Darling Ingredients Inc (DAR) 2016 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Darling Ingredients Inc. conference call to discuss the Company's first-quarter 2016 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 this call. If you do not agree to these terms, simply drop off the line.

I would now like to turn the call over to Melissa Gaither, Vice President of Investor Relations and Global Communications for Darling Ingredients. Please go ahead.

Thank you, Carrie. Good morning, everyone, and thank you for joining us to discuss Darling's earnings results for the first quarter 2016 ended April 2, 2016. To augment management's normal presentation, please refer to the presentation section of our IR website for the earnings slide deck.

Randall Stuewe, our Chairman and CEO will begin today's call with an overview of our first quarter operational and financial performance, and discuss some of the trends impacting our business. John Muse, Executive President and Chief Financial Officer will then provide additional details about our financial results.

Please see the full disclosure of our non-US GAAP measures, in both our earnings release, and at the end of the earnings slide presentation. Finally, Randy will conclude the prepared portion of the call with some general remarks about the business and the rest of the year ahead, after which we will be happy to answer your questions.

For now the Safe Harbor statement. 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 2, 2016, our recent press release announced yesterday, and other filings with the SEC. Forward-looking statements in this conference call are based on our current expectations and beliefs, and we do not undertake any duty to update any of the forward-looking statements made in this conference call or otherwise.

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

Thanks, Melissa. Good morning, everyone. Thanks for joining us. As we discussed in early March, we felt we had bottomed, and would begin seeing a recovery. Sequentially, we improved modestly, and had solid performances across all segments and all geographies, with the exception of the USA. Sluggishness in rendering values persisted in the USA throughout most of the quarter, before steeply rebounding late in March and Diamond Green Diesel was impacted by the downtime related to its first turnaround, and then was forced to stay on reduced rate for an extended period, due to logistics problems related to the KCS Railroad's inability to deliver railcars to feedstock due to flooding.

The good news is that the USA has rebounded on all fronts including Diamond Green Diesel and with our preliminary results in for April, we remain confident in our momentum for the second quarter and the year. Our quarterly results were highlighted by a sequential margin improvements in our food and feed segments, while the fuel segment when adjusted for the Blenders Tax Credit showed a very consistent performance. Globally, all of our product lines are enjoying higher volumes, and the pricing and margin outlook remains on track to improve in the second quarter.

Now let's move to the segment specific updates. Our feed segment showed improvement over Q4, global rendering volumes were strong. Internationally, our European and Canadian businesses continued with steady and predictable earnings and margins.

The USA rendering business, however, was significantly impacted by decade low protein prices in the quarter, before watching them rebound in March. Strong slaughter volumes, reduced exports, and modest winter feed demand led to a temporary oversupply of proteins. Additionally, our Midwest plants were seasonally challenged by winter conditions in February, where we lost 18 operating days across the system. Globally, fat prices have improved, and we did begin to benefit in the USA in March, but given the long supply chain and forward sales to Diamond Green Diesel, the true impact will be felt in the second quarter.

In our feed segment business -- in our feed segment business, our restaurant services group continued building momentum in first quarter, from both increased volume and improved margins. This group is truly set to benefit from the higher finished product pricing in Q2.

Our pet food business got off to a slow start in Q1. Typically, we see strong pet food ingredient demand at the start of the year, however, this was slow to ramp up, and thus we saw pressure on pricing when this product had to be placed in the feed market. Our new wet pet food plants also didn't perform to our expectations. While the plants are sold to near capacity, orders were slow to come in. Operationally, Paducah is complete and world-class, while Ravenna faced some challenges as to, our product mix has changed, and has forced us to modify the process flow, however, both plants should be running and contributing at predicted levels in May.

Our global blood business had a good first quarter, with higher volumes and improved earnings. Our bakery feed business performed as expected, and Terra Renewal services enjoyed nice load growth in the quarter. Additionally, we completed a small bolt-on acquisition in the Netherlands of a small family rendering company.

Now, in the food segment. Within Darling's food segment, Rousselot, one of the global leaders in gelatin production delivered a solid and predictable performance. Global demand from the food and pharma industries remains robust, and thus our sales outlook remains positive for 2% to 3% growth this year.

For the quarter, China delivered a consistent performance, and we now have brought on our expansion in [Wenzhou],China. The USA expansion at Dubuque is complete, and we are beginning to see the benefits. In South America, margins have improved due to raw material availability and improved FX rates, while in Europe we delivered a nice performance driven by good sales and operational efficiencies we developed last year. Clearly, our investments in operating efficiencies are beginning to flow to the bottom line.

In our casings business, we continue to make changes to improve margins, lower operating costs, and reduce working capital. For the quarter, CTH ended with lower sales volumes, but achieved improved margins for hog casings. Outlook for the balance of the year is for higher volumes and improved pricing.

Now on the fuel segment. The fuel segment remains a very predictable contributor, as displayed in the earnings deck. We attempted to show this by spreading the Blenders Tax Credit across the representative period in which the credit was truly earned. Rendac, our government regulated European-based rendering business delivered its normal and consistent earnings.

