Darling Ingredients Inc.
Q2 2014 Earnings Call Transcript

Published: 8 Aug 2014

[Operator:]

Good morning, everyone, and welcome to the Darling Ingredients Conference Call to discuss the Company's Fiscal Second Quarter 2014 Financial Results. With us today are Mr. Randall Stuewe, Chairman and Chief Executive Officer of Darling Ingredients; and Mr. Colin Stevenson, Executive Vice President, Global Finance and Administration. [Operator Instructions] This call is being recorded and your participation implies consent to our recording this participating 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, Emily. Good morning. Thank you for joining us to review Darling's Second Quarter 2014 Earnings Results. 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 our outcome. Colin Stevenson, Executive Vice President, Global Finance and Administration, will then provide you with additional details about our financial results. Randy will then conclude the prepared portion of the call with some general remarks about the business. After which time, we will be happy to answer your questions. This conference call will contain forward-looking statements regarding Darling Ingredients business, its opportunities and anticipated results of 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 by excluding certain recurring and nonrecurring 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 to the most directly comparable GAAP measures in yesterday's press release. The press release is available in the company's website and was filed with the SEC in the form of 8-K on August 7, 2014. And with that, I'd like to turn the call over to Randy.

[Randall C. Stuewe:]

Thanks, Melissa. Good morning, everyone. Thanks for joining us today to review our financial results for the second quarter that ended on June 28, 2014. I'd like to focus my comments on the sequential improvement, as it provides a good picture for our progress following our recent acquisitions and global growth strategy in creating sustainable, natural ingredients for food, feed and fuel. Overall, we delivered a respectable second quarter operating performance globally. The majority of our portfolio delivered improved earnings versus Q1. And at the operating level, we grew pro forma adjusted EBITDA to $158 million versus $139 million in first quarter 2014, when taking into account our newly acquired operations, our Diamond Green Diesel Joint Venture, and excluding nonoperational costs associated with our recent acquisitions. At the EPS level, when adjusted for nonoperational costs, we began to show the accretion related to our various transactions, even though contributions from DGD were limited during the quarter. Now let's look at the segment performance. The Food Ingredients Segment performed as anticipated in the second quarter. Rousselot, a global market leader in gelatin, had a favorable performance from a demand perspective, but we are experienced some pricing and margin pressure globally due to tight raw material supplies, and China continues to endure as the various food safety scandals continue. Our European edible fat business enjoyed increased volumes of raw materials during the quarter due to trade interruptions with Russia, but the increased supplies pressured margins as finished product volumes were forced into nontraditional markets. This impact was noted in our 10-Q filing. CTH, our casings business, improved marginally over first quarter as a result of increased volumes and improved supply chain economics. Now let's look at the global Feed Ingredients Segment. It delivered solid earnings performance with significantly improved contributions from North America, driven by the U.S.A.'s ability to claw back some of the excess cost incurred during our wintry first quarter. Our European feed segment operations provided a steady performance. Our bakery feeds business improved quarter-over-quarter, and we used the rebounding corn market in the early part of the quarter to lay off some additional margin hedges. But overall, the eroding corn market, due to global surpluses, will begin to weigh on this business's performance. Year-over-year, corn was down roughly 37% to an average of $4.58 a bushel during the quarter. In general, the Feed Ingredients Segment raw material volumes were steady around the globe and margins held nicely. And finally, earnings in our Fuel Ingredients Segment, anchored by our DGD Joint Venture, reported weaker performance compared to first quarter on low RIN values due to continued uncertainty, or what I like to call bio confusion, surrounding the renewable fuel standard and the mandated renewable volume obligation policy. And the question still remains as to whether we will see an extension of the blenders tax credit, which along with low RIN values, continued to negatively impact margins at our biodiesel facilities in Québec and Kentucky. During the quarter, Diamond Green Diesel operated at nameplate capacity and continues to be one of the lowest-cost producers of biomass-based renewable diesel in the global marketplace. We expect that its margin structure should return to a more reasonable level once the EPA reaches a final decision on the mandate. Overall, our European operations proved to be steady contributors to our Fuel Ingredients Segment, with Rendac and Ecoson delivering exceptional returns on steady volumes. Additionally, furthering our innovative drive for sustainability in renewable energy, we launched a new biogas facility in Son, Netherlands built to generate green electricity and bio-phosphate fertilizer. Now let me comment on the recent incident at our Diamond Green Diesel facility in Norco, Louisiana on August 3, 2014, in which a fire occurred. The fire was isolated and extinguished, and most importantly, no one was injured. The preliminary assessment of the incident appears to indicate that no major damage occurred to any of the vessels. Damage appears to be relatively isolated and will require some piping, mechanical and electrical replacements. The cause of the fire remains unknown at this time. The facility is currently shut down, and while it is early in the assessment phase, we believe that the facility may be operational within 60 days. The DGD Joint Venture is in the process of reviewing its insurance policies, including property damage and business interruption, for favorable coverage under such policies. Any claims made under such policies will be subject to the terms and conditions of the underlying policy, including applicable deductibles and waiting periods. Additionally, a decision has been made to move forward with a limited turnaround at this time during the downtime to replace some of the catalyst and Eco-finer, along with several debottlenecking and metallurgical upgrades that should result in a nameplate capacity increase of about 10% for winter production. With that, I'll turn the call over to Colin. And after Colin concludes, we'll open it up to Q&A after some closing comments. Colin?

