Darling Ingredients Q1'16 Earnings Conference Call: Full Transcript

Operator:

Good morning everyone and welcome to Darling Ingredients DAR Inc conference call to discuss the company’s First Quarter 2016 Financial Result. With us today are Mr. Randall Stuewe, Chairman and Chief Executive Officer of Darling Ingredients; and Mr. John Muse, Executive Vice President and Chief Financial Officer. After the speakers’ opening remarks, there will be a question and answer period and instructions to ask a question will be given at that time. This call is being recorded and your participation implies consent to our recording this call. If you do not agree to these terms, simply drop-off the line. I would now like to turn the call over to Melissa Gaither, Vice President Investor Relations and Global Communications for Darling Ingredients. Please go ahead.

Melissa Gaither:Vice President Investor Relations and Global Communications:

Thank you, Kerry. Good morning everyone and thank you for joining us to discuss Darling’s earnings results for the first quarter 2016 ended this April 2, 2016. To augment management formal 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 another trends impacting our business. John Muse, Executive Vice 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 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, after which will we be happy to answer your questions.

For now the Safe Harbor statements. This conference call will contain forward-looking statements regarding Darling Ingredient’s business opportunities anticipated results of operations. Please bear in mind that forward-looking information is subject 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.

Randall C. Stuewe:Chairman and Chief Executive Officer:

Thanks Melissa. Good morning everyone and thanks for joining us. As we discussed in earlier March we felt we had bottomed and we again see in our recovery. Sequentially we improved modestly and had solid performances across all segments and all geographies with the exception of the USA. Sluggishness in rendering value persisted in the USA throughout most of the quarter before steeply rebounding late in March and Diamond Green Diesel was impacted by the down time 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 Railroads’ inability to deliver rail cars of feed stock 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 for highlighted by 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 that 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 Mid-West plans 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 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, our restaurant services group continued building momentum in first quarter from both increased volume and improved margins. This group has truly set the 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 thus we saw pressure on pricing when this product had to be placed in the feed market. Our new wet pet food plans also didn’t perform to our expectations. While the plans are sold in near capacity orders were slow to come in. Operationally -- is completed and world class while -- face some challenges as to our product mix has changed and has forced us to modify the prices 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 the 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 that’s our sales outlook remains positive for 2% to 3% growth this year.

For the quarter China delivered a consistent performance and we now have gone on our expansion in Wenzhou, China. The USA expansion if the -- complete and we are beginning to see the benefit. In South America margins have improved due to row 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 the flow to the bottom-line and our casing business, we continue to make changes to improve margins, lower operating cost and reduced working capital.

For the quarter, CTH ended with lower sales volumes, but achieved improved margins for higher casings. Outlook for the balance of year is for higher volumes and improved pricing. Now in the Fuel segment, the fuel segment remains a very predictable contributor as displayed in the earnings deck. We attempted to the show this by spreading the blender’s tax credit across the represented period in which the credit was truly in. Rendac our government regulated European based rendering business delivered its normal and consistent earnings. Ecoson, our European bio-gas and bio fast rate 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 foreign community with necessary disposal. The plant rebuilt for fertilizer production is anticipated to be completed in the fourth quarter of this year. Our bio-diesel business which is supported by assets in both Canada and the USA continued to enjoy the benefits from the perspective tax credit. Although margins remained compressed seasonally primarily due to the products -- trades and marketing challenges. We fully anticipate margins in the second quarter to improve as LCFS 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 turn around. This was the very expensive turnaround involving -- change down and various metallurgical and operational improvements. We were very pleased with the effort and the plan came up to capacity as expected. However as noted on our press release, the KCS Railroad our primarily delivering carrier declared force majeure on us due to flirting with their system caused by a breaking a dike.