Ecoson, our European biogas and bio-phosphate business remains in the rebuild mode after the fire in December. For the quarter, earnings were a bit lower, but most importantly, we restarted our digesters to assist the farm community with necessary manure disposal. The plant rebuild for fertilizer production is anticipated to be complete in the fourth quarter of this year.

Our biodiesel business which is supported by assets in both Canada and the USA continued to enjoy the benefits from the prospective tax credit, although margins remain compressed seasonally, primarily due to the product's cold flow traits and marketing challenges. We fully anticipate margins in the second quarter to improve, as LCS and the seasonality of the business starts to kick in.

Now turning to Diamond Green Diesel. During Q1, we successfully completed our much anticipated first turnaround. This was a very expensive turnaround, involving catalyst change out, and various metallurgical and operational improvements. We were very pleased with the effort, and the plant came up to capacity as expected.

However, as noted in our press release, the KCS Railroad, our primary delivering carrier declared force majeure on us, due to flooding within their system caused by a break in a dike. To complicate things even more, we had depleted our feedstock inventory prior to our turnaround, in order to perform some necessary work. Unfortunately, we lost about a 4 million gallons of production in the quarter, on top of the 10 million lost during as part of the turnaround. In April, we were back at full production, and our preliminary April results are back on track.

Additionally in April, we announced an exciting expansion at Diamond Green Diesel, increasing its capacity from 160 million gallons to 275 million gallons. We anticipate construction to begin later this summer, provided all of the engineering and required approvals are received, and hope to do the tie-ins in fourth quarter of 2017, with the final production ramp up to start in the first quarter of 2018. Diamond Green Diesel has now proven itself to be the low cost and highest quality producer of renewable diesel in the world, and we are extremely pleased with its overall financial contribution. Finally, as John will note in his comments, we did receive the much-anticipated Blenders Tax Credit, and as a result, we received a $25 million dividend payment from Diamond Green Diesel.

In closing, deflationary headwinds persisted during most of the quarter, but have now shifted. Improvements in proteins and fat pricing will boost USA performance noticeably in Q2, and we expect the momentum we have built by improving our margins, lowering our working capital, reducing SG&A, and focusing on delivering improved earnings to continue. The global growth platform and business model we built has weathered the storm, and we are now have a bit of a tail wind.

With that, let's have John take us through some financial highlights. John?

Thanks, Randy. As Randy mentioned, as we move into 2016, we will continue to focus on debt reduction, margin enhancement, reducing our working capital, cost reductions in both operating and SG&A expenses, and monitoring our CapEx deployment. For the first quarter 2016, the following is an update of our progress.

As commodity prices have started to improve, we will continue to focus on improving our EBITDA margins in all three business segments through spread management. For first quarter 2016, SG&A expense was at $81.5 million. We expect our SG&A run rate to range between $83.5 million and $84.5 million on a quarterly basis for the remainder of 2016. As a reference, SG&A in the first quarter of 2015 was $86.6 million, and for 2014 was $90 million, respectively.

We remain committed to reducing working capital in our business in 2016 over the 2015 levels. We will focus on lowering inventories, managing payables, and being better stewards of our receivables. For 2016, we are targeting a $20 million to $25 million improvement in our working capital.

Darling's CapEx target for 2016 is $215 million, and our first quarter CapEx run rate was $53.4 million. In regard to significant CapEx deployments, we are on schedule with our two new US rendering plants to come on line in late third quarter. Going forward, we will continue to focus on debt repayment, with a debt reduction target of $125 million to $150 million in 2016.

Now on to some financial results for the first quarter. For the first quarter of 2016, the Company reported net sales of $779.6 million, compared with net sales of $874 million for the first quarter of 2015. The $95 million decrease in net sales is primarily attributable to lower selling prices for fats and proteins within the feed segment, and continued FX translation impact. Overall, global raw material volumes in the feed ingredients segment were stronger year-over-year, and our food ingredients segment, raw material volumes were consistent for periods.

Net income for the first quarter of 2016 was $1.1 million or $0.01 per diluted share, compared to $100,000 or $0.00 per diluted share in 2015. Adjusted EBITDA for Darling for the first quarter was $98.9 million, compared to adjusted EBITDA of $98.2 million for the first quarter of 2015. This $700,000 increase in adjusted EBITDA is primarily attributable to increased earnings in the food and fuel segments, and higher raw material volumes in the feed segment that more than offset the lower finished product prices.

As we move on to the operating segments, a sequential quarterly result breakdown of each is included in the slide deck that was furnished. In our feed segment, operating income for the first quarter was $13.9 million, a decrease of $21.5 million compared to the first quarter of 2015. Earnings for the feed ingredients segment was lower due to significant declines in proteins, fats, and used cooking oil finished product prices.

On a sequential basis, the first quarter operating income increased by $3.8 million over the fourth quarter of 2015. Looking forward, the second quarter of 2016, both fat and protein prices have increased significantly, and we should realize the benefit in the feed ingredients segment earnings.

