally, is expected to remain strong in 2015, and the fat complex will remain under pressure until renewable fuel policies in both Europe and the USA are resolved.

We're beginning to see some normalization, going forward, from an ingredients pricing standpoint. Globally, our businesses are healthy, and we will continue to manage to a balanced portfolio that provides long-term growth.

On behalf of senior management, we'd like to thank our shareholders and employees for believing in our vision to be the global leader in creating sustainable ingredients for food, feed, and fuel.

With that, let's go to Q&A. Dan?

We will now begin the question and answer session.

(Operator Instructions)

Our first question comes from Carla Casella of JPMorgan. Please go ahead.

Hi, thanks for taking my question.

You showed your chart where you show the pro forma EBITDA, including Diamond Green Diesel for 2014, 2013 -- the last few years. Is it safe to just pull $64 million out of that to get to what the underlying EBITDA is? So it would be $530 million versus $607 million last year. I don't have the page number -- 14.

Oh, on the slide deck. Okay. I'm sorry.

Yes. Diamond Green Diesel is in those numbers.

Okay. And the number that's in there is the EBITDA that you reported for Diamond Green Diesel?

That is correct. (multiple speakers)

Okay, great.

And then, is there any magnitude you can give us, or approximation, for what the dividend you may be receiving? Or how we should look of the cash flow for Diamond Green Diesel, going forward? Should we look at it as a certain percentage of the EBITDA? Something you may get paid out on an annual basis? Or how is that going to be determined?

Well, Carla, on Diamond Green Diesel, the Board meeting will be in a couple of weeks. At that time, the Diamond Green Diesel Board will look at what the capital needs and the working capital needs will be with the increased production that we've got going on there a Diamond Green Diesel.

There is, within the joint venture, there is a waterfall that will be used to pay down some of the debt. But the final number has not been determined, and I really don't want to throw out a number yet that we haven't finalized.

Yes. And let me add a little bit.

At the end of the day, we filed earlier, here, in December when it was reinstated, an amount that would be the tax credit that would be given back to us. We applied for it.

The government has 60 plus days. So sometime in early April, we're anticipating the receipt of that.

Diamond Green Diesel is now currently running well in excess of 11,000 barrels a day. We're working on some challenges on outbound logistics right now. So as John says, Carla, the dividend will be determined after the mandatory debt repayment and then whatever capital we want to leave him there, as we evaluate the additional expansion to take it on up.

Okay, that's great.

And then, just one question on -- given the dollar and commodity moves, how are you looking at 2015, in terms of how you set the hedging? And is there any way we can -- any formula we should look at for every X cent move in the euro, what the impact could be on EBITDA?

No. It probably gives me a little bit of a platform, here, to comment on this.

Number one, it is a fairly complicated global model, now, with lots of moving parts and different ways that we not only procure product, but we sell product -- the segments and the currencies and all of that, that goes on. When we go back and look at the businesses, and say: Did we get what we were buying? The answer is, absolutely.

And we tried to explain that, or in the sense that on a functional basis, the Vion ingredients business is performing precisely where we did our investment case. Rothsay was performing -- or is performing where we did our investment case, with a minor in adjustment for the biodiesel trades at a discount to renewable diesel. So while it did receive a little bit of the tax benefit, it didn't receive the product premiums that Diamond Green Diesel gets.

So on a functional basis, we're incredibly healthy around the world. And within our decision to acquire those businesses, we're very pleased with where they performed, and where they're anticipated to perform for next year. And that all comes to do with how we procure raw material, where the finished products are sold, the kinds of products within the food and feed and fuel segments within those businesses.

As we said, Carla the challenge -- and we tried to explain this -- has been the USA, where we've seen just a constant decline of the price of fat since mid-year last year. As we -- I thought, from my perspective, Q4 was pretty solid, relative to Q3, given that fat prices moved down another 15%, 16%, 17% during the quarter. And then, we saw a little bit of decline within the protein -- a little bit less. So from our perspective, we're still normalizing within the US.

I think, on some of the slides, when you go back there, you get the look at the operating margins, and they're still very healthy. And from our standpoint, that each one of the geographic businesses is performing pretty nicely, when you start to aggregate this -- as John's and my first experience in aggregating a translated Company -- that's where the challenge comes in. But on a functional basis, everyone is in line and doing what we thought it would do.

