Darling Ingredients Inc (DAR) 2011 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Darling International conference call to discuss the Company's third-quarter 2011 financial results. With us today are Mr. Randall Stuewe, Chairman and Chief Executive Officer of Darling International and Mr. John Muse, Executive Vice President Finance and Administration. After the speakers' opening remarks, there will be a Question and Answer period, and instructions to ask a question will be given at that time. This call is being recorded, and your participation implies consent to our recording this call. If you do not agree to these terms, simply drop off the line. I would now like to turn the call over to Mr. Brad Phillips, Treasurer of Darling International. Please go ahead, sir.

Good morning, ladies and gentlemen. Thank you for joining us to review Darling's third quarter 2011 earnings results. Randall C Stuewe, our Chairman and CEO, will begin today's call with an overview of our third-quarter financial performance and discuss some of the trends that impacted our results. John Muse, Executive Vice President Finance and Administration will then provide you with additional details about our financial results. 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 any questions you may have. Before we begin I need to remind everyone that this conference call will contain certain forward-looking statements regarding the business operations of Darling and the industry in which it operates.

These statements are identified by words such as may, will, begin, look forward, expect, believe, intend, anticipate, should, estimate, continue, momentum, and other words referring to events to occur in the future. These statements reflect Darling's current view of future events, and are based on its assessments of and are subject to a variety of risks and uncertainties beyond its control, including disturbances in world financial, credit, commodities, and stock markets, a decline in consumer confidence and discretionary spending, the general performance of the US economy, global demands for bio-fuels and grain and oilseed commodities, which have exhibited volatility, and future expenditures relating to Darling's joint venture with Valero Energy Corporation to construct and complete a renewable diesel plant in Norco, Louisiana, and possible difficulties completing and obtaining operational viability with the plant, each of which could cause actual results to differ materially from those projected in such forward-looking statements. Other risks and uncertainties regarding Darling, its business and the industry in which it operates, are referenced from time to time in the Company's filings with the Securities and Exchange Commission. Darling is under no obligation to and expressly disclaims any such obligations to update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.

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

Thanks, Brad. Good morning, everyone, and thanks for joining us. It's my pleasure to welcome you to the Darling International earnings call to discuss our third-quarter. Our third quarter results were solid and an all-time third-quarter record for our Company. Although extreme hot summer temperatures in the Midwest tempered our performance. Our Midwestern facilities had severe difficulty in processing the dead stock as the record heat rapidly deteriorated the raw material. Typical yield-splits between fat recovery and protein generation, simply were not achieved. As all of you are aware, fat or yellow grease, was worth $600 more per ton than protein during the quarter. Temperatures have cooled now, and we have made numerous process improvements to better combat these conditions in the future.

As a reminder, the third quarter is historically our weakest quarter, due to the impact of hot, summer heat on our ruminant raw materials supplies. To help you further reconcile this quarter's performance, let me highlight a few other key areas. Rendering raw material volumes remains strong, while we did see some modest cutbacks in the poultry side during the last part of the quarter, new accounts, dead stock, and strong cow slaughter in the South provided improved tonnage versus second-quarter. We anticipate this run rate to continue on through fourth-quarter with some adjustment for holiday downtime. On the restaurant front, grease volumes declined slightly, as theft continues to grow, especially in the large metropolitan areas. We continue to have success though, nationally using our improved footprint to provide catalysts for additional customer growth.

Our new sales and procurement teams, or our integrated sales and procurement teams, have made great strides towards growing and identifying their go-to-market approach. Our bakery waste recycling business enjoyed a very nice performance this quarter as well. Seasonal increases in raw material volume, along with continued strength of competing ingredients were the primary drivers. On the finished product front, prices for fats and greases were generally steady although some of our Midwestern product had to be stored, blended, or deeply discounted. The good news is that we will have a home for this product next year with the commencement and commissioning of Diamond Green Diesel, improving both our logistics and lowering our overall cost. Finished animal proteins were softer across the complex. Ruminant meat and bone meal prices were down modestly, driven by the contracting poultry market.

