Aug 14, 2015
Executives
Melissa Gaither – Director of Investor Relations Randall Stuewe – Chairman and Chief Executive Officer John Muse – Executive Vice President and Chief Financial Officer
Analysts
Adam Samuelson – Goldman Sachs Heather Jones – BB&T Capital Markets Daniel Mannes – Avondale Partners Carla Casella – JPMorgan Craig Irwin – ROTH Capital Partners John Quealy – Canaccord Genuity
Operator
Good morning, everyone, and welcome to the Darling Ingredients, Inc. Conference Call to discuss the company's Fiscal Second Quarter 2015 Financial Results.
With us today are Mr. Randall Stuewe, Chairman and Chief Executive Officer of Darling Ingredients; and Mr.
John Muse, Executive Vice President and Chief Financial Officer. After the speakers' opening remarks, there will be a question-and-answer period and instructions to ask a question will be given at that time.
This call is being recorded and your participation implies consent to our recording of 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 Gaither
Thank you, Emily. Good morning and thank you for joining us to review Darling's earnings results for the second quarter 2015, ended July 4, 2015.
To augment management's formal presentation, please refer to the presentation section of our IR website for the second quarter earnings slide deck. Randall Stuewe, our Chairman and CEO, will begin today's call with an overview of our second quarter financial performance and discuss some of the trends that impacted the quarter.
John Muse, Executive Vice President and Chief Financial Officer, will then provide you with additional details about our financial results. Please see the full disclosure of our non-U.S.
GAAP measures in both our earnings release and the end of the earnings slide presentation. Finally, Randy will conclude the prepared portion of the call with some general remarks about the business, after which time, we will be happy to answer your questions.
Now for the Safe Harbor statement. This conference call will contain forward-looking statements regarding Darling Ingredients' business opportunities and anticipated results 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 January 1, 2015, our recent press release announced yesterday and our other filings with the SEC.
Forward-looking statements on this conference call are based on our current expectations and beliefs, and we do not undertake any duty to update these forward-looking statements made in this conference call or otherwise. With that, I would like to turn the call over to Randy.
Randall Stuewe
Thanks, Melissa. Good morning, everyone.
Thanks for joining us. First, as Melissa noted, we continue to strive for greater transparency in reporting our quarterly results and our earnings slide deck is out on our website.
This quarter, we provided a breakdown of facts, isolating used cooking oil to help you better track our progress being delivered in our legacy U.S.A. Restaurant Services business.
For the quarter, earnings improved sequentially on an adjusted basis to $105.5 million, a 7.4% increase from the $98.2 million reported in the first quarter. Pro forma adjusted earnings increased to $107.7 million sequentially when you take into account the FX changes versus the first quarter in addition to the acquisition and the integration-related expenses, but now it's limited to transition services agreement in Canada and [indiscernible] implementation consultants mainly within our international group.
Most importantly, for the third quarter in a row, we showed EBITDA margin improvements in all three segments, which is now a testament to our business model adjusting to the deflationary cycle within the agriculture sector. So, let's take a closer look at our operating performance.
Starting with our Feed Ingredients Segment, which is comprised of our global rendering business, our U.S.A. Restaurant Services business along with our U.S.A.
Bakery Feeds business and our global blood processing business. Once again, we see a declining finished product prices as the world wrestles with significantly larger green and oilseed supplies.
As we have discussed before, this is a spread management business. EBITDA modestly improved in light of a significantly lower finished product prices.
Most notably, we saw 50 basis improvement in our margins as we made procurement adjustments globally. USA rendering turned in a steady performance, making the necessary adjustments to our pricing formulas to offset the lower selling prices of our finished product.
This was accomplished even with seasonally lower volumes. Canada rendering came in slightly lower to Q1 2015.
This was largely a result of finished product prices moving sharply lower in June and our raw material prices being locked for the calendar quarter. Margin adjustments have been made and we expect to see improvement in the third quarter.
Europe rendering delivered an improved performance versus Q1. Volumes remain strong and prices for many of our finished products remain steady during the quarter.
Our global blood business showed strong growth both sequentially and year-over-year. This is a highly seasonal business operated on four continents and should show additional improvement in Q3.
Our Bakery Feeds business showed improved operational performance versus Q1.Volumes were strong, and we have been able to widen margins in several geographies as we renew raw material agreements. We eagerly await the start-up of our new Bryan, Texas facility this fall that will finally take pressure off our system and improve earnings.
We expect improved results in Q3 due to many of the adjustments that have been initiated in the second quarter. Our specialty protein areas made up of wet pet food and the pet food blending business continues to deliver solid results.
Our new plants in Paducah, Kentucky and Ravenna, Nebraska are on target to be completed in the fourth quarter. Nature Safe, our organic fertilizer business is contributing nicely and starting to become more relevant.
Terra Renewal Services also delivered its performance a year and appears to be back on track. Lastly, in the feeds segment, our restaurant services business delivered improved results over the first quarter in both volume and margin.
As we noted in the prior quarter, this business delivers very nice returns to our shareholders but is also one that has the most commodity exposure. We have made significant changes to our model by lowering raw material procurement cost, lower head count, and, in some cases, reinstating charges.
We have more work to do but I am pleased to say we are on track to deliver the $10 million of annual improvements we've promised. Now let's turn to the Food Ingredient Segment.
The Food Ingredient Segment delivered an exceptional second quarter, anchored by solid momentum from Rousselot, a global leader in gelatin and functional proteins. Rousselot is a four-continent operating unit and produces a variety of products for the pharmaceutical, food and industrial sectors.
For the quarter, EBITDA improved 15% sequentially and EBITDA margins improved by 100 basis points. The performance was led in Rousselot by China.
