Darling Ingredients Inc (DAR) 2012 Q4 法說會逐字稿

Good morning everyone, and welcome to the Darling International conference call to discuss the Company's fiscal fourth quarter and full year 2012 financial results. With us today are Mr. Randall Stuewe, Chairman and Chief Executive Officer of Darling International,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 call over to Ms. Melissa Gaither, Director of Investor Relations for Darling International. Please go ahead.

Thank you Sue. Good morning everyone, thank you for joining us to review Darling's fourth quarter and fiscal 2012 earnings results. Randy Stuewe, our Chairman and CEO will begin today's call, with an overview of our fourth quarter and full year financial performance, and discuss some of the trends that have impacted our results. Colin Stevenson, Executive Vice President and Chief Colin Stevenson, Executive Vice President and Chief Financial Officer, 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 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, momentum, continue, and other words referring to events to occur in the future.

These statements reflect Darling's current view of future events, based on its assessment of, and are subject to a variety of risks and uncertainties beyond its control, including determinances of 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 biofuel and grain and oil fuel commodities, which have exhibited volatility, and can impact the cost of food for cattle, hogs and poultry, thus affecting available rendering feedstocks.

Risks including 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 operation viability with the plant on a timely basis, or at all.

Risks relating to possible third-party claims of intellectual property infringement. Risks associated with the development of competitive sources for alternative renewable diesel or comparable fuels. Challenges associated with the Company's ongoing enterprise resource planning project, economic disruptions resulting from the European debt crisis, and continued or escalated conflict in the Middle East. Each of which would cause actual results to differ materially from those projected in those 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 to turn the call over to Randy.

Thanks, Melissa. Good morning everyone, and thanks for joining us. It is my pleasure to welcome you to the Darling International earnings call to discuss our financial results for our Company's fourth quarter and the fiscal year that just ended.

We closed the books on another strong year for the Company, the second best in our 130 year history. Overall both operating segments delivered strong results, although earnings performance when compared to 2011 was marginally lower. This was largely driven by lower finished product prices in our non-formula rendering segment, and by slightly lower volumes in our bakery segment. Let's look at our key market drivers and the coinciding forces that impacted our results.

Throughout the year and into the fourth quarter finished product markets remained highly volatile and inconsistent with historical relationships, as we saw the global feed grains and oil seed markets touch record highs. These traditional trading relationships came under pressure due to trade restrictions in Indonesia on meat and bonemeal and for the fats and greases, a growing supply of ethanol generated inedible corn oil, rising stocks of palm oil, fulfillment of the RFS-2 mandate for biomass base diesel, and overall sluggish exports, predominantly to Europe.

Taking a look at the fourth quarter in particular sales were significantly impacted by more than a 12% drop in fat prices versus the third quarter. The drop was partially offset by a slight increase in pet food grade poultry meal, and an improvement in California protein prices very late in the quarter. Fortunately we have seen both the fats and protein markets rebound nicely here in the first quarter part of 2013.

From a volume perspective our rendering segment experienced modestly lower volume during the fourth quarter, reflecting both the slowing in slaughter, and the corresponding and typical holiday down times. Within the rendering segment our grease collection business continues to be challenged by an ultra competitive environment for raw material. While we have continued to grow our new account totals and market penetrations, our volumes have not correlated as we had expected. Theft continues to plague us in many regions across the country.

Our bakery segment rallied nicely during the last half of the year, recovering from a sluggish commercial bakery market in the first six months, by returning to historical and anticipated input volumes by June. Cookie meal prices improved and tracked higher than tri earned corn prices, which ultimately drove bakery segment earnings providing a solid contribution for the year.

The change in economics of our environment continues to validate our investment thesis in our Diamond Green Diesel joint venture, and its ability to offset declining fat prices, absorb competing fats such as ethanol derived corn oil, and create new markets for our products. Mechanical completion on the facility is nearing, and we anticipate a phased commissioning during the second quarter.

Let's frame the opportunity a little. If Diamond Green diesel had been operating in the fourth quarter, based on average raw material costs and finished product prices for the quarter, and operating at name plate capacity, our EPS would have been approximately $0.08 per share higher. For the full year, our EPS would have benefited by approximately $0.35 per share based on the same assumptions. As a reminder the facility will consume approximately 1.2 billion pounds of fat, and produce approximately 137 million gallons of renewable diesel when operating at capacity.

