May 9, 2014
Executives
Melissa A. Gaither – Director of Investor Relations Randall C.
Stuewe – Chairman and Chief Executive Officer Colin Stevenson – Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Global Finance & Administration
Analysts
Daniel Mannes – Avondale Partners Ken Zaslow - BMO Capital Markets John Quealy - Canaccord Genuity Adam Samuelson - Goldman Sachs Jeffrey Gates - Gates Capital Management Craig E. Irwin - Wedbush Securities Bill Baldwin - Baldwin Anthony Securities
Operator
Good morning, everyone, and welcome to the Darling Ingredients Inc. Conference Call to discuss the company's fiscal first quarter 2014 financial results.
With us today are Mr. Randall Stuewe, Chairman and Chief Executive Officer of Darling Ingredients; and Mr.
Colin Stevenson, Executive Vice President, Global 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 Melissa Gaither, Director of Investor Relations for Darling International.
Please go ahead.
Melissa A. Gaither
Thank you, Danise. Good morning.
Thank you for joining us to review Darling's first quarter 2014 earnings results, and our very first earnings call under our new corporate name of Darling Ingredients Inc. 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.
Colin Stevenson, Executive Vice President, Global Finance and Administration, will then provide you with additional details about our financial results. Randy will then 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.
This conference call will contain forward-looking statements regarding Darling Ingredients’ business, its opportunities and anticipated results of operation. Please bear in mind that forward-looking information is subject to many risks and uncertainties, and actual results may differ materially from projected.
Many of these risks and uncertainties are described in Darling's annual report on Form 10-K for the year ending December 28, 2013, our recent press release announced yesterday and our 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.
I would like to also highlight the non-GAAP metrics that were included in yesterday’s press release. The company believes that by excluding certain reoccurring and non- reoccurring adjustments to comparable GAAP measures, investors have an additional meaningful measurement of the company’s performance.
As a result, this call will include discussion of certain non-GAAP financial measures. The company has provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures in yesterday’s press release.
The press release is available on the company’s website and was filed with the SEC in a Form 8-K on May 8, 2014. With that I'd like to turn the call over to Randy.
Randall C. Stuewe
Thanks, Melissa. Good morning, everyone.
Thanks for joining us. Before we review our financial results for the first quarter that ended on March 29, I would like to comment on our recently announced new company name, Darling Ingredients.
Today marks the starting point for our new company. Our new identity will help to synthesize our new global platform focused on the creation of sustainable food, feed and Fuel Ingredients for a growing population.
It will help us better orient our focus around our global brands and sustainable ingredients portfolio. Now for our first quarter review, as we discussed in our 10-K conference call in late February, we outlined several one-time significant charges that will flow through and negatively impact our earnings in Q1 due to non-operational costs associated with our recent VION and Rothsay acquisitions.
Additionally, we outlined the forward feedstock position Diamond Green Diesel had to work through before regaining what we believe to be its true market earnings power. We have attempted to detail these charges and the impact of both EBITDA and net earnings in our earnings release last night.
Colin will spend a little more time outlining the related impact and what you can expect to follow on in Q2. Most importantly for this call, I want to focus on the true operating strength of our core segments in the feed, food and fuel.
At the operating level, adjusted for the non-operational costs associated with our recent acquisitions, we delivered an adjusted EBITDA of approximately $140 million. This was lower than consensus, but easily explainable.
I will attempt to reconcile the performance for you. First, in the global feed segment earnings were a little lighter than anticipated, but they gained significant momentum during March and carried good velocity into Q2.
As many ingredient and Ag product based public companies had certain earnings announcements, severe winter weather hindered operations in North America. While trying not to sound like a broken record to other announcements, in the Midwest and Canada we lost a significant number of operating days to extreme cold weather and natural gas curtailment.
This led to higher operating costs and directly impacted earnings both in the USA and Canada. Given the structure of our raw material formulas, we expect to claw back some of these costs in Q2.
From a volume and demand perspective raw material volumes across the globe were steady to modestly higher. Finished ingredient prices for proteins increased throughout the quarter, and pet food demand gained momentum after a slow start to the year.
Fat prices globally were down significantly compared to last year driven by continued uncertainty regarding the RFS in the US. Even Europe experienced lower fat prices due to slow demand from the biofuel sector and continued tensions in Russia.
All said, during the last part of Q1 and into Q2, fat prices have recovered nicely and demand remains excellent across the globe. Most notably though on a year-over-year basis, the bakery feeds business delivered significantly lower earnings as its finished product is priced in tandem with corn.
Year-over-year it was down nearly 250 per bushel reducing bakery’s contribution by nearly $12 million. So in summary if we eliminate the noise and the numbers from the one-time acquisition related charges and costs, the feed ingredients segment shortfall largely explains our divergence from consensus.
For Q2, we have improved fat prices globally and significantly higher protein prices along with improved corn prices for bakery feeds, and favorable raw material volumes. Now let us move on to the Food Ingredients segment.
The Food Ingredients sector includes our Rousselot gelatin business, our edible and packaged fats business, and our sausage casings business. Globally demand for our products remained strong.
Rousselot a global leader in gelatin and functional protein production delivered good results. Volumes were up modestly, however pricing lagged the prior year.
This has been anticipated after three strong years and was duly considered during our due diligence in purchasing VION Ingredients. However, from a pricing perspective, we anticipate increasing prices in Q3 and Q4 in our North American gelatin business due to both good demand and tightening raw material availability related to the lower pork slaughter as a result of PED and its effect on hog supply.
As we noted in the feed segment for Q1 fats and oil prices were significantly lower on a year-over-year basis. This spilled over into our edible and technical fats business within the food segment.
In this part of the segment we refine and package fats for food and technical use primarily in Europe. Demand remained good, but slaughter volumes were strong on that continent and provided for more than ample supply to beef sold.
Our casings business, which processes, sorts and sells both hog and sheep casings to the food processors was marginally lower. It was impacted by reduced [runner] availability as a result of slightly lower hog slaughter volumes.