That's great, thanks a lot. That's really helpful.

Our next question comes from the line of Dan Mannes of Avondale Partners. Please go ahead.

Good morning.

Dan Mannes? (laughter)

I guess that's a translation issue. (laughter)

First of all, welcome back, John. And to both of you, thanks for giving us the pro forma historical quarters. I think that helps a lot, in terms of understanding where some of the challenges have been.

I do have a couple of follow-up questions, though. First, as it relates to your activities in the seed business and trying to get the spreads back up on the formula stuff, can you talk about a timeline, here? Because we're now at three or four straight quarters.

I know you're seeing -- especially, pricing headwinds on the fats side. But it doesn't seem like you're even getting back some of the spreads that you lost two and three quarters ago? So I'm wondering, do we need to see a couple of quarters of flat end market pricing for us to be able to see the spread benefit to you?

We would certainly welcome some consistency. Because -- and that's true, not only in the USA, Dan. I think, in the USA -- to further expound a little bit -- we've got the classic rendering business, which is doing quite well. The bakery business continues to come under pressure with the declining corn price. And you forget -- rolled up in the rendering business for us, is that used cooking oil business that has less than half or half, somewhere in there, on some type of pricing arrangement.

So as prices move down, you've always had this lag effect. And once again, we've not seen prices since Q2 anywhere. I mean, when you start to compare Q2 to the end of the year, you're down $100 a ton in the USA alone. So it's pretty easy to see that.

In Q1, here, January was a little weaker, in the sense of fat prices. Protein prices are holding in there in the USA. But at the end of the day -- and volumes are very good around the horn.

When we look at Europe and the Europe rendering model, there's two businesses over there. It's the Sonac C3, which is a classic rendering line for US, and then there's the Rendac business. The Rendac is feeling the pressure of the lower energy prices, but it's a government contract business that then has the ability to adjust.

But with lower crude oil prices -- impacts, then, what? The price of palm oil in the world. So with cheaper palm oil, then you have cheaper fats in Europe.

We're seeing the same compression there that we're seeing here. But at the end of the day, it just takes time to go back and adjust to historical and normal, what we'd call, margins.

The other piece that we're now with -- and I tried to allude to it within my commentary -- it's been awhile since we've seen a pricing point within the USA rendering business that says we have to go back and charge or raise our charges for mortalities and used cooking oil. Those are what we call collection and transportation fees.

We watched many of those fees fade away during some of the super high-priced commodity era. We've crossed that line. So in combination with lowering or adjusting the raw material prices to our suppliers, many of them will be put back on charges, here. And with that, it just takes a little bit of time.

Okay.

And just a clarification, since it's been a long time since you separately reported restaurant services, whereas bakery, we have numbers as recently as 2013. Where is restaurant service from a revenue perspective? Is it still $200 million, $300 million? Or is it -- how meaningful is it, in the context of your feed business?

Restaurant services -- Dan, we don't write that out anymore, as you say. Obviously, our volumes are the same as what we've had in the past.

But the pricing, as Randy said, we're down a lot on the pricing. And that is the biggest share of our non-formula business that we've got.

But from a volume standpoint, the same relationship is there as we've had over the last few years. It's not due to a decrease in volume. It's strictly a price-driven thing, from an EBITDA standpoint.

Got it.

And then, just two more. Next, you have historically -- especially going back since you bought Vion and Roth, say -- you targeted a goal of a baseline EBITDA in the $600 million range core, so ex-[DGD]. Given some of the currency headwinds that, obviously, are outside of your control, is that still a reasonable expectation? Or should we maybe revise that to a different number?

No. Dan, this is Randy.

I slept on that and said: You know, the $600 million number that gets delineated out there was a point in time, as we were trying to set a baseline in the sense of a starting point for where we were going to grow the Business. We commonly said that we never saw a lot of synergies because of the amount of water between -- the ocean -- between the businesses. But we saw a lot of opportunity from a revenue synergies standpoint, in the sense of being able to grow businesses and leverage knowledge that we had between Vion and ourselves.