To complete the complicate things even more we have depleted our feedstock inventory prior to our turnaround in order to perform some necessary work. Unfortunately, we launched about a 4 million gallons of production in the quarter on top of the 10 million loss during this 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 some exciting expense in the Diamond Green Diesel. Increasing its capacity from 160 million gallons to 275 million gallons. We anticipate construction begin later this summer, provided all the engineering and required approvals to are received and hope to do the tied ends in fourth quarter of 2017 with the final production ramp up that started in the first quarter 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 noted in his comments we did received the much anticipated blender’s tax credit and as a result we received a $25 million dividend payment from Diamond Green Diesel. In closing, deflationary headwinds persist the during most of the quarter, but it now shifted. Improvements in proteins and fat pricing will be boost USA performance noticeably in Q2 and we expect the momentum we have build 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 build has whether the strong and we are now have a bit of tailwind.

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

John O. Muse:Executive Vice President and Chief Financial Officer:

Thanks, Randy. As Randy mentioned as we move into 2016, we will continue to focus on dept 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 follow 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 reminder of 2016. As I referenced SG&A in the first quarter 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 focused on lowering inventories, managing payables, and being better towards 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 in our first quarter CapEx run rate was $53.4 million. In regard to significant CapEx deployments, we are on schedule we will have two new US rendering plans to online in late third quarter. Going forward, we will continue to focus on debt repayment with the 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 ingredient segment, raw material volumes were consist with prior 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 the offset to lower finished product. prices.

As we move onto the operating segment, a sequential quarterly result breakdown of features 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 ingredient segment was lowered due to the significant declines in proteins, fats and used oil, that its 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 ingredient 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 the 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 and increase of $3.6 million as compared to the first quarter of 2015. The increase is due to improved operating performances Ecoson and Rendac and improved margins in our Canadian bio-diesel facility. The Diamond Green Diesel joint venture first quarter EBITDA was $9.6 million as gladding fat prices, volatile feeding oil prices as segment -- based weight on earnings. As Randy mentioned Diamond Green Diesel performance was also impacted by 80 days of schedule down time for planned maintenance and force majeure cleared 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 pay down debt by $54.7 million leading debt balance in Diamond Green Diesel with $89.9 million. At the conclusion our first quarter Darling’s total debt to EBITDA ratio was 4.41 to 1 compare to our covenant of 5.50 to 1 and the secured debt ratio was 1.96 compared to covenant requirement of 4.0.

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 and 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 continue 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.

Randall C. Stuewe:

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 remains strong.

Our food and fuel segments remained solid and predictable. Our commitment to deliver and grow has not changed, our one quarter into the year we have gained strong momentum towards reaching our goals which includes finishing construction and beginning operating at our two new USA rendering plans, 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 up for Kerry to questions.

Question & Answer

Operator:

We will now begin the question-and-answer session. To ask a question you may press star then one on your touchtone phone. If you are using a speaker phone please pick up your handset for pressing the keys. To withdraw your question please press star then two. Our first question comes from John Quealy of Canaccord Genuity. Please go ahead.

John Quealy:Canaccord Genuity:

Hi. Good morning folks. A couple quick questions here. Big picture first I guess. Randy on the rebound in prices coming in March I think many of us thought it was gonna bleed in and you are gonna 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 moments but it didn’t capture the P&L. Sis we miss it or what was lost there?

Randall C. Stuewe:

No. That’s a super fair question. We started to see the pricing improvement come through in the facts like I said its a long tail when we got a significant portion of our production going into Diamond Green Diesel so that started to move up and we saw 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 the march average sales prices on a cash basis in the Mid-West around $200 a turn which takes you back to almost 2005 and decade lows at that time.

So the proteins cant me by surprise on how slow they were to react. We have now seen obviously the world -- change on protein and then talking specifically soybean meal, you see continued challenges and crop production estimates coming out of South America and you 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 have seen the protein prices on the USA side move back up to where they have a three in them which is a 50% improvement and you’ll see that translate through.

So yes I will give myself a little bit of the timing rag 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 yes, on the surprise side, 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 have every seen that in my career other than double counting when it went into Europe back in the I know four or five years ago.

John Quealy:

That’s helpful. Thank you. Two more. On the pet food, you talked about some mix herding you needing to go into different markets but also for Kentucky when it scales some different perhaps you stocks of 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?