With that, I will turn it over to Colin Stevenson for a quick financial review. After Colin concludes, then I would like to provide some closing remarks, and we will move to Q&A. Colin.

Thanks, Randy. For the fourth quarter the Company reported net sales of $424.9 million compared to $430.9 million in the year ago period. The $6 million decrease in sales primarily resulted from lower selling prices for our finished products as compared to 2011.

As Randy mentioned, on a sequential basis from the third quarter 2012 fat prices declined more than 12%, primarily due to reduced global bio-diesel demand, and an increase in supply of competing fats for animal feed. This decline was partially offset by an increase in pet food grade poultry meal and improved California protein prices. Net income for the fiscal 2012 fourth quarter was $28.8 million, or $0.24 per share on a fully diluted basis,as compared to net income of $29.5 million, or $0.25 per share for the 2011 comparable period.

As noted in our press release, the $700,000 decrease in net income for the fourth quarter resulted primarily from lower raw material volumes as a result of weaker slaughter and processor rates during late 2012, lower finished fat prices, which impacted margins in our non formula business, and the 2011 impact of a $2.1 million gain related to the 2011 fourth quarter purchase accounting contingency that did not recur in the 2012 fourth quarter.

At the segment level rendering generated net sales of $344.1 million for the fourth quarter as compared to $360.7 million in the fourth quarter of 2011. Bakery segment sales contributed $80.8 million to the fourth quarter compared to $70.2 million in the year ago period. Primarily due to higher commodity market prices and improved volumes during Q4.

Now turning to our results for the full year ended December 29, 2012. Darling reported net sales of $1.701 billion as compared to $1.797 billion during fiscal 2011. A $95.8 million decrease in sales primarily resulted from lower selling prices for our rendering segment finished fat products, as well as lower raw material volumes in both the rendering and bakery segments.

Net income for fiscal 2012 was $130.8 million, or $1.11 per share as compared to $169.4 million, or $1.47 per share for fiscal 2011. The $38.6 million decrease in net income for 2012 resulted primarily from lower finished product selling prices, lower raw material volumes, the impact of increased payroll and related expenses, and an increase in expense from a fiscal 2011 purchase accounting contingency gain that did not recur in fiscal 2012.

Interest expense was $24.1 million during fiscal 2012 compared to $37.1 million last year,a Decrease of $13 million. Primarily due to a decrease in debt outstanding as a result of the prior year and current year payoffs of the Company's revolver and term debt facilities, which included a reduction in the amount of our term loan facility deferred loan costs due to write-offs of approximately $700,000 in fiscal 2012, as compared to approximately $4.9 million in fiscal 2011.

Other income was $1.8 million in 2012 as compared to other expense of $3 million last year. The increase of $4.8 million is due to insurance recovery proceeds on prior year and current year fire losses which were received in fiscal 2012, and a decrease in other nonoperating expenses that more than offset an increase in casualty loss resulting from Hurricane Sandy.

At the segment level rendering generated net sales of $1.406 billion in 2012, as compared to $1.501 billion in fiscal 2011. The $95.1 million decrease in net sales resulted from lower finished product prices, and a decrease in European biofuel demand for yellow grease. Bakery segment net sales were essentially flat at $295.4 million for fiscal 2012 compared to $295.9 million in fiscal 2011,as volumes recovered to normalized levels during the last six months of the year.

Relative to the Company's investment in our joint venture with Valero on the balance sheet, we reported an investment of $62.5 million as of December 29, 2012 as compared to $21.7 million for the year ago period. This statement of operations reported a net loss of $2.7 million for fiscal 2012. These losses are due to noncapitalizable expenses as we finish out the construction phase.

Let me provide some additional balance sheet detail. At year end the Company had working capital of $158.6 million and its working capital ratio was 2.2 to 1, compared to working capital of $92.5 million and a working capital ratio of 1.73 to 1on December 31, 2011. The increase in working capital is primarily due to an increase in cash, and to a lesser extent an increase in inventory quantities.

