Darling Ingredients Inc (DAR) 2015 Q1 法說會逐字稿

Good morning, everyone. Welcome to the Darling Ingredients Inc conference call to discuss the Company's first-quarter FY15 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.

(Operator Instructions)

This call is being recorded and your participation implies consent to our recording of this call. If you do not agree to these terms simply drop off the line. I'd now like to turn the call over to Melissa Gaither, Director of Investor Relations for Darling Ingredients. Please go ahead.

Thank you, Dan. Good morning, and thank you for joining us to review Darling's earnings results for the first quarter ended April 4, 2015. To augment management's formal presentation, please refer to the presentation section of our IR website for the first-quarter earnings slide deck.

Randall Stuewe, our Chairman and CEO, will begin today's call with an overview of our first-quarter financial performance and discuss some of the trends that impacted the quarter. 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, adjusted EPS, based on adding back non-cash amortization charges and excluding from adjusted EPS special non-operating 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 21 of the slide presentation. Finally, Randy will conclude the prepared portion of the call with some general remarks about the business, after which we will be happy to answer your questions.

Now for the Safe Harbor Statement. This conference 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 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.

With that, I'd now like to turn the call over to Randy.

Thanks, Melissa. Good morning, everyone. Thanks for joining us. First off, as Melissa noted our earnings deck is available on our website. We have attempted to provide additional transparency and clarity by including additional information and bridge analysis. We continue to strive for our shareholders and analysts to have a better understanding of our business drivers and expected performance.

On a sequential basis, adjustments made in Q4 2014 are now beginning to take root. First-quarter 2015 adjusted pro forma earnings modestly improved over fourth-quarter 2014 when you take into account FX fluctuations, restructure charges in our gelatin business in France, and the fact we had one less week of operating earnings. When considered, our platform delivered improved earnings while once again watching many of our finished product prices decline.

Overall, many of our businesses are performing well and margins have normalized while a few still need some tweaking. Let's begin with the review of the driving factors impacting performance and then we'll discuss the segment operating results in more detail.

On a translated basis, our lower EPS reflects significantly weaker exchange rates, year over year and quarter over quarter, and clearly distorts the underlying functional performance of both our VION and Rothsay acquisitions. One must remember, at the time of the acquisition the euro was trading in the mid $1.30s and the Canadian dollar was close to parity. For comparison purposes, the euro averaged $1.12 and the Canadian dollar averaged $0.80 on the dollar for Q1.

From our perspective we are extremely pleased with our acquisitions of VION and Rothsay, and they are delivering investment case returns with one exception, our Canadian biofuel business. This is a single plant operation in Montreal that is capable of producing approximately 14 million gallons of biodiesel annually. For the quarter it operated in the red due to two factors. First, on January 12, we suffered a fire that reduced our capacity by roughly 50%, and, secondly, without the blenders tax credit and the RVO clarified this plant has difficulty making a profit.

Now let's turn to the segments. The feed segment margin showed signs of improvement. This segment is comprised of our global rendering business, our USA restaurant services business, along with our USA bakery feeds business and our global blood processing business. Our legacy USA platform, which is the largest component of the feed segment, showed sequential signs of improvement in Q1. Globally, our rendering plants transform animal by-products into fats and proteins, and they delivered as expected.

As discussed in the past these operations are managed on a spread basis. Simply put, our procurement formulas within the rendering business globally were adjusted and margins have normalized. We have successfully adjusted raw material payments in many geographies to reflect the lower fat and protein prices we are receiving in the finished product markets. We still have some work to do but overall we are on track.

Our global blood business with operations in Europe, China, Australia and the USA performed as expected, although unseasonably cooler weather globally has slowed our hemoglobin sales to aquaculture, while our plasma business in China has been sluggish due to the lingering effects of PED. The outlook for this business is for seasonal improvement.

Our focus during the quarter has been to make improvements in our USA restaurant services platform, our USA bakery feeds business, and, to a smaller degree, our environmental services business. These three units account for nearly all of the variance and the weakness in the feed segment, so let me address each one separately.