Our food segment operating income for the first quarter of 2016 was $21.9 million, an increase of $11.1 million compared to the first quarter of 2015. The increased earnings were mainly attributable to increased performance in our gelatin business in South America and Europe, and more normalized margins within our European edible fats business. Our fuel segment, exclusive of Diamond Green Diesel, generated first quarter operating income of $6.1 million, an increase of $3.6 million as compared to the first quarter of 2015. The increase is due to improved operating performances in Ecoson and Rendac, and improved margins in our Canadian biodiesel facility.

The Diamond Green Diesel joint venture first quarter EBITDA was $9.6 million. Escalating fat prices, volatile heating oil prices and stagnant RIN values weighed on earnings. As Randy mentioned, Diamond Green Diesel performance was also impacted by 18 days of scheduled downtime for planned maintenance and force majeure declared by the KCS Railroad due to flooding that caused curtailment of approximately 4 million gallons.

In April, Diamond Green received the 2015 earned Blenders Tax Credit of $156 million. With these funds, Diamond Green declared a dividend of $25 million to each partner, and paid down debt by $54.7 million, leaving the debt balance in Diamond Green Diesel at $89.9 million. At the conclusion of first quarter, Darling's total debt to EBITDA ratio was 4.41 to 1, compared to a covenant of 5.5 to 1, and the secured debt ratio was 1.96, compared to a covenant requirement of 4.

Now let's take a look at our effective tax rate, cash taxes and depreciation. The Company recorded income tax expenses of $1.86 million for the first quarter, an effective tax rate of 41.2%. The effective tax rate was higher in the first quarter, due to the lower earnings from Diamond Green Diesel.

We continued to expect our effective tax rate to be between 22.5% and 25%, and cash taxes to be at the $30 million level for 2016. Depreciation and amortization should be in the $69 million to $70 million range on a quarterly basis for the remainder of 2016.

I will now turn the call back over to Randy.

Thanks, John. The improved pricing environment is helping our feed segment, and we expect the pricing improvements we saw during the first quarter that lagged in reaching the market to positively impact our business during the second quarter. Global raw material volumes remain strong. Our food and fuel segments remain solid and predictable.

Our commitment to delever and grow has not changed. Our quarter in -- one quarter into the year, we have gained strong momentum towards reaching our goals, which include finishing construction, and beginning operating at our two new USA rendering plants, repaying $125 million to $150 million in debt this year, improving our working capital by $25 million, and reducing SG&A by $10 million and most importantly, to work safely and fairly around the world, as we create sustainable food, feed and fuel ingredients for the world. With that, let's go ahead, and open it, Carrie, up to questions.

(Operator Instructions)

Our first question comes from John Quealy of Canaccord Genuity.

Hey, good morning, folks. A couple quick questions here, big picture first, I guess. Randy, on the rebound in prices coming in March, that I think many of us thought it was going to bleed in, you're be able to capture them a little bit better in Q1.

Did that surprise you on the cadence on the pricing environment? I know on the call a couple weeks back, you were suggesting similar good movements, but it didn't capture the P&L. Did we miss it, or what was lost there?

No, that's a super fair question. We started to see the pricing improvement come through in the fat. Like I said, it's a long tail, when we've got a significant portion of our production going into Diamond Green Diesel.

So that started to move up, and we saw that translate into real P&L gains in the USA. But the proteins really went south on us, hard in February. And frankly, at the end of the day, I saw that the March average sales prices, on a cash basis in the Midwest around $200 a ton, which takes you back to almost 2005, and decade lows at that time.

So the proteins caught me by surprise on how slow they were to react. We've now seen, obviously the world S&D change on protein, and I'm talking specifically soybean meal. You see continued challenges, and the crop reduction estimates coming out of South America, and you've seen a rally here in April alone, of around 30% to 40% in the soybean complex.

So what I can unequivocally say here, is we've seen the protein prices on the USA side move back up, to where they have a 3 in them, which is a 50% improvement. And you'll see that translate through. So yes, I'll give myself a little bit of a timing lag on the protein.

The fat prices were starting to move, and then at the end of the day, they have really moved up substantially now. To me, and you asked on the surprise side, I'm surprised also that I can see sales of used cooking oil now happening, at equivalent to soybean oil. And then I don't know that I've ever seen that in my career, other than double counting, when it went into Europe back in the -- I don't know, four or five years ago.

That's helpful. Thank you. Two more. On the pet food, you talked about some mix hurting you, needing to go into different markets, but also for Kentucky when it scales some different perhaps, feedstocks or processes. Could you dive into that a little bit more, in terms of the new CapEx in pet food, and what you might need to reformulate?

Yes, and let me comment a little bit. Number one, these were two brand new plants that had to be approved. And so, they were completed late last fall or mid last fall, in order to get through the quality and certification processes that were necessary.

The sales team did a nice job, put sales on out there. And at the end of the day, we fired up in January for fulfilling those sales, and those orders were slow to come in Paducah. The plant, as I referenced is working properly, and really is a world-class facility. Orders are picking up now.

So when you build a budget, build a plan, and communicate, sometimes you divide by four, and then talk about it from a linear perspective. So from that perspective, we're building momentum.