Randall C. Stuewe:

Yes. Let me comment a little bit. Number one, these where 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 of 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 then really is a world class facility. Orders are picking up now so when you build a budget, build a plant and communicate, sometimes you divide by four and then talk about it from a linear perspective so from that perspective, we are building momentum. I guess we are a little bit of the new kid on the block and earning our stripes in the sense of getting to ship orders but you are going to see nice improvement in Paducah in April. April May or in the second quarter and going forward I think we will be at run rate that we have 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 that has forced to go back and spend about a million dollars more to re-pipe and modify to make the products stay one. The good news is and its had 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 business, it was really be 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 but January it would come in and it did pick up momentum. It’s running full now.

So we have seen the spreads to what we call our premiums there rebound quite a bit. There is 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.

John Quealy:

Great. And then lastly, back to Diamond, two real quick questions. Number one, dividend potential remaining of ‘16 into ‘17 given the expansion I think you press released that you are going to put some of that back into CapEx. and then secondly your early thoughts or quick thoughts on the OMD and RVO hopefully in a couple weeks? Thanks folks.

Randall C. Stuewe:

Well let’s see. I think the -- I’ll talk a little bit and John will step up as you returned from DC on end. I mean from an additional dividend standpoint we communicated in our press release that we’re finalizing engineering and final cost estimates labor market move and steel prices et cetera and then I think really tell you get’s through the final, final engineering.

We did try to give people the estimate of how much it would cost to bring on that under 150 million gallons and I think that’s out therefore and so at the end of the day until we see the final cost estimate to pull additional dividend and like John reference to we got the debt down to $89 million or still we’re going to build cash down their pretty nicely as margins were 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 will just see where we are at and forecast going forward from John from Amendy you came back from DC what you learned anything.

John O. Muse:

Was we all know the APA has central rule OMB which is the final step in the rule making process and OMB is in the process of reviewing at they are having interested stake holders meetings last week and this week and so I would anticipate that some time relatively soon out what that means exactly and attribute certainly by the middle of June. I would anticipate that they will be out with the 2017 advanced biofuel mandate and the 2018 biomass based diesel mandate.

I think the feeling that must more -- 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 know decision making chair for either the EPA or OMB but the sign seems that we will continue on a path of expanded mandates.

Operator:

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

Adam Samuelson:Goldman Sachs:

Great, thanks good morning everyone. May be continuing on the discussion of that DRVO and Randy, John I am interested to get your thoughts on kind of where we are sitting here mid May towards compliance of 2016 and thoughts on the RIN market here. It seems like the young generation today versus the D4 trailing kind of the total 2016 RVO targets and do you have any thoughts on the where that RIN bank could sit by the end of the year? Thanks.

John O. Muse:

I think when the EPA. This is John. When EPA released the final rule for 2016 for both advanced bio-fuels and for the biomass base diesel their intent was to try to keep the market snug but not red hot and they certainly looks like from the earlier production levels of that’s probably where we are as we begin the year obviously all we have done as see in the first quarter at this point in times, so things can change.

But at this point in time it looks like we will be pretty well balance from a supply demand standpoint on D4 and D5 advanced bio-fuel and biomass base diesel and then we will wait and see what they do on the advanced bio-fuel. And I think one of the thing that was important about what the EPA did in the last rule making is it that really jumped up, the advanced bio-fuel category from 2015 to 2016 and that presented tremendous opportunity opportunities for biomass base diesel has really the only other product that can fulfill that advanced bio-fuel bucket is ethanol sugar based ethanol and as we all know the price of sugar is near doubled in the world here in the past year. So, sugar based ethanol is fairly pricing product is based which creates an opportunity for biomass based diesel. That fulfill that advanced bio-fuel bucket, and so, I think that’s going to be a key here as we move towards the RIN pricing for the balance for the year.

Adam Samuelson:

That’s helpful and then maybe Randy, you made a comments, mentioned there earlier about yellow grease price is trading pretty much parity with towards vegetable oil, soybean oil prices and maybe your thoughts on the drivers there I guess it’s the pull from the bio-diesel market. But is there any thoughts on how that spread looks going forward.

