Darling Ingredients Inc. (DAR) Q1 2012 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the Darling International conference call to discuss the company's first quarter 2012 financial results. With us today are Mr. Randall Stuewe, Chairman and Chief Executive Officer of Darling International and Mr. John Muse, Executive Vice President, Finance and Administration. [Operator Instructions] This call is being recorded and your precipitation 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 Mrs. Melissa Gaither, Director of Investor Relations for Darling International. Please go ahead, ma'am.

Thank you, Emily. Good morning. Thank you for joining us to review Darling's first quarter 2012 earnings results. Randy Stuewe, our Chairman and CEO, will begin today's call with an overview of our first quarter financial performance and discuss some of the trends that impacted our results. John Muse, Executive Vice President, Finance and Administration, will then provide you with additional details about our financial outcome. Randy will conclude the prepared portion of the call with some general remarks about the business, after which time we will be happy to answer your questions. Before we begin, I need to remind everyone that this conference call will contain certain forward-looking statements regarding the business operations of Darling and the industry in which it operates. These statements are identified by words such as may, will, begin, look forward, expect, believe, intend, anticipate, should, estimate, continue, momentum and other words referring to events to occur in the future. These statements reflect Darling's current view of future events and are based on its assessment of and are subject to a variety of risks and uncertainties beyond its control, including disturbances in world financial, credit, commodities and stock markets; a decline in consumer confidence and discretionary spending; the general performance of the U.S. and global economy; global demands for biofuels and grain and oil seed commodities, which have exhibited volatility and can impact the cost of feed for cattle, hogs and poultry, thus affecting available rendering feedstocks. Risks include future expenditures relating to Darling's joint venture with Valero Energy Corporation, to construct and complete a renewable diesel plant in Norco, Louisiana, and possible difficulties completing and obtaining operational viability with the plant; economic disruptions resulting from the European debt crisis and continued or escalated conflict in the Middle East; each of which could cause actual results to differ materially from those projected in such forward-looking statements Other risks and uncertainties regarding Darling, its business and the industry in which it operates are referenced from time to time in the company's filings with the Securities and Exchange Commission. Darling is under no obligation to and expressly disclaims any such obligations to update or alter its forward-looking statements whether a result of new information, future events or otherwise. With that, I would like to turn the call over to Randy.

Thanks, Melissa. Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the Darling International earnings call to discuss our financial results for the company's first quarter. As most of you know by now, our first quarter was one marked with volatility. Volumes improved and then fell off, prices declined then recovered rapidly. While we're out of the gate in 2012 a little weaker than most anticipated, our business remains strong and the underlying fundamentals remain favorable. For first quarter 2012, our key indicators of volume, finished product prices and energy can easily explain our performance. From a volume perspective, we operated at a comparable rate to fourth quarter 2011, but significantly lower than the first quarter of 2011. The poultry cutback is clearly evident as our input volumes were off approximately 5% year-over-year. The beef side, while lower year-over-year, is more attributable to a mild winter that resulted in lower deadstock volumes than lower slaughter volumes. Our Bakery Feeds segment felt significantly lower volumes for both year-over-year and on a sequential quarter basis. We attribute most of this to commercial bakery maintenance shutdowns and the possible influence of a slower economy affecting discretionary spending. On the finished product side, sequentially prices well relatively flat for proteins and fats on average. However, one must dig deeper to realize prices declined further from fourth quarter before rallying sharply in March. As many of our shareholders know, price volatility of the magnitude felt in the first quarter can impact earnings due to the lag effect in our formula business. Additionally, the company built significant fat inventories at our coastal plants in hope of better export markets and prices. Overall, protein demand remains solid due to anticipated short crops in South America and our pet food business remain solid as well. On the fat side, seasonal reductions in biofuel feedstock demand, along with significantly lower export demand predominantly from Europe, influenced price and performance. On the energy front, historically, low natural gas prices help to offset the lower prices and volumes felt by us during the quarter. As we discussed last quarter, our Diamond Green Diesel project should offer us an opportunity to offset some of the impact felt from declining and volatile fat prices. To put this in perspective, if Diamond Green Diesel had been operating at planned capacity in the 2012 first quarter, and assuming feedstock cost equivalent to our selling price of fat delivered to the Norco, Louisiana site and a selling price of ultra low sulfur diesel at the Gulf, minus $0.10 per gallon, plus adding back the full RIN value, our earnings per share would have been approximately $0.12 to $0.14 higher in the quarter and potentially $0.48 to $0.50 higher on an annualized basis. On Tuesday, I visited the construction site and can report we are approximately 50% complete with a significant amount of steel being put up, the tank farm nearing completion and about 1/4 of the equipment set. Our major pieces of equipment are nearing port and should be delivered on the site within the next couple of weeks. Our construction and operations team is doing a fabulous job and we have accumulated an outstanding safety record thus far. Startup for the facility is still in flux, but we are assuming a very late fourth quarter to early first quarter commissioning. With that, I'd like to turn the call over to John Muse for our financial review. After John concludes, I'll wrap up with a few comments before going to Q&A. John?