Margins in South America have normalized and in Europe is enjoying the benefits of a lower euro and their ability to export. The U.S.A.
continues to prepare our Dubuque, Iowa gelatin factory for expansion and the inclusion of our new major global food customer. In Europe, we also operate one of the largest edible animal fats business.
Sonac, as we refer to it, benefited from the increased quantities of raw material due to the border closure with Russia. While volumes grew, selling prices declined as the product competes with food grade palm oil.
Selling price is steady during the quarter and we were able to make the adjustments to return margins to more historical levels. CTH, our casings and edible [indiscernible] business faced challenges this quarter.
While a very small contributor to the food segment, it operated in the red due to a Chinese embargo of our specialty finished products. Adjustments have been made, and we expect to see some improvements in the third quarter.
And finally, our Fuel Ingredients segment was slightly down for the quarter. EBITDA was slightly lower, but adjustments in other units allowed us to improve the EBITDA margins.
Canadian biodiesel operated at a $1.6 million EBITDA loss. However, we expect this to be more than offset by the reinstatement of the blenders tax credit.
Net it, we would have enjoyed a positive performance. Most notably, this unit is critical to balancing the supply and demand to fats and oils in Canada as trade barriers still exist from moving products across the U.S.
border. Rendac, our European disposal rendering business, delivered as usual, and volumes were stronger for the quarter.
Ecoson, our European bioenergy business also continued to be a reliable contributor to the fuel segment. Overall, excluding the Canadian biodiesel shortfall, fuel segment earnings improved sequentially, and margins expanded.
Now let's turn to Diamond Green Diesel. Diamond Green Diesel continued a strong track record over the last three quarters and executed well, producing more than 41 million gallons of renewable diesel in the second quarter.
This unit continues to provide the countercyclical hedge to our USA rendering, restaurant service, and Bakery Feeds businesses. Margins were volatile in the quarter with RINs feedstock, and ULSD all bouncing around.
For the quarter, the entity turned in $15.8 million of EBITDA. This was slightly lower than the $18 million to $20 million we predicted in Q1 and was largely a result of the June volatility in RINs and in heating oil and the net hedge positions we had on versus our supply chain.
We are optimistic that the $1 a gallon blenders tax credit will be adopted retroactively in 2015. And taking this into account, the second quarter EBITDA for Darling share of Diamond Green Diesel would have been approximately $30.2 million.
This is reflective of the 44.5 million gallons of renewable diesel we shipped in Q2. We expect the tax credit to deliver between $80 million and $85 million of additional earnings when it is reinstated later this year.
Overall, we are encouraged with our second quarter performance, but we take seriously the need to continue to aggressively execute operational and financial improvements to enhance our profitability. Let me outline several areas of focus.
First, we continue to focus on returning EBITDA margins to more historical levels. This should be obvious given the three quarters of continuous improvement across all segments.
As noted, this has been while commodities and the related prices have all declined. Intertwined in these segments, we continue to focus on the Restaurant Services segment, where quarter-over-quarter improvements were executed and delivered in excess of $3 million.
We still believe that the $10 million of improvements we promised are feasible by year-end. Though our renewable services had its best quarter, we are finally open to close market in the Carolinas, and we feel optimistic about its future performance.
In addition, the Food Safety and Modernization Act or FSMA as we've referred to it should create new opportunities for this unit. Our Bakery Feeds business, which has struggled with its supply chain has clearly turned the corner and should return to more reasonable annual EBITDA run rate of around $30 million.
Secondly, we have reduced head count at corporate by 10% since January 1 and are on track to deliver $10 million of the plant reduction this year. This is evidence again by the SG&A reduction quarter-over-quarter and year-over-year.
Third, we have committed to reducing working capital utilized in our businesses. This is primarily focused on our international ingredients group.
Sequentially, we saw $34 million improvement, essentially bringing us back unchanged versus last year. This was done by lowering the inventories, stretching payables, and just being better stewards of our receivables.
We aren't done yet and have targeted a $50 million improvement for the fiscal year. Fourth, we have spent $98 million year-to-date on CapEx versus $103.5 million last year.
Our plan called for CapEx deployment of around $275 million this year. However, given the environment we are in, we have scaled that back and anticipate spending around $225 million this year.
Fifth, we're focused on debt repayment and deleveraging. We intend to repay an access of $100 million of debt this year.
For the quarter, we repaid nearly $70 million. This does not include any additional dividend from Diamond Green Diesel in 2015.
If operating conditions improve, a second dividend may happen. For 2016, we're targeting now $150 million debt reduction.
Sixth, Diamond Green Diesel continues to be one of our top performing investments. It provides the counter cyclical hedge we have promised and manufactures one of the cleanest fuels in the world.
We are working with our partner, Valero, to modernize its capital structure. As many of you know, Valero stepped in when we were unable to reach agreement with the Department of Energy to provide initial construction financing.
We're grateful for Valero's backstop and now think the business has proven itself to the point where it can find third-party financing on more favorable terms to all parties. As I discussed in the past, we are currently undergoing an intensive engineering study to expand this facility to 18,000 barrels per day.
This is a 50% increase from current operating rates. We intend to comment further on this expansion opportunity later in the year.
Seventh, construction continues on our five new facilities in the U.S.A., the two new rendering plants were slightly delayed by the spring late range but are now working to catch up. Completion is expected in early to mid 2016.
Our two new wet pet food plants are in the final stages of completion and we expect them to contribute for the full year of 2016. Our Bryan, Texas bakery feeds plant should begin processing in the fourth quarter of 2015, and Dubuque, our gelatin factory in the Midwest, will begin increasing capacity in the fourth quarter as well.
And finally, last night, when we announced $100 million common stock repurchase program. As noted in the press release, we will opportunistically purchase stock on the open market from time to time.
With that, I'd like to turn the call over to John for his normal financial review. And after John concludes, we'll open it up to Q&A.
John?