[Colin Stevenson:]

Thanks, Randy. Since we are now providing a greater amount of segment detail, I will focus my comments on our second quarter performance and direct you to our press release and SEC filings for our 6-month comparisons. As noted in our press release issued yesterday, for the second quarter 2014, we reported operating income of $75.5 million on net sales of $1 billion. Operating income increased by $24.7 million or 33% as compared to the 2013 second quarter, which was attributable to our newly acquired operations. Net income for the quarter was $32.8 million, or $0.20 per diluted share, compared to $26.4 million, or $0.22 per diluted share, in the year-ago period. The current year's quarter results include the following nonoperational after-tax costs

[Randall C. Stuewe:]

Thanks, Colin. The first half of the year is behind us, and we are well on our way to solidifying our new global platform. Integration efforts are being coordinated, and new opportunities for growth are being prioritized. Our operating environment remains positive, even though we are witnessing a global replenishment of crops and a resetting of ingredient prices. Our teams around the world are focused on raw material cost adjustments to maintain the margins that we have become accustomed to delivering. We've established a solid baseline and are executing with forward momentum. Our Diamond Green Diesel asset will return stronger than before, and we look forward to the government clarifying the RFS rule shortly. I'd personally like to thank the Diamond Green Diesel and Valero team for their extraordinary effort and professionalism, given the difficult night we endured last Sunday. Finally, we look forward to seeing many of you at our analyst and investor forum being held September 4 in New York. With that, I'd like to now open up the call to Q&A. Emily?

[Operator:]

[Operator Instructions] And our first question is from Adam Samuelson of Goldman Sachs.

[Adam Samuelson:]

So I want to start in Food, and I want to make sure we understand, first, the comment that the performance in the quarter was largely in line with expectations. Does that imply that you are anticipating the issues in the edible fats business in Europe? And then, second, it seems like the sequential decline in operating profit was entirely driven by a $9 million increase in segment SG&A, and I'm trying to square that with the notion of pressure on the edible fats business, which presumably should show up in the gross margin.

[Colin Stevenson:]

Yes, 2 things, Adam. With respect to the SG&A, keep in mind, as we noted in, I think, it was Footnote 14 in the Q, that we did have a reclassification between cost of goods sold and SG&A for Q1. So we reclassified that, and that's probably having a part of the impact you're discussing.

[Adam Samuelson:]

No, I saw it on an adjusted basis. I'm just -- I went through the Q last night. Just making sure I understand the difference.

[Colin Stevenson:]

The other part of the difference to keep in mind is, remember on the VION Ingredients business, we acquired that on January 7. So you have an extra week during the quarter for SG&A relative to Q1. That's a big part of that adjustment.

[Adam Samuelson:]

I guess, I'm struggling to understand how 1 week would be $9 million, but maybe we can take that off-line. And on the edible fats business, can you talk about how much of that was expected versus unexpected? And talk about kind of the lingering impact that it's going to have on the Food Ingredient space?