First, our restaurant services business has been forced to make significant adjustments in its model in the form of lowering raw material payments to suppliers, instituting charges in certain geographies, and reducing headcount. Our volumes are strong and continue to grow but we must balance margin with volume. Many of these changes were instituted in the first quarter so we anticipate the benefits of improved margins in the back half of the year.

Our bakery feeds business had a difficult quarter. While sequentially, track central Illinois corn prices showed a small improvement, we were unable to capture any of this value. Unfortunately, we struggled during the quarter with one of the acquired plants in the previously announced Custom Blenders acquisition.

Initial diligence allowed us to assume an operating rate of the short-term leased asset which has been simply unachievable. We have shuttered the plant. The result has been additional freight for transporting raw material to other plants. This is a short-term issue that will rectify itself when our new plant in Bryan, Texas commences operations later this Summer.

And, finally, our Terra Renewal services business had a slow start in Q1 due to extremely cold and wet conditions in the Southeast. This is a land application business and when we can apply, we must transport and store the material, which adds significant costs to our system.

Overall, in the feed segment, all of our subunits are seeing increased volumes of raw material. In the US this is a result of increased slaughter of poultry and hogs combined with heavier market weights.

In Europe, our volume increases are twofold. First, we continue to see increased tonnage due to trade constraints with Russia and, secondly, similar to the USA, strong volume of poultry and hogs. It should be noted we are closely monitoring a new strain of avian bird flu called H5N2 which was first confirmed in North America in late 2014. Our Darling facilities are taking the appropriate measures in response to the disease.

Let's turn to the food segment. While the food segment operating gross margins improved sequentially, most importantly, they reflect the consistency of this segment. The anchor participant in this segment is Rousselot, a global leader in gelatin and functional protein production. For the quarter our volumes improved year over year. We saw significant recovery in China from the fourth quarter and we saw our margins improve globally.

Additionally, we have executed a restructuring program at our Angouleme, France plant to improve our competitiveness. This is a multi-year process which involves optimizing our European asset base. A charge of $3.7 million flowed through our P&L in Q1, reflecting expected severance costs.

In our European fat melting business, branded as Sonac, we continued to see strong volumes associated with the ongoing Russian border closure. The good news is higher volume. The bad news or challenge is that the edible palm oil prices continued to decline during the quarter and we suffered some margin compression. We continue to play catch up to the declining palm oil prices in Europe and will be forced to make additional raw material price adjustments to improve margins to a reasonable level. And, finally, our CTH business, our natural casings business, did show signs of improvement.

Now, lastly, in the fuel segment, margins improved overall but earnings declined sequentially. This segment is home to our Rendac business which processes non-edible C1 and C2 European animal by-products and mortalities. Additionally within the segment is Ecoson, our European bioenergy business, along with our two North American biodiesel plants.

Overall, Rendac volumes were lower sequentially, which was solely due to less mortalities, but most importantly within Rendac, we felt the pressure of lower energy prices in Europe related to the declining crude oil prices and related BTU values. Ecoson delivered as promised and we have already discussed the challenges at our Montreal biodiesel plant. For comparison purposes, it should be noted that Q4 2014 once again contained one less week of production but it was also the time period when we received energy credits in both the US and Europe.

Now let's turn to Diamond Green Diesel. DGD carried forward momentum from the fourth quarter and continued its strong operational performance into Q1, producing more than 37.5 million gallons of renewable diesel. Plant capacity is now operational at over 12,000 barrels per day of feedstock.

Our investment thesis in Diamond Green Diesel remains solid. As you'll recall, our 50/50 joint venture with Valero was built to be a counter-cyclical hedge to our core rendering business. While we have been successful and created alternative and value-added markets for our proteins, inedible fats prior to biofuels had one primary use -- animal feed. And within animal feed, fat competed as a caloric substitute or a calorie enhancer to corn, the main ingredient in most animal feeds.