John O. Muse:

Yes, this is John again. The LCFS markets really the key driver to that under the low carbon fuel standard the lower year carbon intensity rating is the more the premium you receive as a credit when you sell your product and as that happens used cooking oil are has extremely low carbon intensity rating under the scaling system that the California Air Resource Board uses. So, that mean that the value for used cooking oil, one it’s converted in bio-fuel that Central California and Houston California is greater than other paths. So, that carbon intensity ratings changes from time to time.

But as a general rule used cooking oil is one of the better products that puts into the low carbon fuel standard concepts, and therefore the value is greater to the raw material.

Adam Samuelson:

That’s helpful, and then maybe if I could, just one quick last one quick last one in the first quarter results the any contract lags I am thinking more on the protein and 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.

Randall C. Stuewe:

I don’t know that I call it the negative impact so the 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 you goes in the USA and especially in the Mid-West plants we just don’t carried any storage and so as that product declined in February and then started to come back in March there didn’t a bit forward sales booked there on a lot of them. So we should see, I would see in that cash prices come out into out of the Mid-West back into the high twos lower to mid- threes here and then late March or 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 businesses you have batch with the three unit and in proteins with the three units in the middle of the country here. The poultry side continues to run very-very strong out there and that’s the our plans in the South-East and in the South-West and those products continued to move nicely through the market there is given the strong slaughter after there that you do follow on I mean there is an abundance of chicken proteins out there but you always start to try to you feel a little bit a pressure here, when you transitioned from pet food agriculture season we are in that window right now. But over all it still remains far more positive than it was in Q1. That’s also relates down to the several 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 the guys were all down at the poultry show here I think in February that we are bets whether or not we would see meeting bone meal and animal proteins straight down to sub $100 return I think the lowest cash trade down that was around 150 and before they come back now. So they’ve almost doubled that the period of 60 days here. So that’s what flow through the Q1 results especially in US feed segment.

Adam Samuelson:

All right I appreciate the color. Thanks very much.

Operator:

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

Heather Jones:BB&T:

Good morning.

Randall C. Stuewe:

Good morning, Heather.

Heather Jones:

So sticking with the pet food discussion really quickly. So within a plant when do you expect that to be producing at original expectations?

John O. Muse:

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

Heather Jones:

Okay and Randy in the past you have talked about sometimes how the cash markets can differ significantly from what we see in the corded markets. So I just want to make sure what we are seeing is similar what you are seeing you mentioned the spread between feed and pet food contracting some sequentially, but we are showing that on a year-on-year basis is much better I mean almost its well double doubled what it was a year-ago and so I was wondering if that’s consistent with what you’re seeing.

Randall C. Stuewe:

Yes. I mean in that and that’s right always the difficulty of describing we try to put a trade index out there using the Jacobsen and whether or not you using the Mid-South of the Georgia spread. It is better than it was a year-ago. The problem with it is that there continuous 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’re seeing a cash deviation out there. There is some discounting every time a little bit of avian influence of pops up whether its in Turkey’s or Chickens then all the said and somebody closes the 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 merely down to $60 to $90 return. It is way back but there is still a little bit of material being discounted out there. But overall it’s much better Heather and we anticipated will pretty steady going forward here. And then really the translate the impact the people should understand it is this is one of those things where we have build fixed margin formulas and we’ve build shared margin formulas with our suppliers and shared margins meaning we are sharing those premiums with it and if the premium is $300 return and you are sharing 50% that’s a 150 and if the premiums 200 you are sharing a 100 and so that can have a pretty sizeable impact depending on where the cash markets moved during the quarter and so we got like we said little bit out of the gate and little bit slow here and 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 a learning there, it’s not. It’s just part of how the business works and it has improved but the cash market’s didn’t move as rapidly as the sheets did here, so.

Heather Jones:

Alright but I mean there’s seasonality in your business so it’s constructive for us to look at it on a year-over-year basis. So looking at it relative to Q2 of ‘15, is that business better than it was in Q2 of ‘15? I mean according to Jacobson, it’s more than double the spreads that it was a year ago so is that a head fake or is that or is there a significant improvement?

Randall C. Stuewe:

No, it -- on it is as much it went through. That’s correct.

Heather Jones:

Okay. Then going to the LCFS market, I wanted to check my math because the math I am doing given the difference in the credit per gallon for uco-based or tella-based renewable diesel versus conventional, soya biodiesel, even assuming there is a confidence potentially 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?