So we laid out a baseline that said: Here's the projects we're going to do in 2014, 2015. Here's the projects we're going to do in 2016, 2017, and forward to continue to give forward momentum to the business. That was our way of addressing it.

At the moment when we looked at it, at the start of 2013, we didn't have $50 oil; we didn't have -- we had a EUR1.30 something euro; we had a pretty much parody CAD; and we had $0.35, $0.38 oils out there; along with $450 to $600 proteins. So there's just been a ton of moving parts.

I'm not avoiding your question. I'm just saying it's not relevant, from our perspective.

Our perspective is, we have six new plants under construction. The functional businesses around the world, both in Europe, China, South America and Canada, are performing exactly where we bought them and on target to continue to grow from here. It's just, for us, that translation side and a little bit of headwinds, here, as the USA adjusts to the continuous declining fat and softening protein prices.

Okay.

And then last one, just on RFS. I think EPA is on record as talking about the spring. Can you give us, number one, your view on expectation, in terms of what they come out with and the timeline? And secondly, can you jog that at all with the decision on the Argentinian biodiesel?

Trying to predict what they're going to do is probably a bad idea. (multiple speakers) From our perspective, we were on Capitol Hill yesterday, meeting with different people on different committees again. The body language is twofold. One, the tax extenders will, again, come through this year.

And two, the White House is the holdup on RFS; the EPA is ready to bring it forward. We're not sure what that really means, as far as volumes or increased levels there. From our perspective, the Argentine biodiesel probably was not a good thing, in the sense of we're already over capacity in the US

But, I think we remain optimistic. And I think the other thing that's very important, from a Darling shareholder perspective, is Diamond Green Diesel continues to run above nameplate capacity in January and February so far. And we've got very positive margins down there. This is something that -- we are the low-cost operator, so whatever they do with the RFS and the RVO, it can only be positive for Diamond Green Diesel.

Great. Thanks for the color.

Our next question comes from Ken Zaslow of BMO Capital Markets. Please go ahead.

Good morning, everyone.

Good morning, Ken.

A couple of questions. One is, obviously, this is a trough type of quarter. What is the actual path to withdrawing EBITDA will actually rebound from these levels? Can you talk about what needs to happen in 2015 as you start to correct off these numbers?

Then, I have a couple of follow-ups.

Once again, I'm not going to give forward guidance on that. But what I'm looking at around the world, and what we are doing strategically, internally, the businesses are operating exactly where we thought they would, on a functional basis, again. So we've got growth plans underway in our gelatin business around the world, from debottlenecking to expansion in Dubuque. We're seeing margins normalize.

As we said when we bought the Vion business, in the business case, there, was what we called -- we thought there would be a softening in the gelatin business. We saw it. It was exacerbated a little bit by some Chinese pharmaceutical and confectionery scandals over there. But we're seeing China come back.

South America, on the other hand, as we've said, had a little bit of a -- the price of bovine hides went up dramatically because of leather demand in China. So we saw margin compression there, but now we're seeing the real de-val. And we're being able to raise prices again to offset that.

So overall, the gelatin business is healthy. The packaged fat business remains consistent. You've seen that in the food segment that we reported, quarter-over-quarter, down $1 million. That's a pretty interesting perspective, when you see volatility of 15%, 20% in the underlying commodities, to have that steady.

We talked, already, about Diamond. The fuel segment is comprised of our Rendac business, our Ecoson business, and our biodiesel and Diamond Green Diesel business. Biodiesel Canada is under pressure right now and will be until we get some type of mandate, there. So then, it's back to the USA rendering business, the Canadian rendering business, and the European or Sonac C3 rendering business.

This so next C3 rendering business is what I would call far more -- or less volatile than what we have in the US, although it has the similar challenges. It's finished product markets don't move as dramatically as we do in the USA, and there's a very strong focus on value-added ingredients there.

Canada -- we've had to make adjustments there, because of the declining values. But I think we're in sync with where the markets are there. So the USA, then, becomes windows at normalized.

And really, at the end of the day, as we started to look through Q4 and the different pieces, the rendering side from the fat and bone processing is very stable now. We're seeing very nice input tonnage from the poultry industry. Believe it or not, the beef industry is very healthy within our system. And then, we're starting to see a tremendous amount of pork input again.