Our goal with Diamond Green Diesel was to create a counter-cyclical hedge and a new demand point for our fats and greases, and to be able to own the arbitrage between feed and fuel. It also absorbs competing fats such as ethanol-derived corn oil and creates new markets for our products.

While Q1 operating performance was solid, the EBITDA generated by the facility was reflective of the uncertain governmental operating environment. We fully anticipate the blenders tax credit being adopted retroactively later this year. The fact that the US government has not reinstated the blenders tax credit affects both the Canadian biodiesel plant and our Diamond Green Diesel joint venture. However, when you take this into account, DGD potentially delivered an additional $34 million to $37 million of income or $0.10 to $0.12 of new EPS. As a reminder, this is a credit and it's treated as non-taxable income. In addition, subsequent to the first quarter we took a $25 million dividend distribution and reduced the debt in the joint venture by $43 million leaving a current balance now of $162 million.

Finally, news media is reporting that the EPA's recommendation for the RVO for biomass-based diesel for 2014-2017 has been logged in at the Office of Management and Budget at the White House. This is consistent with earlier reports that the EPA intends to issue the rules and volumes by June 1 with a comment period extending into November. We remain optimistic that the volume obligations will grow and be reflective of the available industry capacity.

Overall, we continue to make adjustments globally to improve our earnings. These include lowering our raw material costs in our rendering, restaurant services and bakery business units to reflect fair margins; two, instituting charges for our services, primarily within the restaurant services; three, focusing on operating efficiencies at all of our plants; four, lowering our administrative headcount; five, delaying and reducing our CapEx out flows; and, finally, focusing on working capital management, especially in our European and global gelatin operations.

With that, I'd like to turn it over to John here for a minute, and when John concludes I'll provide some closing remarks. John?

Okay, thanks, Randy. Before I begin, I want to point out a few items. As Melissa said, we've provided a slide deck detailing segment operating results on both a sequential and quarter-over-quarter basis. We further outlined the EBITDA bridge from the fourth quarter of 2014 to the first quarter of 2015 which we believe is helpful in reviewing segment results.

As you know, we regularly monitor the Jacobsen Index for finished product pricing for the feed ingredient segment in the US. And in Europe we monitor the Thomson Reuters to track competing commodities in palm oil and soybean meal. To that end, we provided an additional slide detailing average Jacobsen and Reuters finished product commodity pricing for 2014 through first quarter 2015. This is on slide 11.

It is also important to note that the first quarter of 2015 results include 13 weeks of operation from VION acquisition as compared to 12 weeks in the 2014 first quarter. On a sequential basis, fourth-quarter 2014 included 14 weeks of operations. As such, both quarterly periods include after-tax acquisition and integration costs, which are outlined in the earnings slide provided on page 4 in yesterday's 10-Q filing.

Now, for the quarterly review. As Randy said, first-quarter results were impacted by lower finished product pricing, especially in the global fats market, and the impact of foreign exchange due to the strong US dollar compared to both the euro and Canadian dollar. Net income for the first quarter was $0.1 million, or breakeven per diluted share, compared to a net loss of $52.8 million or a net loss of $0.32 per diluted share for the 2014 comparable period.

Without the inventory step up costs, the redemptions premium and deferred loan write-off associated with the 8.5% senior notes, the acquisition and integration costs, and the euro forward hedge contract, net income and diluted earnings per share would have been $23.2 million or $0.13 per share, respectively, for the first quarter 2014, as compared to $3 million and $0.02 per share, respectively, for the first quarter of 2015 when adjusted for acquisition and integration costs.

Sequentially, adjusted EBITDA for the first quarter 2015 was $98.2 million compared to $108.7 million for the fourth quarter 2014. On a pro forma adjusted EBITDA basis, the Company would have generated $103.5 million in the first-quarter 2015 as compared to a pro forma adjusted EBITDA of $111.1 million in the fourth quarter of 2014, a decrease of $7.6 million. This decrease is largely due to change in foreign exchange translation of $6.5 million.