At year end the Company had unrestricted cash of $103.2 million and funds available under the revolving credit facility of $384.9 million, compared to unrestricted cash of $38.9 million, funds available under the revolving credit facility of $391.6 million at December 31, 2011.

During fiscal 2012 the Company incurred capital expenditures of $115.4 million as compared to $60.2 million in fiscal 2011, an increase of $55.2 million this significant increase is related to the completion of a number of planned capital projects completed during the year, along with costs associated with implementation of our new ERP system, which is expected to be phased in over the next two years.

I will now turn the call back over to Randy.

Thanks, Colin. As we have attempted to portray we successfully managed through an unusual fourth quarter commodity market disconnect, and for the most part our formulas worked. Our operations teams executed well, and we are well-prepared for the work ahead to take advantage of our entry into the renewable fuels business.

We proved out the resiliency of our business model, we maintained solid cost management, and we have got a robust balance sheet and capital structure now to service our customers, and continue to improve our returns for our shareholders. The changes and challenges we face this year require tremendous commitment and flexibility from our entire staff, and I would like to thank each of them for putting up the second best year in our 130 year history. With that, I would leak to now like to open it up to Q&A. Thanks.

Thank you. (Operator Instructions). Our first question comes from Farha Aslam. Please go ahead.

Good morning.

Good morning Farha.

Randy, question on what your expectations are for 2013 on both rendering as well as bakery?

Okay. Well, I mean we are obviously 60 days pretty much completed of the new year here. The bakery side real easy to discuss here. It is above where we were a year ago at this time as we had some commercial bakery down time there, so bakery has been a continuation of a pretty solid volume. Probably even a little above what you expect in the first quarter. So that is rolling forward pretty nicely.

The rendering segment which comprises the fat and bone collection and grease collection business, for the most part that volume is rolling pretty nicely right now. The cattle slaughter as everyone knows backed off a little bit, but this time of year we have had a pretty good amount of deads coming in with the winter weather, and then the poultry side feels like it is poised to improve. And the check and balance there is watching both the retail and food service consumption levels of meat. We are watching our poultry processing locations do pretty darn good for the first quarter. Our beef plants are hanging in there pretty nicely.

That all said I think, Farha it is kind of safe to say that I am unconcern of what the back half of the year is on cattle supply. Packer margins are pretty challenged right now. We saw Cargill shut down Plainview in the fourth quarter. Hopefully that will take some margin pressure off of the packer side, but that is not what I would say is a real rosy picture. For Darling for the most part we don't have a lot of business with the integrated packers, we support some of the smaller niche players, and for the most part those guys are doing pretty good and running at expected levels.

The grease collection business as we referenced in our earnings script here, came under some pretty good pressure as the dollar a gallon kicked back in, and the market went back to trying to originate feedstock for some of these smaller bio-diesel plants. We have seen those volumes come back and improve here in the first quarter for us from where they were in fourth quarter. So volume looks pretty attractive right now, and as expected, and we have seen as we referenced again we have seen a pretty significant increase in prices.

In November, we saw yellow grease touch down to $0.30 a pound, and it is much closer with a 4 in it today than it is with a 3 in it. And that is without Diamond Green Diesel there. We have also seen the protein side, the pet food grade products improve nicely as the economy has rebounded, and the reference point is aqua culture and fish meal prices are up at $1,800 a ton, so we have seen those markets improve, and then meat and bone meal has been such a value that as the formulations rolled over here, we have seen those markets improve anywhere from $50 to $100 a ton here since the end of Q4.

Great. And then on Diamond Green Diesel, Randy, can you just share what us your ramp up plans for Diamond Green Diesel in a little more detail, as well as when you expect it to be fully up and running?

Yes, I mean I think that is a fairly fluid situation. I think we did lose a little bit of time here in the fourth quarter, and in January with some pretty significant rain and wet weather down there. We are in that final phase of electrical and instrumentation and heat tracing and putting the insulation on the pipes, that has to be done when it is dry, so I think for the most part we fell a little bit out of first quarter here where we thought we would be starting up.

We are anticipating given the schedules that I have been part of and reviewing, we will complete mechanical completion here some time late in the first quarter, early in the first quarter or second quarter on the different pieces, and then begin a phased startup here in mid to late April. I think it is too early to tell what kind or timeframe the commissioning would be, but I think if you talk to the operations team that we have the highest confidence in, they would suggest to you that by third quarter we should be up and rolling pretty nicely.