And all of the animals whether it is a chicken, a hog, or a cow, are coming in at incredible weights. And that's what's pressuring a lot of the fat prices, because you don't have the seasonal biofuel demand. And then, with the strengthening US dollar, you don't have the small amount of exports going out of here that kept it stable. So that's a little bit of it.

The bakery feeds business, we are in the middle of still integrating the custom blenders acquisition. We've got a brand-new plant under construction in Bryan, Texas, that should be on by September. That will bring quite a few of the synergy opportunities that were available back to us.

And really, at the end of the day -- John and I have talked, when Dan Mannes asked the question -- the used cooking oil business is one that's had a lot of competition over the last three years, as it's the main input that many of these biodiesel dealers can use. We've got to change our go-to-market strategy, there.

And that's a thing we're working on very diligently to put a margin back in that business. We've seen significant margin compression there, and so that's -- strategically, our focus is within getting the bakery business plant up to capture the synergies, get the used cooking oil, just manage our margins within the USA rendering business, and then let Canada and Europe deliver just like they delivered last year.

Okay.

When I look at the slide, one of my favorite slides you put together, the projection of EBITDA over time, the projects that you did in 2014, 2015 were supposed to yield $25 million to $30 million in new EBITDA. I'm assuming that came in below expectations, just by the sheer environment.

But 2015, 2016, are you still doing all the projects you expected to do? And do we characterize that $50 million to $60 million of new EBITDA by 20% or something like that? How do we think about that, because that's the incremental EBITDA coming in 2015 and 2016 as well. And how do you think about that?

Are there any projects that are not going on that you thought you were doing, and how do we think about the EBITDA contributions?

No. I think, when we go back and say what we were looking at -- in 2015, here, you've got our Newberry, Indiana, expansion online.

We are just starting up, last week, our Bastrop, Texas, expansion. We've got part of the expansion online in Dubuque right now, but the majority of it will be later, here, in 2015. We brought, as John referenced, the Ecoson biodigester and biophosphate plant online.

So that's all just started up, here, in late 2014. And in 2015, right now, we have a plant under construction in Arkansas. We have one more about to go under construction in Ohio that's approved. We have a new wet pet food plant in Ravenna, Nebraska, we have a wet pet food plant in Paducah, Kentucky, and then the Bryan, Texas, bakery plant. Also started up in late summer was our Muscatine, Iowa bakery plant.

Also, we've got under construction a blood plasma drying plant in Goias in Brazil. But that won't come on until, probably, early 2016, sometime. So really, it's just about getting these plants up and running during late 2015 so that they can contribute in 2016. And so we're right on target with where we thought we would be.

Okay.

And my final question is, cash -- you have a decent level of cash. Your cash generation, despite the quarters (inaudible), cash generation is not a problem.

Would you ever consider a dividend or some way to repay back your patient investors?

It's clearly something that's discussed at all times. We would say that, probably, the likelihood is lower today than what you might think because -- and the reason why is because, as the markets cycle around the world, we're seeing more and more opportunities to grow our platform in multiple geographies right now, that I think would be, from our perspective, if they could be purchased right, would be a better use of cash. But I would never say that a dividend is off the table, at this time.

Our view of a dividend is very straightforward. We want to make it meaningful. And once you put it in there, you can never make it go away, and you always have to grow it. So we're evaluating against the world of additional growth acquisitions that we think fit our platform and help us move forward for the long-term growth for the shareholder.

Great, thank you.

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

Good morning, thanks for taking my question.

Yes, JinMing.

Yes. First, thank you for providing the (inaudible) material processed volume for all historical quarters. I have a question regarding the volume for your feed and fuel segment in the fourth quarter. It jumped sequentially. It jumped a lot, sequentially. So is that normal seasonality, or something abnormal happened during the fourth quarter?

In the fourth quarter we have the blenders tax credit that we received. We have two biodiesel facilities -- one in Butler, Kentucky, and then, one in Canada. And we did receive the benefit of that, around $4.5 million to $5 million extra EBITDA in the fourth quarter.

I think JinMing was asking about volume. And volume, within the feed segment, like we said, tonnage around the world has been very strong. So you've got -- the fat and bone inputs around the world have been very strong in all geographies.

