Nov 8, 2014
Executives
Melissa A. Gaither – Director of Investor Relations Randall C.
Stuewe – Chairman & Chief Executive Officer Colin Stevenson – Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Global Finance & Administration
Analysts
Chip Moore – Canaccord Genuity Inc. Daniel Mannes – Avondale Partners, LLC Adam Samuelson – Goldman, Sachs & Co.
Kenneth B. Zaslow – BMO Capital Markets Corp.
Carla Casella – JPMorgan & Co. Kris Keller – Columbia Management Group LLC William Baldwin – Baldwin Anthony Securities, Inc.
Operator
Good morning everyone, and welcome to the Darling Ingredients Conference Call to discuss the Company's Fiscal Third Quarter 2014 Financial Results. With us today are Mr.
Randall C. Stuewe, Chairman and Chief Executive Officer of Darling Ingredients; and Mr.
Colin Stevenson, EVP, Global Finance and Administration. 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, Director of Investor Relations for Darling Ingredients. Please go ahead.
Melissa A. Gaither
Thank you, Kate. Good morning.
Thank you for joining us to review Darling's third quarter 2014 earnings results. We hope you had a chance to review our earnings press release that was issued yesterday afternoon.
Randall Stuewe, our Chairman and CEO, will begin today's call with an overview of our third 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 result of operations.
Please bear in mind that forward-looking information is subject to many risks and uncertainties and actual results may differ materially from what is projected. Many of these risks and uncertainties are described in Darling's annual report on Form 10-K for the year ending December 28, 2013, and 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 like to also highlight the non-GAAP metrics that are included in yesterday's press release.
The company believes that excluding certain recurring and non-recurring adjustments from comparable GAAP measures, investors have an additional meaningful measurement of the company's performance. As a result, this call will include a discussion of certain non-GAAP financial measures.
The company has provided a reconciliation of these non-GAAP financial measures in 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 November 6, 2014.
With that, I would like to turn the call over to Randy.
Randall C. Stuewe
Thanks Melissa. Good morning, everyone.
Thanks for joining us. We faced several challenges during the third quarter, specifically related to the rapid global resetting of ingredient prices and coupled with the unplanned shutdown at our Diamond Green Diesel facility.
As anticipated record crop production in the USA started to put pressure on ingredient prices late in the quarter. This coupled with the unexpected and sudden downtime at Diamond Green Diesel accelerated a fairly significant price resetting on used cooking oil and animal fats in the USA feed segment, and to a lesser extent in our European rendering business.
With DGD down for nearly half the quarter the sudden interruption in our supply chain force this to divert, delay and discount our fats and grease supplies into alternative markets. The good news is we were able to roll our August and September sales to Diamond Green Diesel forward at existing contract prices.
For the most part our USA procurement formula has worked. As discussed in the past about 75% of our fat and bone rendering agreements are on some type of margin protection formula, until a lesser extent about 50% of our used cooking oil agreements.
Our European rendering business felt similar margin pressures from our lower fat prices driven by a global biofuel slowdown. But management is made some progress to adjust raw material values in order to normalize margins.
In Canada, our rendering business performed well and navigated through a difficult finished product value market. Our food segment led by Rousselot one of the leading producers and marketers of Gelatine in the world also felt the pressure of slowing economies in both China and South America.
During the quarter, the fuel segment remained plagued by USA government ambiguity on biofuel programs. Overall our tonnage remained steady globally, and we completed the acquisition on custom blenders which is an excellent fit with our bakery feeds group.
Now at the operating level, pro forma adjusted EBITDA was $122.3 million when compared to $89.5 million as reported in the second quarter of 2013. The increase reflects full contributions from our newly acquired global operations and more than offset the decrease in earnings from Diamond Green Diesel and the reduction in acquisition and integration expenses, which Colin will address later in the call here.
Now let’s take a closer look at our food, feed, and fuel segment operating performs and later I’ll give you a little more detail on Diamond Green Diesel. Our food ingredient segment was mixed with gelatin business, showing marginally lower earnings, related to the softness in Chinese demand, and margin pressure related to the increase in raw material pricing in South America.
Our European edible fats business normalized sequentially, but our casings business weakened a bit due to lower seasonal demand. The global feed Segment delivered a disappointing earnings performance with EBITDA down 26.6% on a sequential basis.
As I mentioned earlier, the bulk of the decline came from significantly lower earnings in the USA related to non-formula business as fat and used cooking oil prices felt the impact from the downtime at Diamond Green Diesel. Our non-formula business coupled with the lag effect from our USA formula priced raw material procurement agreements put a drag on operating income in this segment.
Canada had a solid performance and China performed generally as expected, while Europe was moderately below expectations due to some price pressure in the C3 rendering category related to declining fat prices and a delay in reducing raw material cost. We also experienced unfavorable foreign exchange impacts caused by the strengthening of the U.S.
dollar. As expected on a year-over-year basis, the Bakery Feeds business continue to experience the effects of lower corn pricing and delivered modestly lower earnings.
The addition of the Custom Blenders acquisition should provide significant synergies to the Bakery Feeds business as we integrated its customers, route, and equipment into our infrastructure. In general, Feed Ingredients Segment raw material volumes were steady around the globe and we anticipate some recovery in Q4 due to the rolling of the Diamond Greed Diesel sales contracts.