Our specialty ingredients business enjoyed a nice quarter though, but reduced aquaculture and pet food demand weighed slightly on finished product prices. Now to update you on our Diamond Green Diesel venture with Valero. We are on track and on schedule with the construction phase of the planned renewable diesel facility. We are approximately 20% complete, and anticipate commissioning in the fourth quarter of 2012. As described previously, the facility will be capable of producing 9300 barrels per day or approximately 137 million gallons per year of renewable diesel on a site adjacent to Valero's St. Charles Refinery in Norco, Louisiana.

With that, I would like to turn the call over to John Muse now for a brief financial review.

Thanks, Randy. I would like to point out that third-quarter 2011 results include a full-quarter contribution from Griffin, as compared to no contribution in the year-ago quarter. For the third quarter, the Company reported net sales of $455 million, compared to $168 million for the year-ago period. The $287 million increase in net sales primarily resulted from a 13-week sales contribution of $231.6 million from Griffin, as well as higher finished product prices. As Randy mentioned, net income for the 2011 third-quarter increased to $41.1 million or $0.35 a share on a fully diluted basis, as compared to net income of $11.4 million, or $0.14 a share, for the 2010 comparable period.

As noted in our press release, the $29.7 million increase in net income for the third quarter resulted primarily from the acquisition of Griffin Industries, as well as higher selling prices for the Company's finished products. Interest expense was $7.4 million during the quarter, compared to $0.9 million last year, an increase of $6.5 million primarily due to the increase in debt outstanding, as the result of the Griffin acquisition, which was completed in December 2010. Operating income increased to $55.4 million in the third quarter of 2011, compared to 2010 third quarter. The increase resulted primarily from the acquisition of Griffin again, as well as higher finished product prices.

The Company reported income tax expense of $25 million for the 2011 third quarter, compared to $6.3 million recorded in the year-ago quarter, representing an increase of $18.7 million, due to the increased pretax earnings in the third quarter of 2011. At the segment level, rendering generated net sales of $376.3 million for the third quarter, a $207 million increase, compared to $168.7 million in the 2010 third-quarter. The Griffin acquisition accounted for $152 million of rendering net sales as a result of the 13-week contribution, and higher finished product prices contributed $55.6 million to the increase. Keep in mind that our rendering segment now includes our used cooking oil removal services and our grease trap services.

As you will also note, on both the segment of operations and balance sheet, we are now reporting separately the Company's investment in our joint venture with Valero as an investment in an unconsolidated subsidiary. The balance sheet reports the investment of $12.9 million at October 1, 2011, and statement of operations reports a net loss of $170,000 for the third quarter. These losses are primarily due to non-capitalizable expenses as we go through the construction phase. Bakery segment sales accounted for $79.5 million of net sales during the quarter, driven by higher finished product prices for bakery by-products.

For the nine months ended October 1, 2011, the Company reported net sales of $1.4 billion, as compared to $497.7 million for the 2010 comparable period. The $868 million increase in sales is primarily attributable to contributions from the Griffin acquisition, as well as higher selling prices for the Company's finished product. Our rendering segment generated net sales of $1.1 billion for the 2011 nine-month period, compared to $497 million in the 2010 comparable period. The Griffin acquisition accounted for $460 million of rendering net sales as a result of 39 weeks of contribution, and higher finished product prices contributed $182 million to the increase.

The bakery segment generated net sales of $225.8 million for the first nine months of 2011, with higher finished product prices for bakery products driving strong net sales. For the nine months ended October 1, 2011, the Company reported net income of $139.9 million, or $1.22 per share, as compared to $34.2 million, or $0.41 a share for the 2010 period. The $105 million increase resulted primarily from contributions from the Griffin acquisition, and higher selling prices for our finished products. Now, moving on to the balance sheet, on October 1, the Company had working capital of $77.2 million and our working capital ratio was 1.53 to 1, compared to capital of $30.8 million and a working capital ratio of 1.21 at January 1, 2011.

At October 1, the Company had unrestricted cash of $28.6 million and funds available under our revolving credit facility of $391 million, compared to unrestricted cash of $19 million and funds available on the revolver of $141 million, at January 1, 2011. Our capital expenditures were $44 million, were made during the first nine months of 2011, compared to $15.9 million in the comparable nine-month period of 2010. The noticeable increase of $28.1 million in CapEx was primarily due to previously anticipated capital expenditures by Griffin. Capital expenditures are in line with management expectations, in order to maintain facilities and equipment for both efficiency and compliance purposes.

