Darling Ingredients Inc (DAR) 2012 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Darling International conference call to discuss the Company's fiscal 2012 third-quarter financial results. With us today are mister Randall C Stuewe, Chairman and Chief Executive Officer of Darling International; Mr. John Muse; Executive Vice President and Chief Administrative Officer; and Mr. Colin Stevenson, 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 this call. If you do not agree to these terms, simply drop off the line.

I would now like to turn the conference over to Mrs. Melissa Gaither, Director of Investor Relations of Darling International. Please go ahead.

Thank you, Emily. Good morning. Thank you for joining us to review Darling's third-quarter 2012 earnings results.

Randy 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 the outcome. John Muse, Executive Vice President, and Chief Administrative Officer will lead the review of our financial results. Also with us today, is our newly appointed Executive Vice President and Chief Financial Officer, Colin Stevenson, who joined Darling late in the third quarter and who will be leading the review of our financial results in future quarters. 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.

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 this assessment of and are subject to a variety of risks and uncertainties beyond its control, including disturbances in world financial, credit, commodities, stock markets, and climate conditions; a decline in consumer confidence and discretionary spending; the general performance of the US and global economies; global demands for bio fuels and grain and oilseed commodities, which have exhibited volatility and can impact the cost of feed for cattle, hogs, and poultry, thus affecting the available rendering feed stocks.

Risks include 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; risks relating to possible third-party claims of intellectual property infringement; economic disruptions resulting from the European debt crisis; and continued or escalated conflict in the Middle East, 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 obligation to update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.

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

Thanks, Melissa. Good morning, everyone, thanks for joining us. It is my pleasure to welcome you to Darling International's earnings call to discuss our financial results for the Company's third quarter.

Our third quarter showed a slight improvement over our performance in second quarter. On the surface, the improvement was small, but our third-quarter had many moving parts that contributed both positively and negatively to the final outcome. Most notably, we watched the continuing saga of a record global drought play out causing extreme volatility in our finished products and competing ingredients, ultimately challenging traditional and historical pricing relationships. Let's look at some the key drivers for our business and their impact on our performance.

During the quarter, we experienced the perfect storm in regard to our pricing dynamics, starting with the drought that quickly destroyed the predicted record corn and soybean crops. Historically, high corn markets result in high fat and grease prices, but to the contrary, we experienced lower selling prices due to several coinciding market disruptions. The increased supply of competing fats, particularly corn oil from the ethanol industry, entered the market in addition to sluggish exports and slowing biofuel demand. Adding to the mix, an economically challenged animal production industry anticipating higher input costs, which forced feed formulators to select alternatives to reduce fat inclusion rates in animal diets well beyond the typical summer reduction. Overall, we saw breakdown of historical pricing relationships between corn and rendered fats and greases.

On the finished product protein front, overall prices improved year over year, but lagged against the run-up in soybean meal until late in the quarter. Protein prices improved, but their respective value-added premiums compressed as aquaculture volumes never really materialized and pet food demand remains slow. On the meat and bone meal side, given the strong slaughter, we saw a supply push into an already saturated market that still has depressed demand from the poultry sector and slow exports. For Darling, California markets remain depressed without the Indonesian export markets.

From a volume perspective, we operated at a modestly improved level year over year, and substantially higher than second quarter due to strong beef and hog slaughters and the addition of several new poultry suppliers. This year, summer temperatures remained consistently hot throughout the season, which produced the normal dead-stock volume, rather than peak volumes when temperatures are more volatile. These hot summer temperatures created the normal quality issues on raw material, resulting in some downgrade animal fats produced.

Used cooking oil collection volumes remained flat compared to the second quarter of 2012, with restaurant traffic still showing signs of economic pressure. Our bakery byproducts business performed well, with higher selling prices, consistent with the corn market and volumes returning to more historical levels.

Now before we discuss Diamond Green Diesel, I would like to address the effects of Hurricane Sandy on our Newark, New Jersey facility, which many of you recently visited during our September investor day. We are grateful that none of our employees were seriously harmed by the storm, and although physical damage to the facility was not significant, the loss of power and damage to the region in general has impacted our ability to collect and process raw material at the plant.

We were able to mitigate these damages by diverting raw material to our other processing facilities. In addition, we are protected by a comprehensive flood damage and business interruption insurance policy until we are back up and running. At this point, we don't believe that the impact of the hurricane will have a material impact on our operation. I should also note that none of our other processing facilities were directly impacted by Hurricane Sandy.

Lastly, our Diamond Green Diesel joint venture with Valero is nearing final phases of construction and should begin commissioning in phases starting in early January. All phases of the project are in their final stages, and at this time, we see very little risk to our budget. From a timing perspective, we did lose several weeks to Hurricane Isaac and the result and effects on labor availability. From an economics perspective, Diamond Green Diesel continues to look favorable in light of even a declining RIN market. One must keep in mind that RINs ultimately affect the ability of our industry to supply the mandate, and once the mandate is fulfilled, the value of the RINs decline.