[Randall C. Stuewe:]

Well, I think, first off, number one, we're talking of margin impact on the edible -- or European edible fats business. What's transpiring, and you're reading about it daily right now, is the trade disruption and the food boycotts now or embargoes against the U.S. and Europe food manufacturers. We started to see that in the quarter, where some of the different low-grade meat cuts that were being processed in -- predominantly out of Germany started to back up in Germany. And instead of being sold into the sausage manufacturers in Russia, they were being diverted into the rendering stream. And because of their classifications, they can go through the edible fat melting product. So what transpires is a little bit of a lag impact, Adam, relative to, you've got all of the sudden -- one day, you don't have the product. The next day, you're getting extra trailer loads of it. And then you just, all of the sudden, began to force prices down to move the inventory, and you didn't get the spread or the margin adjusted quickly. That's already been discussed in-house. I mean, the good news is, we got extra volume. The bad news is, it was at a lower margin than we wanted.

[Adam Samuelson:]

Okay. And then, maybe just on Diamond Green. Can you talk about how you see the 60-or-so day outage impacting the cooking oil and tallow markets in the business? And what was the capital expenditure associated with the increase in capacity?

[Randall C. Stuewe:]

Well, the -- first off, let me talk a little bit about it. The -- originally, we had planned or we're planning to have some time either towards the end of the quarter here mainly. Most likely in the start of Q4, we were going to take downtime to debottleneck the plant and then to change out a little bit of catalyst and do some piping modifications in order to shore up the ability to make what we call a winter-spec product. Overall, the facility's nameplate capacity's been 10,000 barrels a day of input. It will go to 11,000 barrels. So there is a planned 2-week outage coming on here. The downtime right now, we're going to use it to work on that, those expansions or debottlenecking. The supply chain is still being evaluated right now, Adam. I can't tell you that there's going to be a material impact one way or another. Clearly, Diamond Green Diesel has been a major consumer of product, not only for Darling, but the industry, for -- but consistently here since the first of the year. The good news is, on -- when I was down there earlier this week, we're unloading product. We're still running pretreatment, and we're still continuing to receive cars, and the Darling supply chain is continuing to ship. So I'm optimistic it'll have limited impact. We have rerouted some of the product we had shipped down there to other export terminals. That's the value of our system today. As far as the capital, it's immaterial. Down to it, it'll be self-funded within the JV down there. It was planned. So not a big deal.

[Operator:]

The next question is from John Quealy of Canaccord Genuity.

[John Quealy:]

Randy, I'm going to try to ask you to give us a little bit more color on Russia in the food side. If this sort of embargo situation continues on, can you sensitize it for us? Is it material? Or how should we think about a relative drag or pick-up, however that issue resolves over there?

[Randall C. Stuewe:]

I'm still learning, John and, I mean, I can take a little bit of a shot at it. I mean, obviously, at the end of the day, about 40% -- or so the news services report about 40% of Russia's food is imported. And it's from a lot of the countries now that they've embargoed or boycotted. So there's going to be a re-steering of those products to other markets, much as we've seen already out of the closure that happened earlier this summer. We've seen many of those products now head to China. So at end of the day, I don't see the -- I see it as a disruption and a limited one. I don't think it has a lot of impact on our business because the animals are still going to come to market and so we'll continue to process them. But I mean, I'm kind of like you. I'm reading every day trying to figure out what the impact will be. But I think at end of the day, it should be fairly limited to our supply chain.

[John Quealy:]

And so the inventory turns in that part of the business are consistent with the other parts of the business? You got a month or so, 1.5 months so lag, but then it should clear up.

[Randall C. Stuewe:]

That would be my read. I mean, we clearly, we were shipping -- or the -- remember the slaughter industry in Europe was shipping products into Russia. Those products are having to be either put in the freezer or shipped to a different market. But for right now, it's just, as we said, it's just really getting the formulas adjusted to where the raw materials are coming in and we can get the margins there. So it's something we spent quite a bit of time at the board meeting talking about and making sure that as we -- whether it's the grains in the U.S. or the trade imbalances that are happen, making sure that we adjust for the margins we expect.