I will now turn the call back over to Randy.

Thanks, John. In summary, the summer months presented many challenges as is the case every year. The higher debt stock tonnage presented unavoidable product downgrades. Contributions from Griffin Industries brought diversification leverage from the bakery segment, and the value-added pet food ingredients drove solid sales growth versus the prior year. The Darling and Valero teams are executing very well on our Diamond Green Diesel project, which will create an additional market and arbitrage for our fats. While the global economic story remains volatile, we are confident that, along with the very solid balance sheet, the key drivers to our business are in a favorable position for us for the long-term.

On behalf of Senior management, let me thank all of our dedicated employees that help us to continue to deliver solid quarters for our shareholders. With that, I'd like to now turn it over and open it up for Q&A.

Thank you, sir.

(Operator Instructions)

Dan Mannes of Avondale.

Good morning, everybody. I want to make sure I understood one of your comments. You had said as you look forward to Q4, you're expecting, actually volumes to be maybe flat-ish versus what you saw in Q3? Did I hear that right?

You heard it right from us. I mean, we're seeing there is a combination of things there that are picking up for us. We've added some new accounts out there. The diversification between beef, pork, and chicken, yes, I think it's probably fair to say that the chicken complex or the poultry complex is disciplining itself a little bit here, but that's being offset by additional growth and some continued strength in the beef side.

Got it. Okay. And then real quickly, can you just talk a little bit about what we have seen in pricing over the last couple weeks? Especially as we have seen, what's called volatility, and the bio-diesel and renmarket?

Yes. Those are good questions. There's a couple of things driving, right now, the finished product prices. We're kind of in that lull, and I will start with proteins. On the protein side you're in that lull between summer and winter, where animals start to eat more, and so you're starting to see a little bit of a lag of seasonality before that product moves back into those streams. We've not seen the seasonal pet food increase that we normally see, and we attribute that to the fact that, back in January of 2011, here, we saw some really solid demand, which was probably attributable to inventory build believing that the price of corn and the price of other ingredients form could go higher.

So I think you got a little bit of inventory and pipeline draw-down on the animal protein and value-added ingredients side right now. That's creating a little softness here that should pick up. On the fats and oils side, you still got the weight of the summer fats that were created of higher acids, still trying to work their way through the system here, weighing on it a little bit. But more importantly, the bio-fuel industry, has kind of gone into a little bit of a shake-up that I'm sure many have read about, with the fake rens, and some of the indictments that are happening out there. What was driving fats for us, primarily, was export to Europe that kept the price of animal fats at a relatively, or historical high relationship to other competing ingredients.

We've seen that back off, as there is some regulatory arbitrage is going on over there with other types of methalesters being made and brought in from other countries right now, so Europe has kind of backed off a little bit from buying yellow grease. So your yellow grease' home is back into the animal feed sector, which is in its a seasonal lull-band, where it picks back up as it gets a little colder across the country. So overall, it feels that it should pick up a little bit of lull here. We have seen it back off quite a bit here in the near-term. October had some pretty good forward-sales, and our formulas continue to work very well in that area.

Okay. And then the last question is on Diamond Green Diesel, when you see quarters like you had in Q3, and maybe some of the back-down on yellow grease that you see now in the early part of the fourth quarter, does that, in your head -- does that really validate why you're doing this in the first place? Because, it seems to me that this is where that arbitrage would really be playing out.

You said it as well as I could. The opportunity for us is to have a home for product that cannot go into either world export markets, or has a hard time working in the animal feed, because of the high acid and the rancidity of it. So having a home for that product is going to be hugely valuable for us. You can go down to the argument, does this time of year, if you're making 150 million, 180 million pounds a month of product and 20 million to 30 million pounds of it is a super-high acid here, does that 20 million pounds price your total production into a degree? I think it does. So once that becomes less transparent to the market and has a new market for it to go to, I think overall, it'll help our entire finished product portfolio.

Sounds good. Thanks for the color.

Farha Aslam of Stephens Inc.

Good morning. Just a question on Diamond Green Diesel, when you do your analysis, should we include that dollar tax credit? Do you anticipate it to continue? How do you think the bio-diesel market demand will be, post that dollar tax credit?