And finally, earnings in our Fuel Ingredients segment moderated during the quarter as the biofuels market is essentially on hold due to the EPA’s indecisiveness relative to its RFS2 mandated (inaudible) volume for 2014. Our biodiesel plants in Butler, Kentucky and Montréal, Quebec operated near capacity, but have reduced margins as a result in Q1 due to low RIN pricing and the uncertain marketplace related to the possible expansion of the blender's tax credit.
Our Diamond Green Diesel joint-venture operated near nameplate capacity during the first quarter and worked through its long high-priced raw material position carried over from fourth quarter 2013, and by early March held a market price ownership position in its raw material supply chain. Diamond Green Diesel continued to prove out the technology and we expect its margin structure should return to anticipated levels upon the finalization of the EPA’s mandate decision.
Overall, the integration of our new acquisitions remain on track with the new operating segments positioned to perform well in Q2 in more normalized weather conditions and with improved finished ingredient product markets. With that, I will now turn the call over to Colin for his financial review.
After Colin concludes, I have got a few closing remarks and then we will go to Q&A. Colin?
Colin Stevenson
Thanks Randy. I would like to begin by briefly commenting on the change to the presentation of our results in our press release issued yesterday afternoon.
Given our new three operating segment structure, we will now provide what I believe is a more robust business segment with [no disclosure], and our MD&A will address segment operating income, segment income inclusive of our DGD Joint Venture, gross margin percentage and foreign currency impacts. We believe these additional metrics better reflect our focus on profitability and the way Randy and I view and manage the new Darling business.
As Randy indicated, our first-quarter included a significant amount of non-operational noise related to the acquisitions and the associated financings. Thus for the first quarter 2014 we reported a net loss of $52.8 million or a loss of $0.32 per diluted share compared to net income of $32.4 million, or $0.27 per diluted share, in the 2013 first quarter.
The after tax cost of these non-operational items, which were detailed in our press release include $31.4 million or $0.19 per diluted share related to the non-cash inventory step-up associated with the purchasing accounting for VION Ingredients; $20.2 million or $0.13 per diluted share associated with the redemption premium and write-off of deferred loan costs with the retirement of the company's 8.5% Senior Notes; $12.7 million or $0.08 per diluted share in acquisition and the integration costs for Rothsay and VION; $8.0 million or $0.05 per diluted share related to the foreign currency exchange position to effectuate VION Ingredients acquisition; and discrete tax items of $5.2 million or $0.03 per diluted share principally related to VION Ingredients. Without these items, first quarter 2014 net income and diluted earnings per share would have been $24.6 million and $0.15 per diluted share respectively.
Compared to the first quarter of 2013, this represents a net reduction in income of $7.8 million and a 44% decline in diluted earnings per share. While we generally do not provide guidance, and do not expect to do so in the future, I would like to acknowledge a couple of items that I expect to impact the Q2 operating results.
Approximately $6 million related to the non-cash inventory step-up associated with purchase accounting, which effectively represents the remaining balance of that adjustment, and then approximately $2.5 million to $4.5 million of acquisition and integration related costs. Additionally, we have outlined adjusted EBITDA measures in our Form 10-Q, which we believe better evaluates our performance.
As noted in our press release, adjusted EBITDA of $65.1 million for the first quarter includes cost of the $44.8 million associated with the inventory step-up and $15.9 million of acquisition and integration related costs for Rothsay and VION, and includes our share of adjusted EBITDA for the DGD joint venture, which for the first quarter totaled $9.1 million. Note that the DGD joint-venture has not yet made any distributions.
Additionally, I would like to point out that the first quarter 2014 results from our new Darling Ingredients International only reflects 12 weeks in the quarter, rather than a full 13-week quarter. Had Darling Ingredients International been owned for the entire quarter, adjusted EBITDA would have been increased by approximately $4.1 million and thus we would have generated $149.1 million on a pro forma adjusted EBITDA basis in the first quarter.
In addition, on a go forward basis, we will also be providing a cash EPS figure, which is also a non-GAAP measure. For the first quarter of 2014, cash EPS was a loss of $0.19 per diluted share as compared to $0.51 per share in the year ago period.
Now for the quarterly financial review. For the first quarter, the company reported net sales of $931.4 million, compared to $445.4 million in the year ago period.
The 109% increase in net sales was primarily attributable to the inclusion of the company’s international operations and improved raw material volumes in the feed ingredients segment, when compared to the first quarter of 2013. However, these volume increases were largely offset by significant reductions in finished fat prices within our non-formula business.
The bakery feeds business experienced a sharp decline in finished product pricing, driven by the substantial reduction in corn pricing year-over-year. Segment operating income for the first quarter was $29.5 million as compared to $68.2 million for the first quarter of 2013.
Once again, excluding the impact of the non-cash inventory step-up segment operating income would have been $74.3 million. Turning to each of our operating segments.
Feed Ingredients operating income decreased by $32.2 million from $68 million to $35.8 million. These results include $12.7 million related to the non-cash inventory step-up associated with the purchase accounting for the VION Ingredients acquisition.
Adjusting for this charge Feed Ingredient’s operating income was $48.5 million or $19.5 million lower than the first quarter of 2013. On an adjusted basis, Feed segment earnings were lower in the US, while operations in Europe, Canada, China and South America were as expected.
Factors negatively impacting this segment included reduced margins in the bakery feeds business with severe winter weather in North America and the non-formula business, which was impacted by significantly lower finished product prices with competing agricultural-based alternatives. The Food Ingredients segment reported an operating loss of $8.5 million for the first quarter 2014.
We did not have a Food Ingredients segment in the year ago first quarter to provide comparability. Food Ingredients results for the first quarter include $31.9 million of non-cash inventory step-up related to purchase accounting.
On an adjusted basis, the Food Ingredients operating income was $23.4 million. Fuel Ingredients operating income increased by $2.0 million to income of $2.2 million, exclusive of the DGD Joint Venture.
Including DGD, Fuel Ingredients segment income was $6.9 million. As Randy mentioned, the Fuel Ingredients segment operating results were impacted by lower RIN values due to regulatory uncertainty and the possible extension of the blender's tax credit.
From an overall gross margin perspective for the first quarter 2014, we reported 18.9% compared to 27.6% in the year ago first quarter, a decrease of 8.7 points. Adjusting for the non-cash impact of the $44.8 million inventory step-up gross margin would have been 23.7%, a decrease of 14.1%.