[John Quealy:]

Okay, great. Now the second question, on Diamond Green, 2 things. Some industry folks are saying RVO for '14 in the next 30 days or so. Would you care to throw your hat in the ring on what you think about that? And then, also the catalyst upgrade in the Eco-finer, is this some of the new stuff that was laid down a little while ago, then it fouled out? Or just give us a little bit more granularity on why more catalyst there?

[Randall C. Stuewe:]

Yes, the -- a catalyst change-out at 1.5 years was pretty much projected here. We're seeing a little bit of -- I don't know what they call, pressure drop or coking on some or one of the units, not the main unit. So we were just going to change it out. And then, it'll allow us to run for another 1.5 years, is our belief. So not a major deal. It was being done in conjunction with some change-out of piping to allow us to creep the capacity up, so it was more of an opportunity than a necessity for the facility. So no real technological learning there or anything that I'd even remotely consider a failure. The facility has just performed excellently as far as volume, yield and outputs here, so no real issues there. As far as the RVO and the RFS, I mean, it's -- we're as tired as you are of hearing the rhetoric out of Washington relative to someone's ability -- or the administration's ability to make a decision. I mean, it's highly frustrating to think that we're mid-August and we're still discussing or contemplating what the RVO will be for 2014 with 1/3 of the year left. I mean, that's just wrong. We've expressed our frustration. We've held -- been in numerous congressional meetings, White House meetings. And I think I would give you the flavor that we feel as positive as the news reports that are out there that we're going to get an increase in the RVO. I think it is -- does -- is a modest increase help 2014? Possibly. But what's more important news is that they come out and give us clarity for 2015 and possibly '16. I think you're going to see an increase in the '14. Whether you get the '15 clarity or proposed rule, I don't know. I think you could get, also, an increase in the advanced bucket also, which should be positive for our business. Overall, when we look back, John -- and we did this kind of postmortem look at Diamond Green Diesel and looked at the first year of operating, it was a very successful operation, even though we had a little bit of debottlenecking, a little bit of metallurgical and a learning curve. Financially, it continues to be one of the best investments in our portfolio. The incident last Sunday night was not a good one, by any means, but it will make us better and stronger, but it's a great facility. It's one that we continue to contemplate expanding. Clearly, we would like to have some clarity out of Washington before we put the shareholders' money at work anymore.

[Operator:]

Our next question is from Carla Casella, JPMorgan.

[Carla Casella:]

In your last presentation that you gave, you gave a pro forma revenue EBITDA, including the acquisitions. Have you updated that number? Or could you tell us what -- where you would be on a second quarter basis for LTM EBITDA, including the acquisitions for the full period?

[Colin Stevenson:]

Sure. We're going to be presenting at a conference next week, and we will provide in that slide deck the same updated Q2 pro forma for 2013.

[Carla Casella:]

Okay. Can you comment whether we moved up or down from what you showed in first quarter?

[Colin Stevenson:]

Can't comment at this point.

[Randall C. Stuewe:]

That means he hasn't finished the numbers yet, Carla.

[Carla Casella:]

Right, no, I get it. That's fine. And then, just one follow-up on the Russia impact. Can you just talk about timing of when you see the worst of the impact there, and how that should look going forward? You commented on it briefly in the open remarks.

[Randall C. Stuewe:]

Carla, I honestly don't know. I'm, like you, reading. I'm listening to Donnie Smith's comments at Tyson and the Sanderson comments. And I'm just kind of watching this thing evolve. Like I said, we saw a limited impact in Q2 for us from the standpoint of what we would call edible offal materials that were being shipped to Russia. It's hard to say what the domino impact is around the world yet. I do suspect that the meat products were low-end meat products, at least from our European operations. We'll see what happens there. And the chicken guys in the U.S. say that it'll have limited impact on them. Although, we all know that 2% or 3% or 4% of your production that you can get out of your domestic market helps your margin. So overall, it'd be hard to say that it's good, but I see the impact as fairly limited on our business from what I understand right now.

[Operator:]

Our next question is from Ken Zaslow of BMO Capital Markets.

[Kenneth B. Zaslow:]

In the 10-Q, you did talk about that the Canadian operation is actually performing better than expected. Can you talk about what's going on there? And is it an integration? Is it just the fundamentals? And is there upside to your initial expectations on how that business is delivering?