Lots of questions there. Answer is, I'll check them off one by one. No, I do not anticipate the dollar tax credit being extended. There is some tax extender packages out there, that it is attached to, but I don't anticipate it. From our perspective, we're just as happy to let the mandate rule. Farha, all I can tell you is that, with the mandate there, the internal strategy all along has been to use our waste cooking oil and our waste fats and greases that are a substantial discount to the next best alternative, which is soybean oil.

And RB soybean oil that's being used out there is going home tonight. We are a $0.12 or $0.13 a pound discount to that product. Again, putting about $1 margin into that plant, where even if you didn't have the tax credit, and as we snapshot the pro formas now, for that plant, it's pretty simple. It has a $1 a gallon margin, held that through the first 10 months of the year already. So, our anticipation is, we're neutral to -- we really don't care that the subsidy is there. We tend to believe the subsidy probably helps some of the smaller producers more than it's important to us. So, we're neutral to it.

Great. And then when we think about and do the calculations for Ren credit, right now, are bio-diesel plants capturing that Ren credit value? I know the Ren credit has fluctuated but, when we do our analysis for that subsidy, should we think about you capturing that Ren credit?

Yes, I would. It's an interesting thing we saw Rens trade down. They have come back strong now, to trading as high as $1.40 yesterday. Offered at $1.48 as the market filters its way through some of the less than ethical games that were played out there. The other thing you got to remember is, with that green diesel, you get a 1.7 multiplier for its greenhouse gas benefits on that.

Okay. So we can take the Ren credit for regular bio-diesel and add by 1.7 to calculate the value for the diesel coming out of your facility?

Yes.

Those were my key questions. Thank you.

John Quealy of Canaccord Genuity.

Good morning, guys, it is Mark Sigal for John. Just wondering if you could talk a bit about the Griffin integration process? On prior calls, you have talked about how the synergies have been progressing, and tackling Great Lakes and Texas. So just an update there?

Yes. And I think, Mark, to just really summarize at the high level, the majority of our integration is complete now. The operating companies have been aligned, the reporting structures, to dumb it down a little bit here, is we put some Griffin plants under Darling people and some Darling plants under Griffin people. We've consolidated our hide businesses, our blending businesses, our commodities groups, it's all come together. We have shut down a number of our small distribution, or our small accumulation transfer stations. That's relatively complete now, across the Florida, Georgia, Texas, Oklahoma, we're in the Great Lakes area.

We're finding quite a bit more opportunity in the Great Lakes area than we thought, just on the amount of raw material realignment. That should be completed here by the end of the year. We are moving now, after that, into the next phase, which is now taking the Griffin strategy of segregating raw material streams and making value-added products, and we've identified three or four plants within the Darling system, that we will invest to make the plants bio-secure next year, and they're in process of being pet food approved. It should be pretty exciting. A little longer term, but it's on the radar screen to accomplish next year.

Great. Just as we progress in the construction on the bio-diesel plant, I know probably about $80 million in equity commitment is left. How do we think about that in 2012?

Mark, the contributions that we're looking at is close to $30 million by the end of this year. Maybe a little less than that. But then the remainder being made into -- by close to November of next year, depending on the pavement, so I would say factor in right at $60 million to $62 million of funding for next year, and the high $20 millions to right at $30 million this year for us. And we've already put in $14 million.

And, Mark, I think the other thing to comment on there is, as that plant was designed and the contracts were let, and part of the DOE program that drove where we're at today, the construction on that was on a turnkey contract that is on time, on budget. About 90% of the equipment and supplies that were needed to buy our materials bought have been committed. So right now, as we start to look at the risk on that, there are two risks left. As it starts to get really close for us, one is we don't get a strong hurricane season next summer to finish it off, although most of the work will be inside. And then you get into commissioning-risk after that. But overall, we feel really positive about where we're at in the process, and our hats off to the Valero and the Turner Industries engineering teams.

Great. And just my last question, looks like in the queue, reading through the queue, you've got some forward gas and diesel purchases. I think on the gas side, through Q3 of next year, how far out do the diesel forward-purchases take you?

Well, you've got it. It's a little bit through first-, second-, and third-quarter, a little bit heavier in the first two quarters of next year. We felt the exposure for increases in energy was on the diesel side, not as much on the natural gas side. But as natural gas prices have dropped down to the level that they've been at, we have made some coverage in that area as well.