And finally, earnings in our fuel ingredients segment anchored by our Diamond Green Diesel joint venture reported significantly weaker performance compared to the second quarter, largely due to 47 days of downtime at the facility due to a fire incident in early August, that limited production during the quarter. Fortunately, no one was injured and the DGD team sees the opportunity to proceed with a planned expansion, increasing our nameplate capacity by 10% or now to 11,000 barrels per day of feedstock.
While DGD restarted successfully on September 18, it should be noted out biofuel operations in North America continue to be adversely impacted by stalled government policy surrounding the RVO mandates and the blenders tax credit. Candidate’s biodiesel margins were still nominally at breakeven during most of the quarter.
With DGD now back online and operating at the expanded capacity, we expect improved performance, but need to point out that carryover of the higher priced feedstock from August and September contract roll-forwards that will ultimately impact Q4 profitability. Our Ecoson plant in Son, Netherlands is now online and contributed nicely to our fuel ingredients segment with a steady performance also from Rendac, our disposal rendering business in Europe.
With that, I'd like to turn the call over to Colin for our financial review. And after that I'll provide some closing comments before we go to Q&A.
Colin?
Colin T. Stevenson
Thanks, Randy. Since we are now providing a greater amount of segment detail, I will focus my comments on our third quarter performance and direct you to our press release and SEC filings for our nine month comparisons.
Let’s take a look at our third quarter 2014 financial highlights. For the quarter, we reported net income of $14.3 million or $0.09 per diluted share compared to $27.7 million, or $0.23 per diluted share, in the same period in 2013.
Excluding 1.4 million of after-tax integration related expenses associated with the Rothsay and Vion Ingredients acquisitions. Pro forma adjusted net income and earnings per diluted share were $15.7 million and $0.10 respectively.
Net sales for the third quarter 2014 were $955.8 million, as compared to $425.8 million in the same period in 2013. In the current quarter, operating income increased by$8.3 million to $49.9 million, which was attributable to the newly acquired operations.
Including the company’s share of net loss in the DGD joint venture, segment income was $48.9 million or $4.7 million lower than the same period in 2013. Additionally, we have outlined adjusted EBITDA measures in our Form 10-Q, which we believe provides a meaningful analytic to evaluate performance.
As noted in our press release, third quarter adjusted EBITDA was $117.2 million compared to $64.8 million in the same period last year. As Randy indicated on a pro forma adjusted EBITDA basis, the company would have generated $122.3 million in the third quarter, compared to a pro forma adjusted EBITDA of $89.5 million in the 2013 third quarter.
The pro forma adjusted EBITDA figures include the company’s share of EBITDA from the DGD joint venture. However, it should be noted that the joint venture has not yet made any distributions to its partners.
For the third quarter 2014 we reported an overall gross margin of 24.1%, compared to 27.2% in the year-ago third quarter, a decrease of 3.1 points or 11.4%. The decline in gross margin percent results in the VION acquisition and moderately lower margins in the Feed Ingredient Segment.
We have strong cash generation in the third quarter of 2014 with $138.8 million of cash flow from operations or cash EPS of $0.84 per diluted share, as compared to $39.5 million and cash EPS of $0.33 per diluted share in the same period in 2013. For the nine months ended September 27, 2014 the company has generated $179.3 million of cash flow from operations or cash EPS of $1.9 per diluted share, as compared to $168.7 million of cash flow from operations or cash EPS of $1.42 per diluted share for the nine months ended September 28, 2013.
Now turning to each of our operating segments. Food Ingredients reported segment operating income of $14 million for the third quarter of 2014.
As a reminder, we did not have a Food Ingredient Segment in the year-ago third quarter to provide comparability. On an adjusted sequential basis, operating income decreased by $0.7 million from $14.7 million, primarily related to softness in demand in China, as a result of recent food safety and pharmaceutical scandals, increase in raw material prices and competitive pressures in South America and general economic slowdowns in China and Brazil.
On an adjusted sequential basis, exclusive of non-cash inventory step up, gross margins increased by a modest 1.5 points or 6.4%, however, net sales were down $28 million or 8.5%. Feed Ingredients reported segment operating income of $46.3 million or a decrease of $12.5 million compared to the year-ago period.
On an adjusted sequential quarter basis, exclusive of non-cash inventory step up, segment operating income decreased by $29.7 million from $76 million. Gross margins were 23.5%, as compared to an adjusted gross margin of 28.3% in the second quarter of 2014.
On a sequential basis Feed Ingredients earnings in the U.S. were impacted by the significant decline in fat and used cooking oil finished product prices, attributable to an overall lower feed ingredient price environment resulting from the record grain production.
Also the unplanned shutdown of DGD caused us to move finished fats and greases into alternative markets on a spot basis, which had the impact of pressuring prices even further. As expected, the raw material processing formulas utilized in the United States operated appropriately as the finished fat markets moved lower.
But the lag in the formulas in a resetting market resulted in margin compression. Europe felt similar margin pressure with its finished fats portfolio as global biofuels demand softened, with major producers taking extended turnarounds.