[Randall C. Stuewe:]

Yes, it did. Personally I feel kind of, a hats off to the management team. And Neil Katchen has been leading that group up there and helping to integrate it. They've done a tremendous job of taking some costs out of the business. From an SG&A standpoint, we've done a pretty good job of beginning to integrate the operations into how we run facilities from a safety, from a yield, a product mix standpoint. We continue to make progress there. From a raw material and margin perspective, we've been able to continue to work with the suppliers and maintain the margins that, that business was accustomed to. From the rendering side of the business up there, which is the majority of the business, we've had a really good second quarter. It looks like we're off to a good third quarter right now, with -- the volumes are a little lower than what we'd anticipated, a little lower than first quarter, given the kind of the pork cycle related to PED, but that will come back here. Don't know that it will come back in fourth quarter or third -- late third or fourth, but it might. And then, finally, the biodiesel side up there, obviously, there's a little bit of a mandate in the Ontario area, but the majority of that product is still influenced heavily by the RFS and the RVO margins. During the quarter up there, it went red several times. They're slightly positive right now, but we're getting very little contribution for the quarter and at the current rates out of the biodiesel plant. If the biodiesel plant had the margins that were there 1 year ago or a couple of quarters ago, then the quarter for Canada would have been tremendous and very, very above expectations. So it's really turned out to be a good business for us. We just got to get the biodiesel piece in balance.

[Kenneth B. Zaslow:]

Great. The second question is, can you talk about your insurance policy, I guess. What are the deviations around it? Because it seems like, if you have insurance -- and this seems like it would fall under a typical insurance policy. I'm not an insurance expert. But what would create an episode that you wouldn't recapture all the lost business and all that through the insurance policy?

[Randall C. Stuewe:]

Yes. I mean, Diamond Green, the entity is self-insured. It's got the standard property damage and business interruption piece that we put on it. Right now, given the early assessments, it -- the damage down there, at least when I was there this week, and the word from the management team and the experts on site is that it's fairly limited. So it's hard to believe that there might even be a property damage claim down there. The business interruption has a -- we're still trying to identify and understand what that would include, but until it has a time delay to it, and whether or not we can -- we're going to be up or not within that time delay, time will tell. So Ken, I think it's safe to say that the insurance policy and its applicability to this incident are probably pretty limited right now, given what we know. If it goes for any type of extended downtime, if one of the vessels, after they do the thickness test on the different metals and the vessel thicknesses and we're down longer and we have to order something, that's when we would give you guys an update. But right now, I'd say it's fairly limited as to whether it will even apply here.

[Kenneth B. Zaslow:]

And my last question is, can you give us an update on the gelatin business? It sounded like it slowed down a little bit, but the margins are there. Just give us kind of some color on that. I just didn't understand the commentary on it.

[Randall C. Stuewe:]

Yes, the gelatin business is clearly the anchor flagship of the Food segment. It had a good quarter. Year-over-year, we start to -- as we look at that business around the world, it's tied to basically the processed food, the pharmaceutical and then the industrial or paper industry to a degree, or for the film industry. We've seen -- if you start to look at it around the horn, overall business volumes remain steady. As we talked about last quarter, we've seen a little bit of price erosion around the horn and margin pressure. And margin pressure comes in 2 forms

[Operator:]

[Operator Instructions] And our next question is from Dan Mannes of Avondale.

[Daniel J. Mannes:]

Couple of quick follow-ups. First, as it relates to Diamond Green Diesel, what's your confidence level on the 60 days in this point? I mean, it sounds like you've got -- the guys at Valero and Diamond Green have gone through everything with a fine-tooth comb. Just wondering if there's any risk around that.

[Randall C. Stuewe:]

There's always risk, Dan. And I'm pretty confident, just like I don't think the Cowboys will make the playoffs this year. So we'll kind of leave it at that. I haven't received any updated report. Last night I got an e-mail that just said

[Daniel J. Mannes:]

Understood. And then, the second thing I was going to ask about is as it relates to the food business, you're getting a lot of questions on Russia. But can you give us some comment -- I mean, how big is, really, the edible fats business as a percentage of the total Food? I mean, we're kind of -- I know it hit margins pretty hard in the second quarter, but are we making a mountain out of a mole hill here?