Turning to segment gross margins. Feed Ingredients gross margin was 22% as compared to 27.6% in the year ago first-quarter, a decrease of 20.3%.
Adjusted for the impact of the non-cash $12.7 million inventory step-up, gross margin would have been 24.2%, a decrease of 3.4 points. The decline was attributable to the bakery business and lower finished product selling prices in our non-formula business as compared to the year ago quarter and were only partially offset by increased finished product volumes and lower raw material costs.
In the Food Ingredients segment, gross margin for the 2014 first quarter was 13.2%. Adjusting for the $26.2 million non-cash inventory step-up impact, gross margin would have been 24.9%.
Fuel Ingredients segment gross margin, exclusive of the equity contribution from DGD, was 16.1%. Adjusting for the $0.2 million non-cash inventory step-up impact, gross margin would have been 16.4% compared to 17% in the year ago period.
Now a few observations regarding our corporate activities. SG&A increased by approximately $1.8 million on a year-over-year basis.
This increase was principally related to the additional corporate staff to support our new global business platform. Interest expense was $58.9 million in the first quarter of 2014, compared to $5.6 million during the year ago first quarter, representing an increase of $53.3 million, which was primarily related to the redemption premium paid to retire the company’s 8.5% senior notes, and an increase in interest expense resulting from additional bank debt in the senior notes outstanding as a result of the VION Ingredients and Rothsay acquisitions.
Relative to the company’s investment in our Diamond Green Diesel joint-venture with Valero, on the balance sheet we reported an investment of $119.8 million as of March 29 as compared to $115.1 million at December 28, 2013. The DGD statement of operations reported net income of $5.1 million for the first quarter compared to a net loss of $1.2 million in the prior year period.
The $6.3 million improvement is a direct result of the commencement of production in June 2013 and the sale of renewable diesel fuel thereafter as compared to non-capitalized expenses during the construction phase in the prior year. Let me provide some additional balance sheet detail.
On March 29, the company had working capital of $568.7 million and its working capital ratio was 2.07:1 compared to working capital of $950.7 million and a working capital ratio of 6.38:1 on December 28, 2013. The decrease in working capital is principally due to a decrease in cash and cash equivalents as a result of funding in the VION Ingredients acquisition, net of the additional working capital that was acquired in that transaction.
At the quarter end, the company had restricted cash of $143.4 million and funds available under the revolving credit facility of $748.3 million compared to unrestricted cash of $870.9 million and funds available under the revolving credit facility of $680.7 million at year-end. At March 29, the company had long-term debt of $2.39 billion as compared to $886.8 million at year-end.
During the quarter, the company repaid long-term debt totaling $67 million. From a Capex perspective, we spent $51.4 million during the first quarter 2014 compared to $26.4 million in the year ago period, an increase of $25 million.
The increase is directly tied to our acquired businesses. The implementation of our new ERP system is ongoing and we expect to complete the project in 2015.
I will now turn the call back over to Randy.
Randall C. Stuewe
Thanks, Colin. As you can see, there was no active challenges for us in the first quarter.
Spring weather conditions are now here and we expect to see a more normalized operating environment. Globally, our businesses are healthy and strong.
We remain cautious though and optimistic about the biofuel getting some much needed clarity from Washington DC. Our integration efforts are well underway and our global teams have identified numerous opportunities for improving and growing our businesses.
We believe that our three segments are positioned and poised to improve their performance in Q2 with improved markets and operating conditions and we look forward to sharing our successes with you in the future. With that Danise, let us go ahead and open it up to Q&A.
Operator
Thank you. (Operator instructions) The first question will come from Dan Mannes of Avondale.
Please go ahead.
Daniel Mannes - Avondale Partners
Hi, good morning everyone.
Randall C. Stuewe
Good morning Dan.
Colin Stevenson
Good morning.
Daniel Mannes – Avondale Partners
Busy quarter. A couple of questions as we kind of work our way through the new numbers, the first area I wanted to ask about is the feed segment, when I look at the year-over-year performance, it is down $19 million ex the inventory step up, can you maybe walk us through how much of that relates to the pricing of bakery in the existing business vis-à-vis how much was actually added through the acquisitions of VION and Rothsay, that is probably, the thing that is the hardest to reconcile for us?
Randall C. Stuewe
Dan, you said food segment or feed segment?
Daniel Mannes - Avondale Partners
Oh, sorry. Feed.
Randall C. Stuewe
That is what I thought. I was going okay –
Daniel Mannes - Avondale Partners
No food is easy.
Colin Stevenson
Dan this is Colin, and the $19 million, as I think Randy said in his comments, about $12 million of it related to the bakery feed segment. So that was, the single biggest factor.
Obviously with the North American operations principally going into the feed segment, the old Darling business, if you will, the severe winter weather certainly had an impact on us from an energy cost perspective as Randy noted the lost operating days. And then of course, when we look on a year-over-year basis, with that pricing down almost 25% that is sort of the delta if you will with respect to the non-formula business.
Randall C. Stuewe
Yes, Dan, we look at the world, I mean Europe was pretty – was strong relative to where we expected it. Volumes were good.
Some impact of the lower fat prices in North America still lower to – still lower to Europe really driven by the biofuel business and (inaudible) being the largest consumer on that side of the ocean, and so when you – when you sum up, as Colin said, bakery is probably 60%, 70% of it, and then you got the lower – not what I would call the lower non-formula fat prices in the used cooking oil area, and then a little bit of a spillover of lower fat prices in Europe and that is how it adds up. It is very simple.
Those three items – those three things plus a significant amount of additional energy in the Midwest, we had plants down. We lost operating days in the Midwest of almost 60 days, some of them up in Canada.
Canada had a pretty good performance up there, but when you look at what it should have been, it could have been better given the amount of energy that was used to try to process material. Like we said, we don’t want to beat a broken record that the plants had to run longer, our trucking fleet wasn’t big enough to move the material as the roads were really bad and there is just a significant amount of costs that go away here in the second quarter that flowed through the operations in Q1 for us here, especially in North America.