For the biomass-based diesel market this year, fulfillment of the mandate was accomplished in late third quarter. While this has a slowing effect on the profitability of Diamond Green Diesel, it in no way calls into question our investment thesis. Let's put this in perspective. If Diamond Green Diesel had been operating at planned capacity in the third quarter, and assuming feed stock equivalent to our average selling price of fat delivered Norco, Louisiana, and a selling price for ultra-low sulfur diesel at the Gulf, minus $0.10 a gallon, plus the full RIN value, our EPS would have been approximately $0.08 to $0.09 per share higher during the quarter. While clearly fourth quarter could be weaker for Diamond Green Diesel on a pro forma basis, given the same assumption basis, the annual EBITDA for the facility still makes it a highly attractive investment.

I would now like to turn the call over to John Muse for the financial review, and ultimately welcome Colin Stevenson to our team. As our press release announced this summer, Colin joined us in September as CFO and Executive Vice President after a successful career with Pricewaterhouse. As Melissa mentioned, Colin will be presenting the financial reviews on future earnings calls. Once John concludes, I would like to provide a few closing remarks, and then we will move into Q&A where we will address all your questions.

John?

Thank you, Randy.

For the 2012 third-quarter ended September 29, the Company reported net sales of $452.7 million compared to $455.9 million in the year-ago period. The $3.2 million decrease in net sales is primarily attributable to lower finished product selling prices in the rendering segment led by changes of supply and demand in both domestic and export markets for commodity fats.

Net income for the 2012 third quarter decreased to $37.2 million, or $0.31 per share, on a fully diluted basis as compared to net income of $41.1 million, or $0.35 per share, for the 2011 comparable period. As noted in our press release, the $3.9 million decrease in net income for the third quarter resulted from lower finished product selling prices that were offset by substantially improved raw material volumes. Compared to the 2012 second quarter, net income was sequentially flat as finished product prices remained at lower levels.

In addition to the decrease in pricing, our aggregate expenses for SG&A and depreciation increased in the 2012 third quarter compared to our prior quarter average expenses. The SG&A increase reflects additional account manager staffing, ERP expense, and change in incentive compensation allocation. The increase in depreciation expense was primarily due to general increases in capital expenditures. Interest expense was $5.9 million during the quarter compared to $7.4 million for last year's third quarter, a decrease of $1.5 million. This is primarily due to a decrease in our debt outstanding as a result of our prior-year and current-year pay offs of the Company's current debt facility.

Other income was $0.2 million in the 2012 third quarter compared to $0.8 million of expense in the year ago. The increase is primarily due to insurance recovery proceeds on prior-year fire losses received in the 2012 third quarter compared to no such proceeds in the year-ago period. Operating income decreased by $8.8 million in the third-quarter 2012 compared to the third quarter of '11. The decrease resulted primarily from lower finished product prices, net of reduced raw material costs, which were partially offset by increased raw material volumes and lower energy costs. The Company recorded income tax expense of $22.1 million for the third quarter compared to $25 million recorded in the year-ago period, representing a decrease of $2.9 million. And this was due to pretax -- lowered pretax earnings in the third quarter.

At the segment level, renderings generated net sales of $368 million for the third quarter, an $8.2 million decrease compared to the $376.3 million in the 2011 third quarter. Bakery byproduct sales contributed $84.6 million to the third quarter compared to $79.5 million in the year-ago period, primarily due to higher prices in the commodity markets and our improved volumes.

Relative to the Company's investment in our Diamond Green Diesel joint venture with Valero, on the balance sheet, we reported ann investment of $54.4 million at September 29, 2012, as compared to $21.7 million on December 31, 2011. And the statement of operations reports a net loss of $833,000 for the third quarter. Again, this loss is largely due to non-capitalizable expenses as we proceed through the construction phase.

For the nine months ended September 29, the Company reported net sales of $1.27 billion, as compared to $1.36 billion for the 2011 comparable period. The $89.9 million decrease of sales is primarily attributable to lower product pricing, followed by lower raw material volumes, mainly realized in the first six months of the year. Our rendering sales generated $1.06 billion for the 12 -- nine-month period in 2012, as compared to $1.14 billion in the 2011 period. The $78 million decrease in rendering sales was primarily due to lower finished product prices and a decrease in biofuel demand for yellow grease.

Bakery segment net sales declined to $214.6 million for the 2012 nine-month period, from $225.8 million in the year-ago period, due to lower finished product prices for bakery byproducts as a result of lower corn prices in the first half of the year.

For the nine months ended September 29, 2012, the Company reported net income of $102 million, or $0.86 per share, as compared to $139.9 million, or $1.22 per share for the 2011 period. The $37.9 million decrease resulted primarily from lower finished product selling prices and decreased raw material volumes.