Okay. So really third quarter you could be up kind of at 100% of capacity?

If all goes well that would be the plan. I mean the ability to keep the machine turned down is very, very challenging. At the end of the day it is going to work or it is not going to work, and that will be your up and down. And so I think you will see some production in May at some point in time, and then I think you will see a little more production in June, and then hopefully by July we will be up and have some of the kinks and bottlenecks out. It is a fairly complicated, very large facility, but at the end of the day that would be the hopes of the operating team.

Great. Thank you very much.

The next question comes from John Quealy of Canaccord Genuity. Please go ahead.

Hey good morning folks. First on the fat side, Randy, could you give us a geography tour, especially in the export market?I know some fats rebounded here in the early part of the year. Can we talk about Mexican exposure?Is that cheaper than normal West Coast, East Coast, can you give us a little lay of the land about fats by region?

Yes. I mean for the most part I mean the west coast, exports have been very, very slow. I mean year-over-year you kind of have to look back to Europe as being an importer of used cooking oil. I mean I think if you follow the trade regs out there, and anything you are seeing that as Europe modifies their biofuel programs away from crop based fuels, essentially that is your decoder ring says that is for protecting the rape seed farmer over there. We don't see much hope of material going into Europe any time soon.

From a standpoint, the biggest impact John when you step back from this thing, and we spend a lot of time internally discussing it, we have a couple three or four things that kind of created what may be the euphemism the perfect storm, but the number one issue for us has been the amount of corn oil that the ethanol industry has generated in 2012, as they have learned to use enzymes and centrifugal separation to improve their yields, we have seen that business go from 0.5 billion pounds to 1 billion to 1.5 billion, to really no tracking out there somewhere between 1.5 billion and 2 billion pounds. It is a high acid product 10% to 14% acid, and it competes directly for the feed fat formulations that our fats used to go into. So we had two people competing for one pound of business, number one.

Number two, the feed industry much as we have talked or the animal production industry which then translates to the feed industry, always begins to look at alternatives when there is extreme volatility in one of their inputs. In this case as fats moved around in 2011 and 2012, the industry has moved and started to use a lot of different enzymes into the feed rations, that reduced the need for energy derived from a calorie of fat. To explain that I can't do any more than I did. It is a developing situation, but at the end of the day we are not sure how much impact it has had, but we are certain it has had some, and that is explained by the amount of discount we are on a caloric basis to a bushel of corn today.

Exports drying up. I mean the amount of corn or of fats that went to Europe, we have lost about 0.5 billion pounds that was being exported to Europe that is backed up here in the country. All of this is good for Diamond Green Diesel, and obviously as we have looked at the economics, it is certainly something that we wish the plant was running every day, not only from a new demand point but from a margin point, but overall the west coast was weaker than the Midwest, just certainly less animals to feed out there, and when you don't have exports you have got to move against the grain.

That is fine. Dive into corn oil a little bit for us. Obviously we have got a fair amount of Gen 1 ethanol capacity mothballed here, given our FS2 blend wall issues. Is corn oil keeping pace, is it still oversupplied given some people put on trains, and some litigation sort of moved along to increase corn oil penetration a little bit?

I mean at the end of the day corn oil is here to stay. An ethanol plant that doesn't have that recovery process in place is probably one that won't be here very long. We have seen the ethanol grind pick up over the last couple of weeks. It is still lagging a little bit from a demand point, that the USDA thinks they have got to achieve to hit the use numbers they have projected this year, but for the most part you are back up running at pretty high rates. We have seen the amount of corn oil available in the marketplace, and for the most part we have wanted the uses of our investment in Muscatine, Iowa that we made in third quarter has been to use that as a corn oil terminal, and an origination source point for Diamond Green Diesel.

Last question, Randy. On Diamond Green talk about the supply metrics a little bit in terms of the raws?Have you got a good vision of securing that? Does it have to get secured a few weeks after mechanical completion, and I guess my point is, does that help firm fat prices as you are out of the market now buying for that facility?I am trying to understand that relationship. Thanks.

