Darling International Management Discusses Q2 2012 Results - Earnings Call Transcript

Darling International (DAR)

Q2 2012 Earnings Call

August 10, 2012 8:30 am ET

Executives

Melissa A. Gaither - Director of Investor Relations

Randall C. Stuewe - Chairman and Chief Executive Officer

John O. Muse - Executive Vice President of Finance & Administration

Analysts

Farha Aslam - Stephens Inc., Research Division

John Quealy - Canaccord Genuity, Research Division

William D. Bremer - Maxim Group LLC, Research Division

Kenneth B. Zaslow - BMO Capital Markets U.S.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Daniel J. Mannes - Avondale Partners, LLC, Research Division

Jeffrey Linn Gates - Gates Capital Management, Inc.

Tyson L. Bauer - Kansas City Capital Associates

Presentation

Operator

Good morning, everyone, and welcome to the Darling International Conference Call to Discuss the Company's Second 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 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 Ms. Melissa Gaither, Director of Investor Relations for Darling International. Please go ahead, ma'am.

Melissa A. Gaither

Thank you, Mike. Good morning. Thank you for joining us to review Darling's Second Quarter 2012 Earnings Results. Randy Stuewe, our Chairman and CEO, will begin today's call with an overview of our second quarter financial performance and discuss some of the trends that impacted the outcome. John Muse, Executive Vice President, will then provide you with additional details about the financial results. Randy will conclude the prepared portion on 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, stock markets and climatic conditions; a decline in consumer confidence and discretionary spending; the general performance of the U.S. and global economies; global demands for biofuels and grain and oil seed commodities, which have exhibited volatility and can impact the costs for feed for cattle, hogs, and poultry, thus affecting availability of rendering feedstocks; risks including future expenditures; results 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; risks relating to possible third-party claims of intellectual property infringement; 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 as a result of new information, future events or otherwise.

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

Randall C. Stuewe

Thanks, Melissa. Good morning, everyone. Thanks for joining us. It's my pleasure to welcome you to our earnings call to discuss our financial results for the company's second quarter. Let's review our second quarter operating performance before hitting on some major headlines that may affect our business.

Most notably, from a volume perspective, we operated at a modestly higher rate than first quarter due to improving beef and poultry slaughter and the addition of new accounts. However, our bakery volumes remained weak most of the second quarter due to continued downtime by commercial bakeries. The good news is we ended the quarter with momentum building and volumes returning closer to seasonal and expected levels. Used cooking oil collection volumes were flat compared to the first quarter 2012, with restaurant traffic still showing signs of economic pressure and theft continuing to be a major problem in most metropolitan areas. Also, the competitive landscape for used cooking oil continues to be challenging, with some margin compression.

Pricing for proteins, fats and greases held nicely early in the quarter and improved on a sequential basis relative to the first quarter but peaked in early May. On the fats and greases side, inventories from first quarter were sold, but prices remained lower compared to last year due to slow export demand, primarily from Europe, and reduced feed demand from hot weather, smaller herd sizes and improved availability of corn oil from the ethanol industry. Our protein selling prices improved over first quarter but were negatively impacted by the closure of the Indonesia market for ruminant meat and bone meal, especially impacting our West Coast operations. Lower energy cost, primarily natural gas, helped to somewhat offset the lag in our selling prices.

Now let's address some of the major headlines affecting our business and on most of your minds. The first of which is the severe drought impacting the Midwest and other parts of the country. Although we did not see the impact of these extreme conditions during the quarter, it is a critical factor for us going forward. Indications early in the second quarter pointed to the largest corn crop in history for North America, only to reverse sharply with the onset of extremely dry conditions. While typically a rally in either corn or soybean market has a favorable impact on our non-formula business, we continued to see a significant lag in our finished product pricing, causing our normal pricing relationships to be out of sync at this time. Fundamentally, this should change, but it's important to note that we actually saw prices for our products decline late in the second quarter, and now they remain at substantial historical discounts to their competing ingredients.

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