Now moving onto the balance sheet, on September 29, 2012, the Company had working capital of $139.4 million, and our working capital ratio was 2.03 to 1, compared to working capital of $92.4 million and a working capital ratio of 1.73 to 1 on December 31, 2011. At September, 29, the Company had unrestricted cash of $87.7 million and funds available under our revolving credit facility of $384.6 million, compared to unrestricted cash of $38.9 million and funds available on the revolver of $391 million at the December 31, 2011.

And lastly, our capital expenditures of $84.2 million were made during the first nine months of 2012, compared to $44 million in the comparable period of 2011. The significant increase of $40.2 million in CapEx was primarily due to planned capital expenditures, included associated costs with the Company's initiation of our new ERP system, the implementation of which is expected to be phased in over the next two-and-a-half years.

I will now turn the call back over to Randy.

Thanks, John.

In summary, we were able to deliver solid results, despite the challenges of an unusual and volatile commodity market. Our operations team did a great job this summer and continues to execute well. Our plants are in great shape, and we have never been prouder of their appearance. We are positioned well to navigate the fourth quarter. The Darling and Valero teams have worked hard over the last year as we near initial commissioning of Diamond Green Diesel. On behalf of senior management, we would like to thank our investors and shareholders for their support, but we also want to say thanks to all of the folks at our Newark facility who have worked so hard over the last 10 days to bring that facility back online.

With that, let us go ahead, Emily, and open it up to Q&A.

Thank you. We will now begin the question-and-answer session. (Operator Instructions ) And our first question will come from Farha Aslam of Stephens. Please go ahead.

First question regards your volumes and your base business. With the increase in grain prices, have you seen any material production cuts in either poultry, beef, or pork?

On the surface, no. As we referenced in the call here, there is a blend of volume increases here. I think from a slaughter perspective, we have seen very, very strong and our packer accounts continue, what I think you guys have referred to as a liquidation of the herd here. Strong beef, strong pork, and then the poultry side just continues to operate very well. And we've been fortunate enough to add several new large accounts and locations there, and that's got our volume increased.

But as far as anything negative out there relative to volume declines, we are not seeing it yet. I think, as I said, the grain prices probably will challenge the production on the front half of 2013. Obviously, from a meat-production standpoint, poultry is positioned very well to come back when that cycle does turn as grain prices possibly could decline.

So I think, overall, it's a solid quarter. It is set up well for fourth quarter, and we have not seen any cutbacks. In fact, as we have gone into fourth quarter here, the volumes have remained where we thought they would be.

Okay. And then on to Diamond Green Diesel, can you sell that product into the diesel market or the B100 market? Or can you choose whichever is more profitable for you?

I'm not sure I would differentiate between the two of them. What I would tell you is, is the structure and the thesis of that investment from Day One was to align with the petroleum refiners, such that we have the lowest cost access to distribution in the United States. We are on the pipelines down in St. Charles; therefore, given that, the majority, if not all of that product will move out in the most favorable way, which would be pipeline, making the customers of the product most likely the larger oil companies. So it will move out as ULSD in some blend, typically R5, R10 blends, as we call it. We do have the ability to move out R100 in specific pipelines and lead destination blending available.

But as we look at the Business, and I think it's a good point, Farha, as you compare it, we look at the Business build up from an economic basis as ULSD minus a small distribution premium, plus the RIN times 1.7. We do compare that against the B100 market, but that B100 market is predominantly a soybean-oil-driven business. There is some fats and greases in there, but it's a very different product in a very different distribution scenario.

Our next question is from John Quealy of Canaccord Genuity. Please go ahead.

Just two questions. First, Randy I take from your comments on the Jersey facility and Sandy, we should not see any material impact next quarter for that one up on the consolidated numbers, is that the correct impression?

That would be what we would tell you. We are -- it has been a true challenge out there. I did have the honor of going out there, I guess you would call it an honor, to be with the employees. We are still down today, predominantly, the facility did go underwater. The office was a total loss; the plant was in very good shape with minor damage, but we did lose some major electrical systems, predominantly transformers that had to be sent out. Those start to arrive in today to be reinstalled. The biggest challenge we are having right now is the plant opportunistically sets adjacent to the Passaic Valley Sewer Plant, the fifth largest in the United States, and it is still running on limited capacity there today as it catches up on treating effluent.

So the bad news is for us, even if the electrical systems were ready to start today, which we are intending to start bumping motors tonight and tomorrow, we still cannot discharge in any shape. So from an operations perspective, we brought in generation. We've been transloading our fat and bone. We've been running routes since last Friday. We've been running routes successfully for grease and fat and bone, transloading material to other facilities.