Thanks, Randy. Please note that the Griffin Industries results are now fully consolidated with Darling and we're no longer breaking out the Griffin contribution. For the 2012 first quarter, the company reported net sales of $387 million compared to $439 million for the year ago period. The $52.8 million decrease in sales primarily resulted from lower selling prices of our finished products and lower raw material volumes. And as Randy mentioned, during the first quarter of '12, as compared to the first quarter of 2011, fat and protein prices declined more than 4.3% to 6%, respectively, primarily due to lower export demand for European biodiesel, milder winter weather producing -- reducing feed demand and softening demand for protein meal as a cutback in the poultry -- by the poultry producers. Net income for 2012 first quarter decreased to $28.6 million, or $0.24 a share on a fully diluted basis, as compared to net income of $46.6 million or $0.43 per share for the 2011 comparable period. As noted in our press release, the $18 million decrease in net income to the first quarter resulted primarily from lower raw material volumes and lower finished product prices. 2012 first quarter net income compared to the 2011 fourth quarter was relatively flat, as finished product prices continue to decline through most of the quarter with rapidly recovering in March. As Randy mentioned, the mild winter weather also provided historically low rendering volumes from mortalities or our deadstock. In addition to the decrease in pricing, our average expenses for depreciation and SG&A increased in the 2012 first quarter as compared to our prior quarterly average expense. The slight increase in depreciation was primarily due to capitalized capital projects expenditures in '11. SG&A was up approximately $6.7 million to $37.4 million, compared to $30.7 million last year, and up $1.5 million over fourth quarter of '11. While the SG&A or an SGA was 35.9. May increase is primarily due to payroll and related expenses and an increase in expense from our first quarter 2011 accounting contingency gain not realized in the first quarter of 2012, which is -- was in the amount of $2.6 million. At the segment level, rendering generated sales of $322.3 million for the first quarter 2012, as compared to $371.6 million in the first quarter of 2011. Bakery by-product sales contributed $64.8 million in the first quarter, compared to $68.3 million in the year ago period. Interest expense was $6.9 million for the 2012 first quarter, compared to $14.2 million in the year ago quarter, a decrease of $7.3 million, primarily due to a decrease in debt outstanding as a result of prior year and current year payouts of the company revolver and term debt facilities, which includes a reduction in deferred loan costs right also of approximately $3.5 million when compared to the same period in 2011. Our other expenses was $0.6 million in the first quarter of 2012, which is unchanged to the same period in 2011. As discussed in the fourth quarter call, we're now separately reporting the company's investment in the JV with Valero as an investment in the unconsolidated subsidiary on both the statement of operations and the balance sheet. On the balance sheet, we reported an investment of $32.8 million at March 31, 2012, and a statement of operations reported a net loss of $236,000 for the first quarter of 2012. This loss is largely due to non-capitalizable expenses as we proceed through the construction phase. Now let me provide some additional balance sheet detail. On March 31, 2012, the company had working capital of $90.1 million and its working capital ratio is 1.87:1 compared to working capital of $92.4 million and a working capital ratio of 1.73:1 on December 31. The decrease in working capital is primarily due to decrease in commodity prices and cash. At March 31, 2012, the company had unrestricted cash of $27.6 million and funds available under the revolving credit agreement of $389 million, as compared to unrestricted cash of $38 million and funds available under the revolving credit of $391 million at December 31, 2011. Going to capital expenditures, our capital expenditures were $24.7 million were made during 2012 first quarter as compared to $12.8 million in the 2011 first quarter, an increase of $11.9 million. And this resulting from various projects that were begun in the first quarter 2012 due to unseasonably mild weather as compared to the period a year ago. I will now turn the call back over to Randy.

Thanks, John. Our first quarter results are now history and we carry some pretty good momentum in the second quarter. Prices are firm, volumes are improving and energy remains very affordable. Our balance sheet and capital structure are strong, and we are positioned well for future opportunities. We're excited about the value-added opportunities that our protein sales team are developing and look forward to Diamond Green Diesel providing us with that counter cyclical hedge we've all anticipated. Overall, our fundamentals are strong, and we look forward to sharing our success with our customers, employees and shareholders. With that, I'd like to take a moment and thank our entire team for the hard work they continue to provide and helping make Darling International a world-class company. With that, I'd like to open it up to questions and answers here. Emily, we're ready to go here, go [ph].

[Operator Instructions] And our first question will come from Farha Aslam of Stephens.

First question is, Randy, could you just share with us your thoughts on how volume is going to progress for the rest of the year in your Rendering business?

Okay. Yes, let's look at it, it looks like about sequentially quarter-over-quarter. As I referenced, Rendering was relatively flat quarter-over-quarter from fourth quarter, as we look forward here. In fact, our volumes actually improved overall from where we thought they would be. We didn't get the big deadstock boost because we didn't have any wintertime here. Chances are, we'll see a little bit of a boost there in the summertime, as the animals will have a problem getting through the hot weather again here. But the poultry volumes, Farha, I mean, as you guys have been projecting, they tailed off from almost a year ago, September. And so year-over-year, they were down about 5%. We're starting to feel the smaller poultry companies come back a little bit right now. I don't know that you're seeing it in excess and placements there. But we're seeing it and whether they run Saturdays or not. So volumes are starting to improve there. The beef side remains pretty well as we predicted. The pork side is running strong. In the Rendering segment we also report the, as part of that number, is the Restaurant Services business that have used cooking oil collection. Those volumes are off a little bit year-over-year, but we're attributing more of that to theft. In the first quarter last year. We had a lot of cold weather that gave us mortalities and also makes the oil behind the restaurants in a solid form and makes theft very difficult. With it being warm this year, we just did not see the theft deterrent that we had in the past. And I'll comment a little bit for you just to stave off questions on the Bakery side, that's where we saw volumes pretty close to the 10% level. From a customer perspective, I can tell you our supplier -- we didn't lose anybody that I'm aware of. It's all downturn and cutbacks and inventory. And the real question there becomes, is it just an anomaly? Or is it more reactionary to the economy? If you look at the ingredient cost for producing bakery goods, they're highly inverted right now, whether you're talking veg oil, whether you're talking flour, sugar, salt. And so it's obviously, influencing behavior to make products later in the marketing year and pull down inventories. But that's probably, as we look at Q1 here, a little more of a surprise than we would have anticipated in the Bakery side moving forward as to why those volumes were down. The Rendering side is pretty explainable and pretty much understandable.