John O. Muse:

If you look at $120 a metric ton and I note that metric ton confuses people but that’s how the LCFS trades, that comes to a differential of bout $0.50 advantage of of used cooking oil over a soybean based bio-fuel end of the California marketplace. So there is an advantage for waste oils, used cooking oil, corn oil, vis-a-vis traditional crop based bio-fuels that’s been an advantage that’s been in place basically with the other programs as well. So just because there is an advantage in the program doesn’t necessarily translate it to 100% sharing with the raw material suppliers.

But there is an advantage. You are exactly right under the LCFS on used cooking oil and tallo versus soybean oil, canolla oil based bio-fuels.

Heather Jones:

Okay. And then my last question’s on corporate expense. One; the D&A for that segment was up significantly year-over-year. Was there like a one-time item spare something that will go away in subsequent quarters.

John O. Muse:

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

Heather Jones:

Yeah. For the corporate segment it was over $4 million versus like the lowest was $2 million, is that a...

John O. Muse:

Yes, yeah that went away in my script I said it will return back to that about a 69 level. We were around 69 to 70 in the fourth quarter of last year. There was something flowed through in the first quarter and then we it will be back to that $69 million to $70 million on the quarterly basis for the remainder of the year. That’s correct.

Heather Jones:

And then on year-over-year it was elevated some, understand it was some legal fees. I was wondering if you could help us understand the magnitude of those and when those will go away.

John O. Muse:

Well there was two items as you pointed out, it was discussed in the D&A. It was on benefits and on legal. The benefits was at the end of the year 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 stock went up almost $4 a share so that cost flowed down to the first quarter when the stock was issued or the options were issued and then the other was so on legal.

Two items; it was a both two legal cases that we’re working on since those are partly and being worked on and we don’t want to discuss those on the call and then there was another one on a property sale from a few years ago that we’re doing some work from an environmental standpoint. It flowed through for us legal and consulting work but second quarter we should have a little bit of that on the legal steel coming through but that should come off so that was increased expenses in the quarter.

Heather Jones:

But it should come of and back Q3

John O. Muse:

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

Heather Jones:

Okay perfect. Thank you so much.

John O. Muse:

Okay.

Operator:

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

Daniel Mannes:Avondale Partners:

Thanks. Good morning everybody.

Randall C. Stuewe:

Morning Daniel.

Daniel Mannes:Avondale Partners:

Hey, 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 may be walk us through your forward selling and the timeline for realizing price may be by end markets or breaking it down between saps, proteins, and then bakery like how quickly we should see pricing start falling through?

John O. Muse:

Yes I’ll talk about fats and proteins, bakeries here been pretty flat here pretty much perform where we expected to at these levels. But remember the fats, we have always talked about some where between 40% and 50% of our production has down the Diamond Green Diesel and that’s pretty much on because of the supply chain you’re getting from a 45 to 60 day for work on there.

So that will start to flow through. Now the good news is that comes positive as per that rates as the price and the Diamond Green. It allows me to stand on myself -- again and say that’s the reason we build it to offset the ups and flows here. The protein side Dan you’ve got,-- you’ve basically got a couple of different programs that happened in the U.S., you have got the ruminator meat proteins that tend to be, both consumed in the U.S.

And then you have to get a significant portion of anywhere from 20% to 40% of amount of these country because justice as an adequate demand anymore.

So on the export side you can have any where from 45 to 60 days of forward sales to balance your demand book on that. But the poultry proteins for the most part stay within the end of 30, 45 day period there. So, really at the end of the day, like I am really just trying to be very open and transparent on, meat and bone meal in the Mid-West and March traded on a cash basis around 200 bucks of the plan and now was up at 275,300 in April and we should see a little bit more strength even in May. So that’s kind of how it flows though so 60 days on a majority affect anywhere from 30 to 45 days to 60 on the protein and the protein exports of 45 to 60 because of both containerization and the export.

Daniel Mannes:

Yes the only follow up I would make there is particularly is that proteins to proteins is historically you have commented that proteins is where you have your least amount of non-formula business. So oil pricing does get better and I am sure it helps you around the ages. I would think the bigger price advantage do you from a bottom-line perspective is really on the fat side.