Finally, fuel ingredients reported segment operating income of $2.9 million, which reflects an increase of $2.5 million over the same period in 2013 Including the DGD joint venture, fuel ingredient segment income was $1.4 million, or $10.9 million lower than the year-ago period. On a sequential quarter basis, segment income decreased by $5.5 million.
As Randy mentioned, the fuel ingredients segment operating results were negatively impacted by the shutdown of the DGD facility and regulatory uncertainty with regards to biofuel policy in the United States. Gross margins increased by 4.4 points on a sequential quarter basis.
However, this was partially offset by a reduction in net sales of $6.5 million, or 8.3%. The inclusion of our European disposal rendering, green energy and biophosphate operations contributed to margin improvement, while our North American biofuels operations continued to be challenged by the regulatory uncertainty related to the RVO and blender's tax credits.
Finally, on a sequential quarter basis, the strength in the U.S. dollar presented a headwind in the third quarter of 2014.
On a translated basis, this represented a $1.9 million reduction in operating income primarily attributable to Euro functional currency earnings. Now we will review our corporate activities.
As you can see, the Company had networking capital of $599.1 million, and its working capital ratio was 2.2 to 1, compared to working capital of $950.7 million and a working capital ratio of 6.4 to 1 at December 28, 2013. The decrease is primarily due to reduction of cash and cash equivalents used to fund the Vion acquisition.
At September 27, 2014, the Company had unrestricted cash of $193.4 million and funds available under the revolving credit facility of $786.9 million, compared to unrestricted cash of $870.9 million and funds available under the revolving credit facility at $680.7 million at December 28, 2013. As of September 27, 2014, the company had long-term debt of $2.3 billion as compared to $886.9 million at year-end.
During the quarter, the company repaid long-term debt totaling $28.8 million. Corporate SG&A increased by approximately $1.4 million to $8.8 million from $7.4 million in the year-ago period.
The increase was principally related to the additional corporate staff to support the new global business. Interest expense was $25.4 million in the third quarter 2014 compared to $5.3 million during the year-ago third quarter, representing an increase of $20.1 million, which was primarily related to the increase in debt outstanding as a result of the Vion Ingredients and Rothsay acquisitions.
Relative to the company’s investment in the DGD joint venture with Valero, on the balance sheet we reported a net investment in the venture of $119.8 million as of September 27, 2014, as compared to $115.1 million as of December 28, 2013. From a CapEx perspective we spent $154 million during the first nine months of the year, compared to $85.7 million during the year-ago comparable period.
The net increase of $68.3 million is directly attributable to our newly acquired businesses. I will now turn the call back over to Randy.
Randall C. Stuewe
Thanks, Colin. We’ve now worked through a turbulent and volatile quarter with our new global business.
Our integration is ongoing and proceeding as planned, as we transform Darling into a global leader in the production of sustainable, organic ingredients for a growing population. We anticipate a more normalized fourth quarter from our platform.
And with that, I’d like to go ahead and open it up to Q&A.
Operator
We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Chip Moore from Canaccord.
Chip Moore – Canaccord Genuity Inc.
Hey, good morning. Thanks for taking the question.
Randy, maybe first you can talk about what you’re seeing thus far this quarter with formulas catching up and DGD now up and running?
Randall C. Stuewe
Yes, it is. Obviously DGD became quite the twister for us in the third quarter here.
Number one, it is a hard quarter to compare sequentially and to try to understand the impact. We’re going to try to do our best today to help people understand it.
What was involved here was the perfect storm of conditions meaning that you had buyers of finished product anticipating lower prices due to kind of the larger global ingredient and crops available around the world. And then all of the sudden you shut down our largest customer in the world for the Darling system, Diamond Green Diesel suddenly.
And so the impact of that was very difficult for us to calculate while it was happening to us. But as the fire broke out and the decision on the next morning, or Monday morning, was to divert the whole pipeline, we had to significantly discount the product to move it to markets that hadn’t been doing business with us in quite a while.
So in a classic sense we had to buy our way back into a market. So that’s kind of the perfect storm on top of then the typical lag.
And I know we’ve talked about this for many, many years, that as prices move down you adjust your raw material prices, whether it’s in Europe we do it on a 30 or a 60-day basis, Canada a 90-day, and in the USA in the used cooking oil business it’s a 30-day look back. And in the rendering or the fat and bone side it could be week to week or prior week or two weeks.
But you get caught in this vacuum of prices moving down quicker than what you can forward sell. And typically what happens in a situation where prices are moving down, buyers will wait.
You build inventories and you end up selling a lot more high priced product at lower prices here. And if you think about it, the formulas typically take around 30 days to work their way through the system before they normalize again.
So we anticipate, Chip, in October here, which is now we’re in November, we’re seeing that impact come back to us in the sense of more normalized pricing. We’re seeing prices on fats and greases and tallow actually in the USA move back up $0.01 to $0.02 a pound here in the last couple days.
You’re seeing proteins hold steady as the pipeline for protein around the world remains pretty tight. And then also as I pointed out, our largest customer is Diamond Green Diesel, we worked with them, they worked with us.
And we moved all of the August, September sales forward at that time to the October, November period. So we’re going to have some benefit from that.
The good news is, that benefits the core rendering business. The bad news is a little bit of that’s offset within the Diamond Green Diesel system itself.
Chip Moore – Canaccord Genuity Inc.