Daniel Mannes - Avondale Partners
Okay. Just kind of – I guess maybe the weakness in North America kind of masks the addition of your – it is hard to see where Europe plays in other than on the revenue line?
Randall C. Stuewe
Right.
Daniel Mannes - Avondale Partners
Okay. And then kind of transitioning over to the food segment real quick, some foods is all brand new, when we look at – when we look at this segment, how much seasonality is in there in this business and is this, margin once you exclude the inventories step up, is this sort of a normal rate or is this – is this business even a little bit more profitable as you move through the year?
Randall C. Stuewe
Well, I think a couple of things. One, we are still learning the business, so I take a little bit of a honeymoon approach to that.
But when you look at it the Rousselot business is a food ingredient business for the production of gelatin and other functional proteins, it has a little bit of seasonality to it, much in sync with the food industry in the world. The high portion of that also ends up in pharmaceutical, but it is pretty linear.
The fat melting business or the edible fat melting and packaging and refining business, you have some of the similar seasonalities, which you have in the U.S. and the vegetable oil business and the casing businesses is pretty much a linear business.
So, not a lot of movement into that as we talked about in the earnings script here, we have seen some tightening of raw material supply driven by PEV in the U.S. especially and the lower availability of hogs and we anticipate putting out a price increase to maintain the margins in the (inaudible) business in North America for Q3 and Q4 here and that we are setting up in positioning right now.
So hopefully we have a – we will be able to maintain margins and grow margins there and additionally as we share, as we acquired the ruse low business and then we did significant diligence on learning that business globally. It had come through a period of some really significant margin and price increases over the last three years, we shared the view of what management, Vion or international team, gross margin probably couldn’t be sustained, they were too good and so as we factored in purchase we believe they back off.
They have backed off to the level that they thought they would but it's still a very good business for us.
Daniel Mannes – Avondale Partners
Got it and then the last one on the fuel segment. I was pretty pleased with what you did Green Diesel or certainly looks like any operational issues you had you worked your way through but can you talk about maybe where the margins are right now on a spot basis given the uncertainty in two, what is current crystal-ball tell you in terms of timing from the EPA and what they might come out with?
Randall Stuewe
Yes, I think obviously we have got a pretty good supply chain and it has to feed the monster down in New Orleans. It is running at or above main play capacity now.
We are maintaining that position and going to run it through the second quarter here. The optionality that's go underneath this is same right now.
It has a tremendous return relative to our asset portfolio. If the dollar of gallon comes back in it's just a ginormous win for us.
Our belief is that right now that as we shared with our board that the signs are fairly positive at DC but I am not sure what that gets any more but we are hearing that the RVO will get some clarity here towards June – end of June, our belief from our side of the table is that they do modestly increase from 1.28 to 1.4, 1.5 tight number and maybe little more in ’15 and then the dollar a gallon, anybody if guess I think as we described to our Board, once they give that it seems hard to not give a back or take it away from us but it probably be after the mid terms in November. Relative to performance in Q2 replacements margins are pretty tough in that business right now.
We have got some pretty decent forward ownership running into the quarter but for the late May, June period replacement margins are somewhere just above breakeven right now. What we have proved in that business is we are the low cost providers and processor in the world today in that business and I anticipate will have profitability in second quarter both at the entity and at the JV level for us here and then hopefully we will get some better news.
Our belief is that if you look at it relative to our cost structure and we know what our performance is and then we have seen several results out there for REG and for Neste we understand our cost position and then we also operate multiple bio-diesel plants, we know what those margins are, we (inaudible) to have to come up here at some point in time or the industry will not be able to run through the summer here. We have seen diesel come up pretty shortly in the last week while (inaudible) come down but the feedstock prices remained up.
Something has to get there for the industry to meet the mandated level here.
Daniel Mannes – Avondale Partners
Got it. Thanks for all the color Randy.
Randall Stuewe
You bet.
Operator
The next question will come from Ken Zaslow of BMO Capital Markets. Please go ahead.
Ken Zaslow - BMO Capital Markets
Good morning, everyone.
Randall Stuewe
Good morning, Ken.
Colin Stevenson
Good morning, Ken.
Ken Zaslow - BMO Capital Markets
I just want to kind of figure out so what actually happened during the quarter in couple of respects, one is if I – how much will be operating days is taking out in natural gas issues and the poor hedges on DDG can you break those out to see exactly what the ongoing operating profit would have been?
Randall Stuewe
So ask the question again. I am not sure what – [Cross Talking] things we don't disclose so I am trying to understand what you are asking for and I will see if I can give you some color around it.
Ken Zaslow - BMO Capital Markets
Okay. Because you said during the quarter, there was a number operating days that you are out, you also said that natural gas prices spiked and you had to some charges associated with that.
So for me that's not part of going forward operation and you said it's back to normal environment. So how much was distributed to those two things and then on my understanding the last quarter you have said that you had higher input cost related to DDG where you hedged earlier than you thought and I am assuming those hedges are off.
So I want to take out those three, in respect of those to figure out the $139 million EBITDA would have really meant for the quarter. I guess that’s my starting point.
Colin Stevenson
No I think that's fair. I mean we haven’t released what the natural gas level was around North America but it's safe to say it was a material amount that was out there for us.
The thing is with the formulas that we buy raw material from both in the USA and Canada allow us to make adjustment and claw back or recover in most cases, most of that in Q2. What we saw was that we have forward ownership in the NYMAX, we didn't have the basis ownership at the distribution side and especially from an interruptible level at many of the plants and so we have not traditionally released what our portion of, what our earnings or what our energy piece of or what our cost structures been so I leave with that.
Diamond Green Diesel, it wasn’t related to a hedge position. It was related to a forward purchase of flat price fats of the oil delivered to the facility that were bought in the fall of last year and then when the plant had it metallurgical and operating issues we carried that flat price position forward.
It was run out in about late February. Obviously, the EBITDA we reported about $9 million, a lot of that if not most of it was made in the month of March as we worked through that higher position.
Ken Zaslow - BMO Capital Markets
So if I were to put this together, I guess it has not really helped me in that much on this so the 13 -- 9 if the normal operating environment happened in 139 we translate that at least 150 or 160 is that fair number? I am just trying to figure out because it seems like unless you think that whether you are going to keep your operating is short and you have already worked pass the high priced inputs, is there kind of a normal number that you can give us for the quarter?