Randall C. Stuewe:

Oh absolutely John already shaken his head -- so that’s specially true in the USA that you will see the bigger bunk coming from the fat price move the transition or translated from March to April here and I will tell you in the preliminary April results the all of the fact benefit hasn’t even come through yet that still part of the supply chain lag that happened.

Daniel Mannes:

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 have made in terms of ultimately delivering and third of all have you work through the economics on delivery and if at all you would need to share any part of the credits with potential blender.

John O. Muse:

Hi this is John. We are shipping product to California come down at RIN diesel we have approved pathways and we had them for a while I know they don’t appear on the California website Dan you have asked that question. But that simply because California has a verification process on pathways or you have to submit pictures or loading the ships and so forth, the way you said you’re going to load them and then they go through the review process on that you approved prior to that may go through that review process.

Once I go through that process than I posted 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 products to California how the economics sharing that green premium the credit, the market is still in flux on how that’s going to work its brand new, they just reinstated the LTFS here late last year and I think we will see that move around over a period of time.

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

Daniel Mannes:

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 costs of blending since basically homogenous product with the existing market. Biodiesel which obviously the blender’s seems to want to take a significant pull 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.

Randall C. Stuewe:

We have none of the issues associated with the margins of the blender’s want to take that the biodiesel industry faces.

Daniel Mannes:

Got it.

John O. Muse:

Now to talking about is that’s not going be a concern from marketing one of the California.

Randall C. Stuewe:

And Dan this is Randy and just a filling a little bit I mean obviously we always remind people that Diamond Green was a predecessor of the LTFS and that’s the marketing strategy and deals that we put in place for road fuel and so we are in the process of transitioning payrolls that were headed to road fuel where we can arbitrage the contract back to the LCFS and I think by ‘16 year back half ‘16 early ‘17 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 efforts that’s being put forth.

Daniel Mannes:

Got it and my follow up question is just given the meaningful improvement you see in this yield pricing and your comment about trading -- can you talk it all about the competitive environment on the collection side and may be anything you’ve done in order to protect your share here so you’re able to capture the up you’re able to maintain a volume in light of what’s likely to be a more competitive environment.

John O. Muse:

Yes Dan we’ve been working on essentially re- our restaurant services organization for all over a year now within an emphasis on putting more tanks inside of restaurants is supposed to the outside. I think you’re absolutely right with higher prices we will see some of this steeling that we saw historically in this business come back -- it’s a little easier to drive your -- grease and so we will see some of that but we’ve been working and preparing quiet frankly before we knew the LCFS was going to be a big driver to us to make sure that we can protect our volumes and try to expand our volumes. Because we have the perfect vertically integrated supply chain right now that we are the person that’s in best position to be able to picked that yield sticking in the restaurant so we are working on that.

Randall C. Stuewe:

And I think Dan that’s what I think from the standpoint of John has take on a leadership position in that area with thought masses and they’ve done a nice job I looked back in the height of 010, 11,12 as I was doing some comparisons the other day and we’ve actually been able to grow our volume now in ‘16 anywhere from right at 20% to 30% of new volume out there. So we have got a very effective go to market strategy program and clearly the it’s turning back in to liquid goal is both you and Heather point out and we’ll do our best to guard the port and the safe here but at the end of the day our volumes were way up from where they were and our programs are much different in where they were and so and John’s been able to widen in the margin, and so you’ll start to see that benefit, I think truly flow through here.

Daniel Mannes:

Got it. Thanks so much guys.

Operator:

Our next question comes from Ken Goldman of JP Morgan. Please go ahead.

Tom Palmer: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 bit earlier in the fourth quarter you noted that formula lags hit EPS 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, we see a reversal and probably see some degree of boost from those formula lags?

Randall C. Stuewe:

The answer is clearly there is a lag, and let me, obviously when you get into a situation, two things, one, when you got prices running up and you are buying off of the sheet for a portion of your business or the trade industries you are in the case where you’re sold 60 days forward you are buying at the higher price this week and putting the elements to lower price that you’ve got on the book. So, you always have to work through that. That’s what you saw the lag in the fat prices that we’re under contact with the rapidly escalating market here towards the end of March.