In the fuel segments, you got a couple of things. Number one, Diamond Green Diesel is running in excess of 11,000 barrels a day. And then secondly, we brought in the Ecoson business that is reported in there, now.

That's correct.

Okay, I see.

Regarding Diamond Green Diesel, have you experienced any trouble to source high-quality material feedstock for that facility? And also, what kind of percentage coming from [durnings] internal production go to supply DGD?

DGD continues to operate and proves that it can run about any type of input that's available to it. Obviously, we spent a lot of time qualifying facilities for the amount of alkaline metals, and that determines long-term catalyst life for the facility.

So the blend of that facility runs, as we've released in the past, on used cooking oil, yellow grease, and distillers corn oil. And it moves all over the place, depending on availability of supply. You know, today, yellow grease is a little cheaper than distillers corn oil, and et cetera.

Darling continues to supply somewhere between 30% and 50% of the volume that moves down there. And that's what gives us a view that we have a real opportunity to further expand that plant, going forward.

Okay. Thanks a lot.

Our next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.

Yes. Thanks. Good morning, everyone.

So I wanted to come back to the question I think Dan and Ken we're coming at in different ways, on the normalized EBITDA. On the base business, so ex-DGD, $513 million of EBITDA in 2014. I think the comparable number would be $594 million on a pro forma basis in 2013.

You talked about, in the release and the K, $30 million year-on-year headwinds 2015 for FX at January rates. It's gotten, probably, a little bit worse since then. So that would take you to $480 million, just on an FX basis for 2015.

John and Randy, can you walk me through the pieces that negatively impacted 2014 that shouldn't repeat and would start to grow from here. So polar vortex in the first quarter, the Diamond Green downtime? In fact, on the feed business in the third quarter, any kind of lower SG&A? And then, the organic growth initiatives that you have in place on top of, presumably, better base volume growth on higher slaughter volumes, principally in the US?

No. It's a great question, Adam. When you look at it, and I try to break it still within the segments -- food, feed, and fuel. Rousselot came under -- and you've got to remember, you're talking translated. So translated to translated, it becomes a little bit of that challenge, but we'll go with it.

Rousselot is was growing. Volumes are up year-over-year. I don't see anything changing, there, in 2015, other than an improvement of both efficiency and higher sales volume.

Margins move around in that business, given the supply and demand. As we have said many calls ago, and continue to reinforce, that business came out of a tremendous couple of years around the world. And with tremendous years, you get expansion.

So we've got to put the supply and demand back in balance around the world. And I think that's starting to improve. We're seeing it in China.

We're feeling the margin compression relax just a little bit in Brazil. But there are still a little bit of headwinds in Brazil with energy costs, et cetera.

So that's the food segment. I think pretty straightforward, from the standpoint of a functional basis. And then you've got the currency headwinds, there.

The fuel side, we continued to -- we said we brought on the Ecoson unit, that processes pig manure into methane gas and biophosphate fertilizer. We've got Diamond Green Diesel now up and running bigger and better.

And so, at the end of the day, we anticipate consistent type of contribution there. Once again, it will be a fantastic finish, with the blenders tax credit either in or out.

And so the fuel segment, from that standpoint, has a little bit of translation risk because of the Rendac unit in it. But Rendac, as we've always said, is a very consistent, predictable business model that is a fee for service business that's tied to government contracts with plants in Belgium, Holland, and Germany. So the fuel segment feels pretty darn stable.

When you get over to the feed segment, that's where you have your commodity exposure, as we've always talked about. But commodity exposure, then, can be broken down around the world.

Europe is very, to a degree -- as we use the word -- insulated. We've got some in competition and pricing exposure in Germany that we're working through with the lower prices.

Canada, we continue to just chug along up there and do quite well. In the USA, or rendering business is now starting to feel and will feel the benefits of several new accounts that come online, here, during second, third and quarter for the year, that we've landed. Our volumes will be up quite a bit during the year, as I look forward, here, provided the industry, the slaughter industry, continues to operate at or near the levels it's at currently.

The bakery business -- we're adjusting to the lower corn price there. You buy it off of corn; you sell it off of corn. And it's not hard to look back into 2013 and see $6 and something corn and then, at the end of 2014, $4 corn. And that translates into quite a bit lower earnings.