That would make both of us trying to understand what is going to happen. There is a myriad of bets around the table what will happen here. First thing is we have really not turned the machine on down there, so we have not turned our machine towards it yet. Our procurement team and commercial manager down there did enter the market in December for a little bit when corn oil and yellow grease got really cheap there, and procured just a little bit, a few days of production and we watched the market bounce $0.02 or are $0.03 a pound in a few hours. We have not started that up. That is under discussion. I think you will see us start to turn the supply line that direction here as we approach March and into early April, and really it is just trying to now try to figure out, we know which plants are going to head there, but trying to get is the supply chain in a reasonable fashion headed in that direction shortly. At the end of the day I don't think from my vantage point the marketplace has not felt the impact of the giant demand that is about to happen down there.

Great. Thank you.

The next question comes from Ken Zaslow of Bank of Montreal.

Good morning, everyone. Hello?

Good morning, Ken.

I guess three questions. Can you talk about the bio-diesel credit and how much it benefited to you, and how you think it is going to play out?

That is question one. Alright. Number one, the tax credit came back into play here, and then our wonderful government obviously made it retroactive to the production in 2012 too, which is astounding in itself. About the end of the day when we have talked about the basic economics of Diamond Green Diesel, we have talked to you about road fuel at the ultra low sulfur diesel level, and then we have talked to you about a green premium that was a combination of either the RIN value or tax credit and RIN value, in order to derive economics that were favorable enough to incent production.

At the end of the day if you look back a year ago, we had RINs up there $1.20, $1.30, $1.40, whatever the number was, and now you have got RINs at $0.50 or $0.60, but you have the dollar a gallon. At the end of the day it is one offsetting the other. It is actually today in its sense from an economic perspective a little more favorable for us, with the dollar a gallon in there today. It would be a miss for me to say we are a supporter of the dollar a gallon as we are not. We would just assume see that go away and compete at the production level mandate level.

Is there anything you can do on the theft side and to reverse the trends on the grease side?

Ask that again in a different way, please?

The theft on the grease.

Oh, the theft.

Yes. To what extent can you reverse that? Are you making anything progress? I think you have been talking about this for quite a while. Just trying to figure out, is there is point in time that you would see an inflection point in that?

I think we are seeing it right now, from the standpoint we watched our volume from a collection perspective bottom out. A couple of things. Number one, the margins in the grease collection business got extremely attractive in 2011. That is code for they got too good. In 2012 it became the only feedstock that some of these smaller biofuel producers could convert into bio-diesel, so there became a new demand point for a market for product, and yet and I would then say not to accuse anybody, it became a liquidity point for an unscrupulous theft process to go out there and take product, and deliver it into the biofuel market.

Okay. I am sorry? Okay. And then my last question is including the profitability of the JV, again just from a modeling point of view, would the second quarter be actually a loss as you ramp up? I mean will we see a loss in there, or will we just see the beginning of the profit in the third quarter? Just help us out from a modeling standpoint?

I think it will be fair to say that there will be a small operating loss from a startup perspective so.

And then --

John, do you have any comments?

Looking at the P&L, Ken, we have been running the losses there are running about $600,000 a month, and that is with full startup costs and everything, and you are seeing that reflected in the P&L that comes over onto our P&L. That is fully staffed today. The only thing you don't have is the hydrogen costs that will kick in and everything during the startup. So for the first few months of this year, you are going to continue to look at what you have been seeing for the last couple quarters on that. Until we start commissioning the equipment, and then the costs will increase a little bit there.

Okay. So nothing we shouldn't really be modeling much as a loss, it is not a big deal?

Not at all.

No. It is not material.

I just wanted to make sure. Cool.

It has already been built in as John said, because the labor, we are fully staffed and essentially if you will operating today at a sense without production.

Alright. Cool. Thank you.

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

Good morning, gentlemen.

Good morning, Bill.

First question. As we look into the back half of 2013, is there a potential that Diamond Green Diesel truly is at full capacity? Are we going to start seeing it slowly integrate?In I guess my main question is, the ramp up let's just say we are good for this April timeframe, from that timeframe to the end of the year, how do I think about that ramp up?

Well, if we are a successful team I would tell you to take 137 million gallons and divide by 12 and multiply times six, and that will be pretty much what we are shooting for from a budgetary standpoint around here.