Okay. That’s helpful.
And then if we move over to feed, maybe you can just – I know it’s early on 2015, but your thoughts given some macro issues at least in Asia and Brazil, and how you’re thinking about spreads for Rousselot and the gelatin market?
Randall C. Stuewe
Well, in the feed, and the food and the fuel segment, you’ve got a major global resetting that’s pretty interesting to watch. I mean, as we still and are beginning to learn our new platform, I mean, as we said we’ve got lower feed prices all around the world right now.
So we’re adjusting a normalizing margins there. That will level out here in Q4, Q1.
My personal opinion is, is that the lows in the marketplace are probably in now. As I look to the Chicago Board of Trade and use it as my barometer, the market is in a carry.
The market seems to like $4 corn for the balance of the year here. We’re at all-time lows in the USA on soybean oil stocks, we’re seeing palm oil improve a little bit.
So the marketplace is set up in the feed segment and really kind of awaiting what happens in Washington relative to the biofuel mandates. It’s kind of a unbelievable to be talking about or thinking about Washington still trying to set a 2014 biofuel mandate, when there’s only 45 days left.
So now you become kind of hopeful that they issue a 2015 guidance and also give us the blender’s credit. If you get an increase in whether it's ethanol, advanced or biomass, that should be fairly supportive of the market for the balance of the year and that will help the feed segment.
In the food segment, as we said and Colin spoke, the softness as we look at it we have a four pillar business anchored in Europe, North America, China and South America. North America and Europe continue to perform fairly nicely, as expected.
China felt the pressures of the, as Colin referred to, some pharmaceutical and consumer scandals that continue to plague Western companies over there. And South America felt the tightening of the hide market, where we make hide gelatin in South America, the reduction in the USA cattle herd has caused the price of hides to move up.
And hides ultimately in South America had increased in price, and that gives us a chance to move prices up in South America. But it just takes a little bit of time.
Conversely, Chip, if you think about it the Russian border closure has caused some of the fattier cuts of meat that typically left the continent for Russia to back up on the continent. And that's helped the availability of pig skin and the pricing of pig skin, which translates to improved margins or within the gelatin business on the continent today.
So a little bit of balancing going on there, arbitrage opportunity. And obviously the fuel segment for us, you're still awaiting, as we said, very similar to the feed segment the RVO mandates.
Canada operating at breakeven. Europe felt the impact of the biofuel slowdown in Germany that’s typically very seasonal this time of year.
Plus Neste, the other big renewable diesel provider, had some turnarounds scheduled around the world that caused a little bit of fat to back up in Europe during the quarter while it was – and that's the impact we felt. So I hope that helps you a little bit
Chip Moore – Canaccord Genuity Inc.
Yes, that's helpful. To your point on the regulatory vacuum, post mid-terms any updated thoughts on does that help get something done here or still wait and see?
Randall C. Stuewe
I'm probably as frustrated as you are. I suspect it's a little bit of wait and see.
Obviously the dollar tax credit means a lot to both Valero and Darling. And for Darling it takes a good year, and will make it a really good year if we can get that.
The question is, does Congress take up a tax extenders package? The word we're believing is we thought it would happen here between the 12th and Thanksgiving, and now we're hearing between Thanksgiving and Christmas.
So we'll see and we'll keep our fingers crossed.
Chip Moore – Canaccord Genuity Inc.
Okay, I appreciate it. Thanks guys.
Operator
The next question comes from Dan Man from Avondale Partners. Please go ahead.
Daniel Mannes – Avondale Partners, LLC
Thanks, good morning.
Randall C. Stuewe
Good morning, Dan.
Colin T. Stevenson
Good morning, Dan.
Daniel Mannes – Avondale Partners, LLC
Maybe you already answered this in a couple different ways, but maybe I'm going to try to narrow it down. So if you can help me out just in sort of the walk from the second quarter of 2014 to the third quarter of 2014 on the feed segment.
We're showing a drop in operating income in the I guess the mid-$30 million range. If you can kind of breakdown for me how much of that is sort of the pure price move on the non-formula business, which obviously is a function of corn and fats and meat and bone meal, versus how much was really the lag impact that you hope to get back over the next couple quarters?
Is there any way you can kind of separate that out for us?
Randall C. Stuewe
Number, one I think it’s pretty difficult to do that I mean we do know what the pipeline we had shipping down to Diamond Green Diesel. We’ve traditionally not released that as it can move around dramatically depending on whether or not the clay can – what you can originate from other suppliers.
And in the case of August and September, it was a significant portion of our production, both of our used cooking oil and of some higher asset fats that come out of the system in the summer time. So that’s a pretty significant impact.
And if you look at the price, if you go back, Dan, and you start to think that stuff that you made in July ships really in August, you had $0.32, $0.33 type of FOB fat numbers that were – in order to move that product back into the market during the month was discounted to $0.24 to $0.26 a pound. So there’s was a $0.07 to $0.09 a pound move and that’s taken not only – you were buying the raw material at $0.32, you’re now selling the finished product at $0.24, $0.25, that’s a substantial portion of it and you’ll get a lot of that back here in October, November as we do ship it out.