And my one follow-up would be, could you just share with us the M&A front if there's opportunities and how you're thinking about acquisitions?

Well, acquisitions for us start when the phone rings. The phone is ringing. It is -- it would appear that any of the businesses that has some attachment to agriculture and commodity cycles as people tend to take a differing view on global agriculture right now. You've seen a couple of big trades out there and Viterra and potentially Gavilon now. So the market is becoming a little bit more awash with opportunities, as people look to reposition some of these ag businesses. What I can tell you is our cash balances are growing. The balance sheet is strong. And if something makes sense, and sense is really driven by what John and I have known historically on it, we're certainly looking to grow again. And I think that's our pledge to our shareholders.

Our next question comes from Lindsay Drucker Mann of Goldman Sachs.

Just a follow-up on Farha's question. So as of the end of the fourth quarter, I think we have been looking for something like a 2% to 3% volume decline. Is there a way for you to break out how much of the shortfall in the period for Rendering was a function of deadstock versus a function of the packers slowing down more than expected to balance out their margins? How would you sort of bucket the deltas versus your expectations exiting last year?

In the Rendering side, it had super high percentage of it was deadstock. There just wasn't any. Our packers, remember, the majority, if you break it into beef, 20 something percent of our tonnage is beef, 20 something percentage of our tonnage is poultry. The poultry side has really been steady for many months. The beef side usually gets the winter bumps. So at the end of the day, it was all very -- John and I are making eye contact, a very high percentage of it was mortalities that just didn't come due to really no extreme winter weather.

Can you help us put some understanding around what that impact is to your bottom line? Because clearly, that's sort of a one-off that we should think about as getting better on a normal weather basis?

Yes, I mean, clearly, as the team on the call here starts to analyze and you guys do a really nice job of trying to model the business. It's a simple business with volume, finished product price and energy. But then there's a ton of moving parts underneath each one of those metrics. And under the volume side, the weather -- remember, deadstock, there's 2 things attached to it. One, you charge somebody to haul away the animal and two, it's not tied to any formula pricing so there's no profit-sharing in most cases on that. So that stuff falls straight to the bottom line. And given where protein and fat prices are, deadstock's very profitable. The tonnage wasn't there. So that's probably the biggest key. Our packers on the beef side ran as expected, a few Saturdays that they didn't run or most Saturdays they didn't run given the high price of cattle, that's an all formula business. And the same with the poultry side, very few Saturdays there, but it's been that way for quite a while. The big uptick that we get in the poultry side when we're running is the pet grade products that we make out of that and the ingredients for the pet food industry. That business was fairly steady. Those prices both never really reacted down nor did they react up here during first quarter. So the poultry side was steady. The beef packer side was fairly steady. And then, it was the earnings impact was mostly attributable to the deadstock side. Also point out to remember a lower portion of, in the rendering segment, is the used cooking oil side, Lindsay, and that volume was off more than we'd anticipated, both year-over-year and quarter-over-quarter. And with that, not being on formula, and remember that the prices came off in yellow grease pretty dramatically. That hit the bottom line. That's the one that will highly be offset or have the best counter hedge in Diamond Green Diesel. The other piece that I would add to help connect the dots here is that our export plants in LA, Tacoma, San Francisco, Newark, Tampa, New Orleans, Houston -- when Europe had its issues on biofuels, meaning they kept changing their rules on double counting and really, the regulatory arbitrage that was going on, it all but shut off yellow grease exports out of this country. And that was really felt in first quarter here. So all the coastal plants that by their location and position get those premiums for just being in export position built inventories. Thus, you saw on the balance sheet, you saw that the growth there of inventories, which is related to -- while it wasn't obvious to some, it should be because volumes grew substantially while price went down. So the dollars look like they were relatively unchanged, but the volumes are in-store right now and being moved out of position now back at a higher price.

Okay, that's helpful. So you mentioned -- we have this nice pricing lift towards the end of the quarter, but that didn't really flow-through the first quarter, it will probably flow-through the second. Can you help us quantify the impact?

No, I think, it's pretty dramatic. I mean, although at the end of the day, it's -- remember, there's no deadstock. So the main impact would be the yellow grease lift on the non-formula business. And then you saw -- but you've also seen protein. You saw the fats dip down, although Jacobson was reporting in January yellow grease at $0.35. We saw trades as low in the low 30s, below that on the coastal plants that didn't have export position. So you've seen yellow grease move up into the mid-40s and you've seen, at the end of the day, you've seen the proteins move up in the meat and bone meal, ruminant side 275 to material trading on the East Coast at 500. I do want to comment a little bit and make sure everybody understands that when the case of Mad Cow happened, it did disrupt the export trade for meat and bone meal closing the Indonesian market. And that's the bad news. The good news was, the U.S. needed more protein. And so at the end of the day, we were able to kind of reverse logistics with minimal impact back into the interior.

But just back to the -- my understanding for your fixed cost contracts are the ones where you're taking sort of a fixed margin. Is that -- in the event of a rapid moving commodity prices towards the end of the period, I mean, you tend to have a lag effect, so you'll go ahead and pay the price on a Jacobson, then when you turn around to finally go sell the products, you may have a higher price to actually sell it for. And so that will be a short-term margin benefit, which seems to me like it potentially going to flow-through your second quarter because of the timing of the commodity price inflation. I mean, is that true? And if so, would you expect to see some sort of benefit in the second quarter as a result?