Okay. Great. Thanks, guys.

William Bremer, of Maxim group.

Good morning, Randy, good morning, John. Randy, you mentioned commissioning risk. What is the timing on something like that?

Well, the intent, Bill, is to start it up in fourth-quarter 2012. And as in any developing technologies and plants of this magnitude, you always have some risk there, but we feel pretty good about it. We anticipate starting to run the pre-treatment and run and fill the tank farm late next summer.

And also, moving to the bakery feed, can you sort of give us an idea what your strategy is there to grow that? Is it new customers? New products? What is the strategy to grow that segment?

It's a fairly consolidated industry that we have a pretty good feeling that we're number one in. We see a chance to make some additional investments on some of the Darling real estate that's owned. We are in process of doing some stuff here in Texas, and we're looking up in the Midwest, so there's an organic growth-strategy that is driven off of both logistics, how it works both to our existing plants and to future plants. And then also what we're looking at there, is as we align the key suppliers out there and key customers, I've always found in my career, that if you align with the right customer supplier, they will give you the chance to grow with them, and that's starting to happen for us.

Great, thanks for the color, Randy.

JinMing Liu of Ardour Capital.

Good morning, gentlemen. My question is related to the renewable fuel spend-out. Recently, I know there were some efforts by some interest groups to acquire, at least modify the renewable fuel spend. What is your take on that? Do you see any implication on your renewable diesel efforts?

This is Randy, JinMing. My personal opinion on it is, that I don't see much risk there. I think that it was fair to come to the conclusion, as Farha asked earlier on, I think the blenders credit, whether it is ethanol, and possibly the import tariff, and then the bio-diesel credit, and renewable diesel credit, those are probably in jeopardy here. Does that give somebody courage, that wanted those to go away, to go after the renewable fuel standard? Sure. But as we all know, that's law with no sunset-provision, and it certainly doesn't feel that it has enough support out there. If crude oil was to go to $30 or $40 a barrel, and the cost of these programs became too prohibitive, you might have a more interest in it. But I think it's very -- fundamentally I think it's very sound. And then I would caveat it to say, especially with an election year coming on, I don't think anyone is going to remotely get traction trying to address that or attack it.

Back to your operation, Randy, you mentioned that the protein fat ratio during the third-quarter was low. Can you give us some color, like say, how much off it was from your normal yield?

Yes, and John and I talked about this, and we appreciate the chance to try to explain it a little more to people, because it was the primary driver. Typically, when you're putting out a cue, you are comparing it year-over-year, which was even more difficult, so we tried to sit here, and kind of set up a little internal bridge-analysis between Q3 and second-quarter's wonderful performance. And so as you look at it, you compare the two, you'll see that sales was down about $14.7 million, and cost of sales was up about $1.4 million, which kind of says okay, our formulas are working just right, given the volatility that happened in the finished product markets.

SG&A was up about $1.4 million. That's attributable to the earn-out and true-up that's attached to the merger agreement, as there is a Monte Carlo simulation that we hit the income statement with a charge or a credit, depending on whether or not they think we're going to maintain above the $10 a share threshold limit, which from my view, seems fairly safe here. But the EBITDA was down $17.5 million for the quarter. We started to look at it and say, everything seemed to make sense to us. And then we dug into it, and typically we see in the third-quarter, fat downgrades. A downgrade is defined as, you thought you made tallow, but you ended up selling it, because the acids rose on it, for yellow grease prices, usually range in the $2 million to $4 million range. About $2 million this quarter was attributable to that.

But more importantly, what we looked at was the ability or our inability to get the dead stock through the plants. There is about 7 plants in the Midwest, that every year process mortalities that are driven by stress or heat. And in the month of July and August and even through September, record heat, lots of animals went down. We attempted to process the animals, we were unable to recover the hide off the animals, so we processed the animal whole. I know it's a little gross here, but it deteriorated in the trucks, and we were unable to get it through the plants efficiently. And efficiently means, if you think of the business we are in, we are in the evaporation business, meaning removal of water, and then we're in the fat recovery business. We separate fat from the protein after we get the water out. And ultimately, you do that because fat is worth quite a bit more than protein.