Alright. All systems go, I got you. Colin, maybe if you could just provide a little help there, in terms of number one the CapEx as we look forward 2013 as this plant is starting to finish down?

Yes. Well, I think our CapEx expectations for 2013 are right at $100 million.

Okay. And I guess for the last question, SG&A pretty much stays at this level since we are fully staffed going forward, no real is surprises there then?

Bill, let's clear that up a little bit. The amount of money that we are required or that we believe will be funded from a cash perspective in the Diamond Green Diesel between now and the first of June is probably about $44 million. And that is aside from our normal CapEx and a maintenance programs to run the Company.

Okay. Got you. Okay. So that is in addition then to the $100 million that Colin just mentioned?

Yes. That $44 million is into the joint venture. The $100 million is what we are anticipating our CapEx programs for plant improvements, and some other projects we have underway in the business today.

Okay. And then the --

And that includes a significant portion for our computer system upgrade.

Oh, okay. The new update, got you. Good luck on that. Finally the final question is just an overall tax rate that you will be utilizing for 2013?Does this really change things in any way?

You are going to need to increase the tax rate for 2013, and I will try to give a brief explanation of why. With Diamond Green coming on, we will get our share of bonus depreciation from the equipment that will be placed in service. That will dramatically reduce our cash tax. It will also significantly reduce the benefit of the Section 199 production activities deduction, and that has an inverse effect if you will to your overall tax rate, so from a tax rate modeling perspective for 2013 I would use 38.4%.

Okay, gentlemen, thank you.

The next question comes from JinMing Liu with Ardour Capital. Please go ahead.

Thanks for taking my question. Most of my questions have been answered. Just one last in there. Randy, can you share with us how big is your west coast operation compared to your overall business, because I mean to put in price stay low over there?

Typically I wouldn't break that out, but at the end of the day it is about, we operate plants in Los Angeles, Fresno, Central Valley, Turlock, San Francisco, and then on up to Seattle Tacoma. There are five operations out of our approximately 50 operations that are out there. It represents roughly about 15% to 18% of our total production is on the West Coast.

Okay. Got that. Thanks a lot.

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

Good morning, Dan.

Good morning everyone. A couple of follow-ups. As it relates to the RIN market, and biodiesel demand broadly, we obviously saw the increase in the bio-diesel or biomass based diesel mandate. I was wondering when taking into account number one the tax credit, but two the potential for bio-diesel to be advanced, how do you view bio-diesel or biomass diesel demand for 2013 given the parameters I mentioned, and how do you think that plays out from a RIN perspective?

A couple of things Dan. Number one I am going to probably pontificate and guess about as much as you are on it. From the standpoint of 2012, obviously we will fulfill the mandate there in early/late September or early October, and then we saw a significant ramp down of that industry. The good news is that we came into the year probably not carrying forward a lot of production, other than people that had a crystal ball that knew they were going to get the buck a gallon on a retro basis, which I am not sure would have been a prudent way to run your business.

At the end of the day you have got to produce pretty sharply here the 1.28 billion gallons, and you will see with the dollar a gallon most likely going to expire at the end of 2013 and not be renewed, you are going see possibly an overproduction this year carrying forward into 2014, as the dollar a gallon is still there. I will think you will see a pretty solid run rate that may be longer this year than it was last year, and then from our perspective, we are hopeful that the biomass based diesel volumes move up to 1.6 billion minimum to 2 billion would be our dream, and that will provide additional support, and then also the ability of our product to fulfill the advanced biofuel mandate that is out there, and we have seen RINs go to near parity there now. It is a pretty interesting dynamic that is pretty friendly our situation.

Okay. Real quick. A couple of quick follow-ups on other topics. First on the bakery business, can you just remind us of the seasonality of the business, because from a pricing perspective obviously corn is still pretty strong and Q1 should fare well. If I remember there is also some seasonality in that, which certainly impacted the first quarter of last year, and I wanted to make sure that we were accounting for that correctly?