Moving to the operating segments, a sequential quarterly break down of each operating ingredient segment is included in the slide deck. Please also note again that we have one extra processing week in the fourth quarter 2014. As Randy mentioned, our feed ingredients business was impacted by lower earnings in the US primarily as a result of lower finished product prices in our restaurant services business and weakness in the bakery feed unit. You will note on slide 9 from the feed segment that our rendering business formulas adjusted our raw material costs down within cost of sales to adjust for the lower finished product values.

Our European feed specialty ingredients business performed nicely lead by Rousselot's stated performance and from strong volumes, along with edible fat business declined quarter over quarter due to the continued closure of the Russian trade border. The food segment was the most impacted by foreign exchange translation of approximately $6.9 million when using prior-year average rates.

The gelatin business rallied in China, normalizing, and lower raw material prices in Europe. Also, our casings business showed improved margins for the year-ago period. The fuel ingredients business showed solid margin improvement in the first quarter, in particular from strong contribution from Ecoson operations.

Now I'd like to move to the balance sheet highlights. On April 4, 2015, the Company had working capital of $568 million and a working capital ratio of 2.19 to 1 compared to a working capital ratio of $569 million and a working capital ratio of 2.18 to 1 on January 3, 2015. As Randy mentioned, we paid debt down by $19.1 million during the first quarter of 2015. First-quarter CapEx was sequentially flat at $58.8 million compared to $51.4 million in the first quarter of 2014. CapEx is expected to be between $150 million and $200 million for the remainder of 2015, which includes the planned investment in five processing plants.

As an update in the 10-Q effective May 13, 2015, Darling entered into an amendment with our lenders to remove the previously existing requirement of a step down in total leverage ratio over the life of the credit facility. The current ratio is 5.0 to 1 and will remain for the duration of the credit agreement. This simple amendment provides the Company with additional flexibility going forward.

And, finally, the effective tax rate during the first quarter is 53.7%, which is higher than the US statutory rate of 35%. This is primarily due to the inclusion of sub part F income generated by our foreign subsidiaries. Most of the sub part F income relates to inter-Company dividends, interest and royalties, which are currently taxable in the US even though there is no actual repatriation of earnings to the US. Last year, this income was not taxed due to tax extender package.

We do not expect the effective tax rate to change much for the remainder of the year unless the tax extenders package, including the federal biotax credit and the sub part F look through rule, is passed for FY15. If so, then we would expect the effective tax rate to decrease at the end of the year to approximately 28% for the year.

I will now turn the call back over to Randy.

Thanks, John. Functionally and globally, our businesses are improving. Our team is making changes and we are committed to delivering to the best of our abilities. While we expect continued FX headwinds to impact results, our volume improvements are expected to remain across all businesses.

Globally, we are seeing improved fat prices as our discount to soybean oil and palm oil was simply unsustainable. Additionally, the world seems to be in the process of clarifying renewable fuel programs. Europe recently clarified their commitment, and long term it is most likely friendly to our industry. However, proteins might begin to soften around the world, especially if there is continued disruption in North America to the poultry business.

For the second quarter, it is important to point out that our finished product pricing for fats and proteins is down significantly year over year. Percentage-wise, this is displayed in our earnings deck. And, lastly, we are on track with construction of our five new processing facilities.

To close, we are confident in our business model and our opportunities for long-term growth. We'll continue to focus on widening margins, managing cost, and maintaining a strong balance sheet.

So, with that in closing, let's go ahead, Dan, and open it up to Q&A.

(Operator Instructions)

Our first question comes from Adam Samuelson of Goldman Sachs.

Yes, thanks, good morning, everyone. Maybe first, a question on Diamond Green. I want to just make sure I understand the performance in the quarter. Last quarter ex the tax credit Diamond Green was about breakeven on an operating basis. RIN prices sequentially were up close to $0.30 quarter on quarter, feedstock costs were down and diesel prices were up. I'm trying to help [state] reconcile that with the EBITDA per gallon at the plant which was only about $0.12. Can you help me reconcile the operating performance of Diamond Green relative to general commodity and RIN price movements that should have been helpful to you guys?