Absolutely. I mean, the hardest thing is, is that you, in this business, you have to stay sold in front of anywhere from 3 to 4 weeks just for logistics. And so as we got into that rapidly escalating March, we were upside down both on our forward sales and our formulas there. So you will see that flow through April, May, June quarter.

Okay. Any way to quantify that or no?

You'd love me to, but no.

I'm working it. Okay, and then just lastly, I was hoping to go through the math on Diamond Green Diesel because as we've talked about before, I think there's 2 different ways to talk about potential revenue per gallon for renewable diesel. And I believe you guys mentioned Low Sulfur diesel plus the RIN value, if you were to look at it, just looking at the B100 list price because there has been some disconnect of late and then adjusting for the appropriate RIN number. Does that change your expected profitability in the quarter?

Yes, that would have attributed about $0.08 to $0.10, if you would have taken the B100 and then just the RIN multiplier, the 15 to the 17 adjustment. Yes, that would have given you about $0.08. From our perspective, and we just keep getting smarter and smarter about it as we look at the product, as it moves in the pipeline and as we talk to customers, we're more comfortable talking from a perspective that we're really not competing in that biodiesel bucket. But at the end of the day, from a conservative standpoint, we have no problem talking to you from the B100 or the ULSD, plus the RIN value minus a small freight discount down at the Gulf. And so one method gives you $0.08., one method gives you $0.12. I mean, it's a 50% delta, I understand. And hopefully, it'll be somewhere there. The other thing, Lindsay, I know you're a student of following this is that, we think that when we started to look at the facility, that ultimately, you've got to look at where the product may flow to and given the change from a legal perspective in the low carbon fuel standard in California, this stuff may end up in California. And I can't even begin to tell you what it may be worth there.

Our next question comes from Ken Zaslow of Bank of Montréal.

So my first question is, if I look at the last 2 quarters, your earnings run rate would be like almost like $1 of earnings. Is that how you guys expect your earnings to be going forward? Or is that kind of a trough look at how you think of that? Can you just give us some color to that?

Ken, it's --#1, I've never made a habit of trying to put guidance on this business. I mean, but what you do see out here and I will comment on it is, there's some -- there was some really good momentum going into second quarter here. First quarter, as I've said, you can look at and you can check the box and say, lower mortalities, a little less grease, a lot less bakery, declining prices upside down against the formulas, offset by good energy costs. Second quarter, we've got prices that are off the charts, still volatile. So there are some lag that happens there in the formulas. But the prices are very, very favorable into second quarter. You've got a soybean market that seems to say it doesn't have enough soybeans here and south of here. You've got a corn market that looks, that says, we're going to grow a really big pile of stuff as long as weather permits. I can tell you I've never seen this business where we've had too many -- or no soybeans and too much corn. So the impact on what's going to happen in the back half of the year is one that, I think, is uncharted waters for us. I think, fairly, it's fairly safe to assume that second quarter is very solid, provided volumes maintain where they're running today and even improve a little bit. Third quarter will be a swing depending on how the crop progresses. I think you're a very good student. I've been reading your writing of -- as of late. Your read on that's pretty right on to my opinion. And then in that fourth quarter, it's a complete tossup. And the question will be is, what is the value of a calorie, meaning yellow grease or tallow in an animal feed ration if you do have corn back off to $4.50 to $5.50 a bushel here? And while you have proteins at $400 a ton and soybean oil in the mid-50s? So the question is, can that spread get really too far out of whack? And I don't know that I want to speculate on that today, other than to say I can't wait for Diamond Green Diesel to come up to be there to offset that risk.

Okay, fair enough. The buildup of the inventory, does that not sell-through on this quarter?

Long as the boys can get it out of the tanks and get it sold. Exports have picked up a little bit, but it's moving out at a higher price but not at a higher pace.

But eventually, it will move out, so it's dropping [ph]?

But it is dropping, yes, absolutely. I mean, we are moving the product out. It will flow-through. And you'll see that delta or that change flow-through in second quarter.

So is that part of the kind of shortfall, it's really just a timing issue. Somehow it's going to get through in this year? It's not a point of -- the inventory will go?

Yes. It was a big inventory adjustment for the quarter as we wrote it down to lower of cost or market.

Okay. And then I'm not 100% sure, why was payroll so high?

I got a raise.

Yes, we saw.

In looking at SG&A, and when you look at first quarter of a year ago, there was some credits that flow-through there from the acquisition of Griffin. One of them alone was $2.6 million that was a contingency that we booked at the end of the year as to the share value of what was being guaranteed price. You have to really look at the SG&A from third quarter, fourth quarter forward. And in fourth quarter, our SG&A was 35 8, third quarter 35 5. At this quarter, we were 37 4. $1.6 million of that is a one-time adjustment that when we closed the books at the end of 2011, the incentive comp program was moved more heavily to a stock incentive for management. And when we closed the books at the end of the year, the share price was around $13.30. When those shares were issued in March, the share price was over $17. So we had to book in the first quarter $1.4 million, a little over, well almost $1.6 million, to account for that price increase and that hit us in the first quarter for incentive that was accrued at the end of the year. So if you take that off, that brings -- that's a one-time charge in first quarter, that brings SG&A back to 35 8, which is exactly the same as it was in fourth quarter and third quarter.

So when we look forward, the...

I would use 35 5 to 36 as the SG&A number, that's correct.

And also -- that's also when I look at corporate expense excluding the taxes on your divisional, it was insulated by about $2 million as well, so we should take that down as well? Is that -- that's the link between the 2?