A - John Muse
Thanks, Randy. I'm going to point out that in our slide deck, we have further delineated our segment reporting by breaking out our used cooking oil sales from fats in our Feed segment.
This should provide additional segment detail and the impact on the segment to price changes. We further outlined the EBITDA bridge from the first quarter 2015 to the second quarter ended July 4, which we believe is helpful in reviewing segment results.
Historical segment data is also provided in the slide deck. As you know, we regularly monitor Jacobsen Index for finished product pricing for our Feed Ingredients segment in the U.S.
And in Europe, we monitor Thomson Reuters to track competing commodities in palm oil and soy meal. To that end, slide 10 details average monthly prices, finished product prices for the first half of 2015.
Now for the quarter financial review, for the second quarter of 2015, the company reported net sales of $859 million as compared to net sales of $1.031 billion for the second quarter 2014. The $172 million decrease to net sales is attributable to lower finished product prices primarily in global fat markets, and by $113 million for foreign exchange rate impact of a weaker euro and Canadian dollar.
Overall, global raw material volumes were stronger year-over-year. Net income for the second quarter was $3.1 million or $0.02 per diluted share, compared to net income of $32 million or $0.20 per diluted share in 2014 second quarter.
Without the after tax-related costs related to the acquisition and integration expenses, and deferred loan cost write-off of the euro bond, per share would have been – our earnings would have been $9.6 million or $0.06 per share, respectively, for the 2015 second quarter as compared to $39.2 million or $0.24 per diluted share respectively for the second quarter ending June 28, 2014 when adjusted for the non-cash inventory step-up and acquisition and integration costs. Our interest expense increased by $10.6 million in the second quarter due to the write-off of the deferred loan cost associated with the retirement of the euro term B loan.
This was an impact on an after-tax basis of $5.8 million to net income. Sequentially, adjusted EBITDA in the second quarter 2015 improved to $10.5 million compared to $98.2 million in the first quarter of 2015, an increase of $7.3 million.
This increase is largely due to lower raw material prices, lower acquisition and integration expenses and cost reductions. Moving to our operating segments on a sequential basis, which you'll find in our slide deck.
Sequentially, Feed Ingredient business has stabilized with improved margins resulting from our actions to adjust raw material pricing dynamics and our global rendering, U.S. restaurant services, and bakery business.
The Feed segment is the largest of our three platforms and it's anchored by North American business and as Randy says, we operate this is a margin management business, which includes the largest commodity exposure. Noted on slide 7 for the Feed segment, you will see that our rendering business formulas suggested our raw material costs down within cost of sales to adjust for lower finished product values.
Overall, larger price declines were in the feed grade to pet food meal spread. Both Europe and Canada remained steady, but we are still challenged by weaknesses in bakery finished products; however, this business contribute a slight improvement in the quarter as we had our restaurant services business.
Rousselot led our European food specialty ingredients business and continues to be a steady and stable contributor with increased demand globally especially in China. Strong volumes across this platform and necessary adjustments made in the edible fats refining business delivered a solid sequential improvement and strong margins.
Favorable raw material prices benefited our European operations; however, our casings business struggled due to the Asian border closure. Food segment was the most impacted by foreign currency exposure of approximately $8.2 million while using our prior-year average exchange rates.
The Fuel Ingredients business performance was down due to the $1.6 million loss incurred in our Canadian biodiesel facility due to operating breakdown issues and lower rent values and low crude oil prices. The European Rendac and Sonac, Ecoson business delivered stable earnings.
Now, a few balance sheet highlights. As Randy mentioned, we are tightening our working capital resources and fortifying our balance sheet through maintained solid liquidity long term.
On June 3, 2015, we closed on our following offering for the Eurobond 4.75% unsecured notes to refinance euro portion of our term B notes, locking at fixed rates for the next several years and reducing the amount of our secured debt under the credit agreement. We improved our net working capital beyond the second quarter ended July 4.
Working capital improved by $33 million within the second quarter. With this, we have also resecured our debt.
With working capital improvements and the $25 million dividend for Diamond Green Diesel, we repaid nearly $70 million of debt in the second quarter. We believe we have greatly enhanced our capital structure to provide stability and financial flexibility to meet our long-term growth goals.
We are fully confident, compliant with our bank covenant ratios. Our total debt to EBITDA ratio is currently, at the end of the second quarter, 4.3, compared to our covenant of 5.0.
And our secured debt ratio was 1.99 compared to the covenant of 3.75. Capital spending through the second quarter was $98.7 million compared to $103 million in the comparable period of 2014.
We expect to incur additional CapEx between $110 million and $130 million for the remainder of 2015 which includes planned investments in the five new processing plants and normal CapEx. With respect to our foreign exchange exposure, and the strength of U.S.
dollar, both the euro and the Canadian dollar, if we use actual results for the first six months of 2015, and compare that to the first six months of the 2014 FX averages, operating income in 2015 would have increased by $27.1 million. On a sequential basis, first quarter 2015 actual results would have increased by approximately $1 million.
I want to point out, our European and Canadian debt is in line to the functional currencies used by our non-domestic operations. Now let's take a look at our effective tax rate.
During the second quarter, it was 48.6% which is higher than the U.S. statutory rate of 35%, due to U.S.
taxation of certain payments from foreign subsidiaries. A significant portion of the payments or dividends from Chinese joint ventures which are currently taxable in the U.S., even though there is no actual repatriation of earnings to the U.S.
Last year, these payments were not taxed due to the reenactment of the look-through rule which was included in the tax extenders package. If the extender legislation is passed this year, that is the same as – or similar to last year's package, including the biofuel tax credit and the look-through rule, we expect our effective tax rate to decrease significantly to approximately 25% for the year 2015.
And finally, I want to briefly mention cash taxes. For the first six months, the company paid $11.4 million of taxing the taxes, most of which was related to our international operations.