[Colin Stevenson:]

Yes, Dan, it's not -- it's certainly not a material majority portion of the Food Ingredients business. I mean, I think part of your description is an apt one.

[Daniel J. Mannes:]

And is it fair to say, I mean, on average, the margin profile of it is structurally lower than that of the gelatin business or no?

[Randall C. Stuewe:]

Yes.

[Colin Stevenson:]

That's correct.

[Randall C. Stuewe:]

Certainly, it was clearly one of those where -- we've been walking down our raw material cost the best we can and around the globe here to the kind of the declining ingredient prices that we're starting to feel. And this is one of those where the supply push came and you just didn't get the chance to walk it down quick enough.

[Daniel J. Mannes:]

Okay. The next thing I want to ask is the Feed business. And it's easier for us, obviously, to compare things sequentially since we don't have great prior year numbers. When we look at pretty material improvement from the first quarter to the second quarter, can you maybe help us think through how much of it was improved volume, which is a lot of it seasonal versus actually some price improvement on the protein side versus anything else. Just kind of help us walk through that. And then, secondarily, any other factors, as we look forward to the next couple of quarters, on the Feed business, aside from pricing?

[Randall C. Stuewe:]

Yes, I mean, globally, volumes were pretty steady. I mean, I would put the European feed segment as just a steady contributor. We had an improved performance in Canada and the U.S.A. A significant portion of that was just the ability to run the facilities without the winter weather there, between energy cost, extra labor, extra trucking. Make no mistake, protein prices were really strong, and we saw a pretty good improvement in fat prices during the quarter. But for the majority of the increase Q-over-Q, it was operational related to the just not having the Mr. Winter blasting on us.

[Daniel J. Mannes:]

So conceivably, was it a catch-up? Or is it more that -- not so much the Q2 was really strong, more the Q1 was notably weak?

[Randall C. Stuewe:]

Q1 was notably weak. It got punched pretty hard by the extra costs.

[Daniel J. Mannes:]

Got it. And then, lastly, we've been focusing a lot, obviously, on the quarter, but you've kind of laid out -- and I'm sure you'll talk more at your Analyst Day. But some of the growth initiatives that you've kind of talked about, whether it's on the expansions here in the states or some of the things you're looking to Brazil, for instance. Can you maybe give us an update on anything that's happened over the last couple of months in terms of some of your growth initiatives?

[Randall C. Stuewe:]

Really, the last couple of months, we've shifted from, as I said, in Q1 just being able to file financials accurately and properly. Q2 was, once again, reassessing the business, it's earnings power, and preparing to make raw material adjustments to maintain the margins. We're in that phase now, Dan, where we're now, what I call, prioritizing growth opportunities. I think we have several of them around the world that we're working on right now. I'm not prepared to give detail on them yet. But I know in our slide, in our slide deck for investors, we talk about their trajectory. Lots of them that we started to talk about, that I always called in the orange and the green area, they're coming home. So I feel good about where we're at. We have -- as we said, we're seeing -- as the globe begins to reset and you're seeing the lower -- the grain surpluses and, to a degree, the lower ingredient prices, we're starting to see people become more realistic about what they're expecting for their business and what their longevity is for operating their business. So the environment has turned, in my opinion, very positive to growth and will continue that way through the end of the year and probably next year.

[Operator:]

Our next question is from Derrick Jumper of DW Investment Management.

[Derrick Jumper:]

Wanted to see what your expectations were in terms of probability and timing relating to the blender tax credit getting reinstated. And what would the financial impact to the company be?