Colin Stevenson
Well I think, let's look back into it a different way. If the feed segment was up about $19 million and we said 12 other was bakery feed, we see bakery feeds come back quite a bit, corn averaged in the mid low 434 - 440 in the first quarter, we are going to be up over five in second quarter so you are going to get some lift there.
The delta between the 19 and the 12 most of that energy that's going to come back and Diamond Green Diesel, carried in some – carried in good ownership now in April and a portion of May but at the end of that the margins have come down. So I would expect Diamond Green Diesel to operate similar, maybe a little better than it did in Q1.
Ken Zaslow - BMO Capital Markets
Okay. And then one bigger picture question, you said on the prepared remark that you saw numerous, you guys were talking about numerous opportunities to improve the operations.
Can you give us where you are in terms of assessing them? What the potential opportunity would be and when we can start to see you reaching milestones?
Randall C. Stuewe
Yes I mean and I think we will, Ken we will be laying and we are going to be attempt to layout the portion of that when we do the spring conferences here starting with your show. We are still trying to figure out how to articulate that and then put it into a make-sense form here but from our perspective we would qualify there is some low level synergies that there being developed in Canada, mainly from the operation standpoint.
We have taken out SG&A up there and we have, we were shown (inaudible) how we do it in the USA and hopefully so we can gain some operational improvements up there on both the cost operate the plants and how we trade in market finished products. So that's been accomplished.
The same thing is being looked at in Europe. We are getting one view of the world now, our marketing teams are working together to identify common customers and then if you will optimize logistics product moving from, that was moving from one destination to another destination that has a cheaper origin to come out it, it just takes time to get plans approved and that should happen very soon.
The second piece is that we continue to make progress with our nutrient recovery technology down in Hampton, Florida. The plant is operational now.
It is proving out that we do have the ability to recover proteins and fats from waste water streams. We are working diligently now to understand the economics of that plant and looking for a site both in North America and I would say the lower 48 and then one in Canada that should happen over the next year or two.
We are working with to grow several of our raw material suppliers. We are optimistic that the poultry side is growing and we are working with our suppliers there to grow.
There has been some mention that with noted expansions out there and we are part of them so we are excited about that going forward and then as we start to look at the world, we are seeing numerous opportunities that by bringing the two companies together that give us a chance to grow through both small acquisitions and potentially larger acquisitions around the world to solidify our footprint in Europe to enter the rendering business in South America and to continue to grow our portfolio or businesses in china. So, I think it's a combination of what I would say is synergies, organic expansion, product line expansion and then acquisition opportunities within the portfolio that will continue to grow the business for us.
Ken Zaslow - BMO Capital Markets
And my final question is, and I guess I would have to ask this, what surprises good or bad have you found and then you have both these operations under your belt? Is there anything on the upside or downside that is kind of taking you little bit by surprise?
Randall C. Stuewe
You know not really, I am kind of making eye contact to Colin. I don't – I wouldn't say that we have been surprised I think the European team led by Dirk Kloosterboer and group and it has been tremendous to work with.
It's interesting that we share a common vision of continuing to grow the business. I think the greatest difference we look at between the operating businesses between here and the continent that probably surprise me more than I understood is the differential cost of energy to process raw material in Europe versus here.
We make a lot of investments in Europe produce to electricity, to reduce our natural gas consumption, to outsource our transportation function over there that we kind of take for granted over here. I think it's a – I think when I look at the highest level energy cost at the aggregate level about three times higher in Europe than they are here.
And I would say that's the biggest surprise when we get to looking at margins around the world and saying what can we do to normalize grow and standardize margins, the big challenge is energy recovery as a portion of the margin within the European portfolio. They do a marvelous job of pricing their raw material same as we do in Canada but that's probably the biggest surprise out of it.
The ruse low business is really got a lot of opportunity in it, adding that ingredients piece to our business in the food side just opens up a really large portfolio of additional businesses and products we can make and develop over the long term. There is just to me there is unlimited growth in that business globally for long time to come.
Ken Zaslow - BMO Capital Markets
Thanks. I appreciate it.
Operator
The next question will come from John Quealy of Canaccord Genuity. Please go ahead.
John Quealy - Canaccord Genuity
Hey good morning folks. Randy, back on back on ruse low gelatin, you said maybe some price increases in North America back after the year, can you just comment the mix of gelatin North America, Europe and then also can you do anything in European side to help price or is it just market take around price in Europe?
Randall C. Stuewe
Yes, I mean we try to keep our portfolio production kind of close to the vest here. It's a very competitive business out there.
We operate two plants in North America, here in the Dubuque, Iowa which is a big skin gelatin business and then you have got a bone gelatin business at Peabody Massachutes, the pigskin side is one that's affected, lot of that moves into the food industry and as you see the hog slaughter back-off that was, or potentially back-off, I think it was referenced pretty sharply in the Tyson earnings call. We just anticipate that there will be a little more competition for pigskin, for raw materials to make gelatin and as the pigskin price moves up, then at the end of the day in order to maintain the margin, we have got to move up to finish product price.
Historically, the ruse low business with tighter raw material supplies around the world has done better. The margin contraction that’s happened after three years of price increases has come through the increase slaughter we have seen around the world in the last 14 to 18 months and so now it's a – once again it's tightening up and as our leadership team in the ruse low business anticipates trying to move forward with some price increase here in North America.
Now, North America also imports gelatin from Europe, gelatin from South America to balance the different customer’s needs. So we look at the, the world is one giant arbitrage for the different types of product and applications that we make in the ruse low business but North America is a critical part to it.
John Quealy - Canaccord Genuity
Okay and then the second question, clearly corn in bakery in a dollar perspective hit you from a underlying organic perspective, I know pre-Vion we had always looked on different input or reference commodity prices for Darling performance and what your take now that you have got quarter of Vion underneath, are you still generally corn sensitive on a dollar basis or it certainly seem that way this quarter but how should we think about that moving forward?