We anticipate income tax statements of $15 million to $20 million in the second half of 2015 for a total tax in 2015 of approximately $30 million. I will now turn the call back over to Randy.
Randall Stuewe
Thanks, John. We closed the first half on a strong operational footing.
Third quarter has its normal seasonal challenges, along with what appears to be continued pricing pressures from the increasing global supplies of grains and oilseeds. Our management teams globally have endured commodity cycles before and know exactly what adjustments need to be made.
Foreign exchange headwinds will continue and we remain optimistic in the long-term viability of our model. Our positioning globally is one of a kind and we are proud of it.
Operational efficiencies, working capital improvements, cost reduction and managed CapEx spending will allow us to more quickly deliver and grow Darling shareholder value. And with that, let's go ahead and open it up to Q&A.
Thank you.
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions] Our first question is from Adam Samuelson of Goldman Sachs. Please go ahead.
Adam Samuelson
Yes. Thanks.
Good morning, everyone.
Randall Stuewe
Morning.
Adam Samuelson
I guess to start, Randy, you went through a long litany of actions in terms of cost improvement targets and growth projects that you're working through. I'm hoping you could maybe try to wrap those all together a little bit as you think about the back half of the year are annualized into 2016.
How big those – in terms of the growth projects, the EBITDA contribution you think for 2016, kind of the full-on impact of the cost actions to 2016 if they're sustainable particularly as we – it looks like we're going to stay in a pretty deflationary commodity price environment and a strong U.S. dollar environment for the near term?
Randall Stuewe
No. I mean, fair question, Adam.
I mean, the aggregate is a little difficult, but I will try to speak a little more to it. And I mean – first off, I mean, the deflationary environment we're in right now is obviously we saw the [indiscernible] come out with a massive grain supply increase this week, and that's pressuring essentially fats and oils globally again.
But at the end of the day, as we said, our July prices were pretty much unchanged to June. There's some pressure there, but we will just have to make the adjustments that we've made three quarters in a row now to offset some of the pressure that's happening there.
So, that's always hard to quantify, but the model proves that it does work. The headcount reductions, I mean, that I take near and dear, well, there are several more to be made here by the year-end.
As we said, we would deliver a $10 million SG&A reduction that we're well on the way, and I think we're probably 70% to 75% of the way there for the year. The working capital is clearly, a chief focus among the entire team.
It's always difficult in deflationary environments while everybody believes that if the prices go down 30%, your working capital should go down 30%. The reality of it is, is remember you're buying the raw material, and it went down too.
So it's a spread management business. You recapture a part of that.
As we said, we had a $34 million movement quarter-over-quarter that essentially brings us back to even year-over-year and we're setting a target out of there of $50 million by year-end. And then from that point on, we anticipate and we'll structure to attempt to hold that going forward.
The capital spending plan, I know we'll get a lot of questions on, are we just deferring or what are we doing. There's always projects in our portfolio that compete, that are somewhat profit-adding but can be delayed or we think there's a better use for capital.
And in this case, we think a better use for capital is deleveraging and then having the opportunistic share repurchase program out there. So, ultimately, our CapEx plan is one that we're just going to manage around and return essentially $50 million to the cigar box here for uses or better uses or other uses.
And those are really the main driver for us out there as we go forward, I mean to quantify any more than that would be difficult but they are sustainable and they are real.
Adam Samuelson
Okay. And Randy, in the last part of that answer you alluded to my next question, it was can you help us think about the CapEx program coming down.
What programs or actions or projects are maybe deferred or slowed? How should we think about that pace of CapEx going into 2016?
And related, how do you think about your leverage over the next two years? What's the comfort level especially given the authorization, repurchase authorization you put in place last night?
Randall Stuewe
Hi. I'll take part of this and I'll let John take the other part.
From a capital standpoint, we've always kind of said between the global businesses and North American businesses that we need around $175 million to support the business. That's the – if I call that's maintenance, safety, environmental, and replacement capital that keep the plants operating efficiently.
After that, it's really competition for profit-adding projects. So, as John said, we've spent $98 million year-to-date or through June anticipated out, somewhere around the $2.25 million for the year.
So, that $50 million is going towards profit adding, and the majority of that is going towards brand taxes, the Paducah and the Ravenna plants that are all due to start up and be in position to contribute for the full year of 2016. The two rendering plants are up and out of the ground.
They were delayed a little bit by the heavy rains we had in the Midwest this spring and early summer. And those will be coming online here in 2016.
So, some of that spending was moved to 2016, but not a whole lot as it moves, if you will, into that $50 million bucket as we set for next year, $200 million to $2.25 million is the target spend for next year, once again, in capital. As we've said, deleveraging is key to us.
John, you want to comment about leverage rates and where you think we're going?
John Muse
Yeah. Well, it's – Adam, on the leverage ratio, as we've said, we were 4.30 compared to the bank cover of 5.0.
Looking forward with what Randy outlined in less CapEx spending, improving our working capital by $50 million by the end of the year. We're going to be very comfortable with our leverage ratios because we still can reduce the debt down even with the repurchase of the stock over the next 24 months as was indicated in the release.
And we're in good shape. We're keeping more than a half turn that we've always set as a company with our buffer that we would not exceed going above that 4.5.
Adam Samuelson
Okay. And maybe just a final quick one on the CapEx deferrals, Randy, is it – would it be fair to assume or imply that given the deflationary environment [indiscernible] commodity prices, some of the projects you had on the table might not return kind of opportunities over the next few years, might not look like as attractive as you thought 18 to 24 months ago that has driven some of the slowdown in the capital spending or is that the wrong inference?
Randall Stuewe
No. There's a little bit of that Adam, and really I don't like the word deferral.
I mean, essentially there's a little bit of rain delay. We've had a couple projects in the feed area, in the Sonac blood area that the margins haven't looked as attractive as the original business case did, and that was pretty good spending.