And then the other piece is as you can – as I've tried to describe to people over time, you can do the change in the USA of the 75% or the 25% that’s not on formula within the rendering segment and try to do a look forward of that. When I’ve kind of just penciled it roughly, I think that probably about a half of it has led to that right now.
There’s just a lot of variables in that. When you get this type of volatility and this type of sudden movement, there’s just a lot of things that happen before the ship normalizes in.
As I said we anticipate that to level off here in Q4, but the margin compression was a couple of points and I understand that, and 100% of that is related to the compression of fats within the formulas here. Proteins have held steady, premiums on our different proteins have held steady.
As we look forward and this is kind of back to Chip's question, we anticipate pet food prices to remain steady if not increase this year, because fish meal has now gone to near all-time highs at $2,000 a ton and that’s the aquaculture driver in the world. And we’re seeing aquaculture people already start to take positions in Chicken proteins in order to augment their inventory and to support their position for next spring.
So lot of good things happening in proteins 90% of the impact here was all related to the sudden drop in fat prices. As we’ve said, Diamond Green Diesel is back up with its pipeline rebuilding right now, and I think things should improve.
Daniel Mannes – Avondale Partners, LLC
So if I can just clarify, so again just as I try to break this out, clearly there is a direct impact on the non-formula business. You said maybe half of the total, give or take, but tough to tease out.
The Diamond Green impact, this may well have been a product that you sourced under formula, but because you sourced under formula when pricing was at let’s call it $0.33, $0.34, and then you were forced to sell it at $0.24, $0.25. I don’t want to say the formula is broke, the formula worked.
But the contract is broke so to speak. So just to clarify that is kind of the transitory issue that we’re talking about now?
Colin T. Stevenson
Yes, Dan, that’s correct. It was the forward book disappeared on us.
Daniel Mannes – Avondale Partners, LLC
Right. So there’s no – the formulas work, it’s just the formulas were tied to a forward price which no longer held.
Colin T. Stevenson
Correct. Because we rolled the contracts.
Daniel Mannes – Avondale Partners, LLC
Got it.
Colin T. Stevenson
So then you’re going into a spot market and as Randy said, buyers were shortening up what they were they were buying for the belief that the price was going to be continuing to move down.
Randall C. Stuewe
When you move, Dan, from a dedicated customer that’s just turning rail cars, and all of a sudden you have to go compete with the price of corn or the export market, that became very, very challenging. And ultimately you built inventories too.
Daniel Mannes – Avondale Partners, LLC
Is this at all analogous with maybe what you saw in 2008, 2009 when prices fell and some of your export contracts were cancelled on you?
Randall C. Stuewe
I wouldn’t say we had anything cancelled, but, yes – you’re seeing the same volatility impact as in like last year fourth quarter a little bit, and then as I reminded Colin and he wasn’t here at the time, but it was what we saw flow through in 2008 when everything moved so rapidly.
Daniel Mannes – Avondale Partners, LLC
Okay. And then secondly, you did build some inventory it sounds like.
Any mark-to-market, lower cost of market on your inventory. I know you don’t give us that number but is that part of the equation as well or no?
Randall C. Stuewe
Go ahead Colin.
Colin T. Stevenson
Nothing material, Dan. Little bit but nothing material to speak of.
Daniel Mannes – Avondale Partners, LLC
Okay. And then the last thing is on the food business.
You were down sequential. The second quarter, if I remember right, you’re obviously getting hit pretty hard from Eastern Europe and you expected that to turn around.
Did that turn around and that was offset by China and South America? Or did that remain a challenge as well?
Randall C. Stuewe
Our European team once had – the good news was they had more tonnage coming out. And the bad news was they were having to move it into the market at lower prices.
And so then they had to adjust their raw material values to normalize their margins. [Yan] (ph) was very successful in doing that.
What you see in the food segment was the pressure that we’re feeling in the gelatin business right now. That business, as we expected, came off of three very good years, and at the end of the day, it’s a fairly concentrated market with five or six leading companies out there.
And the Chinese slowdown is I think impacting all of us. I’ve read all of our releases around the world, and China is the majority of the slowdown for us, along with a little bit of South America margin pressure that should normalize.
Daniel J. Mannes – Avondale Partners, LLC
Got it. Thanks for all the color.
Operator
The next question is from Adam Samuelson of Goldman Sachs. Please go ahead.
Adam Samuelson – Goldman, Sachs & Co.
Thanks. Good morning, everyone.
Randall C. Stuewe
Good morning Adam.
Adam Samuelson – Goldman, Sachs & Co.
Maybe just to ask the question on the feed segment a different way. And I understand kind of the dynamic with Diamond Green shutting down and then the contracts break and you end up selling the product into a lower priced market.
Why wouldn’t that show up in the revenue line? Your revenue – your ASPs in, I mean your volumes were pretty flat sequentially in feed, and the average selling price per ton really didn’t change.
Your revenues only declined $16 million. Presumably if you were seeing a sharp drop in selling prices because you had to sell into different markets, why didn’t that show up in the top line?
I think that’s where I’m getting – I’m still not getting full clarity.
Randall C. Stuewe
Well, a couple things, Adam. As I referenced the protein values remain very, very good for us around the world.
Also you get into the seasonality of sales in China the blood sack – a blood or the hemoglobin business for aquaculture, and that’s the time that we liquidate a lot of the inventory in the summer. The protein and the hemoglobin business more than offset or helped to offset a significant portion of the fat price impact.