Randall C. Stuewe
Well I mean on a trailing 12 it was in the performance out there and you have got a portfolio the $600 million plus EBITDA business that's out there now would detail plans that I just gave get grow it. I mean bakery is small portion of it, I mean last year bakery put up in the mid 50s with the pretty good hedge position or derivatives position, the margin locked in it.
We came into the year telling investors that you got to compare $6.89 or $7 corn against $4.30, $4.50 corn and earnings were going to drop down to around that $30 million number, it's pretty straight forward. So $20 million dealt on $600 million portfolio, corn is not a significant driver in that business or in our business portfolio now, I mean, when you also -- and the second part of that is that we have seen pretty much of the decoupling of our used cooking oil business here in the U.S.
as it moves now as the – we are the largest consumer of it, the Diamond Green Diesel and we have seen those prices move up substantially above what their corn equivalent is which is kind of was the pieces for the construction of Diamond Green Diesel for us.
John Quealy - Canaccord Genuity
Okay and that actually leads to my next question. So the mix rate now at Diamond Green, are you more animal fats or how are you looking right now for raw in Diamond?
Thanks guys.
Colin Stevenson
It moves around. I would say it's still a significant portion of it is used cooking oil and then the high acid yellow greases, it’s the lowest cost beef stock, it's the reason we have the profitability we have down there and then we do work in some corn oil down there although corn oil has become more expensive as it's be exported around the world.
So I would say it's probably – it's a pretty good slip today 50/50 between our products that are coming out of the rendering industry and the corn oil.
Operator
Our next question will come from Adam Samuelson of Goldman Sachs. Please go ahead.
Adam Samuelson - Goldman Sachs
Yes, thanks. Good morning everyone.
Randy, I think you covered this in some detail but I want to, just to make sure we are clear and understand how your outlooks for the base and acquired businesses and maybe you could do those separately probably helpful, has changed if at all today versus the start of the year and as you think about the timing of kind of layering in some of those potential synergies if that timing has changed at all?
Randall C. Stuewe
Well I think we have been clear and we articulated in the 10-K call, we came into the portfolio, we now look at it as portfolio of businesses, I am not in a break core, non-core businesses out here. We have talked in the performance of what the trailing 12 and EBITDA run rate and then you have got normalized it for the downturn in the bakery side, clearly Diamond Green Diesel isn’t contributing at the level that we thought of going into the year.
We saw margins coming into the year and believing that we see dollar, dollar ten a gallon, they are path of that, still a great return on our investment and I might build another one as that those types of returns but from where we saw the year coming in, Diamond Green Diesel is going to have to pick up some momentum for this to be a great year for us and we think we are going to get there in the June/October period and especially if they live the mandate we will get some incredible momentum there. But the bakery business came into the year at about 4.30 bushel we are now up over 5, that will start to come through volumes have been good in that business.
Volumes in the Darling of the North American rendering between Rothsay, Darling and then (inaudible) business in Europe are very strong. Protein prices have improved tremendously in the first quarter to level at some points that we have never seen before and some of the products.
Fats and oil started out the quarter very, very weak in Jan/Feb and it improved tremendously again. So I mean I think it's pretty easy to take the breadcrumbs and say you got an uptake in the bakery, the core rendering business is getting stronger, ruse low is performing as we expected we are going to attempt to take a price increase and in that arena Diamond Green Diesel has to get some momentum here because the industry is operating at red with the exception of us and so I think from our perspective it feels pretty good to sit in my chair today for the next couple of quarters as we go forward.
Adam Samuelson - Goldman Sachs
Alright. That’s very helpful.
And maybe some modeling clean up for Colin. Is the $95 million SG&A run rate in the quarter is that a reasonable expectations for SG&A for the company and in that number how much is ERP and how long you think that takes before it rolls up?
Colin Stevenson
Yes, I had a more – you said something about the ERP?
Adam Samuelson - Goldman Sachs
ERP. So your, in $95 million SG&A is that sustainable, does that a reasonable run rate and in that how much is the EPR expense?
Colin Stevenson
I mean the ERP expense is under $95 million as we don't break the expense piece but its more than a few nickles. I think that is a reasonable run rate to think about as we move in Q2.
Adam Samuelson - Goldman Sachs
Okay and then on the balance sheet, I was surprised that you end the quarter with over $140 million cash I am just, help us think about kind of what you are comfortable with running, the cash balance at and the amount of debt pay down that we should be contemplating with the balance of the year?
Colin Stevenson
I think coming into this, we are trying to get around the new global business Randy and I made a decision to keep it a little bit more cash on the balance sheet than we would have putting early. So we are going to run a little higher cash balance, I would tell you at least in the Q3 and then kind of reassess after we kind of figure out the rhythms that are necessary for the acquired businesses.
Adam Samuelson - Goldman Sachs
Alright. That's very helpful.
Thanks very much.
Operator
The next question will come from Jeffrey Gates of Gates Capital Management. Please go ahead.
Jeffrey Gates - Gates Capital Management
Yes, I have a couple of questions. The first one is in the past during the road-show you have talked about the core earning power of the company, I am just wondering your view of that has changed since the road-show and by the various building blocks that you talked about.
Secondly, you had an investment of unconsolidated subsidiary of 149 which is up about 35 million from the end of the year; can you tell me what that is? I assume it's something that you pick up with Vion, and then can you talk, third, can you talk about the working (inaudible) Vion business and if I look at that March balance sheet, how much working capital do you think you will be able to take out of Vion over the course of the next year?
Randall C. Stuewe
Look Jeff I think I have talked, this is Randy and then Colin will take the working capital and another question there. When we went to the street and talked about the business, I think we have been clear the way we saw the business roll up on a trailing 12, 600sh million type numbers within and that was through I believe September so it has weakened a little bit in the earnings power in OMD, you can normalize with this.
Our view on it, it hasn’t changed in fact we see as I just spoke with Adam there, I am really optimistic on the go-forward earning power and the growth potential for the business. I know that we have never said here and outlined giant synergies.
I don’t they aren’t that we see today the businesses have a lot of water between them. We have been able to capture some pretty good synergies up in Canada with lower SG&A and some operating improvements we see going on up there.