So from an operations perspective, very minor impact. From a financial perspective, we are well insured with flood insurance and business interruption insurance and so with very limited deductibles on a material basis. So at the end of the day, it should have, if we have done it properly, it won't have impact on the financials of the fourth quarter in any material way.

And in terms of volumes in truck rolls, I imagine they got pulled back a little bit, but again, just not a big deal for you folks, given the scale that you have now.

Right. It's just not material in the scope of the things. It was disrupted for a few days there, but as you know in the Northeast there, if you were impacted, it's been a very major deal. If you were in Midtown and some the areas, it was like nothing happened.

Perfect. And then my last question on the supply side for Diamond Green Diesel, as we get this thing up and running in the Q1 period, remind us again the dynamics on corn oil. I know that has some olio chemical potentials, but I know traditional bio-diesel folks may have a lot of trouble processing corn oil on the front end. If you could just sensitize again to what you folks are doing on the supply side on Diamond Green. Thanks.

Yes, okay. First off, a couple of things here. One, you've got to go back to the configuration of the design of the facility. As we have talked about with Diamond Green Diesel, we have got a very significant tank farm that allows for segregation of specific fats and greases coming in. Number two, we built the most robust pre-treatment facility of its kind in the world, meaning we can refine out the impurities that are necessary before we feed. The third component being the ecofining unit. So those three components are really critical to making a good product.

From a supply standpoint, the alignment with Valero has many, many positives for us. Number one is, obviously, their operating expertise, but number two, their ability to originate corn oil from their number of ethanol plants that they have. The blend right now that we are looking at is a blend of waste, fats, and greases, predominantly used cooking oil from the Darling system located between the Appalachians and the Rockies, plus corn oil out of the Midwest there.

The economics of corn oil are favorable. I say that tongue in cheek, because that has what pressured used cooking oil because it has so limited uses. It's a difficult product to run in classic bio-diesel plants because of the waxes. As it gets cold, the product clouds over again. But from our perspective, it goes through our facility that does molecularly change the product, at least at the testing level that we performed at Texas A&M on a very, very easy basis, relatively speaking to other fats and greases. So corn oil is something that will be part of the Diamond Green Diesel mix.

As we built the thesis, if you will, I keep using that word, the business model, the assumptions for Diamond Green Diesel four years ago, it was probably a little tiny sub-point. When we said, what's one of the risks to the facility was the availability of corn oil. Corn oil is real now. It's probably in the total of about 1 billion pounds, maybe creeping on up to 1.5 billion pounds as some of these dry mills go to fine grind. That's all very much an opportunity for Diamond Green Diesel.

As we talked about on the last call, we were successful in acquiring a small facility in Iowa located on the river in Muscatine, Iowa. Part of the investment rationale for acquiring the Muscatine Iowa facility was the 10,000 or 12,000 tons of storage that is there right in the middle of the ethanol production area to accumulate ethanol to feed on down to Diamond Green Diesel. At the end of the day, it will be used cooking oil. It will be corn oil, and then we will fill opportunistically. The next fat of any alignment that will go to it will be poultry fat. And then from there, as we learn to run the product, we will fit in the high-acid waste animal fats out of the Midwest into there and go from there.

Your next question comes from Dan Mannes of Avondale. Please go ahead.

So first question. On fat pricing, obviously, you laid out what has been going on the last couple months. Obviously the trends don't appear to be differing yet, it seems may be getting worse in the fourth quarter. I guess my question to you is, you been in this business a while, have the feed formulators ever acted this way? We are sitting here with a $0.10 spread at least between the feed value of fats and where they're trading. What's holding them up from starting to re-include, especially now that the weather has cooled off some?

It's a couple of things, and I think as I tried to succinctly, or not so succinctly, say in my opening comments, we have seen our historical and traditional pricing relationships that we have preached over the last 10 years that John and I have been on the calls with you guys, thrown out the door. And really, if you had to look at it, a couple of things I think contributed to that. I'm not sure I can give you the precise answer to it, but the one that would has happened is we've seen fats and greases move up and down very volatility here over the last two or three or four years. That is number one.

Number two, enzymes have come into diets, allowing the dip feeding of different feed stuffs in order to capture energy out of those ingredients. So, I would probably put enzymes up there number one. And then number two was the volatility.

Number three, there is no push to get animals to market today, and so, as we've always referred to fats in the diet here, fats were what we called in a McDonald's vocabulary, a super-sized component of the ration. So as they slow and make smaller birds; and they don't want them to market as quick; you take the fat out, the enzymes allow a longer, more consistent conversion.

And then you put in the final piece here, Dan, that I would say is you put in the corn oil component. And given its very, very, limited market acceptance, it has put a lot of pressure on it. And then in the summer here, we have seen the summer heat and the typical slowdown in diets.