Adam Samuelson – Goldman, Sachs & Co.
Okay. All right.
So maybe just looking forward a little bit, clearly 2014 had some impacts, both we had the 1Q weather. You had obviously all the integration with Vion, you had some of the gelatin softness, obviously the issues in feed this quarter.
You’re kind of still undergoing ERP implementation. Can you help us think about some of the discrete items that have impacted the P&L on the profit line in 2014 that maybe shouldn’t repeat?
And I would imagine ERP, stock comp, 1Q weather, some of this feed price normalization – fat price normalization in 3Q with the DGD shutdown. Help us tease out some of the things that you wouldn’t put into the base plan for 2015 that for why the 2014 EBITDA base maybe is a little bit artificially low?
Randall C. Stuewe
Well you gave me a pretty bad report card there, but I think you answered your own question.
Adam Samuelson – Goldman, Sachs & Co.
Pretty good list.
Randall C. Stuewe
Pretty good list. Obviously DGD had its issues and hopefully that’s behind us.
Clearly since September 18 it has been running at record operating rates. Colin continues to move forward with the implementation of the ERP system here.
We continue to try to implement our ERP system up in Canada in the Rothsay acquisition. Those expenses should be tailing off as we are doing it now with our people, the consultants are out of here.
When I look at it, you can’t predict weather here, but at the end of the day we had a lot of headwind in the early part of the year with bad weather. And then we had a pretty good – a really pretty nice second quarter and then to have the DGD.
So as I said I kind of anticipate things more normalizing. We’re seeing the integration come together.
We’ve got some opportunities for 2015 with some new plants that we anticipate putting under construction here around the world. We're optimistic on the gelatin business growing again next year.
And overall the rendering business around the world looks pretty darn good to us. Meat supplies look favorable about on every continent, and I think that’s once we get – adjust the new margin structure and you sit there and say what's the new margin structure, it looks like soybean meal's at $350 a ton for most of the year, it looks like vegetable oil seems to like somewhere around $0.30 to $0.35 a pound and I think you’ll see that the structure start to normalize as we get through some of these events that hit us this year.
Adam Samuelson – Goldman, Sachs & Co.
But no way kind of thinking about some of the discrete earnings impacts, some of those charges and events and helping us kind of build a bridge to 2015 at this point? You don't want to put a finer point on some of those numbers?
Randall C. Stuewe
No, not at all.
Adam Samuelson – Goldman, Sachs & Co.
Okay. And maybe just a clarification question for Colin on the balance sheet.
Looks like there was – did something get reclassified from accounts payable to accrued expenses? Seems like those numbers flipped pretty sharply sequentially.
And I want to make sure I understand what happened there.
Colin T. Stevenson
There was a mapping issue Adam, with the roll-up from Europe. So we had an account mapped one way that have gone another way, so we corrected for it.
If you look at the total between the two really didn’t move the whole heck of a lot.
Adam Samuelson – Goldman, Sachs & Co.
Okay, all right. Thanks very much.
Operator
The next question is from Ken Zaslow of BMO Capital Markets. Please go ahead.
Kenneth B. Zaslow – BMO Capital Markets Corp.
Hi, good morning everyone.
Randall C. Stuewe
Hi, Ken.
Colin T. Stevenson
Hi, Ken.
Kenneth B. Zaslow – BMO Capital Markets Corp.
Just a couple cleanup questions. I think most of these have been answered.
So 2015, anything that happened in this quarter has no impact and does not impact your view on 2015. Is that fair?
Randall C. Stuewe
That’s a fair statement.
Kenneth B. Zaslow – BMO Capital Markets Corp.
Okay. What gives you confidence that the global resetting is going to be finished in the fourth quarter?
Randall C. Stuewe
It’s already leveled off, as I can see. You’re seeing proteins move a little bit around right now that we’re in the – for the pet food ingredient side globally, you’re in the annual contracting time here.
Those feel pretty steady to try to widen margins there this year because of fish meal. Really the unknown, underneath the business today really is will we get some type of stability in the fats and greases area, which is tied pretty much to global biofuel demand which has still been the wild card here for six to nine months.
And I think in my world it's pretty simple. If you go and look at the soybean oil S&D in the U.S.
you went under £1 billion, which is the first time and I don't know how years, but in my career to be that low. You look at the non – the other oil seeds around the world and stocks are down 3 million to 4 million tons around the world.
So you’ve got a pretty tight S&D that that’s comfortable but tightening on the oil side if any of the biofuel mandates continue to grow around the world. And for example, if you take it from a 1.28 billion gallon mandate this year to 1.5 or 1.6 next year, you’re going to pick up £2 billion or £3 billion of new demand out of the tightening situation.
So I think that’s a fairly positive outlook for that. I mean – and from our perspective, the bakery side we've seen corn pretty much it’s low, and it's starting – we 're seeing those prices normalize.
I mean the challenges for us is just getting through the volatility here to where if the prices continue to move down, we will put charges back into a lot of our different business units for the service we provided. But right now it looks pretty optimistic.
Kenneth B. Zaslow – BMO Capital Markets Corp.
Okay. And then you said your biggest [continent growth] (ph).