But from our perspective, when you look at the businesses around the world which is really the core rendering activities the ruse low business, and then the energy business we continue to feel very optimistic about those for the balance of ’14. We are going to be bringing new bio-gas plant here, I think we start up in September here, late July it should be finished and it should be up to full rate here shortly and that's going to bring new EBITDA to the stream.
So lot of things going on there that should help us grow the business here and you will start to see the growth.
Colin Stevenson
Hi, Jeff. The last two questions the investment in unconsolidated subs at 129 mill that's really comprised of two things, one our Diamond Green Diesel joint venture.
However, in the acquisition of Vion, they had a handful of minority interest and a handful of joint venture. So, it's the combination of the two Jeff that it gets you to the 149 and if you simply look at what we have disclosed about Diamond Green being 119 million of it, you can be at math and the Delta is the other joint ventures.
In terms of networking capital on the Vion side, as Randy and I spoke in the road show and talked about it in the K call. Clearly, the Vion side catered a much higher level of networking capital.
Part of that is inventory and part of it it’s in receivables. The inventory part is clearly related to the food segment business and the gelatin and casings businesses underneath that segment.
They have a longer processing time than our traditional U.S. animal byproducts business.
So both in the time and what it takes to process the material and then as well on the gelatin business because the specific customer requirements for gelatin, we have to maintain some inventories to meet those very specific needs. So the inventory is going to run updated number than what you have seen in the traditional Darling pre-transaction.
The receivables, I think one of the things that we have looked in that got little closer and trying to understand there is clearly a bit of a difference between contract terms and the, what I would call more feed segment versus what I am calling the food segment. So when dealing with farmer companies and food companies once again principally on the gelatin side, they tend to have longer terms.
Do I think there is an opportunity tighten that up? I do.
I don't think we are prepared today to say what that reduction might be but clearly it's a focus as the integration team that's working on the financial integration objectives.
Jeffrey Linn Gates - Gates Capital Management
Just for example on the call, the receivables are up about 100 million from the pro forma year end number with beyond and this one – is that just the timing difference?
Randall C. Stuewe
Yes I think it is part of timing difference Jeff.
Jeffrey Linn Gates - Gates Capital Management
There hadn’t been any change, it had a seasonally high number?
Colin Stevenson
No, I do know that, we had a decent March particularly on the food segment business which would have driven that receivable a bit. There is no abnormal movement in the aging of those receivables or anything like that Jeff.
Jeffrey Linn Gates - Gates Capital Management
Okay, thank you.
Colin Stevenson
You are welcome.
Operator
The next question will come from Craig Irwin of Wedbush Securities. Please go ahead.
Craig E. Irwin - Wedbush Securities
Good morning gentlemen and thank you for taking my question. So, over the past couple of quarters when we saw some significant commodities declines there was formula slippage that resulted in some slightly lighter profitability than anticipated.
I know with the back end, at the end of the first quarter that we actually start to see the strong rebound but can you maybe discuss whether or not that’s something that we will now flip or where we are going to see some of the catch up and if there is potential maybe for small upsize contribution in the second quarter?
Randall C. Stuewe
Yes Craig this is Randy and that's a good catching, probably something I should have commented on before. Clearly, if you look at the, in North America and in Canada and in Europe we take a forward look at that finished product prices and then look at the competitive nature on the margins and establish the raw material price and so as you get prices moving up and in the front you have to play a little bit of catch up there and so we are going to get a benefit in Europe and in Canada here in the second quarter, prices has moved up and we have been able to maintain our raw material cost.
But in the U.S., its index predominately on the weekly basis and so in several cases we saw meat and bone meal move to near all-time high as high in the mid 500s. We are pretty much upside down all quarter playing catch up meaning the sense that we have still next mixed week out at lower price or we are going to buy raw material for the following week.
And so you are going to see a lot of catch up in the sense of that and through second quarter we saw a little bit of that happened on the poultry meal side but the most of it was in the – was clearly on the fat side and the on the beef side and the meat and bone meal side.
Craig E. Irwin - Wedbush Securities Inc.
Great. Thank you for that and then my next question, two questions really about Diamond Green but before I ask, I should say congratulations you really are the only one posting solid profitability in the green diesel, bio diesel in North America.
So the first question is with the rising feed stock environment and the inventory position on forward purchase position you are carrying into the first quarter, was there any contribution from the markup of those commodities during the quarter as in did you already have matching sales commitments that neutralize the benefit of that commodities move and then second thing Randy, you did mention in your prepared remarks Diamond Green has a lot of blue sky to get to way you have been suggesting that it could be – if we run the maths on the rims and everything else, there really has been a discussion about potential for much greater profitability even adjusting for the economics of feedstock and rims and everything else. Can you maybe mention for us like what does Deltas are operationally, how you get there, if there a potential time line?
Randall C. Stuewe
Yes I think, first thing relative to Diamond Green, I mean we carried in some high price feedstock as we have said in the Q1, March was a tremendous performance, a significant portion of the product down there is an index sale through the pipeline predominately to different petroleum companies. So, it has significant operating cost advantage both on the inbound the cost of hydrogen, the cost of processing and the outbound side and that became very evident to us in March.
There aren’t any flat price forward contracts in that business for us so it truly is just a conversion business. As we margined and we just kind of play a movie one more time as we margined the business in the back half of last year, the piece that we were unable to lock in or the leg was the rim value and that was the risk that as the team didn’t –we knew we had a little bit of rim risk but we didn’t think it was 50% type of delta rim risk.
So we kind of see pretty close to home year running the business, going forward but obviously the plant has about 100 day supply chain pipeline in front of it. It is consuming almost 1500 tons a day of fat input into it, so you got to keep it in line and obviously as you make the connectivity to the Darling system, it means the Darling system is forward sold further out and we have traditionally been.
So while Diamond Green Diesel has its supply chain the Darling shipping system or supply chain has a little more risk to it and that’s probably a little bit different than maybe we would have thought that at the current time and part of that is related to the overwhelming, over-load with the railroads tap on it today and little bit longer turn times throughout the United States. So, Diamond Green Diesel from an operation perspective the VALERO team led by Garry (inaudible) just done a tremendous job, the plant is performing in our opinion in all assets as expected and as anticipated.