Those are going, those were in the 2015 plan. Those will probably move to 2016 but they once again compete with other projects that we have around the world.
The other thing that steps down in 2016 versus is we've made significant investments in our global gelatin business both from a capacity expansion and from a waste water and environmental compliance area. Those investments are beginning to scale back and that's the reasons you're going to see the more normalized CapEx.
Adam Samuelson
Okay. It's very helpful.
Thanks.
Operator
Our next question is from Heather Jones of BB&T Capital Markets. Please go ahead.
Heather Jones
Good morning.
Randall Stuewe
Good morning, Heather.
John Muse
Good morning.
Heather Jones
Thanks for all the color on the call. I guess first, simplistically, I just was wondering if you could walk through something with me.
So, setting aside Diamond Green which will clearly fluctuate quarter-to-quarter, can you help us understand whether you believe adjusted EBITDA bottomed in Q1 given the changes that you've made in the core business? Is that a fair assessment of the business?
John Muse
You know – yeah, you included, Heather, then Diamond Green in that or not?
Heather Jones
No, excluding Diamond Green. Your other businesses.
John Muse
Excluding. Okay.
Randall Stuewe
You know, I always hate to give guidance like that, to be wrong as I've proven myself to be wrong in the past times. You know, I think we've made a lot of the changes and it feels like, from a margin management perspective, that we are seeing the bottoms here.
But the challenge we have in Q3, as we've always said, the people is – that's when the – the heat is pretty intensive around the country right now. The quality of the finished product we make in the fats and oils takes some discounts.
And so, that's always been a challenge for the European and the global businesses. The European manufacturing industry slows down in August for what appears to be lots of holidays.
And so, seasonally, you're going to get some impact during Q3. As I look back over 2013 and 2014, and with the seasonality in the business, there's always a little bit of a seasonality moderation that happens in within the business.
Now, offsetting that is as we've got a lot of good things going on in bakery, restaurant, services, Terra Renewal, and in our protein rendering businesses that come back into play here. So, I mean, I think, overall, as we start to look forward, we've got a lot of positive momentum heading forward here.
Heather Jones
So, barring something unforeseen, it sounds like you feel comfortable that – and excluding Diamond Green – that Q1 was the bottom, given what you can foresee.
Randall Stuewe
Given what I can foresee at this time, as long as fats and oil prices don't fall out of bed and take us lower.
Heather Jones
Okay. And my second question, comment is that what we found is despite how depressed your stock has been, some investors are still wary of touching it because of the level of debt.
And four, three more comfortable from a covenant perspective but still fairly high particularly given the earnings volatility of the business. So, was wondering, given that, do you believe that all of your free cash flow would be best deployed to debt reduction?
And secondly, has there been any consideration by you or the board to potentially dispose of some assets?
Randall Stuewe
Well, I think – let me answer that in two or three different pieces. Number one, we are constantly doing a benchmarking exercise within the company, where we use financial measures on capital employed within assets.
And, yes, we have identified assets that are either annoying to be fixed or rationalized. So, that's always part of our business model that's out there, and then we share that with the board constantly and inform them of what we're working on in that area.
From a leverage ratio, I think the beauty of this company and there's no doubt the stocks have been under pressure, and there's no doubt that that was the reason for putting the share repurchase announcement out there is that we do believe in the company and that that is clearly something that we want to make sure the people understand. We believe in our model as a strong cash flow generator.
And we also believe that given the strong cash flow, we can fund the organic capital expansion that we've talked about along with maintaining the business, not going into a capital starvation mode. I mean, by no means that we, as a management team, and I think I can speak for the board view, any type of stress here, it's a cycle we've been through.
We're going to look at what we call strong return projects, deleveraging and also share repurchase all as investment opportunities and we'll make the decision on how those go. Right now, our intent is obviously to deliver the best and the most we can.
As you know, part of the stress that appears to be – that happens to us here is the disruption of the Diamond Green Diesel cash flows, meaning the ability to pull dividends in kind of the unknown as to the timing on the tax credit. And so, what we're optimistic and that's the reason we stepped out with the additional debt repayment in 2015 or 2016 was that that we believe that the tax credit will be made retro and it will be put in place for 2016, which will then help, if you will, I don't like the word smooth, but make more predictable the cash flows and the dividends that can be used for both financing the business, paying down debt, growing the business, and share repurchases as we go from time to time.
Heather Jones
And you mentioned that you have a benchmark as far as assets that will be either fixed or rationalized. Can you share with us what that – what that benchmark is?
Like what is your internal ROA target before you consider disposing of an asset?
John Muse
Well, as Randy said, every quarter when we meet with the board, we update them on projects within each of the business segments. We've been going through that.
There are a number of single-site plants that we're looking at that are below our 15% threshold that we like to see on a return. And we look to see what we're going to need to do there.
A lot of times, it's just a capital infusion to may take out costs, or we look at how the market pricing is done against the raw material at times. We do a deep dive into that.
We have a group that spends a lot of time looking at that, and it's pretty easy to point out when you do a benchmarking against all of the rest of the facilities. And we line them up as really green, yellow, and red.
And if you fall into the red category, you're under scrutiny and we look at those, and determine how to fix those and brings those up to the standard that the other plants are running now.
Randall Stuewe
Right. And quietly, Heather, it's just not something we openly talk about out there.
We have shut down our trading business in New Orleans in the quarter, and we're in a process of exiting our – one of our facilities in Memphis right now that doesn't make sense anymore in the bakery feeds area. So those are the things we go through as we look around.
I wouldn't tell you there's a hard line in the sand, but we're also very honest with ourselves as to the viability and whether or not those assets are viable. There isn't a long list of them.
So, I'd ask you not to spend much time thinking about that, because I think we're pretty well-positioned out there.