In this case, fat was worth about $0.30 a pound more, or $600 a ton. The amount of extra protein we made during the quarter, or the less amount of fat we made during the quarter, hit us for about $8 million, maybe a little more, that we could identify. And so, when you're trying to bridge the analysis between Q2 and Q3, there's roughly a $0.05 to $0.06, $0.07 a share of downgrade driven by, both downgrade of the fat prices, and then the protein separation issue that happened to us. Internally, we have retro-fitted about half of the plants now with an improved technology, so we don't get into that problem next year. And ultimately, the cooler temperatures now should help us move on into fourth-quarter, and be ready to handle the same amount of raw material tonnage again. So I hope that helps.

It's very helpful. Also on your former pricing, I noticed that your inventory level by the quarter-end was a little bit higher. And given the recent price decline, in fat and the protein, will that put some pressure into your fourth-quarter margins?

JinMing, can you help us? A little more, one more time, on what your specific question is?

Yes, I look at your third quarter-ending inventory numbers, and that number was higher, comparing to second-quarter. And also, recently there is more decline in the fat and protein prices. I'm trying to ask, is whether that will put some pressure on your fourth-quarter performance.

Right. What you're asking, as Randy pointed out, from a quality standpoint in the third quarter, hide-free fatty acids were to a level we had to have some better product, blend some of that product down, so that we could market it. So our inventories were up in the third-quarter, and most of that was related to fat product. You're right, we normally run inventory levels up around 13 to 14 days of sales, and we were running closer to 18 to 19, during that period, and just because of inventory builds. We would expect that to -- those averages to drop down as the markets -- we can move that product in the market, as we get better product going forward.

Okay. Thanks.

Ken Zaslow of BMO Capital Markets.

Good morning, everyone. The $0.05 to $0.07, that doesn't include the $2 million to $4 million as well, does it?

No, well, that include a couple million for product downgrades.

So it's probably, the actual impact on a year-over-year basis is closer to $0.10, no?

No. $0.05 to $0.07.

You would have to tax-effect that down.

Okay. The second question I have is, if I was to run the model right now, what would Diamond Green Diesel actually be contributing to earnings on an annual basis right now?

You know, we spot checked it and ran it for the first 10 months, took our fats sales and said, had we diverted them down there, put on freight and then took the selling price, the rens and what we looked at there, and through the first 10 months, it would have had an annualized run-rate of about $130 million to $140 million of EBITDA. That's on a 100% basis.

And even at the current levels right now with the tallow and the input costing down, you would still get that run-rate? Because I get it higher than that.

Yes, Actually, even a little higher right now.

Because I get an EBIT of almost over $100 million for you guys alone. I will look at the calculations with you guys off-line, but it seems like it's a lot more than that on an ongoing basis to you guys.

Yes. On a spot basis, it looks very attractive right now, especially since rens have come back.

Okay. So I guess what I'm trying to get at is, look, in a year from now, if we're in the same environment where prices have come down and you actually have the Diamond Green Diesel actually working, your operating performance would actually be more than offset? This would be a significant offset that you would actually be generating some significant earnings?

Especially going on my Excel spreadsheet, it would have been very nicely accretive. (laughter)

Okay, because I have $125 million of EBIT. I just want to make sure, because I'm seeing that this model could actually work very nicely in a year from now. Okay, my next question that I have is, at what rate are you actually gaining new accounts? I mean, is there an end to the time that you'll be getting new accounts?

Well, there's two levels of new accounts. We have been fortunate enough over the last, let's say quarter and a half, to pick up about, I think 8 or 10 new rendering accounts, fairly meaningful rendering accounts to us. So those come and go. What is interesting is we are seeing it across all fronts, but primarily it's the beef and pork side that are coming back with the slaughterhouses. Well, it's clearly the non-integrated ones, but it's the non-brand names that are out there that are starting up some smaller slaughter plants again for us. On the restaurant side, we just continue to chip away at it. So I don't know that I could call it meaningful and material, in the scope of things, but it's fun to add, versus lose in that area and that's being driven by the new approach that the sales and procurement teams have taken.

Would you say for 2012, your volumes would be down probably in the 3% to 4% and partial offset by the new accounts? I mean, how do you think about it for 2012, in terms of volume?