All that says is when it gets cool, it should come back. If you look historically at where fats and price should be, we should be in that mid- 40s to high $0.40 on a 3 to 3.5 basis on a caloric conversion to corn. Going home, we are in the mid- 30s right now. There is some pressure here that we have not seen, but at the end of the day, it bodes well for having the Diamond Green Diesel finishing alternative.

Absolutely. That makes a lot of sense. So real quick, just segueing over to Diamond Green Diesel, first of all, can you walk through a little bit of the commissioning? I think you said you had hoped to start commissioning in the January timeframe. Any thoughts maybe on the timeframe for -- because I assume you will run refined products like soy bean oil first. And then as it ramps, you will start introducing some of the other stuff. Can you just maybe walk us through the current timeline there?

Yes, the current timeline, and of course always, from a Public Company perspective, give a little bit of an out if something changes here, but what we have presented to our Board is that the plant will come on in three phases. The initial commissioning will be the tank farm and the unloading. We expect and anticipate to start shipping raw material down there in December, to start unloading and getting ii an in position. We have a really large tank farm down there capable of holding around 100 million pounds.

Once that is in line, about mid-January, late to mid to late January, we're going to bring up the pre-treatment facility and start to bring it online. And then towards March, late February, March, we will start commissioning the ecofining unit and anticipate making product in some form. The facility has the ability to be turned down a little bit, but not a lot, so it's really it's either on or off in a sense. And it will come online here towards the end of March would be the target line right now.

We don't see anything there as far as equipment holding us up. We are in that final instrumentation and electrical phase, but overall, that's how it's going to come on. So, as we have said in our prior calls, first quarter is a commissioning and startup with the belief that we will be in some type of production of scale in the second quarter.

Got it. An then lastly, just in terms of the capital spend, it looked like the spend was actually fairly modest in the third quarter. How should that ramp, and is a big chunk of what's left just the working capital build at Diamond Green?

Dan, it is John. We would anticipate that we will be up probably another $20 million in fourth quarter and investment, maybe $25 million. And than we will add another $20 million or so in the first quarter to be in that $100 million to $105 million range.

And that's inclusive of that working capital, because it sounds that will be a big piece?

That's correct. From our investment standpoint, that's correct. And that is consistent with what we have told you guys.

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

You mentioned that you are positioned to navigate the difficult environment for the fourth quarter, what you mean by that?

Volumes are good for us. The formulas, the plants are in good shape. Ken, in the general comment, it was meant from an operational perspective that we are positioned well to navigate, at the business model is intact. I know that the fat prices are under some pressure in some areas, but the protein prices are rebounding nicely here, especially in the feed grade, pet grade, and feather meal areas for the poultry. So overall, it's in pretty good shape.

So do you think that sequentially you will be higher on an operating profit basis?

I'm not going to answer that, Ken.

The second question I have is in terms of you talked about what the issues were between the relationship. When you think the relationship between commodities and rendering will actually be restored? How do you think about it where we are going to be back to the typical historical relationship? Is it going to take a quarter? And what are the key drivers that you're actually waiting to see? Is it Indonesia? How do we look at it?

Well, I want to break it down to the fats and the proteins. The proteins are pretty easy to discuss. We have already seen the proteins on the poultry side react and readjust to their normal historical relationships. We are moving into the pet food pricing time of the year. It's looking like that has some positive growth opportunities and margin opportunities.

The meat and bone meal side, as of last night, we are still, as we said in second quarter on the way the third quarter here, waiting for Indonesia to try to get everything in order here. People have to keep in mind that corn delivered in the US is still $8 a bushel in the feed lots and most feeding areas in the country. That will force use of other proteins. And if it's $8 here, it is a heck of a lot more around the world.

So Indonesia has an incredible backlog of material there. We should see that start to be unloaded here in fourth quarter, and allow meat and bone meal to come back more to what I would call its historical relationship in the last five years. Meat and bone meal has pressured anywhere from 50 to 100 under soybean meal, and we anticipate that it will come back in more of a historical relationship.

The fat side is one that probably has a little more concern for us. Traditionally, you see in commodity markets over-reaction, whether it's on the upside or downside, before normalcy returns. There's just a lot of supply being put on the market right now with the beef slaughter, the hog slaughter; the chicken side is running good. And then the limited amount of exports that continue to be very sluggish in this country.

So there's just a backlog of rendered fats that have traditionally been exported competing with corn oil for share of market here in the animal production industry. The animal production industry, once they -- the formulators relook at fats, we will probably start to put them back in here in pretty good style here in fourth quarter. They are just too attractive not to.

So we should get a little bit of a bounce here. From a trading perspective, it's giving us an opportunity to fill up our tank spaces in anticipation of bringing up Diamond Green Diesel. So I think the fact that we are bringing on a new entrant called Diamond Green Diesel for 10% of the US market here, and it is now a reality within 60 to 90 days, our storage, and the fact that fats are just too cheap, we should see them rebound here nicely.