Could you tell me about Diamond Green in terms of it is up and running, everything is going as you expected? Is that fair at this point?
Randall C. Stuewe
Yes, the number one, as we said, obviously no one ever wants to have an unintended down time or a fire in this case and an explosion. Frankly, we were planning to go down at the plant probably about 30 days later to do some of this work that we'd identified, replace some of the metallurgical stuff, improve some of the outbound logistics constraints that we had.
That's all been done. The plant is running very, very well.
The product is – the facility from a customer demand point is to a degree sold out. It is really, really performing as we'd like.
I mean, obviously it would be a better light if we'd have some clarity on the RVO and put some real margin back in it. But it remains even profitable and will be profitable in fourth quarter even with the higher priced contracts that exist, even with diesel being down $0.50 a gallon or $0.30 to $0.50 a gallon in the quarter.
Kenneth B. Zaslow – BMO Capital Markets Corp.
Okay. I think that you said your biggest customer is obviously Diamond Green Diesel, but there’s also a new facility that just came online also.
How is that going to be affecting the price outlook? Does that make a difference or is that too small?
Or how do you think about that?
Randall C. Stuewe
I read the REG press release or whatever they had in their conference call I can’t tell you if the facility is really running and at what rates. It looks like they’re running about 1,000 to 2,000 barrels a day which is, as I mentioned new demand.
Any demand helps. But obviously that facility is a little bigger than one-third the size of Diamond Green Diesel.
So it will help add nameplate capacity. That facility would use about 600 million pounds of fats and oils I don’t know if it has the capability to utilize the quality of feed stocks we use.
I think it’s safe to say that it would prefer a cleaner raw material which is used cooking oil and now that’s the reason that you see used cooking oil prices in the U.S. moving up above yellow grease.
I’m hearing used cooking oil is moving up $0.28 to $0.30 now which is really good for our base business. So we like to see new demand.
Kenneth B. Zaslow – BMO Capital Markets Corp.
Okay. And then my final question will be you said the fourth quarter is going to be more like a normalized number.
What does that mean? You guys don’t normalize.
What does that mean to us?
Randall C. Stuewe
Did I say that?
Kenneth B. Zaslow – BMO Capital Markets Corp.
I think you said it.
Randall C. Stuewe
No, I think what I’m trying to look at is I mean we’ve always talked about watching the business normalize I mean when the impact of Diamond Green we have always looked at the business Ken, and we put charts up in our investor presentations where we look at the business without Diamond Green Diesel is normalizing and our intent is to normalize in that $600 million EBITDA run rate. And obviously, that’s got a lot of assumptions in it on tonnage and performance in the gelatin business.
The $600 million, we’re under a little pressure in the bakery business. But at the end of the day when we talk normalize we’re trying to, that’s where we’re starting to try to grow from is the $600 million number.
Kenneth B. Zaslow – BMO Capital Markets Corp.
Great, I appreciate it.
Randall C. Stuewe
Yes.
Operator
And the next question is from Carla Casella from JPMorgan. Please go ahead.
Carla Casella – JPMorgan & Co.
Hi. On the Diamond Green Diesel side, in an ideal quarter in a normal year, how much of your production from the Feed Ingredient business should go to DGD?
Randall C. Stuewe
Carla, its moves around I mean clearly Darling could fill 100% of the needs of Diamond Green Diesel if it needed to. We've typically been anywhere 40% to 50% of it.
And it just depends on product mix and what we can originate down there, depending on where corn oil is from the ethanol industry, depends on where poultry fats are. It just moves around from quarter-to-quarter.
As we said, August, September was a big portion of our production headed down there.
Carla Casella – JPMorgan & Co.
And so that's 40% to 50% of the DGD feed stock is coming from your other businesses. But how much of your feed business as a percentage does that represent?
Randall C. Stuewe
We don't really break that out. We've kind of held that number in house there.
So I'd say it's pretty similar.
Carla Casella – JPMorgan & Co.
Okay. And then did you give a pro forma number for EBITDA for last year, if you had had Vion in the numbers?
Colin T. Stevenson
Yes, we provide that on a look back pro forma basis with each of our investor decks and we have an investor conference coming up here that we'll get a deck out very shortly. We'll put it out with an 8-K.
Carla Casella – JPMorgan & Co.
Okay. Thank you.
Randall C. Stuewe
You’re welcome.
Operator
The next question comes from Kris Keller from Columbia Management. Please go ahead.
Kris Keller – Columbia Management Group LLC
Hi, guys. Thanks for taking the questions.
Just a follow-up on the question that Carla just asked. Can you talk about how the contracts with DGD or the pricing in there?
Are they different than contracts that you have within the rest of your business?
Randall C. Stuewe
No, not really. I mean, they may have – number one, Diamond Green Diesel is our number one customer.
They have specific quality needs, and at the end of the day we have lots of our plants within the Darling system that can meet that quality. So really they're no different than any other customer.
The only thing they're different about is they take rail from us. So we sell a lot of rail cars down there, and so there was a lot in transit when we went down in the quarter and a lot to be loaded.
So that's the only difference. And so as we said, when you tie up that many rail cars that were loaded and sitting down there, and then you also have – now you’re used to load and rail cars and you've got to go find either a rail customer or move the stuff to the truck market, the local market, there's just a lot of impact when that facility went down.