And then, the final one we talked about in the USA is still the headwinds that we have in that used cooking oil business. It's a big business for us. We've talked about it in the past.

It's one that came under extreme competition for the biofuel industry. And that's where the margin compression that we had.

So when I go back to the feed segment, and I try to normalize or explain as I look across, you've got the bakery piece that is very obvious. You've got the ForEx decline that's there, and then you've got the used cooking oil impact, along with just the normal decline that's happened in feed or in the protein and fat prices, even within the rendering business.

As we said, or rendering business feels like, at the slaughterhouse level, it feels like it's normalized. At the fallen stock business, where we are picking up mortalities in the country, as prices go down, you've got to put charges back in place to protect those margins.

That just takes time; it's been part of the Darling business model forever. At the end of the day, we see that coming back.

John and I are trying to get all of the extra consultants and SG&A expense out of here. And get back to somewhere -- we have a new, bigger global Company with very complicated reporting requirements around the world. It was a tremendous effort on all parts to pull this thing together for year-end, but We've got to get that out.

Our new Oracle system, basically, is coming online now. So we have very little consulting costs in there, and they're all our own employees. So I think there's a normalization that's going to happen here.

But as far as transparency and look forward, here, we've got to have fats and protein prices in the USA stabilize, so you can see the progress we're making with the startup of Bastrop, Texas, with Newberry, Indiana, with Muscatine, Iowa. And then, as we bring on our other plants, here -- it's hard to show you that there's true volume growth going on, as long as there's these downward pressure that's happening with the prices.

Okay. So maybe, I'm going to ask the question a different way.

The $600 million normalized EBITDA that you talked at the September analyst day, is that predicated on corn price well north of $4 and soybean oil or fat, as a proxy for fat, is $0.35 or $0.40? And oil is at $80? And how long does it take, on the non-formula businesses, to really get those charges in place, just due to normalization in margins?

Do we just need one quarter of, really, no declined in fat prices? Is it six months; is it a year?

The commodity prices have been on a downward trend, now, for the better part of two years. And it still seems like we're playing catch-up. I'm just trying to understand how long it takes. If commodity prices stop going down, how long that you would start to see the EBITDA actually rebound?

I think you answered most of your own question, there. When we -- as I said in one of the earlier discussions, that $600 million was just looking at the time. We don't give guidance. At the time we looked at it and said, on a 12-month look back, given what's going on in the market today, that number would have been about $600 million. Then we told you the projects that we used going forward.

So the $600 million was not a prediction of earnings, but a reference point to go forward. And I want to be clear about that, one more time.

What we've seen since January, February, March and 2014, we've just seen a constant decline of prices and that severe compression in the bakery feeds business. We seen the used cooking oil business collapse from a high of $0.34, $0.35 down to $0.25, $0.26.

You're taking $100 a ton and then overriding all of this, as we've said, 3 or 4 times, the price of crude oil impacts the value of energy around the world, but it also impacts the price of the alternative fuels business. And therefore, you've had some incredible pressure in Europe that then translates to Brazil and South America, on up to the US, driven by the $50 a barrel decline in crude oil. So to answer your question, we operate the business from a margin percentage basis. And where we're at today, going forward, is where we're building from.

Okay.

And then, maybe just on the last point, thinking about where we are. It's March 5. We're more than two-thirds of the way through the first quarter. Can you talk -- fat prices have been (inaudible -- background noise). I'm just wondering for the business through the first quarter] maybe profitability of Diamond Green Diesel prices did move up in February, that, I presume, should help the Diamond Green margins. And thinking about the 4Q to 1Q progression, how you're seeing the business running today?

As we said, we're seeing volumes -- raw material volumes within the feed segment, they're up substantially all around the globe, right now. You've got just a strong hog, beef, and chicken slaughter in the US; chicken and pork in Europe; and pork in Canada. So volumes are up very solidly.

You've got a little bit of price pressure still happening, as you've got fats down another $40 a ton, here. We are seeing fat prices start to normalize and improve in Europe. As we talked about, with the decline of crude oil, it's allowed palm oil to start to decline. And when palm oil starts to work into Europe and the biofuel programs at pressures cat one, cat two type, and even cat three fats, there. So we continued to feel pressure there, but volumes are good.