Yes, that is correct. What I gave you is a link between that. That's correct.

Okay. The other question I have is a 5% decline in Bakery volumes leads to a 25% decline in profits. Can you talk about that? Honestly, of all the things that happened in the quarter, I think, that's the only surprise that we really saw.

Yes, there are couple of things that went on there. #1, the volume decline was a little more than that. Pricing was relatively flat of the finished product. But there is a standardization process that we don't spend much time talking about there where we standardized the calories in the finished feed and the blending stock that we used to standardize that moved up sharply. So if you will, the cost of our blending stock moved up and offset that.

Right, but the volume have you seen them leveling off, getting worse or getting better since?

In April, I would say that we have the same plants that are part of our system running at a reduced rate, while in May, we've seen them fire back up and start to move to more historical levels.

All right, so again, this quarter it was somewhat aberrational in terms of what you would see in profitability for the Bakery business?

Typically, as we say, when the ballparks open, you see the yellow grease pickup and you see the Bakery side pick up. It's been a little slow to pick up this year, which I'm not sure I know the answer to that other than I have a theory that it's more related to the economic pressures being felt in the U.S. than it is anything else.

Our next question comes from Tyson Bauer of KC Capital.

The way you're going, we might as well just have you keep missing numbers and having a better stock price. A couple of quick things. When you talked about the freight discount, how much of a discount is there really when you're an adjacent plant and the product is going directly into a pipeline as supposed to discounts that are associated with remote plants that are either trucked by rail or other special transportation? That $0.10, is that already adjusted? Or is that a number that's being awfully conservative, given the format and the location of the plant?

Well, it's one that we try to get smarter and smarter on. I mean, what will happen is a portion of the product will move out of the plant by truck, a portion of it will move out by rail, a portion will move out by barge, a portion move out by pipeline. The more that can go out the door by pipeline, the better off we'll be. So at the end of the day, it -- that's kind of it, throwing a pretty sharp dart at the target here right now, but we keep getting smarter and smarter about it. I mean, long-term, the question is going to be, can we differentiate the product? It fulfills both the biomass and the advanced bucket, where is the final market for it? More and more interest out of California with the ruling out there on the low-carb and fuel standard. Clearly, the carbon value and footprint of this product making greenhouse gas number makes it a very attractive product there. So we'll see, Tyson. I mean, it's a moving target. I know that there are -- the track record, whether it's dynamic or whether it's next [ph] days model on palm oil, isn't exactly stellar. But at the end of the day, certainly this product has a home, and I think we're starting to understand the economics very, or much clearer than we were before.

You touched on this a little bit with the soy complex and the corn dynamic and how that all plays out which we'll see over the summer months. And also given what's happening in South America, where they may end up becoming a net importer for at least a year next year. When you run the equivalent calorie feed formulas on a 450 corn relative to soy oil trading at about 53, you're coming up with about $0.20 variance from the top end to the bottom end. Have we seen that kind of spread? At least I don't remember in the umpteen years of covering you guys, that big of a variance between the top end and the bottom end, where do you think we kind of play in that range?

Yes, that is so well said because that's what I was attempting to articulate because if you look at absolute values, that's what the math or the caloric math would tell you. But we've never seen that before. So something's got to give. And potentially, I think, what you're going to see out there as the -- on the positive side is the European situation is one that I don't know has much clarity today to be able to handicap it. But let's see, they've thrown out Argentine methyl ester. They've thrown out palm oil as a feedstock. What are they going to make biodiesel from? And the question is, do you use grapeseed oil that's domestically produced? Or do start to bring in the carbon positive used cooking oil that they did, that drove cooking oil prices up last year. So our guess is, is that Europe will probably offset that downturn, driven by the lower or the potentially lower corn prices, but it hasn't materialized it.

Is there any possible -- this is my last question. Is there any possible benefit, we're seeing Valero kind of holding back on converting their ethanol plants to get out that crude corn oil because of the pushback on the lower caloric feed formulas from the DDGs taking that oil out. Is it just a zero-sum game that you can actually benefit from? Or what's your read on that maybe this isn't the be-all end-all to take that crude corn oil out of the DDGs because it's making that much less valuable on a feed formula?

Well, once again, well said. You've done your homework there. I mean, what looked like a no-brainer in that business, the market has now adjusted and said that a defat at DDG should be worth less, and it truly is. And so the economics are still compelling, but not to the point that they were to defat DDGs. And I think you're going to see the majority of those dry mill systems convert over to that technology. It's in process. The equipment's ordered. We're fairly close to it. I mean, one of the investment thesis is, as we went forward with Diamond Green Diesel all along, was that we believe that more and more of the DDGs would be defatted because it made sense to do that. It gives some more flexibility, more alternatives. That product will not enter the edible chain and it's an inedible product, high in waxes. So it's very challenging, at least today to run into classic biodiesel plants. It's a very attractive feedstock for us at Diamond Green Diesel. And to a degree, it's a lower cost and very attractive feedstock that will help us have even have a bigger chance to arbitrage around and maximize the value of our bucket of fat.

Our next question comes from JinMing Liu of Ardour Capital.

Randy, can you give us more color on your yellow grease sales for the quarter? Because if I run my numbers, this decrease looks like very significant.

Yes, JinMing, there's 2 things. As you run through the yellow grease, there's about 3 things that I would say. Some are fairly transparent some aren't. Number one, the majority of our yellow grease traditionally has been exported out of those coastal plants and they do get some nice position premiums that didn't happen. That'd be the first thing. The second thing is, is we absolutely saw yellow grease on the West Coast decline more than it did in the Midwest. And then the third thing is typically, what you see is, when we process a lot of deadstock, there's some -- there's a lot of product that gets reclassed as yellow grease and that didn't happen during the quarter. So those are your primary drivers that happened. Lower exports drove lower price and then less yellow grease from the deadstock trader downgrades of animal fat.