Yes, Adam, this is Randy. I would give you a little direction there. There's a pretty big lag effect that happens with the supply chain into that plant. And then there was some forward positions in there that most likely impacted most everything.

The plant produced 37 million gallons. You add the feedstock prices, while they did come down in the quarter, remember that, that unit itself has about a 60-day pipeline that's attached to it at all times. You got [whipsawed] a little bit on the heating oil side. But for the most part you're going to see a pretty substantially improved performance, both in gallons and also in margins, in Q2 as the supply chain effects roll through.

Okay, that is helpful. And then maybe over in restaurant services, Randy, you alluded to a series of margin actions that you're putting into place that should benefit the business unit in the second half of the year. Could you help quantify what you think the benefit could be? And, specifically, does that embed an improvement in yellow grease pricing or would that drive underlying earnings growth in a flat $0.22 to $0.24 yellow grease price environment?

First off, Adam, the restaurant services business is a business that needed some serious attention. We have done that. The first thing you do is we've re-examined all of the geographies we operate in and made sure and looked at each customer and how we were pricing their material into the plants.

That business got a little bit, I would say, I don't know if the word is out of control or out of balance with the biofuel frenzy of the last couple years as it became easy to enter the business and become a collector, and you didn't really have to process the product. You just dropped it off at your local biodiesel plant. We've gone back, looked at each geography, adjusted our procurement formulas and how we pay customers. That's number one and that's the biggest piece.

The second thing is, as prices came down in different geographies, especially on the coast where are your higher costs to operate and serve, we have instituted charges. Those charges are also in the fat and bone area, too, but also predominantly in the restaurant services area. And then, finally, hopefully if we do get some clarity in the renewable volume obligation, hopefully we'll see those prices pick up seasonally. Ultimately, if you say what's it worth to us, John and I are making eye contact here, $5 million to $10 million by the end of the year.

That's the annualize? That wouldn't be $5 million to $10 million in the quarter? That's the annualized benefit.

I'd love that but no.

Okay, that's helpful. And then maybe one quick last one for me. On SG&A, it came down pretty meaningfully sequentially, notably in the feed segment but at the corporate level, as well. Any color there and any countenance on full-year SG&A expectations for the Company?

As Randy said we're continuing to work on SG&A, looking at it. A year ago and then sequentially, we have now taken a lot of the consultants out that were in here on the ERP project. That had a huge impact as we built our IT group up to support Oracle. We did have some duplication of costs during that period. Those consultants are out.

But we're also relooking at the structure, now that we're running it ourself. We have made some changes. We have reduced people at the corporate level. We've also reduced SG&A in the field.

A lot of that was done during -- right at the end of December but also in first quarter. Some of the cost that is involved in that is in the integration line where there is some severance, just like we had with Angaloon. We're going to continue to look at opportunities and try to drive SG&A costs down. Our goal is to get that down below $85 million.

We could see some ups and downs here in the year. We have, in a lot of cases, where we had some consultants helping in some areas other than IT, we're going to be doing that work ourself now, and have some very large savings in that area, as well. So, we're focusing on that and continue to try to drive that down.

And just to be clear, $85 million SG&A, so below $85 million a quarter?

Yes.

Okay, great. Perfect, thank you.

Our next question comes from Carla Casella of JPMorgan.

Hi. A question on the EPA and its ruling June 1, with the comment period through November. If it rules favorably would you get the credit in June or do you wait until after the November comment period.

This is Randy. It would be nice to think that the tax extenders package would come before December but I think we've seen the movie before and we're expecting to watch it again this year. We do spend quite a bit of time on Capitol Hill and the feedback to us and all of the visits we make are that they fully expect the tax extenders package to be a last minute pre-holiday exercise again.