Typically it is first and fourth are your weaker quarters there as you come in barbecue season and picnic season and state fair season, and what last year like I said we still today cannot explain the volume decline that happened to us the first five months of the year. Probably the most subscribed to theory that exists around here is that the wheat market, sugar markets and vegetable oil markets were all severely inverted last year, believing that we would have a better crop coming on, so there was truly an economic incentive to pull down stocks and replenish with cheaper ingredients, plus you had the Kraft breakup, and Kraft is a significant portion, not significant but they are a pretty good portion of our tonnage at different plants, and when FoodCo and SnackCo were broke apart, there was some of the Kraft bakeries went down for two to three weeks at a time there, and then ramped up slowly. What we have seen as I described to Farha early on, we have seen in the first quarter here volumes holding at or above fourth quarter levels right now, which is much higher than last year, and probably higher than seasonally we have seen in the past here, which is probably more of an indication of a robust economy than anything right now.

Sounds good. Two more quick ones. One on SG&A on the corporate level I think you were about $39 million in the fourth quarter. Is that a decent run rate for 2013 including the ERP implementation, or do you expect that to maybe tamp down a little bit?

No, actually with the ERP coming on, and as we move from the cap phase to starting to expense with the consulting support we are getting from that, plus the folks we are adding to our IT group, I think from a 2013 quarterly perspective you would want to model something closer to $42 million.

Wow. Okay. And then one last thing. On the sequester we have obviously heard some dialogue about the USDA budget and the potential impact to meat packers. Have you guys started feeling anything to that, or have any thoughts about if there is sort of a flow through impact to you from a volume perspective?

Dan, the only thing I can answer there is when I ask the question I get complete denial that could happen. That while it would seem to be something that obviously needs to be discussed and faced, the packers just don't believe that they are going to lose the inspectors and the funding there, and it will just keep roll as it does.

Got it, thanks.

Yes.

The next question from Roman Kuznetsov of Gates Capital Markets. Please go ahead.

It is actually Jeff. I was just looking at the budget for Diamond Green Diesel, and I think if I did the math right you are about $440 million which is a little higher than expected. So what was the extra capital and does that include all of the working capital? And then secondly, can you talk more generally about the capital deployment opportunities that you are seeing?

Jeff, first off, I mean we have had a little bit of capital creep there. Not much at the end of the day on the project there. There has been a few items that as you get to the end that cost a little more and stuff there. But at the end of the day most of the working capital assumptions are in there. It depends on where bath prices will be, and then at the end of the day a little if you want to call it a protracted startup here, you have got a little more capitalized interest in there creeping the price just a little bit. Not far off from where we thought it would be. So very pleased there.

From a capital deployment perspective, we completed 2012 with a lot of modernizations and expansions at several of our plants across the country. We picked up some additional raw material around the country that hopefully will pay dividends this year for us. We have got a pretty aggressive capital program next year for some Midwest modernizations that we are going to do, and from that standpoint when we model the business going forward and given the cash benefit that the accelerated depreciation off of Diamond Green Diesel may give us, we are going to be provided that the industry and the earnings kind of turn out as anticipated here going forward, we are going to have a substantial amount of cash again on the balance sheet.

Met with the Board again. Obviously and kind of regurgitating the same discussion we had in the past they want to get Diamond Green Diesel startup, and make sure that the technology works and that there aren't any major issues there. I think we are very confident at least in this room that the team down there is nearing completion, and there aren't those surprises. The second thing is then the Board is evaluating at that time are there additional opportunities to grow. It is always a new year. As you know the investment bankers all make rounds in the first quarter, and are all looking for opportunities. Hopefully we will see some opportunities this year to put the cash into play through acquisitions and growth, and then if we don't see that then I think the Board is at the point where they will either evaluate a buyback or start to put a dividend as you have always requested underneath the business.

Great. Thank you.

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

Good morning, gentlemen.

Good morning, Tyson.

Randy, you made a comment earlier that the market still doesn't fully understand the demand implication of DGD once we start pulling that volume out of marketplace. Have you with these delays started to fill up your supply tank farm in Louisiana, and are you any closer to trying to predict what kind of or gauge the price impact once you do start full production?

The answer is yes, the tank farm and rail unloading system is operational at Diamond Green Diesel. It was commissioned in late December and yes, we have unloaded not a material amount with the machine that we will use, we use what 3 million pounds a day down there. We have probably got less than a week down there right now in position,in order to fulfill. So when I make the statement we have not felt the impact, we have really not turned the spigot on.