And protein side you’ve got, you had some forward sales or higher and then they went down much deeper and lower, and so you’ve got lag once again on the way backup but as that said here Tom and I hope I am clear about it. If we seeing fat prices come up rapidly here in April we will see it 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 a meat and bone meal side throughout the Mid-West. So that will translate through in that and then additionally from the fat price standpoint remember we always talk about and John -- was on with the restaurant services business that every penny of talent of price escalation that you see and the use of 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 you will see a pretty nice bump in Q2 with the lot of that coming from just straight use cooking oil and then additionally from USA red meat rendering side of the business as those protein prices improved.

Tom Palmer:

Okay Thank you for the clarity just one more you touched on this prepared remarks but just looking for a little bit more clarity last quarter you indicated food segment might have been aided a bit by pull through from the first quarter such as the timing in the new year the Chinese new year. But it looks like when 1Q was really strong and more comparable than fourth quarter than perhaps you would expected where there areas that where stronger than you had initially anticipated and could you touch on this?

Randall C. Stuewe:

Yes. The food segment is clearly remember one that was completely acquired with the Vion acquisition and it’s made up really its anchored by the gelatin business and the edible fats business and couple of things the gelatin business remains robust and incredibly in Q1 we had a little bit of Chinese new year was a little bit later this year. At the end of the day is as we followed on volumes remained strong and rebounded nicely throughout the balance of the quarter.

Europe remained strong. The US we brought on our new major customer and our expansion in the Buick Iowa and then we saw margins improve in South America driven by the raw material availability and the currency translation. So from a perspective the four continent system just continues to perform very nicely for us. Traditionally we see a little bit of seasonality in second quarter but right now at preliminary April we have pretty good system which still running at the capacity out there. Now in the edible fat side, you saw what. You have 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 a year-ago or two year ago or whatever but at 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 yes 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.

Tom Palmer:

Great. Thanks guys.

Operator:

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

Patrick Chen:BMO Capital Markets:

Hi this is Patrick Chen on for Ken. Just a quick question, do you still expect to hit the $450 million or $500 million full year EBITDA mentioned in the last call? I mean it seems like food is the only segment that underperformed relative to expectations and it’ll likely regain going forward so can expect performance later on the year to offset the 1Q weakness given higher fat grease purchasing prices -- guys when -- coming back online and higher seasonal values of production?

Randall C. Stuewe:

I don’t know that -- in all those in there Patrick. But I think what we’re trying to say to people 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 bio-diesel side within North America I think we are clearly on that run rate and what we can see clearly here in second quarter and the start of April supports that and I think but I mean if you look back here back when we talked to you in March I think soybean mill was $260 a ton and now its $360 a ton. So there is some things that moved pretty rapidly out here that looked fairly positive right now for what we’re doing and yes it’s kind of hard not to say that that isn’t the run rate you’d be on possibly more towards of a higher side there.

Patrick Chen:

Great and then I was hoping you’d give us a little bit to the DGT expansion. How do you foresee that affecting fast increases supply demand. I mean it’s about a year, a year and half, two years out but will fat supplies grow allows your expansion or there will be a timing of supply chain.

Randall C. Stuewe:

Well I think we’ve always talked that the product mix down there today is roughly 40% Darlings mix which is a huge portion of used cooking oil going in there, a little bit of animal fat out of the Darling system and then 40% corn oil when it’s available, 10% other stuff, and other stuff being poultry fat. Poultry fat traditionally and typically have not had the profile that we want to run through that plant. They tend carry metals in the 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 US 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 at what we call the high asset low grade animal fat that are in animal feed today and not being run down there and as John said that between corn oil, used cooking oil and then animal fat, so is 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 fat but what the heck.

Patrick Chen:

Appreciate the color. Thank you.

Randall C. Stuewe:

Okay thanks.

Operator:

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

Randall C. Stuewe:

Okay. Thanks to everyone. Q1 on the record book Q2 looks as perhaps some really good momentum here and we look forward to talking to you here in August. Thanks again.

Operator:

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