I guess we're a little bit of the new kid on the block, and earning our stripes in the sense of getting to ship orders, but you're going to see a nice improvement in Paducah in April. April, May are in the second quarter, and going forward, I think we'll be at run rate that we've communicated there.

The Ravenna plant is a beef plant. Paducah is chicken for pet food. Ravenna is beef. We had some customer specifications change on us, here in the fourth quarter on us, and has forced us to go back and spend about $1 million more to repipe and modify to make the products they want.

The good news is, it's at equivalent or better margins as we were able to move pricing up. So getting a little later start there, than what we had put in, or communicated in the 10-K call or the March call, but very optimistic.

From the standpoint of the other pet food businesses, it was really the inclusion of the chicken grade, or the dried chicken products that go into pet foods. Just really at the end of the day, the market got a little bit of a seasonal slow January ramp up. Fourth quarter, it kind of dried up, thought January would come in, and it did pick up momentum.

It's running full now. So we've seen the spreads to -- what we call our premiums there rebound quite a bit. There's a lot of material in the world today.

So those premiums are under just a little bit of pressure here in May. But at the end of the day, it's a much improvement from fourth quarter, and picking up momentum.

Great. And then lastly, back to Diamond, two real quick questions. Number one, dividend potential remaining of 2016 into 2017, given the expansion, I think you press released, that you're going put some of that back into CapEx.

And then secondly, your early thoughts or quick thoughts on OMB and the RVO hopefully in a couple weeks? Thanks, folks.

Well, let's see. I think I'll talk a little bit, and John Bullock, if you'll step up, as you returned from DC on that. I mean, from an additional dividend standpoint, we communicated in our press release that we're finalizing engineering and final cost estimates, labor market's moving, steel prices, et cetera. And then, really until you get through the final, final engineering -- we did try to give people the estimate of how much it would cost to bring on that 115 million gallons.

And I think that's out there for you. And so, at the end of the day until we see the final cost estimate to pull additional dividend out, like John referenced here, we've got the debt down to $89 million. There's still -- we're going to build cash down there pretty nicely, as margins are improving, and our ability to access the LCFS market is improving down there.

And so I think, as we get towards the end of the year, we'll just see where we're at, and forecast going forward. From John, from a mandate, you came back from DC, what did you learn, anything?

Well, as we all know the EPA has sent the rule over to OMB, which is the final step of the rule making process, and OMB is in the process of reviewing it. They are having interested stakeholder meetings last week and this week.

And so, I would anticipate that some relatively soon -- now what that means exactly I'm not sure. But certainly by the middle of June, I would anticipate that they would be out with the 2017 advanced biofuel mandate, and the 2018 biomass-based diesel mandate. I think the feeling that most folks is have, is that they are going to continue to increase those mandates.

We don't know how much. But I think they probably will increase those mandates. But I don't sit in the decision-making chair for either EPA or OMB, but the signs seem good that we will continue on a path of expanded mandates.

Our next question comes from Adam Samuelson of Goldman Sachs.

Great, thanks. Good morning, everyone. Maybe continuing on the discussion about the RVO. And Randy, John, I'd be interested to get your thoughts on kind of where we are, sitting here in mid May towards compliance of 2016, and thoughts on the RIN market here?

It would seem like the RIN generation to date, both at the D4 and D6 level is trailing, kind of the total 2016 RVO targets. And do you have any thoughts on where that RIN bank could sit by the end of the year? Thanks.

I think when the EPA, this is John, when the EPA released the final rule for 2016, for both advanced biofuels and for the biomass based diesel, their intent was to try to keep the market snug, but not red hot. And it certainly looks like from the early production levels that, that's probably where we are, as we begin the year.

Obviously, all we've done is seen the first quarter at this point in time, so things can change. But at this point in time, it looks like we will be pretty well-balanced from a supply and demand standpoint on D4 and D5 advanced biofuel and biomass based diesel. And then, we'll wait to see what they do on the advanced biofuel.

I think one of the things that was important about what the EPA did in the last rule making, is that they really jumped up the advanced biofuel category from 2015 to 2016. And that presents a tremendous opportunity for biomass-based diesel, as really the only other product that can fulfill that advanced biofuel bucket is ethanol, sugar-based ethanol.

And as we all know, the price of sugar has doggone near doubled in the world here, in the past year. So sugar-based ethanol is a fairly pricey product these days, which is creates an opportunity for biomass based diesel to fulfill that advanced biofuel bucket. And so, I think that's going to be a key here, as we move towards the RIN pricing for the balance of the year.

That's helpful. And then, maybe Randy, you made a comment earlier about yellow grease price is trading pretty much at parity with vegetable oil, and soybean oil prices. So maybe your thoughts on the drivers there? I mean, I guess, it's the pull from the biodiesel market, but any thoughts on how that spread looks going forward?

This is John again. The LCFS markets are really the key driver to that. Under the low carbon fuel standard, the lower your carbon intensity rating is, the more of a premium you receive as a credit when you sell your product. And as it happens, used cooking oil has an extremely low carbon intensity rating under the scaling system that the California Air Resource Board uses.