Rousselot business is performing as we both predicted and anticipated. And Diamond Green Diesel has had some pretty good production months here, so far.

So we think we're pretty consistent with where we were. But we do still have a little bit of price pressure, both in the bakery side and in the feed and proteins side, or fat side, in the USA for Q1.

All right. Thanks very much. I'll pass it along.

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

Hey, folks, good morning. Can you hear me?

Yes.

All right. Thanks, Randy.

So on the balance sheet and cash flow can you fill in some of the numbers? CapEx: what ballpark are we looking at?

And then, John, welcome back. I know you're aggressively focused on balance sheet. How should we think about debt and anything that you can do with that over the next near- to mid-term?

Okay. I'll cover debt first.

During 2014, we reduced our debt by $122 million. Obviously, $26 million of that was as mandatory amortization on the Term A, Term B. But we also reduced our revolver by $96 million. So our focus is going to continue to be paying down debt as we go forward.

Our CapEx spending in 2015 was $228 million. With the number of capital projects that we've got going, that Randy talked about -- the two wet pet food plants, the two rendering plants, the bakery plant -- our CapEx spending is going to be more on the $260 million range, I believe, in 2015, because those are the plants that are going to get the earnings that we're looking at, as we go forward.

So we will have a little bit heavier CapEx spending in 2015. But most of that is being driven by, as I said, the new facilities out there.

Okay.

And then, just come back to the cost of collection fees and all of that. Randy, can you help orient that again for us?

Is this going to be rolled out across the product line? Is it focused on some others? And how long does it take to implement this across whatever part of the enterprise is affected?

It is very transparent, in a sense. It's -- geographically, John, it's one of those things that you have to start improving your pickup charges in Iowa and Nebraska. With the lower oil prices in Europe, you have to reapply to make changes in the tariffs for the lower values of energy.

It is just something that will be happening in each quarter, and adjusting to -- if fat prices rebound, you don't as much, but if protein prices continue to back off a little bit. We continue to -- if you watch the soybean [bordered] out there, you see soybean oil seems to like $0.32, $0.33. And it seems to like about $325 per ton.

Our proteins are trading still a little bit above that, and driven by good protein demand and consumer protein demand around the world. So as long as the prices hold in there, there may not be many changes or many adjustments made. But if we do get any further deterioration, we're going to have to.

Okay.

Lastly, real quick. Good to see (technical difficulty) picked back up in China. Did you get any share gain there? Or is it just the market re-inflating, post some of that gummy bear pharma stuff? Thanks.

Yes. I think we've had an aggressive growth pattern around the world. We position ourselves as the highest quality and the market leader. So yes, we've gained share around the world at what we believe to be pretty consistent with our current share and the way the market is growing.

Our next question comes from Robert Kolosieke of Eminence Capital. Please go ahead.

Hey.

In feed, you did $115 million in EBITDA in Q2. And now, that's down to $76 million this quarter. So of that $38 million decline, how much is formula-related lags?

Well the biggest impact, as we've said, from the $116 million to the $76 million is the non-formula. Our rendering volumes has held well, and our earnings out of the formula rendering business are basically still the same, because that's why the business is under a formula. It's a fixed margin business.

The big impacts there were bakery. As the corn prices started dropping during the year, as the new crop came on board, we were looking at corn in 2014 first-quarter for $4.56. Second quarter, $4.93. And then, we got into third-quarter, it went round to $3.80, so it was over a $1 drop happened at that point in time, and then, fourth-quarter was even down.

The bakery businesses, as we've always said, was our largest exposure to a downside market because we buy on corn, sell on corn. And that is, also, a sharing relationship. It's a formula, but not a margin protection formula. It's a sharing -- and when that price comes down, it comes down as well.

There are floors under those, of which a lot of those are starting to kick into place now. So the margin pressure on that should ease from going down, from that standpoint. We've reached the bottom on that one.

The used cooking oil, as Randy said, over 50% of that market is under non-formula. We've been consistently stating that over the years. And with this drop-down -- when you've got a large-volume business like that and it drops off, that's where the two areas of where that pressure came from. And it's mostly in North America, with the bakery and the used cooking oil, is where the majority of that reduction has come from.