Okay. Is there any way for you to quantify the volume decrease in yellow grease? Because it looks very significant to me.

JinMing, this is John. Again, in looking at the year-over-year from first quarter of 2011, we were looking at 5%, 8% decrease. Fourth quarter to first quarter, that decrease was not nearly significant. It was down a little bit, as Randy had said, most of it, though, we believe was due to theft. Because first quarter in 2011, the yellow grease could not be pumped out of the bins by the thieves. This year it could because of the warm weather. So it's kind of really hard to tell how much of the restaurant volume. We're seeing where we don't see the theft, that the volume is leveled off from first -- fourth quarter to first quarter.

Okay, that's very helpful. Switch to Diamond Green. Once the plant is entering the startup phase, how would you contribute to the startup expense and the future working capital requirement? I mean, I'm trying to say what are your budget? How much did you budget for that, for those requirements?

Yes, JinMing, within our commitment to the Diamond Green Diesel joint venture was a $93.2 million investment. Yes, that included a working capital line within that. And we did not break that out. So we publicly discussed that. But that was to cover almost a month supply of raw material going there. Yes, though, when those assumptions were made versus where we are today, prices are a little higher. We'll wait and see where those fat prices are when we get into the November -- the September, October period when we start having product move in that direction. But we would anticipate seeing some increase in that working capital demand at that time, if prices would stay where they are. But we did factor that in. Where a lot of companies have gotten in trouble with -- they didn't plan on working capital needs as much, we did. We had large quantities factored into our equity investment. But we will see some increase in that. But we don't see anything substantial over that. We think that we're going to see a little bit of extra working capital needs, but we've already had quite a substantial working capital assumption in our investment already.

Our next question comes from Dan Mannes of Avondale.

I want to follow up on a question. I think it was from one of the other analyst. Looking forward to the back half of the year and the potential for divergent performance between soybeans and corn. When you look at your product mix, how do you think you net-net participated in that move? Do you see this as sort of a net tailwind, net headwind? How do you think your business performs in that kind of environment based on the moves you've seen in those commodities individually in the past?

Depending -- if you think of the formula business, there's no impact. I mean, lower corn prices will definitely impact the value of a calorie and a calorie is truly that Bakery business. And so that will have impact on the Bakery business if corn does decline. The fat prices, as we've said, obviously, if on a calorie basis, they'd have to decline. But at what spread can they -- will they, will it widen out to relative to soybean oil or the tight stocks in palm oil around the world? So I don't know that I want to stand in front of you and say, it's headwind. If we have, in third quarter, if we have strong mortalities, mortalities are much heavier in protein than they are fat. So at the end of the day, the strong protein markets are more beneficial. In the back half or the back quarter of the year, as yellow grease volumes typically pick up and then fall off. We'll just have to see, Dan. I don't know. As I said, it's uncharted water. I would tend to say, it's somewhere between the crosswind and to a degree, a tailwind rather than a headwind.

Sounds good. Two other quick ones. First, we have seen a lot of dialogue obviously on the RIN market and the number of fraudulent RINs out there. How does that play into your thoughts on getting "full value" for your renewable diesel, diesel BV100? And if you could just walk us through how you see the current RIN market and how that impacts the value of Diamond Green Diesel?

I don't know that I qualify myself as a RIN expert yet. But the clearly, the move is afoot to make sure that whoever is producing the RIN is legitimate. And obviously, the biggest one to fall, I mean, in Houston the other day or in the Gulf the other day was pretty amazing. So really, I'm not sure how the rest of the year is going to work out as we have to replace the RINs. But at the end of day, I think it's buyer beware and make sure that they're coming from a reputable party. And I think, clearly, our commercial team down there is already being courted because they know both the quantity and the producer of the RIN are going to make them marginally, I think, probably more valuable over time.

So it's fair to say that's one of the reasons why you guys seem confident that you'll be able to get ULSD plus RIN rather than the B100 type price?

Absolutely.

Okay. And then one last final one. Over the course of the last few months we've had a number of headlines around the beef business, particularly both on pink slime and on Mad Cow. Can you talk about any real tangible impacts of either of those 2 things? Or are they really just completely headline and not really meaningful for you?

A couple of things. On pink slime, I think the pink haze is now past us. It caused a logistical dislocation as the processors, the meat or the beef processors that had edible systems that were still capable of running had to restart them up. We benefited from that at our edible plant in Denver. And then, essentially, we had to go find homes for that product. That product was then going to move back in, meaning product, both the finished meat product and the fat product. So it, really, the impact was, where the BPI organization was loading out railcars of edible and technical great animal fat, it was now being produced back at a lot of different sources that didn't have logistics or railcars in place. And so that pressured the towel [ph] market a little bit. That's all but past. The interesting thing in that business, and I don't remotely claim to be a consumer beef expert, is that the amount of that filler product that was removed from the consumer channels, if the consumer continues to buy that, that cut of meat in the form of ground beef, it's going to have to be replaced. And where does that come from? That either comes from another cut of meat or additional slaughter that has to happen. And so there's still a balancing that has to happen in that business. The Mad Cow side, I think, to kind of, if you will, toot the horn a little bit, for the United States, the regulations we had in place clearly work. The system worked. It caught it before it went either in the Rendering chain or in the food chain. The U.S. has us test in different locations. I want to say the number is 40,000-ish approximately brain samples from animals looking for the disease. The old adage if you keep testing, eventually, you're going to find something, whether it's a positive or a false-positive. The form that was found was atypical, which means no one really knows where it comes from. And so pretty much it was a nonevent in the sense of disruption domestically. From an international perspective, we saw a reassurance of many of our trading partners, but the Indonesian step forward both from a consumer and from an ingredient perspective and shut us down. They allowed us whatever we had in transit with a bill of lading to be delivered. But anything that was being loaded had to be postponed or canceled. So that caused a little disruption especially on our West Coast plants of material that had to come back into the interior. That's largely been logistically balanced now. So for us, the next benefit will be as if Indonesia reopens and that material or at least for meat and bone meal or ruminant, ruminant ingredients can move back that direction.