So that means that the value for used cooking oil, when it's converted in biofuel that's sent to California and used in California is greater than other fats. Now that carbon intensity rating changes from time to time. But as a general rule, used cooking oil is one of the better products that fits into the low carbon fuel standard concept, and therefore the value is created for the raw material.

That's helpful. And then, maybe if I could just one quick last one. In the first quarter results, did any contract lags -- I'm thinking more on the protein than the fat side, but in the feed segment, was there any meaningful kind of negative impact from contract lags that hit 1Q results, that we should expect, should at least reverse in the second quarter, and probably go the other way?

I don't know that I'd call it the negative impacts, it was simply price. We don't carry at our -- and I am speaking specifically USA here, when I address this -- I mean internationally Canada and Europe were steady as she goes. In the USA, and especially in the Midwest plants, we just don't carry any storage. And so, as that product declined in February and then started to come back in March, there isn't a big forward sales book there on a lot of them.

So we should see -- I was seeing cash prices come out of the Midwest back into the high [2s], low to mid [3s] here in late March, early April. So I think that will translate on through even greater in May. And so, essentially what you've got back now into the USA rendering business, is you have fats with a [3] in it, and proteins with a [3] in it, in the middle of the country here.

The poultry side continues to run very, very strong out there. That's the -- our plants in the southeast and then the southwest, and those products continue to move nicely to the markets. There is, given the strong slaughter out there, Adam, that you do follow. I mean, there is an abundance of chicken proteins out there, but you always start to try to -- you feel a little bit of pressure here, when you transition from pet food to aquaculture season.

We're in that window right now, but overall, it still remains far more positive than it was in Q1. That also relates down to the feather meal products, as those move into fertilizer, and then back into range blocks in the summer here.

So overall, the protein complex is much improved. At the -- as we -- as the guys were all down at the poultry show here I think in February, there were bets whether or not we would see meat and bone meal or animal proteins trade down to sub $100 a ton. I think the lowest cash trade down was around $150 and before they've come back now.

So they've almost doubled in a period of 60 days here. So that's what flowed through the Q1 results, especially in the USA feed segment.

All right. I appreciate the color. Thanks very much.

Our next question comes from Heather Jones of BB&T.

Good morning.

Good morning, Heather.

So sticking with the pet food discussion, really quickly, so Ravenna, the Ravenna plant, when do you expect that to be producing at original expectations?

Heather, this is John. We'll complete the revisions from a process standpoint here in May, and then we'll be bringing the plant on a revised operational basis up here in June. So but I would anticipate that in Q3, is when you would see Ravenna back online at where we thought it was going to be at the beginning of the year, before we changed our specifications.

Okay. And Randy in the past, you've talked about some types how the cash markets can differ significantly from what we see in the quoted markets. So I just want to make sure what we're seeing is similar what you're seeing.

You mentioned the spread between feed and pet food contracting some sequentially, but we're showing that on a year-on-year basis, it's much better. I mean, almost as -- well, double what it was a year ago. And so, I was wondering if that's consistent with what you're seeing?

Yes, I mean, and that's right, always the difficulty of describing -- we try to put a trade index out there using the Jacobson, and whether or not you're using the mid South or the Georgia spreads, it is better than it was a year ago. The problem with it is, is that there continues to be a significant amount of production that is being still -- when it can't be sold into that premium market, it gets forced back into the feed grade market.

And so, at the end of the day, you are seeing a cash deviation out there. There's some discounting. Every time a little bit of avian influenza pops up, whether it's in turkeys or chickens.

Then all of a sudden, somebody closes a border, and we back up material back into the US here. So it's better than it was, especially in fourth quarter, we saw the spread on a cash basis, even narrow down to $60 to $90 a ton.

It is way back, but there's still a little bit of material being discounted out there. But overall, it's much better, Heather, and we anticipate it will be pretty steady going forward here.

And then, really to translate the impact to people, so they understand is, is this is one of those things where we have built fixed margin formulas, and we've built shared margin formulas with our suppliers. And shared margins meaning, we're sharing those premiums with it. And if the premium is $300 a ton, and you're sharing 50%, that's $150.

And if the premium is $200, you're sharing a $100. And so, that can have a pretty sizeable impact, depending on where the cash markets move during the quarter. And so, we got like we said, a little bit out of the gate, a little bit slow here.

It improved during the back end of the quarter, and it's very strong right now. But there is a lot of material that's still out there in the marketplace. So don't want to position anything that's alarming there, it's not.

It's just part of how the business works, and it has improved. But the cash markets didn't move as rapidly as the sheets did here so.

Right. But I mean, there's seasonality in your business so it's instructive for us to look at it on a year-on-year basis. So looking at it relative to Q2 of 2015, is that business better than it was in Q2 of 2015?

John, do you have that? (multiple speakers)

Because I mean, according to Jacobson, it's more than double the spread that it was a year ago. So is that a head fake, or is there significant improvement?

No, under the Jacobson, it is significantly improved, that's correct.

Okay. Then going to the LCFS market. I wanted to check my math, because the math that I'm doing, given the difference in the credit per gallon for UCO-based or tallow-based renewable diesel versus conventional soy biodiesel.