Like I said, this is a lot of different opinions around here, Tyson, given the amount of corn oil to what impact we will have on that situation. I think it is safe to say that if the animal slaughter on the beef side gears back, you already have seen tallow pricings improve. Those are back to 42 now. You have got yellow grease and cooking oil prices back into the high 30s, maybe touching on 40 in different geographies, and yet corn oil still sits out there, and as long as the ethanol industry is going to run strong this year which it would certainly look like it is going to, I think we will just see where it goes. I mean we have always factored in some price creep relative to traditional spreads there, but that was before the amount of corn oil there was so time will tell. We will place a bet with you here in 60 days and see how we do.

Alright. And 2012 we kind of fell out of bed with our typical grain complex relationships with your products with corn, soybean oil, palm oil, some of the others due to various factors. Given that situation that we just experienced, is it more beneficial than this go around if we do see 99 million acres of corn being planted, that we actually do see some leveling off or reduction in some of those grain prices, just to spur more protein volume in the marketplace especially on the poultry side?

It is kind of a whack a mole thing, where you sit there and push once and it pops up over here. Obviously if you look at the USDA numbers, and you see the amount of if you can have normal and normal productions you have got pretty significant crops,which should help the animal production industry. I mean the first thing that would come back be would be poultry. The second thing would be the hog market, and then the longer growth animals on the beef side. Yes, I think we have hit that inflection point of probably the lowest amount of animals in this country, so that side should start growing.

Protein demand around the world continues to be tremendous. When I say protein, consumer proteins, and then feed-grade proteins continue to be in high demand. To a degree while we may have bigger grain crops coming, on the other side is all of a sudden the fish harvest again was reduced, and we have seen fish meal prices rocket on up. The corresponding effect now has been that the pet food guys have come rolling in, trying to make secure their supplies of pet grade products for this year, and then the aqua culture guys are already starting to sniff around and look for what I would call late in the year seasonal demand, bringing it much earlier this year. Pretty bullish the pet food side complex of the business.

The beef side will compete with soybean meal. It got completely out of whack, and what drove it out of synch here was the export demand from the Indonesian market. That was our largest and most sophisticated market for the Darling system, and we have been excluded from it. But in return markets are efficient and the surrounding Asian countries now have started to bring in a lot of material and take some of that pressure off, and thus you have seen meat and bone meal rebound nearly $100 a ton for us around the system, just on a little tiny bit slaughter rate but finally some more demand around the world, because we had saturated the amount of poultry you could feed it to here in the US during 2012.

Overall the complex feels pretty good. It is going to take its lead from the soy complex. The markets from my perspective are always anticipating there is probably still a little bit of risk premium in there, given that we going to need good moisture this year, but as I am sure you got to use your snow blower this week up in Kansas City, the moisture is certainly more this time of year than it was last year.

And a last quick one for me. Your Florida plant you had to rework some of the technology there, and you are going to test that again this summer. What are the implications there, and you do have the capital deployment there that you can use organically. Where do we stand, and what are some of the benchmark dates and results that we should be watching?

The plant in Hampton, Florida is one that has been a dream of the operations and engineering group, as we look for different ways to recover waste streams that are currently being land applied today, or put into other streams that they are not recovering the full value from. The technology in Hampton from continued runs this year continues to prove itself out. We are optimistic that we are onto something, and that the products produced from the process are of value that we need to make it a successful operation.

There is some more equipment that is ordered in order to get us into the compliance and the efficiencies that we need that we will be putting in later this spring/early summer, and then we anticipate coming onstream with that unit hopefully towards the end of the summer here, and get a level of comfort that we can operate at the economics that we anticipated, and from there we will develop a business plan for additional applications from recovery of other waste streams, whether it is waste water or other protein streams produced by the meat packing industry.

Alright. Thank you, gentlemen.

You bet.

We have reached our allotted time,therefore this concludes our question and answer session. I would like to turn the conference back over to Mr. Stuewe for any closing remarks.

Thanks, Sue. Appreciate everyone joining us, and we look forward to catching up with you here I believe in May, and give you our first quarter results. Thanks again.

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