Our next question comes from William Bremmer of Maxim Group.

Can you give us an update on the Griffin integration? I'm just trying to get a handle of continued synergies there and whether or not you've been able to fully utilize their expertise in some of the other facilities to your own. Secondly, then, if you had to pinpoint Diamond Green Diesel, do you really believe that the underlying production begins in the fourth quarter? Or really, do we feel, at this point, looking at it, it's really a 2013 story from that point on? And then, finally, John, if you could just give me a tax rate going forward given the sequential decline and what you're looking for there?

Yes, let me comment a little bit, Bill. From an integration perspective, we're one team and one dream now. Things are working very nicely. The operations teams have come together. It is, from my perspective, it's really going well. Our sales, our solicitation teams, our restaurant services teams are in process of continuing to redefine and realign their efforts. Brian Griffin leads that group and he's doing a really fabulous job for us, as we try to consolidate our offerings from equipment to services and make some modifications to transfer best practices. That's an ongoing thing. The -- probably, the one that, from an integration perspective, is our commitment and our focus to trying to find different products or improve the ingredients out of the meat and bone meal side and Jim Conway side there has done a really nice job in identifying some customers, markets and products that we weren't making before, out of the ruminant side. So overall, I'm very pleased how that's coming together. That's a long-term transition there. But every month is a step forward. We've got a couple of plants now that are being modified to segregate raw materials, to make new ingredients for us. So that's moving forward. From a -- what was the question John on Diamond Green? I'm blank. Bill, what was your question Diamond Green Diesel?

If you had to take a step back at this time do you believe that based upon the percentage complete of the underlying project, do you believe that we actually see production fall in the fourth quarter? Or really fall in 2013, say, mid first quarter there?

From a conservative basis, Bill, I would say commissioning, given my almost 30 years around this stuff, is I have a huge degree of confidence in the Valero operations team and Gary Steckel, our Operations Manager. But at the end of the day, I'm anticipating ramping up very sharply and really towards second quarter of next year that I think first quarter, whether we get started up on December 29 or January 13 or February 1, it's still a learning curve. And so at the end of the day, I would suspect it will be accretive and growing to us in the second quarter going forward.

Okay, great. Then just a housekeeping question for John on the tax rate?

Yes, we finished up last year the effective rate of 37.7%. First quarter was 36.1. %I would use 37.0% as a -- that's something that we've talked to our tax guys. And they feel that it should be a good number. That's what we're going to use going forward. So 37.0%.

Our next question comes from John Quealy of Canaccord.

Just 2 quick questions. First, Randy, I think you earlier referencing Diamond Green Diesel and how you guys are maybe a little bit different than the biodiesel complex in some respects. Can you just flesh that comment out a little bit in the biodiesel complex, we're waiting for the RVO to hit. It looks like volumes are still going to be somewhat invisible until we get that Q4 pop as refiners sort of hit it. So can you talk about how Diamond Green Diesel is or is not impacted by that vagary of RVO? And then, I just have a quick follow-up.

Yes, I mean, right now, obviously, we have been pushing the EPA as has the National Biodiesel Board to come up with the 2013 quantity. A little disappointing that everybody else knows how much they get to make except our sector. I think I'm optimistic that, that will grow. There was some opposition to it that it was probably unfounded, that got listened to for whatever reason. And so I'm optimistic that, that will get cleaned up here shortly. From a standpoint of making a product, and time will tell if we're right or we're wrong with this. But overall, when you make a product that's pipeline ready, that has the attributes of the cold flow and the cetane value, it will disappear in that petroleum complex. It will trade at equivalents to a premium to biodiesel. You just have to find the customers that recognize those attributes. And that's what our commercial team, Clay Bryant [ph] and the team and the Valero services marketing corporation are doing right now. So I can't really tell you more because it's in the developing stage. I'd also tell you that we have been a close follower of what Dynamic Fuels has done. And while they've struggled a little bit operationally with plant design and pretreatment capability, the products that they have made and that's marketed by Mansfield oil is really a superior product and they've done a nice job with it. So overall, we're confident in the product. We've now just got to get a plant up and running continuously and making the product.

And then here's a one-off for you. Given the truck fleet that you folks have and your experience with natural gas, would you ever consider doing some vehicles that return to home every night on the net gas systems, whether it's Boone Pickens and leasing the compressor? Or does that math not work for you guys?

We're in kindergarten on that. We've asked our fleet manager to prepare us an analysis of that. There's a couple of issues there. It's the weight and the heaviness, if you will, of our trucks. And the question is, can they be compressed or do they have to be liquefied? Most reads on it are that they have to be liquefied and then the terminals. You start getting into about $40,000 a copy for truck, whether you convert or you order new. And then you got to come up with a fueling station, which has 7 digits in it. So it's something that makes, possibly make some sense on the lighter route trucks in the cities that can go in and out. But we're looking at it. Long-term, I'm not exactly varies [ph] natural gas from these levels, and neither is the market when you look at it and the LNG terminals that are going to go in and potentially turning the U.S. into an exporter of natural gas. So I find -- a short term view I'd love to take advantage of it. A long-term view, by the time to all the premiums and the extraction that people want for providing you the service, it's kind of a push.