My last question is -- actually I had two questions. One is the insurance settlement, I'm assuming, was nominal in the quarter?

It was in the $0.5 million range, that's correct.

And you talked about the cattle side, but the poultry side, still production going pretty well still? No pullback, right?

We are not seeing a pullback yet at this time. We are still seeing everybody run there. I think 2013 is going to be an interesting year to comment a little bit out in front there. Our feeling is we may see a little bit of pullback in first and second quarter, and then there is going to need to be a replenishment as the grain markets are inverted here a little bit and then they will put them back on feed. I think from a fact set, you are looking at a historical low egg sets. At some point in time, that's got to play out here, and that will probably play out in first quarter.

Our next question is from JinMing Liu of Ardour Capital. Please go ahead.

First question is about Diamond Green Diesel. Can you share with us what -- that are you projecting for the operating cost for that facility? Big salaries, insurance, all those type of things altogether.

JinMing, we have been projecting and telling indications that we are in that $0.38-a-gallon range for operating costs for that facility.

Okay. And then I speak to the commodity supply. There is discussion that potentially EPA may waive the RF standard for next year because of what happened to the corn crop this year. If that happens, what impact do you think will have on your revenue?

Well, first off, one has to ask do believe that they're going to wave RFS-2? No, given the conclusion of the election, for sure. The reality is if RFS was waived or backed down a little bit, it would truly have an impact on corn, so that the weight would come in the way with corn going down. People have to keep in mind that biomass-based diesel does not have a waiver provision to it. And so was it 1 billion gallons this year. It will be 1.28 billion gallons next year in '13, and we are being told that that number could go on up to 1.6 billion gallons in '14 if not higher.

There is some discussion right now in Washington since the dream of cellulosic fuels is not developing, that some of that volume may be put over into the advanced and the biomass-based diesel. So long answer is that we don't see much risk of the RFS or any waiver.

You start to look forward next year at grain production, the S&Ds of whether it is corn or soy bean acreage, continue to require full production. And you can plug all kinds of yields from historicals to trend lines, and you've got to have big production next year just to fulfill both the feed demand and the fuel demand.

Roman Kuznetsov of Gates Capital Management. Please go ahead.

It's Jeff. I'm wondering, I know you're extremely focused on getting Diamond Green Diesel up and running. But I'm wondering, assuming things go well there, what is the earliest point at which you would consider taking on another deal?

Well first off, I think while it sounds like we're focused on Diamond Green Diesel to a degree, that is a passive operating investment for us, as the Valero people run it. Ultimately, we are focused on making sure it comes up on time and on budget and does what we say. But at the end of the day, it's not requiring much management resource from within the Company today. So we are ready to go there, Jeff. Ultimately, we are looking every day to grow.

Also along the lines of capital allocation, what will the CapEx spend at the parent Company be in '12. And looking out to '13 directionally, where is that going? And secondly, when might the Board consider again initiating a dividend?

I will address the CapEx. As we said, we're at the $80 million level at nine months. We had some identified CapEx projects. We had, as we reported, $9 million of that is the capitalized portion of our ERP project. We are going to be in that $100 million range this year, and we would be in that $85 million to $100 million range potentially next year as we go forward.

Where is that capital going, by the way, besides ERP?

Back into the facilities through upgrades and for expansion capability to run volume.

It's about a 70%-30% split right now, Jeff, with what was going back in from a maintenance and environmental perspective. And about 30% of that CapEx has gone into efficiency and expansion for in different geographies as we try to grow our footprint.

And the other component is in our fleet, we are making a concerted effort to take a little bit of a shrink down to average lifespan on our fleet a little bit, so that is the other component of it.

And to address your second question on capital allocation, after we pay for maintenance and upgrades, as you know before we release a Q, the Board gets together. And the topic of dividend and buyback continues to be a deep discussion point for us. The cash build on the balance sheet continues to grow. If you -- even looking out and saying if you look at the Chicago Board of Trade as a base in pricing for corn, soybean meal, soybean oil next year, it's not hard to come up with a fairly optimistic look at the earnings stream again underneath this business and the cash build.

The reality of that discussion is and the conservative nature of both myself, John, and the Board is we're going to take a very low-key approach here, make sure that Diamond Green Diesel comes up here in first quarter, make sure that there aren't any big misses on capital needs there. And so by the time we get closer and see things work and see what the year is going to turn out, that's when that discussion will turn to some type of either keep it in the war chest because we found something to grow with, or consider returning a portion of it either in the form of buyback or dividend.

Thank you, and John, I just want to wish you all the best in the next chapter.

Okay. Thank you.

He's got two years left, Jeff. Don't be wishing him off too soon.

I know, but he's planning for it now.

Our next question comes from William Bremer of Maxim Group. Please go ahead.