Heather Jones
Okay. Thank you.
Operator
Our next question is from Dan Mannes of Avondale Partners. Please go ahead.
Daniel Mannes
Thanks. Morning, everyone.
John Muse
Morning.
Randall Stuewe
Hi, Dan.
Daniel Mannes
First, congrats on being able to expand EBITDA sequentially even in a tough price environment, but I guess I'm going to extend the prior group of question is given we've seen, what, another 10% decline in [indiscernible] prices in the last month-and-a-half. I'm wondering, are there more costs you can take out?
Are there more things you can do to kind of offset that given some of the sensitivity of both restaurant service and bakery?
Randall Stuewe
I don't want to isolate it to one product there, because at the end of the day, I mean as I look around the world and really when you look at that you're predominantly talking about the Feed segment. And the Feed segment, the core drivers are Canadian rendering, European rendering, and U.S.A.
rendering restaurant and bakery. So, if we start in Canada, Canada as we talked before fixes its raw material procurement formulas with its suppliers on a look forward basis 90 days out.
We had some massive volatility if you will in June both up and down that and then brought prices lower in Canada in June below our raw material or what we call our atypical margins that we expect and anticipate up there. So our management team has had to go back for the third quarter and reprice that.
That should help us improve there. In Europe, it's about a 60-day look forward as we do, and I think we're in pretty good shape there with pretty steady earnings depending on volumes within that business.
They seem to be holding in there quite a bit from what we planned and a little bit over last year. And then in the U.S.A.
rendering, in Q2, we felt a little bit of pressure of the fats. We also have pressure in the proteins from the standpoint of the – a significant portion of our rendering portfolio is poultry-driven.
We saw some of the pet food grade and aquaculture grade, premium proteins. The premium collapsed quite a bit, especially in the month of June.
We've seen that return, or a portion of it returned in July. And so, from a U.S.A.
rendering standpoint, I'm trying to be optimistic that the protein price rebound will offset the fat price pressure that you referred. In the restaurant services, we have made significant raw material price changes.
At this point, we haven't lost any volumes. So, it's always when you're looking a price in volume, you kind of say, okay, there's more to go.
We are now not paying for used cooking oil in most of our markets around the country right now. And then in the bakery feeds business, the supply chain have gotten screwed up, if you will, pardon my English on that, from the standpoint of the acquisition and too much tonnage for a system that was running at or near capacity and we had to shut down the Caldwell, Texas plant.
That tonnage is still being moved around the country. That's spending about $0.5 million a month there moving that stuff around.
So, we're trying to get Bryan, Texas up as quick as we can. We've also made some formulae changes both in the products that we make and how we procure it.
It should be supported there. So fats and oils are down.
Long answer to your question, pressure. I mean, there's no doubt with crude oil down to where it's at, the world is putting less fat into the fossil fuel mix around the world.
That's making palm oil feel a little light, and that's also making soybean oil feel a little light. So at the end of the day, there is fats and oils pressure.
I'm hoping we can offset that with the proteins here in the feeds segment.
Daniel Mannes
Let me try a little bit differently. You've laid out some pretty interesting cost plans, certainly about headquarters, and food, and also at restaurant services.
Have you guys looked at anything more holistic? I don't know if you've considered or bring in a third party to look at overall cost.
Just given that you're such a bigger enterprise now than you were 12 to 18 months ago. And I'm wondering if now was – with some time passed since the acquisitions, there's an opportunity to find some broader cost reductions?
Randall Stuewe
That's something we – we use an array of consultants within the company, and at the end of the day, a lot of those were in the SG&A trying to help us figure out how to put the new global platform together. For the most important part, they're all out of here, and we are – what you're seeing is the result of the recommendations as we put things together.
So the answer is yes and no. I mean, I think you're seeing the results of our plans right now.
Daniel Mannes
Okay. And ten switching over real quickly to the commodities side, given the RFS2 proposal, would look like attractive volumes given fairly decent production from a biodiesel perspective.
Are you all surprised that grease price haven't traded better? Or are you seeing another factor besides the lower price of corn just maybe weighing on grease?
In light of what's been a fairly decent industry-wide by a decent production?
Randall Stuewe
Well, I think there's a couple of things. As we met with our board here this week, and we always put the slide up that shows what we thought would happen for Q2 versus what happened.
In the slide itself said, we thought that the RFS volumes that would be announced would be supported of fats and oil prices for the quarter and going forward and I couldn't have been more wrong. What you see is that there continues to be a significant amount of renewable diesel from nesting and biodiesel being imported into the country, from Argentina, from Germany that comes in to the country given the weak currency positions or the strong dollar on the offset there, cheaper freight rates and lower fats and oils prices around the world that are coming in here.
So, that's tampering – we saw RINs go from 86 to 67. The industry appears to be running at least the biodiesel industry appears to be running for the tax credit as we talked to you.
Our Canada plant is running red, but when you net out the tax credit, it's about breakeven or slightly above. Diamond Green Diesel continues to run profitable at the EBITDA level right now even with the prices.
What you've seen is ULSD come down hard, RINs come down because of the imports, and then feedstock not come down. Feedstock's coming down a little bit here.
And I guess the answer to you is, yeah, I'm a little surprised. I'm trying to think that that will turn, but it doesn't feel like it in the short term here.
Daniel Mannes
Okay. My final question before I step off.
We have seen some movement in California on LCFS. It looks like that's supposed to get re-proposed and finalized later this year.
Talk a little bit about your positioning for that market and how you view it at this point and if it is attractive to you.
Randall Stuewe
Yeah. I think, Dan, that is – it's a very interesting and a very complicated discussion.
I mean, you're probably more skilled at it even than me. We continue to look at moving product to California.
Obviously, renewable diesel and biodiesel made from waste fats and greases will qualify and are very, very much going to be part of that LCFS. We've seen the premiums of that market come up very significantly here.