Okay.

So if we're thinking, going forward, and you're doing, let's say, $76 million EBITDA today, what's the confidence that you can grow that by going back to the customers on a non-formula business? Or is this something we should think of as upside, if you can, potentially? Otherwise, we're basically talking about $300 million in annualized EBITDA in feed?

Yes. It's a great question. And I'll tell you how I look at it.

The two businesses John talked about, bakery and cooking oil, have unbelievable optionality on the upside. We're, right now, at the floors on those businesses. We're putting charges back in for cooking oil. The bakery has hit the floors. We're widening margins there.

So the non-formula business, now, to my view, is coming -- if it's not at the trough, it's close. And so from this standpoint, we look at and say: Okay, we've got to make further adjustments around the world a little bit on raw materials to get our margins back to where we want them. That is always a lag, whether it's in Canada, or whether it's in Europe.

You take the best shot at where you think you're going to sell the product for the next month to two months, and then you adjust accordingly. And sometimes you get it right, and sometimes you don't. And so at the end of the day, you've got to make those changes.

The other thing that we've continued to try to highlight is, you're going to see, in the feed segment -- remember, feed is made up of USA rendering; USA bakery; USA cooking oil; Canada rendering; and Europe, or what we call Sonac, rendering. And within Sonac, you have the rendering and the blood business. The blood businesses is always kind of weak in the first quarter, strengthens as aquaculture and things happen around the world in the back half of the year.

But you throw on -- we've got expansions underway right now. We're bringing on our Bastrop plant. Newberry is up and running. The Muscatine plant is up. We've got a new blood plant the just came online in -- a second line -- in Zhejiang, China.

So overall, from my perspective, I'm not giving guidance here, it feels like we're turning the corners, as long as we don't get any more extreme price pressure on the downside, here.

Got you.

And something you said before you talked about the blood element -- is that you said there's still adjustments on a lag. So I'm a little confused, because I felt like you said there were not adjustments beyond the $76 million. It is what it is, and we have great optionally. And then, I guess you said there are some adjustments on a lag basis.

Well, you've already seen fats and oil prices for January go down $0.02 a pound, or $40 -- $35, $40 -- a ton from where it was in Q4. That means we have to go back to suppliers here in North America, Canada especially, and lower what we're paying for raw material.

The same goes true when you get the upside. You're always making adjustments to try to keep the margin in a range that's acceptable for you and fair to the supplier.

So we've had, again, price movements here in Q1 that will warrant additional adjustments. And it doesn't mean that the prices won't come back, and it won't. But that's the way we've managed the business and have forever.

Got you.

And then, in terms of competition in used cooking oil and bakery, presumably, if you're struggling with it, smaller peers are, potentially, losing a decent bit of money. Are you seeing a lot of competitors actually leaving the market?

We're seeing, in the used cooking oil business, a lot for sale. And so -- I wouldn't say that's an acquisition candidate for us, because we would rather just be patient and go back on the Street with the quality accounts and earn them back.

I mean, the loyalty in that business is very low. The barriers to entry are even lower. So finally, there's been enough margin compression there, and with the ambiguity in the biofuel programs, we're seeing some -- quite a few for-sale signs in front of these little that went out and started their own trucking operations to sell to the biofuel guys.

And then, to answer your other question on bakery, yes. There's been some pretty good consolidation in that business.

It's just a function of finding a fair margin in that. Remember, we came off with some great big years in that business. Like we said, incredible optionality.

John was talking about second quarter. You saw corn prices at $5 in second quarter, and you saw corn prices at $3 during fourth quarter -- $3.28 a bushel. So lots of movement. It's just one of those things you've got to pick your point in time and try to ask yourself what's normal, and then work with the supplier.

Got you.

And last one for me is, if you could give us an update on the M&A opportunity in Europe?

Not sure that -- we're looking at lots of M&A opportunities around the world right now. And Europe -- there are several opportunities in Europe, several in China, and several in South America, right now. So I'd just leave it at that.

Okay, thanks so much.

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

All right. Thanks, everybody. Sincerely appreciate everybody's questions today.

And as always, we look forward to bringing you our progress in Q1 when we report in May. Thanks.

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