We said we can now sustain rates above main play capacity but the challenge for us is the margins that are available in the industry today and largely that's related to the rim values. We talked about it as the green premium.
The green premium being the combination of the rim and the dollar a gallon and at some point in time, those are going to have to change or the bio diesel industry like I said that we are very familiar with in the Quebec and Butler, Kentucky we see the numbers every day. Those are pretty hard to run those plants right now.
Both are doing okay because of their positioning and their customer base but things are going to have to improve. I mean when we look back at the model and then we did this at the board level, our investment into that plant today is $115 million equity if you take it to the fully loaded debt load or full investment and there is $445 million or whatever it is and we are still going to put up even at these lower rim value you can sit there and margin the plant and you can still sustain and put up 20% to 30% returns on both the investment than leaving a little higher returns on the equity piece.
So it's doing what we said it will do. It's just a very difficult environment to operate in where you have got this implied optionality that exists out there with the dollar gallon out there if you take our Q1 production and run rate out there and you see we are running at nominally 140 million gallon divided by 435 million gallon those $35 million of tax credit that can come flowing back in here and then by the end of second quarter that’s $70 million and so all of the sudden you can sit there depending on what happens and we have $100 million plus EBITDA type number coming out of that business for the first half of the year and $200 for the year.
So we are not writing the system up-to-date, we are just being consciously optimistic. It has provided a new market for us that we have talked to their shareholders about that's the reason the price of fat were at today because we are buying 3 million pounds a day from a marketplace today at 12 billion pounds and so we are significant use point now for guiding value to our core business.
So we look at it as just if you will, it's an integration place to our system and it's performing very, very nicely both operationally and from an earnings perspective it's going to get better.
Craig E. Irwin - Wedbush Securities
Great and then last one if I may, a few years ago you used to talk about Diamond Green maybe being something that could help put a floor on your profitability across the commodity cycle given that there is a range and volatility and that the bio diesel producers tend to make a lot of money when commodity prices are low, but then when they are high, they are obviously little bit more constrained. Do you have any updated thoughts there given that you have operated the facility now making money in this quarter, couple of quarters ago and have a lot more operating experience with it.
Randall C. Stuewe
Yes I mean clearly, the price of fat down there in the mid 30s or high 30s delivered down there right now and then you take the price of corn, it is providing a 10% to 15% up lift to our core business today there wasn’t there a year ago. So we are pleased with that.
It’s providing the new home for the high acid fats that didn’t have a home before. So we feel pretty darn and good about what it's doing for us from that perspective, when you look at our Canadian bio diesel assets we don't have enough homes for our fat in Canada today without our bio diesel assets up there, it's an integration if you will, finished products extension to our offering up there.
So both in Canada and in the US, it is doing exactly what we thought it would do. But all said, we made the investments in both of the plants from the perspective that they can stand on their own and make enough money to support the investment and they both are understand that we believe that we are going to see better earnings out of them here.
We have got the low cost assets in Canada. We have got the low cost asset operating cost assets in the USA here and I think you are going to see some pretty significantly improved operating environment here once the government gives us some clarity.
If they don't give us clarity, then it's pretty darn and good business.
Craig E. Irwin - Wedbush Securities Inc
Great. Thanks again for taking my questions.
Operator
And the next question will come from Bill Baldwin of Baldwin Anthony Securities. Please go ahead.
Bill Baldwin - Baldwin Anthony Securities
Good morning. Just couple of questions.
Randall and Colin can you offer any color at all when you look at your oil and feedstock cost in the Diamond Diesel about how much of that is represented by transportation or freight?
Randall C. Stuewe
Bill, we move from so many different places but we kind of look at – I have always described it as a funnel between the Rocky Mountains and the Appalachians and then it comes down there. Freight rates have increased from where they were a years ago but I think nominally got $0.03, $0.035 fright down there now.
Bill Baldwin - Baldwin Anthony Securities
And secondly Randy, can you offer some color as to what’s going on with the carbon credit out there in California, the low carbon credits? Why they are selling, where they are and what you kind of think the outlook might be over the next 12 to – let’s say the rest of this year?
Randall C. Stuewe
Well we have already viewed California as kind of another piece of optionality to Diamond Green Diesel because of a from the carbon perspective renewable diesel is clearly the preferable item there. We think California taken aggressive stand last year and they kind of waffled and backed off, the step up of their low carbon fuel stand.
So LCF has dropped out there $60, $70, $80 a ton down to $25 to $30 of ton now. For us we still view at long term as a real opportunity and twofold the opportunity for us is to find freight essentially ocean-free to go from Norco, Louisiana or St.
Charles on through the Panama Canal and into there. We are working on that.
We have been working on it due diligently as many people in the trading side of the business knows that if you move from U.S. port to U.S.
port it requires a Jones act vessel or a US flight vessel. So that freight is very difficult to find but we continue to work on it.
We have got some opportunities there but I think it will become apparent here shortly. If the low carbon fuel standard gains the momentum that we think it will as it gets stepped up here in 2015 - 2016 I think we are prepared to move forward with an additional investment out in California probably in the bio diesel area.
We are the largest producer of fat on the west coast and that's – that would be a great value addition or finishing capacity piece for our system out there. So we kind of remain cautiously optimistic.
We have seen an LCF has also being (inaudible) in Canada today but I think it will provide us some nice uplift in the future here. Climate change is clearly getting some momentum around the globe today obviously on the front of the new steppers here, the last week here and so I think you are going to see the Darling system globally is very, very well positioned to take advantage of carbon credit climate change and greenhouse gas credit emission as we go forward.
Bill Baldwin - Baldwin Anthony Securities
Thank you for that color Randall.
Randall C. Stuewe
Alright. Thanks Bill.
Operator
And ladies and gentlemen this will conclude our Question-and-Answer session. I would like to turn the conference back over to Randall Stuewe for his closing remarks.
Randall C. Stuewe
Thanks everyone for joining us. Thanks for your patience with us and lots of great questions and look forward to talking to you here in August and sharing our successes with you, be safe.
Operator
Ladies and gentlemen the conference has now concluded. We thank you for attending today's presentation.
You may now disconnect your lines.