Even assuming that carbon intensity score gets lowered, it still looks like that the difference in that value could justify another $0.05-plus move in yellow grease per pound, even if soybean oil stays flat, before yellow grease would price itself out of that market? And I was just wondering do you get the similar math?

If you look at $120 metric ton -- and I'd note metric ton confuses people -- but that's how the LCFS trades, that comes to a differential of about a $0.50 advantage of used cooking oil over a soybean-based biofuel into the California marketplace. So there is an advantage for waste oils, used cooking oil, tallow, distillers corn oil vis-a-vis traditional crop-based biofuels.

That's been an advantage that's been in place, basically with the other programs as well. So just because there's an advantage in the program, doesn't necessarily translate into 100% sharing with the raw material is suppliers. But there is an advantage, you're exactly right, under the LCFS, on used cooking oil and tallow, versus soybean oil, canola oil based biofuels.

Okay. And then my last question is on corporate expense. One, the D&A was, for that segment was up significantly year-on-year. Was there a one-time item there, or something that will go away in subsequent quarters?

You said SG&A, and then you said, D&A, the depreciation and amortization?

Yes, for the corporate segment it was over $4 million versus like the low [$2 millions] (multiple speakers)

Yes, there was -- (multiple speakers) in my script, I said it would return back to that, about a $69 million level. We were around $69 million to $70 million in the fourth quarter of last year.

There was something flowing through in the first quarter, and then we -- it will be back to that $69 million to $70 million on a quarterly basis for the remainder of the year. That's correct.

And then on year-on-year, it was elevated some. Understand there were some legal fees, just wondered if you could help us understand the magnitude of those, and when those will go away?

Well, there was two items, as you pointed out, that was discussed in the MD&A. It was on benefits and on legal. The benefits was at the end of the year, of when we do the accruals for the incentive comp, or the stock value of the incentive comp, those prices that were in place at the end of the year, and then the prices that were in place when the stock was issued.

That was when stock went up almost $4 a share. So that cost flowed into the first quarter, when the stock was issued or the options were issued.

And then, the other was on legal, two items. It was both a two legal cases that we're working on, since those are currently being worked on, we don't want to discuss those on the call. And then there was another one on it, a property sale from a few years ago that we're doing some work on, from an environmental standpoint that flowed through, as far as legal and consulting work.

But second quarter, we should have a little bit of that on the legal still coming through, but that should come off some. So that was increased expenses in the quarter.

But it should come off by Q3?

Yes, yes, by third quarter, we should be back a little bit on that. Okay.

Okay, perfect. Thank you so much.

Okay.

Our next question comes from Dan Mannes of Avondale Partners.

Thanks. Good morning, everybody.

Good morning, Dan.

I want to follow on the topic on the pricing lag. Obviously, we did see the big move up in pricing in the latter part of the quarter.

Can you maybe walk us through your forward selling, and the timeline for realizing price, maybe by end markets? So breaking it down between fats, proteins and then bakery, like how quickly we should see pricing start flowing through?

Yes, I'll talk about fats and proteins. Bakery has been pretty flat here, pretty much pro forma where we expect it to at these levels.

But remember the fats -- we've always talked about somewhere between 40% and 50% of our production heads down to Diamond Green Diesel. And that's pretty much on -- because of the supply chain, you've got anywhere from 45 to 60 days forward book on there. So that will start to flow through.

Now the good news is that comes positive to us, but that raises the price then to Diamond Green. It allows me to stand on my soap box again, and say that's the reason we built it to offset the ebbs and flows here.

The protein side, Dan, you've basically got a couple different programs that happen in the US. You've got the ruminant or meat proteins that tend to be both consumed in the US, and then you have to get a significant portion of them anywhere from 20% to 40% of them out of this country, because there just isn't adequate demand anymore. So on the export side, you can have anywhere from 45 to 60 days of forward sales to balance your demand book on that.

The poultry proteins for the most part, stay within the 30 to 45 day period there. So really at the end of the day, like I'm really just trying to be very open and transparent on, meat and bone meal in the Midwest in March traded on a cash basis around $200 at the plant, and now was up at $275, $300 in April, and we should see a little bit more strength even in May.

So that's how it flows through. So 60 days on a majority of fat, anywhere from 30 to 45 days to 60 on the protein, and protein exports are 45 to 60 out, because of both containerization, and the export books.

Yes, the only follow up, I would make there is, particularly as it pertains to proteins, is historically you've commented that proteins is where you have your least amount of non-formula business. So while pricing does get better, and I'm sure it helps you around the edges, I would think the bigger price advantage to you, from a bottom line perspective is really on the fat side?

Oh, absolutely. John is over here just shaking his head, going oh, yes oh, yes. So that's especially true in the USA, that you will see the bigger bump coming from the fat price move up, that, that it transitioned or translated from March to April here.

And I will tell you in the preliminary April results, the -- all of the fat benefit hasn't even come through yet. That's still part of the supply chain lag that happens.