Many of my questions have been answered, specifically, on the fat side. Randy you gave us some good color on the way the RIN market trades, given the fact that the mandate has been fulfilled. How do you look about how those RINs are going to trade, say early in '13?

Well, first off, I think it's fairly safe to say that the biomass space diesel RIN market has come through a treacherous and tumultuous last year, year-and-a-half. And it's a very immature market with a lot of people getting their hands burned with fraud. Ultimately, that speaks well for what I am going to call platinum producers here, which we would be with Valero, knowing that the product is both being made and certified. The RIN market, as I said, it is an immature market. As you've seen in the ethanol business when the mandate is fulfilled and there's no blending advantage, those RINs can go down very rapidly. My belief here a little bit is that it was overdone as people got their fulfillment. There's a little bit of bedding going on as to what next year will bring.

But ultimately, you have to go back and say, what are the wet gallons that have to be produced next year, and what technology and what feed stocks are available to do it? You have got to rely on the fact that probably 65% to 75% of that mandate is going to be fulfilled by soybean oil. And those economics today look like that the bio -- classic bio-diesel industry, and when I say classic, integrated bio-diesel industry, that is Cargill, Bunge, ADM, Louis Dreyfus, the integrated soybean crushers.

Those guys are not running those plants. They're running at somewhere between $0.80 and $1.00 per gallon red right now. And so you should see RINs come back, and ultimately, you've either got to bring RINs back, bring the price of ultra-low sulfur diesel up, which we won't. We don't have any control on that. Or bring down the value of soybean oil to make it attractive to make it, which the Board of Trade would tell you, that is not going to happen. So, when you come into January, I would suspect that you will see some type of rebound of the RIN values.

Now the only question that becomes relevant is how quickly does the industry fulfil the mandate, the wet mandate again next year? Obviously, there's always been a lot of excess capacity out there, but at the end of the day, that excess capacity is soybean oil. And at the end of the day, it's got to be at a level where it makes economic sense to happen. So, at the end of the day, if you look back at Q1, Q2, Q3, pro-forma earnings, and we've always looked back and back-casted this thing, and said how would we have done? It is still a very favorable business, and we anticipate that the RIN or the base economic of the Business will react accordingly in Q1, which I wish we would be up in, in order to maximize.

Our next question comes from Tyson Bauer of KC Capital. Please go ahead.

Great job, gentlemen. A question, it was last year's call you gave us a product degradation effect on the EPS, which was $0.07. Do have that comparable adverse impact this quarter also?

Back the answer is as I mentioned in our script early on, weather changes are what effect the number of dead animals or mortalities out there. Basically, it turned hot in about last February and never changed. So the number of mortalities was very traditional, and we did not get slugged with big events this year. So once you don't get hit with big events, you are able to get it through the plant.

Make no mistake, we did have a few issues out there, but we were able to blend off the material to minimize the impact. So last year, we talked in third quarter of making capital investments in the way that our cookers and our products are processed. We were able to complete that in the majority of the plants. There is a couple of exceptions out there yet that will completed here this fall or in the winter in preparations of next year. But the impact was very minimal at this time.

Does that imply it will eliminate for the most part? As we go forward, the seasonal heat effect in Q3 and getting a bump back up in Q4?

Well, in my conversations with God, he's told me I don't have control over the weather.

You mean mother nature. The European Regulatory Board came out and said they want to shift a percentage more towards waste streams for their biofuel programs and away from food crops, which has made headlines here but no action. There it seems they have taken action. Will that help reopen the export market as we go into 2013 along with the prospects of palm oil increasing in price?

Yes. You have seen and you brought up a couple really good points there. Number one, what weighed on the fats markets globally has been the production cycle of palm oil, and I probably should have mentioned that earlier. Traditionally, you'll see that cycle, and the stocks will come down there.

Number two, you talked about Europe and the biofuel. Clearly there is a move to find a feed stock that doesn't harm the environment, both from an environmental perspective and a land-use perspective. Waste fats and greases, predominantly used cooking oil in our case, is that feed stock that is going to get favorable treatment if that legislation moves forward. Conversely, you always have to remember is that the Europeans both lead and follow. In the sense here, our belief is that they will move to some type of favorable nation perspective to used cooking oil, which will help our Business here.

And so long-term we believe -- or long-term probably next year, we will start to see a resurgence of used cooking oil exports. There is lots of discussion of how you keep from cheating there and sneaking in animal fats. They clearly don't want animal fats in there. So if that was the case, the perfect storm for us would be to export used cooking oil out of our East Coast facilities in Tampa and Newark, and then ultimately the feed stock that would be replaced out of here then would then be our higher acid animal fats that would end up down at Diamond Green Diesel. So overall, I think that there is probably more upside to a European modification than is downside right now. Because downside is, we are basically exporting zero.

Okay. You talked about Phase 1 for DDD starting up in early January. Have you been able to calculate what kind of tax benefits on the cost of completion you will get with what you've gotten done so far this year?