Now, from the EPA, what we're anticipating here is within the next couple weeks to have the mandate levels published for 2015, hopefully 2016 and 2017 is what we're being told. And we're hoping that they come in at the current production levels of between [1.7] and [1.8] and maybe step on up from there. That will provide some pretty significant floor to the business here, and some pretty interesting demand for our products. That's about the best we can hope for. Admittedly there's a comment period out there until November which can lead to all kinds of speculation

I think what was most interesting about the EPA's earlier press releases was that they were working to resolve some issues within the petroleum industry, and it looks like they had a consent decree there which would say if that's behind them, then this should be a pretty good platform for them to move forward here. It just doesn't make sense to publish something and then have more litigation from the people they just settled with. But it's Washington and anything is possible.

Okay, great. And then on the bank leverage covenant, you set it at 5 times with no step down. Are you implying that you expect your leverage to tick up from where it is currently or are you just trying to allow for at least a turn of cushion?

Allowing for a turn of cushion, a little more conservative in my approach. But, yes, for all of 2014 and the first quarter of 2012, the leverage ratio was 5. It was supposed to step down to 4.75. Our leverage at the end of the first quarter is 4.19 and we expect basically to work our way down from there. So, yes, that was the only reason, to just have more head room.

Okay, great. Thank you.

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

Good morning, everyone. Just going to a couple things, the fire and the shuttered plant, how much of an impact is that?

The plant up in Montreal, Ken, number one, there was no margin in the biodiesel business, so probably a little bit of a blessing in disguise there in the Q1. But that plant runs 14 million gallons. And, so, if you say it runs 3.5 million a quarter, it ran 50% capacity. To a degree, if you back into it, and the way the biodiesel industry is working out there with receiving only 50% of the tax credit, if it's available; we left 1.7 million gallons on the table and probably $800,000 to $1 million there.

The plant down in Texas, at Coldwell, Texas, was an acquired or a leased facility from Custom Blenders where we thought we could operate it until the Bryan, Texas plant came up. That's what diligence told us. We assumed an operating rate that simply just we could never get there. And the capital to get it to there was not a good decision. Down there, I think I would say that we're probably leaving on the table around $0.5 million a month right now in trucking fees and storage fees until we can get the Bryan, Texas up here around August.

Okay. You didn't quantify the actual cost-cutting initiatives. Is that another $5 million to $10 million annually?

The cost-cutting initiatives were solely within the people or the headcount. And, yes, the target is in that $5 million to $10 million range. It will trickle in over the course of the year. There's been some pretty significant headcount reductions that have already taken place, and those will phase in over time here.

Okay. So, we have that plus the annualized new fees for the restaurant, so we're at $10 million to $20 million increased profitability relative to where we are now. Is that a fair statement?

That's what we are shooting for. On a run rate, yes.

Okay. Do you have any issues left in your Diamond Green Diesel joint venture? I know you said that it's forward positioning. How much was that as an impact into your earnings? And is there anything left over that we're going to actually operate at margin that we could actually see now?

I would tell you that it's going to operate at the margins we can see now, Ken. Second quarter is operating closer on a spot basis that I was looking at anywhere from a $0.45 to a $0.60 margin right now. Obviously, the annual production rate that we're telling you to assume down there, our goal is to put out 160 million gallons this year.

Okay. And how much was the forward position negative to you guys, again?

I don't want to quantify that. It's just a supply chain -- if you look at it, you're always carrying 60 days inbound, and the market probably went down $0.02 or $0.03 on us, and that's the delta between it.

Okay. And has there been any impact -- your competitor, Geismar plant obviously went down. Is there an impact on you guys at all on the rendering products because there's not enough demand from that? And does that change after two to four months when it comes back up?

We welcome it to be up because it's another great demand point. It was consistently running, obviously, much like our challenge that we had last summer. When they went down, they had quite a supply chain that they had to unwind and that backed up fat into the Midwest again. We were able to take advantage of a little of that and put it into our supply chain.