Our next question comes from Roman Kuznetsov of Gates Capital Management.

I got 2 quick questions for you. One, as a follow-up to the growth and integration question. Are you able to quantify, at least approximately, the amount of synergies that have already been achieved and are embedded in the run rate and if there are any more synergies left to achieve there let's say, on the cost side?

No, Roman, we're really not going to -- I mean, it would be just be a true guess on my part. I mean, the routing is done. The operations team's integrated. The products, the marketing teams have been aligned. So there's still some room to go. But for the most part, it's all in there right now.

Okay. And second question, as far as the drop in exports, are you able to provide any more color on what countries and which products were hit the hardest and what you're seeing there now?

Predominately, it was yellow grease exports to Europe, Spain, Portugal. Very little -- none going there but the price of yellow grease is moving back into the feed rations in South America again. So that's about all we're seeing there. We just have not seen that European pull that we saw a year ago.

Our next question is a follow-up from Lindsay Drucker Mann of Goldman Sachs.

Just wanted to quickly touch base on your -- the new plant in Florida and the opportunities you see for converting alternative waste streams? Just any update on timeline, effectiveness and how you're thinking about that project?

Yes, it's a giant pilot plant there and a fairly expensive one to say the least. It is running. It has been running products for some pretty significant trial, feeding trials of the finished product. What we're doing down there is, not to give away any company secrets here, we're looking at different waste streams, dap streams, sludge streams that are currently being land applied to see if we can recover both the fat and some type of usable solids fraction. Hopefully, we can call it protein. And the question is, does the technology work? The answer is yes. The development is on the protein sales team. What is the value? What's the digestibility? Who's the buyers of that? And so we have kicked off now feeding trials at several universities in order to see really what the value of that product is. Is it a soybean meal equivalent adjusted for protein? Or does it have some type of ingredient premium attached to it? That's a product project, Lindsay, where we've kind of got a targeted go, no go, on both additional capacity and expansion later this summer.

Okay. So later this summer, you'll have a better sense of: a, who wants the product and what you can charge for it and b, how incremental it could be ultimately to your bottom line because my sense is that it would essentially be all gravy getting better conversion out of stuff you're already picking up.

You got it. That's a solid read on it. I mean, we are extremely excited about it. But I got to find a customer for the product.

Okay. And then just lastly, on pet, you talked about how pet food pricing, so poultry protein that goes in the pet food market was more stable in the quarter. My understanding is that a lot -- is a lot of this product sold to big pet food manufacturers on contract basis? Is this spot market really reflective of what's going on in terms of the actual business dynamics? And then, also, do you see this product as stickier in terms of pricing even in the event we have some bigger swings in protein, the commodity protein prices?

Yes. Really, at the end of the day, as it flows-through our operating statements, we trade the product annually to the pet food companies, and it's traded at a premium over the feed grade equivalent. And so those premiums were stable to slightly wider than they were a year ago. The underlying commodity is feed grade poultry meal and then it's the premium over. So that was very stable. The one that we do get some volatility around and some pickup in is feather meal. And feather meal was slow to react in the quarter and then started to come back. Conversely, feather meal is a major component in our organic fertilizer business. And if there's a barometer out there of our fertilizer, of the overall economy, our organic fertilizer business really had a pretty solid, well, a near record quarter in first quarter. It's not really broken out today for us. But it was more -- reflected that the economy, at least from the turf management area, meaning golf courses, was -- and from the consumer buying organic products was starting to grow again.

Okay. Do you have any concern that Mad Cow might be a damper on your effort to roll red meat protein, do the same thing with your beef and pork rendering process as you've been able to do with poultry? In other words, establishing sort of a pet food grade for that type of protein meal?

Clearly, it's a concern. I mean, obviously, I think it's a bigger concern that whether you're Tyson, or Cargill or National Beef or JBS, you clearly, didn't need another case of Mad Cow out there telling the consumer, after you told them they have pink slime, now they have Mad Cow. It can't be positive to beef consumption. So yes, overall, it's a concern. But it's one that seems to, you're the first question on Mad Cow we've had in about 3 weeks.

Our next question is a follow-up from Ken Zaslow from Bank of Montreal.

Just a quick question. In your prepared remarks you said that, and I should have picked it up earlier, is the progress in the mix shift in your projects? Could you talk about is there -- to what extent that actually makes a difference and what year it will make a difference? And if you could quantify some of that? I just was curious because it sounds like it was part of the prepared remarks but I don't think anybody followed up on it.

Ken, ask the question again. I'm not sure I understood what you're asking.

I think you said that in your prepared remarks there was progress made in your mix shift on your projects to the mix shift within that portfolio. Sounds like there's some CapEx projects that might be moving more to higher value products somewhere within that or maybe I misunderstood. I just wanted to clarify if there was something in your prepared remarks that we should actually have picked up a little bit clearer than I did.

I don't think so. I mean, we've made some capital investments now to segregate raw materials that will hopefully add value down the line here. But those are quite a few months away yet.

Okay. So there's nothing in your prepared remarks that was talking about your mix shift or any incremental earning that we should be thinking about?

No, there was nothing intentionally said that I can remember.

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

Okay. Thanks, everyone. Lots of good questions. We look forward to talking to you after second quarter. Thank you.

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