As Randy said, the first point, the asset has to be being used. They are being completed, but they need to be put into service. Which by the end of the year, that will be the rail unloading facility and the tanks and the mix tanks. We will not get any benefit from the pre-treatment or the ecofining unit. So that, and from a dollar standpoint, that is by far the lowest investment component of the facility.

We are working with Valero on that. They are handling the tax side of that, which we do get 50% of the benefit of that. We are not at this point in time ready to say what that number is going to be, because it's going to be a timing thing of when that product starts moving in there in December, if we are able to utilize all of the tanks as a tax benefit.

And given the result of the election, I guess now there is a glimmer of possibility that we could see a return on the tax credit for the bio-diesel production. In a nutshell, is that overall favorable for you? You're such the low-cost provider that it could actually work in your favor not to have it and take out some of the small guys.

My preference, this is Randy, my preference would be to get at tax extenders package, especially on the depreciation side and not give $1 a gallon to the other producers. It just creates a lot of disruption in the marketplace. So, our preference would be the mandates work just fine.

And the last question, are you seeing additional pressure on the West Coast as we've seen an increase in the dairy herd liquidation, more so than we saw on the beef side, which primarily was last year? Is that adding to your woes on the West Coast?

Not really, Tyson. I think, I don't have the exact number. I want to say one year ago, there were 20, 28 dairy bankruptcies out there. This year, I think the number is more than double. So there has been a little bit of material moving to the market, but nothing there that I would say is material to the earnings on the West Coast. Volumes have been good, but it's all been good in a lot of different areas out there for us, as that economy appears to be returning to a more normal status.

Our next question is from Shawn Severson of JMP Securities. Please go ahead.

I just wanted to apologize if you touched on this a bit, but going back to inedible corn oil and what's going on, the dynamics of that market. The ethanol industry is moving aggressively, and everybody I talk with that has an additive to the plant and tends to, because it's a high ROI investment for them. And so as we look ahead and the opportunity for a lot of capacity coming on in edible corn oil, I'm just trying to understand how that affects now your business, both at the renewable diesel level and in the feed stock level, as that comes on and the ability to hedge internally. I'm just trying to understand what that means if we have a lot of inedible corn oil and the prices are cheap relative to other feed stock.

Well first off, the impact, whether as they start to put in the start or the majority of the plants already have made, as you've referenced, the investment into the centrifugal separation technology The yields on that are four-tenths to six-tenths per pound per bushel. As you start to go to fine grind and enzymes, you're going to creep that on up eight-tenths to one pound a bushel. At the end of the day, what does it mean in the total when you take the daily grind and all that and who can do what?

Potentially you could have come on the market here somewhere around 1.5 billion, maybe up to 2 billion pounds of corn oil over the next two or three years. I would say they are about halfway there right now, close to about 1 billion pounds. That's about 10% of the marketplace for used fats and greases. The limited use of that product, both domestically for feed and biofuel has been what has put pressure on this market.

So at the end of the day, Diamond Green Diesel will be a consumer of 1 billion to 1.25 billion pounds of fats. If corn oil is priced properly, it will move there. If it's not, it won't. So at the end of the day, I think the fact that we are bringing a new consumer of roughly 10% to offset that supply push will be positive to both our core business and the profitability of Diamond Green Diesel.

So you would expect that the fats feed stock would be competitively priced with inedible corn oil, assuming that -- I have heard the same capacity addition numbers, getting 2 billion or so. But if we are there, you would expect there to be some price parity, because of the industry dynamics between the fats and inedible corn oil?

Yes and no. The corn oil still has some challenges. There is multiple interpretations there in that it does not have grass status for animal feed yet. There is the argument if you're an ethanol producer is that DDG's have grass status, therefore corn oil should. But they've also used enzymes to transform it and recover that product, which may or may not have approval yet.

So, part of corn oil's discounting and driving of price today is it is looking for a home. And so at the end of the day, it should just be another waste fats and grease that competes for either a calorie or a BTU, and it has got just some limited market uses right now.

And biofuels, because of the waxes, it has got some challenges. People are putting it in in small percentages. I'm sure as in any market over time, people figure out how to use a little more. But at the end of the day, if you think about it, if we called the waste fats and greases 9 billion pounds 9.5 billion pounds this year, add another 1 billion, 1.5 billion, we are up to 11 billion pounds of product that will have the chance to go onto biofuels. Ultimately for us, if your scenario is correct with the additional supply, it makes for consideration of expansion of Diamond Green Diesel a true opportunity to consider.

We have reached our allotted time for questions. I would like to turn the conference back over to Mr. Stuewe for any closing remarks.

I want to thank everybody, appreciate all the questions today. I look forward to talking to you with our 10-K in, I believe, February. Best of luck. Have a great holiday season and be safe.

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