It is one that within our long-term strategic plan says that we need to figure out how to move Diamond Green Diesel product to California. I would also say the LCFS is going in place in British Columbia and also Ontario.
And we're starting to see some pretty abnormal and premium moves that support Diamond Green Diesel. It also supports for Darling, the evaluation of a future investment in biodiesel within California or nearby.
The challenge with building renewable diesel in California is simply the permitting and the timeline to construct. So, that's what you're seeing as we talk about expanding Diamond Green Diesel.
It would be for either a rail or a water move into California. Between the complexity of moving to a blenders tax credit or a blenders to a producers tax credit and LCFS, I think there's a very, very bright future and I think our board does, too, in the view of what kind of support the biofuels can bring to this business model long term in the USA.
Daniel Mannes
Sounds good. Thanks a lot.
Operator
Our next question is from Carla Casella, JPMorgan. Please go ahead.
Carla Casella
Hi. I have a question on the border closures that you've mentioned.
Is there any outlook on how long that should continue or how are you mitigating it?
Randall Stuewe
Yeah. I mean, CTH is a – there's a couple of border closure I referred to, Carla.
One was still the low grade cuts of meats are coming still back – flowing back into Europe. And then we're making edible fats and edible products for the sausage industry.
I don't see much change happening there. Obviously, the meat producers in Europe, they're struggling a little bit.
They're looking for better homes for their product, and I suspect they'll ultimately find it. Within the goods segment we referred to CTH which is comprised of our casings business, and then we ship some stomach packages and other products to the Asian markets, and China closed the border on some of those products here during the quarter.
It wasn't a material impact to earnings but it was something that was notable for us within the Food segment. It is not open yet.
Once again, those are products that are purchased on formula, and it just takes a 60-day lag to where you have to re-price them. And whether they – right now there's still premiums in the world for those products not going either back in to pet food or into the sausage business.
So, we're continuing to move that. But that was just a notable item in the quarter for us.
Carla Casella
Okay. And then the currency move in China, does that have any impact?
Randall Stuewe
Well, the devaluation of the – the good news is all our raw material is, basically, bought in China, and our finished products are sold in China. So, from that standpoint, it's not like we're shipping products out of the country.
But when you do convert at the end of the period the earnings back to U.S. dollars, there will be an impact there.
But the day-to-day business in China would not be impacted.
Carla Casella
Okay. Great.
Thank you.
Operator
Our next question is from Ken Zaslow of BMO Capital Markets. Please go ahead.
Unidentified Analyst
Hi. Good morning.
This is [ph] Patrick for Ken.
Randall Stuewe
Hey, [ph] Patrick.
Unidentified Analyst
Hey. Just quick question on what do you see for supply and demand in terms of biodiesel for 2016, especially in light of the potential change from the blenders credit going into a producers credit and also the dollar per gallon biodiesel tax credit?
Randall Stuewe
Well, here's what we see going on out there is once again a step-up in the mandate. Two, the Grassley legislation that's out there is moving it to a producers credit versus the blenders.
Obviously, we'd like to see that be a NAFTA inclusion to take care of our Canadian facility. And then you've got the low carbon fuel standard.
And ultimately, if you step back and where you can really get excited, and I mean excitement with a capital E here, is if you go to a producers credit, then that can hopefully shut down these imports, which not only changes the profitability of our biofuel business and the industries in the U.S. but it creates new and additional feedstock demand in the form of 2 billion, 2.5 billion pounds of new feedstock demand from our industry.
So, as we go into 2016, we're incredibly optimistic right now from what we see out there, the tax extenders package being made – if you will, taken out of play in an election year, meaning made when it's brought retro this fall. 2016 is then put in at $1 a gallon.
We think the blenders credit will go into place, and then there's the LCFS steps in it. It could make further – some really interesting times in 2016.
Unidentified Analyst
Great. And just a quick follow-up, how fast will that accelerate your DGD expansion if both legislations get passed through?
Randall Stuewe
I'd love to tell you, you can expand that on a dime. The soonest that the expansion – if Valero and the board or Darling improves it, we would have to take some time down in early 2017 to bring it on.
So it's a year out, year plus out right now.
Unidentified Analyst
Great. Thank you.
Operator
Our next question is from Craig Irwin of ROTH Capital Partners. Please go ahead.
Craig Irwin
Hi. Good morning, and thank you for taking my questions.
So, Randy, just to touch on the blenders credit again, lots of questions already. You've been very clear, $25 million for Diamond Green, once reinstated that your operations in Canada making a small loss, becoming profitable or expected to be profitable depending on the actual structure of the way this gets passed.
But just to step back a little bit, looking across the industry, a lot of the plans were actually running today just like your Canadian facility, at a loss, running with the expectation that they'll more than make up that loss on the retroactive reinstatement of the blenders credit. And one thing that a lot of them are saying is that that psychology is also finding its way into feedstock pricing.
Basically, around third of the blenders credit is being pulled away for the rendered fats that are being supplied into these facilities. Can you discuss whether or not this is something that maybe helped you at the tail end of the quarter?
Once we did get the RVOs, is it something that you expect to come in over the back half of the year to potentially benefit the profitability of fat sales into biofuel market.
Randall Stuewe
Yeah. I think, Craig, I think, you got a pretty good feel for it.
I mean, Canada is a little different for us because as I try to allude to in the script, there's a fence up there. Many people don't want to refer to it that way, but it's not as easy to move products over and across the border in the fats and oils areas as it probably should be.
We're working on that such that we're not married to our, if you will, our finishing capacity which is our Quebec biodiesel plant. But right now, that's a way for us to both add value and to sell our fats and oils in Canada versus trying to load them on a boat and put them on the global fats and oils market.