[Randall C. Stuewe:]

The -- Derrick, this is Randy. I came into the week believing that we might get an announcement this week. I guess, the week's not over yet, although it's pretty close here. We did see the -- at least, that's from the RVO. I'm talking RFS clarification RVO. Because for me, that's more important long term because that will drive the value of RINs for about, the end of the year. And if we get a '15 type of indication and the indication is up versus '14, that would be -- at least steady to bullish RINs for next year. Because we got a lot of people sitting on the fence relative to fulfilling their volume obligation and their RIN requirements. So that's key to me. I think that's coming here in the next -- I can't see it not happening in the next week or 2, although the White House appears to be preoccupied with about 3 dozen global crises right now. So we'll see. As far as the blenders credit, I don't see anything there until we come out of elections. I think, what, November 4 or 5 is election day, and then, sometime after that. It's interesting to note that you now have discussions within the senatorial side that they want to make sure that those decisions aren't made out there until the State of Iowa's knowing on who's there or who's not going to be there relative to ethanol. You've got corn prices that are back down to levels that are going to make it difficult, given fertilizer and diesel fuel prices and land prices for the farmers. So all of the sudden now, the farmer, who's had some really tremendous years in the United States, is now back calling his congressman and telling them we need help, especially with the ethanol mandate. So I think you're seeing a lot of pieces go into play here, but I'm looking to November. What it means to us is that we're running Diamond Green Diesel. Except for the little bit of downtime, it was running at about the 136 million to 146 million gallon annual rate. And so at the end of the day, we'll recapture $1 a gallon at the entity level on those productions within the biodiesel business for us in Québec and in Butler, Kentucky. And the biodiesel trade's a little different. In a lot of cases, we'd get $0.50 as that has had to been traded away. But the big impact is Diamond Green Diesel. As we told our board, if that $1 a gallon would've been there, we've had a really outstanding first half of the year.

[Operator:]

Our next question is from JinMing Liu of Ardour Capital.

[JinMing Liu:]

Just a couple of questions for clarification just regard the Diamond Green Diesel. So first, the -- regarding the catalyst replacement, is that just a timing issue or the catalyst was almost fully spent? This sounds a little bit peculiar [ph] to me.

[Randall C. Stuewe:]

JinMing, this is Randy. It's just a small top layer portion, and it's not even in the main reactor. It's just a chance to replace it. It was the only place we were showing any pressure drop or fouling. And so with the downtime here that we were to change pipes out, it just made sense to change that out. It doesn't even -- it wouldn't even be qualified as a catalyst replacement. It's a replenishment of just a little top layer. So the catalyst has performed extremely nicely for us, probably even beyond our expectation. And why is that? It's very simple. It's because of the exceptional pretreatment plant that we built that is truly cleaning up the fats and oils that we're running down there. We've recently started to bring in poultry fat into there, and, also, what I call high-acid animal fat from some of our western operations. It's really pretty nasty stuff in the summertime, and we're getting good performance out of it. So this was just more of a timing and opportunity than it was a necessity.

[JinMing Liu:]

Okay. And regarding the required metallurgical work, was that just to debottleneck and replace whatever got damaged? Or is this give you a chance to replace some material that they couldn't handle or may not be enough to handle the high-acid feedstock?

[Randall C. Stuewe:]

Now if you remember last summer, about 1 year ago, we had the metallurgical failure in the heat exchangers. And so at the end of the day, we're going to take an opportunity to potentially replace some of the piping around some of that, such that we don't have to think about it in the future. But the piping is all set up to handle any of the acidic issues related to high-acid animal fat. That's already been designed in. This was related to corrosion issues that, for the most part, we think are behind us. But given the opportunity to improve the facility, they're going to look hard at those. And if there's any that need to be replaced with either stainless or carbon steel, they'll go at it and they'll do what's right.

[JinMing Liu:]

Okay. Lastly, on Diamond Green. You mentioned that potentially the facility can run at above the current nameplate after the repair. So can you help me understand where the increase in capacity coming from?

[Randall C. Stuewe:]

Yes, the -- obviously, we're getting the yields in the throughput, the pretreatment and the Eco-finer. We have some limitations on the outbound side, predominantly in the fugitive gas area. We needed to increase a couple of pipe sizes. And so at the end of the day, it's a pretty simple fix to get that 10% that allows us to make both summer-spec, winter-spec diesel fuel and then, move the baseline capacity for the full year up from 10,000 to 11,000. So it's a pretty simple fix. That's the reason I commented earlier that it wasn't a major capital project by any means for the facility. You just have to be down to do it.

[Operator:]

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Stuewe for any closing remarks.

[Randall C. Stuewe:]

All right. Thanks, everyone, for joining us. Appreciate your patience with us, and we look forward to seeing many of you here in September again at our investor forum. Thanks again.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.