Got it. Two more follow-ups, one is on California. Can you talk at least currently about what your pathway is there, what progress you've made in terms of ultimately delivering? And third of all, have you worked through the economics on delivery, and if at all, you would need to share any part of the credits with a potential blender?

This is John. We are shipping product to California from Diamond Green Diesel. We have approved pathways, and we've had them for awhile.

I know they don't appear on the California website. Dan, you've asked that question. But that's is simply because California has a verification process on pathways, where you have to submit pictures of loading the ships and so forth, the way you said you're going to load them.

And they go through the review process on that. You're approved prior to when they go through that review process. Once they go through the process, then they'll post it on the website.

So Diamond Green Diesel has all the pathways that it needs to be able to go to California, and we are shipping product to California. How the economics of sharing that green premium, the credit, the market is still in flux on that, on how that's going to work. It's brand new, they just reinstated the LCFS here late last year. And I think we'll see that move around over a period of time.

It is important to note though, that from Diamond Green Diesel's perspective, all of our existing long-term contracts end at the end of 2017. So as when we go into the 2018 time frame, we will have all of the supply chain capabilities we need, and total contract freedom at that point in time, to move every gallon of Diamond Green Diesel's production to the LCFS markets. And frankly, that's where we anticipate every gallon will go.

Got it. I guess, my comment as it related to the sharing was -- I guess, I wanted to understand -- you have an advantage in terms of having a much lower cost of blending, since you're basically a homogeneous product with the existing market. Vis-a-vis biodiesel, which obviously, the blenders seem to want to take a significant toll on, before blending that product. So I guess, I wanted to understand maybe your advantage there, as it relates to being able to retain more of the green premium?

We have none of the issues associated with the margins that the blenders want to take, that the biodiesel industry faces. So the fact of the matter, that's not going to be a concern for marketing renewable diesel into California.

And then, Dan, this is Randy, and just to fill in a little bit. Obviously, we always remind people that Diamond Green was a predecessor of the LCFS, and thus the marketing strategy and deals that were put in place were for road fuel. And so we're in the process of transitioning barrels that were headed to road fuel, where we can arbitrage the contract back to the LCFS.

And I think by 2016 here, back half 2016, early 2017, a greater portion of our barrels there will be headed to California than there are today. So I don't want to give a number there, because I don't know the number, but it's clearly an effort that's being put forth.

Got it. And my final question is, just given the meaningful improvement you see in UCO pricing, and your comment about trading at parity with SBO. Can you talk at all about the competitive environment on the collection side?

And maybe anything you've done in order to protect your share here? So you're able to capture the up, you're able to maintain volume, in light of what's likely to be a more competitive environment?

Yes, Dan. Yes, we've been working on essentially revamping our restaurant services organization for over a year now, with an emphasis on putting more tanks inside of restaurants, as opposed to the outside. I think you're absolutely right with higher prices.

We'll see some of the stealing that we saw historically in this business come back. The weather is a little nicer, it's a little easier to drive your truck around at night, and steal grease. And so, we'll see some of that.

But we have been working and preparing quite frankly, before we knew the LCFS was going to be a big driver to us, to make sure that we could protect our volumes, and try to expand our volumes. Because we have the perfect vertically integrated supply chain right now, to be the person that's in best position to be able to pick that used cooking oil up in the restaurant. So we are working on that.

And I think, Dan that's what -- I think from a standpoint of John, has taken on a leadership position in that area with Todd Mathes. And they've done a nice job of -- I looked back, in the height of 2010, 2011, 2012, as I was doing some comparisons the other day.

We've actually been able to grow our volume now in 2016, anywhere from a -- right at 20% to 30% of new volume out there. So we've got a very effective go to market strategy program. Clearly, it's turning back into liquid gold, as both you and Heather point out.

We'll do our best to guard the fort and the safe here. But at the end of the day, our volumes are way up from where they were, and our programs are much different than where they were so. And John has been able to widen the margins, and so you'll start to see that benefit, I think truly flow through here.

Got it. Thanks so much guys.

Our next question comes from Ken Goldman of JPMorgan.

Good morning. It's Tom Palmer on for Ken. Thanks for taking my questions. First, I just wanted to clarify something you touched on a bit earlier. In the fourth quarter, you noted that formula lags hit -- or hit EBIT in the feed segment by between $7.5 million and $10 million.

Sounds like impact in first quarter was pretty neutral. As we look at the second quarter, do we see a reversal, and probably see some degree of boost from those formula lags?

The answer is, clearly, there's a lag. And let me -- obviously when you get into a situation of -- two things. One, when you got prices running up, and you're buying off of the sheet for a portion of your business or the trade indices, you're in a case where you're sold 60 days forward, you're buying at a higher price this week, and putting it in [against] the lower price that you've got on the books.

So you always have to work through that. That's what you saw the lag in the fat prices that were under contract, with a rapidly escalating market here towards the end of March. On the protein side, you got -- you had some forward sales that were higher, and then they went down much deeper and lower.

And so, you've got lag once again on the way back up. But as I've said here Tom, and I hope I'm clear about it, we've seen fat prices come up rapidly here in April. We'll see them come up even more in May, as they translate through the USA P&L.