The reality is that we didn't anticipate RINs back in office as far as they have. And feed demand from the perspective while we talk about biofuels, feed demand for fats has been very, very strong this summer.
And so, ultimately, in the USA, there's been a strong pull from the feed industry. We continue to see, if you say, big chickens, big hogs, and big cows go into market.
And so, there's a lot of fats still moving into those markets too. So, while the industry runs for the biodiesel or the tax credit today, even with that, it's really not a very good business.
It's a breakeven to marginally better business. So, really, from our perspective, I see feed demand remaining strong.
It was hard to believe it was this strong, given as warm as summer as we've seen. But animal numbers are strong and still coming back.
And then we'll see what the fourth quarter brings and what happens with the LCFS, do we get the $1 a gallon for 2016, and is the industry successful and moving it towards the blenders credit. If that happens, then the psychology of that is probably supportive.
Craig Irwin
Great. Thank you for that.
Then just a follow on about Diamond Green, I guess, I should say first, congratulations for another production record at the facility in the quarter. So, revenue production is strong.
It looks like you're able to monetize NAFTA and some of the other byproducts out of the facility. When we look at the feedstock cost and conversion cost, they seem to be close to the high end of the range.
It's where you've been historically. I was wondering if there was anything in the quarter that maybe impacted your conversion cost, your feedstock cost, and whether or not you would expect to trend towards market prices for things like [indiscernible] and yellow grease as cost in the next couple of quarters.
And then as a second part of that question, can you maybe discuss the associated CapEx along the $18,000 a day?
Randall Stuewe
Yeah. I mean, number one, remember, as I've always said, Diamond Green is the largest fat consuming point or entity in the United States at any given time.
And its supply chain is fairly complex and fairly long given the railroad delivery times that are out there today. So, you roughly have 60 days out there, either in the tank or in transit at any given time.
So, when you get in to a deflationary cycle, they've always been – no matter how good they purchase, they've always been lagging on the way down. We've also been able to pull the supply chain down a little bit there to take advantage.
And I think you'll see a little more of that flow through. I mean, the amazing thing with that facility is it does run in excess of 12,000 barrels a day.
And it is profitable at the EBITDA line without the tax credit. So, it is performing quite nicely.
As far as the CapEx could go, that is something that's been developed right now. We're simply in the Phase 2 or engineering study right now of a very complex or sophisticated engineering and gated process that we should have those answers here, I would hope by the November call as to what the number is there.
And I can tell you, on an incremental basis, it will still makes sense.
Operator
Our next question is from John Quealy of Canaccord Genuity. Please go ahead.
John Quealy
Thanks. Good morning, folks, to put me on.
Real quick just on Diamond Green, Randy. Can you – I'm sorry if you said this already.
The cash flow expectations from blenders if we get retroactive in 2015, what it would be? Second, can you ballpark either on a basis point perspective or cost perspective, what are recap and expansion of Diamond could bring for you guys in savings?
And then last thing maybe for John, I know you talked about raising pricing across the complex, mostly on used cooking oil and some of the restaurant services business. I understand formula has lagged but can you just give an update on how that progress is going?
Thank you, guys.
Randall Stuewe
Thanks. No, I think first off in Diamond Green...
John Quealy
Do you want me to come back at you for Diamond?
Randall Stuewe
He gave us one more. He gave us three, And I...
John Quealy
I tried to be quick for you guys. Anyway, so Diamond Green, number one, what's the blenders cash flow for you guys for Diamond in retroactive for 2015?
Randall Stuewe
Got it. Now, with the Diamond Green, it's on a target to run 160 million gallons.
So, $80 million there as long as we get it shipped out. And then you've also got our Butler plant up in Butler, Kentucky, and then our Québec plant to qualify there, too.
And so – around – if everything works right, about $85 million would come in, $80 million to $85 million for the year. What's the other one?
John Quealy
Yeah. The other one was the recap of the plan itself plus the expansion, what sort of basis point or interest cost savings can you ballpark, you think you can get off it?
Randall Stuewe
Number one, that credit agreement is confidential at the request of Valero. I mean, they stepped in and we're so ever grateful when the Department of Energy negotiations became too complicated for us.
And so as we look at it, what we're working with our partner and trying to do is to say we couldn't finance this on the outside or third party at the start because it was unproven technology. It's proven now.
It's more than proven. And we would like to begin to look at taking it to a third-party financing to lower the interest rate, which I can't share with you, you could back into it.
And then most importantly then to have better access to the dividends. As we've said in Q1 that there's a pretty steep waterfall here that's aimed at deleveraging the loan.
And that – Valero stepped in, that's a good news. And the good news is at the current run rates, it would be paid off in three years.
That's probably not the right way to run this business long term. And then to have the ability as we go forward with the major expansion to continue to not only finance that but also finance the working capital that would be required to go forward.
I mean, to not refinance it is not a terrible deal we would like to improve it. So, I just want to be clear about that.
We're not unhappy with what we have. We're just – we look at things opportunistically and say that's the right thing to do.
From your last question, which was the restaurant services, we've set a target for $10 million of improvement in that business. As I said before, it's still one of our best return on asset businesses that we have out there, but it has a lot of commodity exposure.
It's coming under pressure right now, and the only ways that you can really improve that business in deflationary is to either lower your raw material costs or institute charges. Instituting charges is a long-term proposition that does yield some viability, but the number one thing is that we are taking our raw material costs down as quickly as we can in that business.
John Quealy
Great. Thanks, folks.
Operator
Thank you. We have reached the allotted time for questions.
So, this will conclude our question-and-answer session. I'd like to turn the conference back over to Mr.
Stuewe for any closing remarks.
Randall Stuewe
All right. Thanks, everyone.
Appreciate all of the questions today, and we look forward to talking to you here in November.
Operator
The conference has now concluded. Thank you for attending today's presentation.
You may now disconnect.