And then the second thing is that a lot of the biodiesel industry right now is really idled back because of the same margin issues that we see in that business up in Canada. And then you couple that, the biodiesel business predominantly in the Midwest was operating on a blend of choice white grease and used cooking oil. So that's what softened those prices. The choice white grease, the hog slaughter, and the weights of hogs, as you know, being a follower of the protein, are just unbelievable right now, so there's just a ton of choice white grease out there.

And with Geismar down and the biodiesel in the Midwest, predominantly REG, to a degree, idled back or the industry idled back, that's what's put the weight on fat prices. We are seeing fat prices come back here in the last two, three weeks for the month of April. And then we are seeing fat prices in Europe come back, also driven by the biofuel industry there starting to ramp back up. As oil came back from $45 to almost $60 a barrel now we're seeing some start ups again here.

And my last question is -- and I think somebody asked but I'll ask it slightly different -- I'll put you a little bit on the spot, what is a good decision from the EPA on June 1 and what is considered a bad decision, from your perspective?

A good decision is a mandate of [1.7] to [1.8] through 2017. A bad decision is a reaffirmation of the [1.28].

Okay. Betting on the government is obviously not a good bet but [1.7] to [1.8] seems like it's well expected. It would be a shocker if it was anything less than [1.7] to [1.8] right? Is that fair?

I'd say anything lower than [1.6], it will be disappointing, and the right people didn't read the right memos and industry data again, because to set it any lower than what the industry produced in 2014 would seem to be pretty foolish. But, like you said, it's Washington.

And would you expect, as soon as that happens, that you would get a demand call on your rendering products or would it take months? How long would it take for the demand pull to start working through your system on the rendering side?

I'm a little more optimistic than some around here. The view is that there's a lot of choice white grease out there off of the hog industry to work through. But I think it will be friendly-use cooking oil again, and move it on up. And I think you would have to restart an industry here, to a degree, in the first quarter that was heavily running soybean oil.

When you look at it, what's fascinating out here is to look at the soybean oil complex and see that it's now showing $0.33 a pound, and, I don't know, a couple months ago we were at $0.30 a pound. So, the money is coming back into that. Clearly, the soybean industry and the canola crushing industry are going to have to ramp up here in the sense of making oil to fulfill a number that's [1.7] to [1.8] out here. You're seeing that and that was my comment that we can't be as big a discount to soybean oil as we are right now. And if you kick in that mandate it should be pretty friendly our products here.

Great, thank you very much.

Our next question comes from Dan Mannes of Avondale Partners.

Thanks, good morning, guys. First, I want to go back and discuss maybe a little bit some of those organic initiatives. Obviously you have five plants under construction. Can you maybe remind us what the expected onlines are for those. And, number two, what does your CapEx look if you ex that out?

Let me take a couple shots at that. Number one, CapEx for Q1 was about $50 million, it was about $50 million, $51 million in 2014. So, that's got some pretty heavy spending in the new plants that are under way with long lead time order equipment. So, as we go forward here and roll forward, the two pet food plants are businesses that are being retrofitted, one in Ravenna, Nebraska at a retired cheese processing factory, and then in Paducah, Kentucky, a frozen storage warehouse that's being retrofitted. Both of those should be online by the end of August, is our goal here, I believe.

The two rendering plants, we have broken ground on the one in Arkansas. Today we are pushing dirt. Time frame of that should be by the end of the year first quarter. We anticipate that the processing plant that's being built adjacent to it may be online before that, at which time that would go into our system already or be processed in our existing plants.

And then the final plants up in the Upper Midwest, we have not broken ground on, but we're anticipating that any time. And we should be up in late 2016. And then the Bryan, Texas bakery plant is due to be finished here about August.

All of those plants combined, as we've said before, we had a capital budget of around $250 million for the year, about $175 million of it was what we call normalized within it, and about $75 million of it was growth. And that's what's in there, around $75 million. And then if you look at it with our earnings standards that we set to these projects, each of these projects have north of 20% to 25% returns, and that's what we're looking forward to bringing on here in early to mid 2016.