Kris Keller – Columbia Management Group LLC
Okay. But just maybe to clarify, like if that same situation had happened with another large customer where you had to go sell it into the spot market, sell all that product into the spot market, it would have had a similar impact on margins?
Randall C. Stuewe
There is no customer that even – this customer is 40 times larger than our nearest customer.
Kris Keller – Columbia Management Group LLC
Okay.
Randall C. Stuewe
Kris, there is just no comparison that when you build a supply chain that is just geared at turning rail cars every two or three weeks and it goes down for 45 days and remember, when we went down we also said that it would be up to 60 days. So we made plans, and then the operations team did a really nice job and brought the facility back up earlier.
So we had to scramble then to rework our supply chain to get them back up on time.
Kris Keller – Columbia Management Group LLC
So I guess then I would ask, given the significance of DGD to Darling then, does Darling have business interruption insurance on if there’s – in a circumstance that something like this happens again?
Randall C. Stuewe
Yes. Darling does carry business interruption insurance on its own facilities.
This is a joint venture with Valero. It is a subsidiary here, if you will, or whatever, a joint venture.
It does have its own business interruption insurance. Unfortunately we weren’t down long enough for that to kick in.
It does have property and casualty insurance with a small deductible that has kicked in to cover the repairs.
Kris Keller – Columbia Management Group LLC
Okay. And then I know this kind of question has kind of been answered or kind of asked.
But you said your contracts are anywhere from kind of a 30 to 90-day lag depending upon the geographic region. So if things stabilize here, can you provide any more color on kind of the positive impact you expect to see in Q4 on operating income within feed?
Colin T. Stevenson
Well, I think Randy has attempted to already answer that. I think it’s important that the U.S.
rendering contracts do not have that kind of 30-day lag to them. Those are typically more weekly, biweekly.
So there are shorter lag to them. It’s really the used cooking oil contracts that have a longer lag.
I think earlier in response to one of the questions I think Randy gave out a 50% kind of number.
Kris Keller – Columbia Management Group LLC
Yes, but I mean 50% of what though? That’s the question that I don’t think – I don’t know that anybody has really a good sense of.
Colin T. Stevenson
I think it was based on the sequential change.
Kris Keller – Columbia Management Group LLC
Okay.
Colin T. Stevenson
Quarter-over-quarter.
Kris Keller – Columbia Management Group LLC
All right. I appreciate it.
Thanks, guys.
Randall C. Stuewe
Okay. Thank you.
Operator
The next question comes from William Baldwin with Baldwin Anthony Securities. Please go ahead.
William Baldwin – Baldwin Anthony Securities, Inc.
Hi, good morning.
Melissa A. Gaither
Good morning, Bill.
Randall C. Stuewe
Good morning, Bill.
Colin T. Stevenson
Good morning, Bill.
William Baldwin – Baldwin Anthony Securities, Inc.
Randy, can you offer any color as to where you think kind of quote normalized, there is such a thing operating margin should be eventually in the food business, the food ingredients business for Darling?
Colin T. Stevenson
Bill, I think Randy just a second ago tried to address that normalized – with this nominal $600 million number, which we haven't really broken out between these three segments. Although you would expect the feed to be the largest piece of that.
Randall C. Stuewe
But I think within the Q itself, I think those margins in the mid-20%s, which they all are, are pretty symbolic of what this business is capable of as it goes forward there. So for us, I mean, you can look whether it’s food, feed or fuel, I think clearly the fuel segment has a lot of upside to it related obviously to mandates and tax credits.
But food and feed amazingly are pretty similar. The good news is food doesn't have the raw material procurement volatility that the feed segment has.
But that should – those should normalize from there.
William Baldwin – Baldwin Anthony Securities, Inc.
Your gross margins are pretty similar between food and feed, but the SG&A brings the operating margin of feed considerably below the operating margin of food and I mean food is below feed is what I meant to say. I'm just wondering, Randy, over time as you put your initiatives in and so forth, do you see those margins kind of equalize?
I mean do you see operating margins potentially in the food area getting up to the 7%, 8%, 9% area? Is there any opportunity for an SG&A expense reduction in the food area also to help out operating margins?
Randall C. Stuewe
Yes, I mean, Bill I think one of the things we have to keep in mind in the food segment is you're selling into a very different market. There's a very different kind of customer touch point profile that exists in the feed business.
There's a great deal more hand holding and sort of what I'll call customer intimacy. I don't think we'll ever on a percentage basis get food SG&A down in the same range as we have feed.
It will always be a little higher just from the nature of the business. Then you also have to keep in mind within the food segment is our casings business, which is a considerably lower margin business that averages it down.
So there is not complete transparency there.
William Baldwin – Baldwin Anthony Securities, Inc.
I see. Okay, thank you very much.
Randall C. Stuewe
You bet, Bill.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Mr.
Randall Stuewe for any closing remarks.
Randall C. Stuewe
Okay with that I appreciate everybody’s input, comments today, and we look forward to talking to you I believe about Q4 results the end of February. So have a great holiday season and we’ll talk to you then.
Operator
The conference has now concluded. Thank you for attending today’s presentation.
You may now disconnect.