We just recently completed a Company wide, nationwide budgeting process. The opinions ranged from poultry being down, we look at our run-rates, 2%, 3% there. We think beef will be strong first half of next year. Kind of hard to say where the animals are going to come from, but they always do the back-half of the year. So we're thinking, from a tonnage perspective, and what we're seeing from both the trade rigs or the trade publications out there, reading some of our fellow analysts' on the calls, material here, we think it could be down 2% to 3%, at the most. We're kind of neutral on it right now. In fact, we have just come through in October that the tonnage was very strong.

Right. When you say down 2% to 3%, does that include or exclude new accounts coming in?

Net of.

That make sense to me. The other thing is the bakery business, would you not expect it to be sequentially stronger in the next quarter? Is it not into the holiday season? Is that how to think about it? Or does it not get stronger?

It starts to back off, most of that stuff is already baked.

Okay.

Hard to believe, I know. (laughter)

So this current profitability is probably the right level to use going forward for a little bit?

Probably. It will tail off a little bit. Tonnage always -- as I've looked historically and we're learning that business as a team here, you may see tonnage back-off there, 10%, from seasonal. And then that tonnage kind of carries forward, into first-quarter next year and starts to pick up. February is always the low in that business before rebounding.

Have you realized your cost savings yet? In the actual bottom line yet? Have we actually seen the numbers actually come into the bottom line?

A little bit. There's been some plants or some transfer stations closed, there's been some trucks taken off the road, there is, quietly and unfortunately, been some job eliminations in the Florida, Georgia, Texas area. So yes, it's starting to trickle in. It should move pretty good pace in 2012.

So in 2012 you will actually get a bigger chunk of the incremental cost savings?

Yes. I mean, every time you close something, you got a shutdown cost, you just got stuff that's got to go away before it starts to move the ball forward.

And then my last question is, cash generation is not exactly a problem for you guys, but deployment of cash seems to be something that we're anxious to see you do something with it. Can you talk about how you're thinking about your cash deployment for the next year? And given where your stock is, dividends, CapEx, how do you think about the returns? How do you allocate it?

No, I think that's a great question. It's one that the board spent a pretty considerable amount of time discussing again. The machine here is definitely not short on generating cash, here in the near-term, and then in the medium-term, as we look forward against the markets that we participate in. I think it's pretty safe to say that we've got a pretty solid CapEx program for this year and next year, as we create, as we invest in the plants that are needed to do. So that's pretty traditional. We owe another $50 million to $60 million to finish out the Diamond Green Diesel.

You know, we've got the Term B that is still out there, that we'll consider looking at paying down a portion of that. I mean debt-repayment has always been an underlying strategy of John and mine, in the behavior of the Company. The next thing is, that as we have gotten closer and into the merger and getting into the personalities, relationships, and the views, we have identified six internal organic growth opportunities, that as they develop, we will talk more. So, we think is a pretty good use of cash for building additional plants, employing new technologies that we've developed throughout the Company. Then you get to the next level for us, which is the bolt on acquisition, that may or may not be out there. We're seeing some stuff go by. Nothing of material category today.

Most of it overpriced, and so we're just kind of sitting back and waiting on that. Typical behavior of the team here is to let the war chest build. As it builds, you can then start to look at a dividend or a share repurchase. Clearly from our perspective, and articulating for the Board's endorsement is, that M&A is something that's more of interest, coupled with some of this organic new growth that we've identified, opportunity growth. Then if that doesn't develop for us at a fast enough pace, and cash out-paces the ability to grow from that, then you get back into coupling a dividend with a share repurchase program.

Okay. When you say that other acquisitions are expensive, I would argue that you would probably not think your stock is expensive. Would you not think about buying yourself?

You said it as well as I could. That's code for, if we can't find something better to do with it, clearly buying ourselves is a pretty good value.

Thank you very much.

Roman Kuznetsov of Gates Capital.

Hi, it's actually Jeff and Roman. A couple questions. I know you talked about volume next year, but can you go through the other segments, the other input sources as well? And perhaps talk about volume for fourth-quarter and for 2012? And then, secondly, can you remind us again, the total cost synergies you expected out of Griffin? And how much are baked into the current numbers? And how much you expect to get next year? And then, lastly, on the pension, I see you contributed $10 million, so what would the pro forma under funding be today? And what would the expense be annualized going forward? And do you expect to make contributions in 2012?