But the total budget for those five isn't just the $75 million this year, because obviously you spent some last year and you'll be spending some next year, at least on the ones that are coming online next year.

Yes, just there was a little bit last year and then there will be a little bit next year. The bulk of it will be out this year.

Got it. And then you've talked about maybe cost initiatives in a couple different buckets. I'm going to go back over some territory, I think, that some other analysts have talked about. You laid out the improved pick up fees and such on restaurants. You noted a cost, it sounded like a more broad cost plan, and then, two, the SG&A. I'm wondering, can you give us an all-in number, because it seems like there are a lot of moving pieces? I think what everyone is trying to figure out is if we finally bottomed out on a core basis, we're trying to figure out what the uplift is as we move into the second half of this year and next year.

All-in, we would give you a range there before the new capital projects that are coming online of $15 million to $20 million.

Okay. And then theoretically, as you said, roughly $75 million to spend at 20%, so it's another $15 million? So theoretically we're looking at $30 million to --?

Yes, probably another $15 million to $20 million in 2016.

And have you identified the next batch of organic growth projects or would you anticipate maybe cash flow ticking up a bit as we move into 2016?

The answer is yes, we've got another list of organic growth projects that are being worked on right now. The engineering and construction team is pretty stretched right now with what we've got going on here. But I think you'll see us with several more opportunities that are similar to what we're doing this year continue on into 2016.

Okay. And then, lastly, just on the avian bird flu, I believe where most of it's hit has been areas where you currently don't have a rendering presence. But is there any flow through impact to you, either through reduced feed demand and/or I don't know if there's any movement of birds or anything like that? Or is that something that's mostly missed you guys so far?

It's basically throughout the Midwest now. Minnesota and Iowa have obviously been hit pretty hard and we're pretty big players in both of those areas. Right now, we work closely with the state veterinarians on this. For the most part, the US approach to eradication has been to compost, bag and bury, if you will, on site where the disease was identified. So, there is nothing coming into our plants. There's been no, if you will, cull zones or safety zones that have been culled around where the disease is right now.

It's a fluid situation. I think the vets remain hopeful that as weather warms up that it tempers the spread. But right now discussions are happening, if you will, with the different governmental agencies on when and how strong it comes back next year. One of the things I think that we like to point out to our shareholders, in the US we don't handle disease mitigation type of situations right now. In Europe that is our Rendac subsidiary that is geared towards taking in. We do take in avian influenza culled birds into our different plants under hazardous conditions and processes.

Right now, there's been very little or no impact on our business today. The only thing that we always raise a little bit of a caution light on is it's the layer industry and the turkey industry, and both are pretty good consumers of meat and bone meal. And if we do get any type of momentum there it could have a little bit of effect on the meat and bone meal pricing as we have to shift it to different markets. So, like I said, it's very fluid but no impact at this time.

Sounds good. Thanks, Randy.

Our next question is from Chip Moore of Canaccord.

Thanks. Randy, on the edible fats business in Europe, where we're a little less familiar, can you talk about what you're doing there with palm oil prices, how long that takes to flow through to margins?

It's a month to month deal. The volumes have been very strong there. Essentially what happens in that business is that some of the fattier cuts of meat that are ending up in the edible rendering streams are being converted into food grade fats that then have to be sold against palm oil.

You've seen palm oil decline 8% to 10% in the quarter. In the European model, you set your purchasing price for a month to two months, and then you have to get back in front of the supplier and plead your case one more time. We're in the process of doing that but we've been playing catch up. You make an adjustment and next month it's lower again.

Hopefully, it will turn. And, as I said, it feels like fats and oils are getting ready to turn here a little bit and then we'll put a little more margin back into that business. But it's clearly been, if you will, upside down for us here for the full quarter.

Okay, that's helpful, thanks.

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

All right, thanks again for joining John and Melissa and I. Hope we've answered a lot of your questions and given you more guidance on where we're taking the Company here as we navigate the headwinds. We'll look forward to talking to you here for our second quarter in August. Thank you, everybody.

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