I mean, the international side is very consistent. And then, in the protein side, we've seen a 50% improvement in cash selling prices on the meat and bone meal side throughout the Midwest here. So that will translate through.

And then additionally, from the fat price standpoint, remember, we always talk about -- and John Bullock was on with the restaurant services business, that every $0.01 of pound of price escalation that you see in the used cooking oil business, translates back to around $4 million to $4.5 million of recognizable EBITDA to the USA business, and that hits the feed segment. So that -- you will see a pretty nice bump in Q2, with a lot of that coming from just straight used cooking oil, and then additionally from the USA red meat rendering side of the business, as those protein prices improved.

Thank you for the clarity. Just one more -- you touched on this in the prepared remarks, but was just looking for a little bit more clarity. Last quarter, you indicated the food segment might have been aided a bit by pull-through from the first quarter, such as the timing of the New Year -- the Chinese New Year.

But it looks like -- I mean, 1Q was really strong and more comparable to that fourth quarter, than perhaps we'd expected. Were there areas that were stronger than you had initially anticipated, and could you touch on those?

Yes, the food segment is clearly -- remember, one that was completely acquired with the Vion acquisition. And it's made up -- really it's anchored by the gelatin business and the edible fats business.

And a couple things, the gelatin business remains robust. I mean, clearly, in Q1 we had a little bit of -- the Chinese New Year was a little bit later this year. And at the end of the day, as we followed on, volumes remain strong and rebounded nicely, and throughout the balance of the quarter.

Europe remains strong. The US, we brought on our new major customer, and our expansion in Dubuque, Iowa. And then, we saw margins improve in South America, driven by the raw material availability, and the currency translation.

So from a Rousselot perspective, the four continent system just continues to perform very, very nicely for us. Traditionally, we see a little bit of seasonality in second quarter, but right now at, preliminary April we had pretty good system that still is running at capacity out there.

Now in the edible fat side, you saw what? You've seen a decline in palm oil supplies in the world. So palm oil prices have rallied rapidly throughout February.

I think, the Malaysian stocks are now at the lowest, since the year or two years ago or whatever. But at the end of the day, animal fats are sold against the hard fats, into the edible and industrial market in Europe predominantly.

And so, we had a little bit of a widening of margins there, that happens for us when palm oil moves up, and animal fats don't react quite as quick there. So you had some positive things there, and I think for second quarter, we see pretty much more of the same, coming on in the food segment for right now.

Great. Thanks guys.

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

Hi, this is Patrick Chen on for Ken. Just a quick question. Do you still expect to hit the $450 million to $500 million full year EBITDA mentioned on the last call?

I mean, it seems like food is the only segment that under-performed relative to your expectations, and it will likely rebound going forward. So can we expect performance later on in the year to offset the 1Q weakness, given higher fats, grease, protein prices, [RHGI guys] weren't planning on coming back online, and higher seasonal [bodies] of production?

I don't know that I'd throw all of those in there, Patrick. But I think what we're trying to say to people is, is number one, I think you've got an improved run rate.

And clearly, if the prices hold that we're seeing right now in the USA, the food segment remains strong, Europe and Canadian rendering remains strong, and we don't have anything negative hit us in the biodiesel side within North America, yes, I think we're clearly on that run rate. And what we can see clearly here in second quarter, and the start of April supports that. And that I think -- but I mean, if you look back here, back when we talked to you in March, I think soybean meal was $260 a ton, and now it's $360 a ton.

So there's some things that have moved pretty rapidly out here, that look fairly positive right now for what we're doing. And yes, it's hard not to say, that isn't the run rate you'd be on, possibly with more towards the higher side there.

Great. And switching gears a little bit to the DGD expansion, how do you foresee that affecting fats and grease supply demand? It's about 1 year, 1.5 years, 2 years out, but will fat supplies grow in line with your expansion, or will there be a tightening of the supply chain?

Well, I think we've always talked, that the product mix down there today is roughly 40% Darling's mix, which is a huge portion of used cooking oil going in there, a little bit of animal fat out of the Darling system. Then 40% corn oil when it's available, and then 10% other stuff -- and other stuff being poultry fat.

Poultry fats traditionally and typically, have not had the profiles that we want to run through that plant. They tend to carry metals in their feedstock, so we do have some approved poultry suppliers, but not a lot in there today.

As we move forward, clearly, there is not enough used cooking oil in the United States to support the next billion pounds of fat that's going to need to go in there. So the reality is, it will come out of the animal fat side, and it will come out of what we call, the high acid, low grade animal fats that are in animal feed today, and not being run down there.

And as John Bullock said, between corn oil, used cooking oil, and then animal fats, those are your carbon intensity premium products, and that's what will be put down there. So I think at the end of the day, it should firm animal fats, but what the heck do I know? That's a year away yet so.

Appreciate the color, thank you.

Okay, thanks.

And this concludes our question and answer session. I would now like to turn the call back over to Randall Stuewe for any closing remarks.

Okay. Thanks, everyone. Q1 is in the record books, Q2 looks to -- has to have some really good momentum here, and we look forward to talking to you here in August. Thanks, again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.