Okay, Jeff, this is Randy. I'll take the first one, and give John the next two here. From a volume perspective, you know, I'll kind of repeat what I said there. I anticipate, and as we completed our budget meetings, we see volumes in the fourth-quarter pretty steady to what we've seen going on here, in the third quarter. There is always some holiday downtime, Thanksgiving and then the Christmas holiday there, where some of the big slaughter plants take a little bit of downtime. So, maybe a little bit there, but it's fairly typical to what we've seen in the past. But overall, nothing there material, relative to any big changes out there. Probably a little more red meat than poultry, as the poultry guys are actually trying to be a little more disciplined than they've been in the past. We'll see if that maintains. The bakery side, as I said, probably down 8% to 10% which is very typical seasonality.

And then yellow grease, we actually anticipate that the grease volume will probably come back in fourth-quarter as it cools down, and hopefully the thieves are unable to as easily pump out the containers, and the bio-diesel market dries up a little bit as a home for the stolen grease. So, pretty steady to what we have seen in third-quarter, a little bit of holiday downtime adjustment. Into 2012, I think first half of the year is very solid, pretty similar run-rates coming out of fourth-quarter, third- and fourth-quarter. We actually have a debate internally, that we believe that the poultry side will pick up in late Q2, early Q3. And that may offset the downturn that the markets talking about, from the beef-side for the back-half of next year. Pork remains really strong. Overall, the exports of finished meat continue to be the driver of slaughter, as driven by the currency. John, do you want to --

Yes. Jeff, your question on the pension, yes, we made the contribution to meet the requirements under the PPA on that. And, as you also read in the queue, where we've been looking at the combining of the benefit plans for the Griffin group and the Darling group. What that's going to be, we're looking at freezing our defined benefits programs on the salaried and hourly side of that. We'll keep the union side open, but what that's going to do by freezing that, going forward, we will be moving to a defined contribution, or 401K-type retirement program.

We will not be terminating those, for the time being, until interest-rate environment or funding environment is there. But in the queue, we pointed out that the minimum contribution that we would be expecting next year was around $2.2 million. And the expense portion for that, using the actuarial assumptions that we have today, we'll have to wait until we get to them at the end of the year and see where the markets are, but we'll be looking at expense also in that $2 million-range. Because of where the discount rates are, that could impact that and that could be a little higher. But that's pretty much where we are with the pension today.

On the synergy piece, Jeff, we've never formally come out and set a number there. There was limited overlap there. It is relative to the overall earnings of the Company, it's probably not material, but it's a pretty good chunk of change.

Okay. So if I understand you on the pension, it basically will be about a $1 million reduction, from this year, on the expense side?

Yes.

Okay. Thank you.

And we have a follow-up question from Ken Zaslow of BMO.

Thanks for taking the follow-up. The other question I had was, what's the tax implications and the tax reduction opportunity from the Diamond Green Diesel? I forgot to ask that.

It's -- boy, the tax impact on that, obviously that's the reason where the emphasis to get this facility up and running in 2012, because it's going beyond 2012 into 2013. That one-time tax benefit would not be available. It would be a sizable quantity, on the asset purchase-side of that, that could roll out for the two companies. Approximately, the acquisition cost in the range of 30% to 40% of that, we could benefit from that.

Would that be on a cash basis? You would actually return that cash to yourself?

That would be a deduction. The tax benefits from the joint venture roll in, we get half of those benefits as those Valero, that works into our tax calculation. And we get that credit on that in 2012.

And how long will that credit last for?

It's taken in 2012.

Okay. But that will be a reduction in the cash taxes, so you will not only show a better --?

It would not affect the effective tax rate. It will be a cash tax reduction, that's correct.

So you would actually, then receive more cash from your sale, and then you can deploy that, and actually get a return on that, that you wouldn't have expected?

That is correct.

Or it could buy back stock. Okay. I appreciate it. (laughter)

Yes.

Thank you.

And this concludes our Question and Answer session. I would like to turn the conference back over to Mr. Stuewe for any closing remarks.

Okay, thanks again, everybody, and we'll talk to you in the Q4. Have a great holiday season, and be safe. Thank you.

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