Darling Ingredients Inc (DAR) 2015 Q4 法說會逐字稿

Good morning everyone and welcome to the Darling Ingredients, Inc. conference call to discuss the Company's fourth-quarter and year-end 2015 financial results. With us today are Mr. Randall Stuewe, Chairman and Chief Executive Officer of Darling Ingredients; and Mr. John Muse, Executive Vice President and Chief Financial Officer.

(Operator Instructions)

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.

(Operator Instructions)

I would now like to turn the call over to Melissa Gaither, Vice President Investor Relations and Global Communications for Darling Ingredients. Please go ahead.

Thank you Andrew. Good morning and thank you for joining us to review Darling's earnings results for the fourth quarter and year end 2015, ended January 2, 2016. To augment management's formal presentation, please refer to the Presentation section of our IR website for the earnings slide deck.

Randall Stuewe, our Chairman and CEO, will begin today's call with an overview of our fourth-quarter and full-year operational and financial performance and discuss some of the trends impacting our business. John Muse, Executive Vice President and Chief Financial Officer, will then provide additional details about our financial results.

Please see the full disclosure of our non-US GAAP measures in both our earnings release at the end of the earnings slide deck presentation. Finally, Randy will conclude the prepared portion of the call with some general remarks about the business and the year ahead, after which we will be happy to answer your questions.

Now, for the Safe Harbor for statement. This conference will contain forward-looking statements regarding Darling Ingredients' business opportunities and anticipated results of operations. Please bear in mind that forward-looking information is subject to many risks and uncertainties and actual results may differ materially from what is projected.

Many of these risks and uncertainties are described in Darling's annual report on form 10-K for the year ending January 2, 2016, our recent press release announced yesterday, and our other filings with the SEC. Forward-looking statements in this conference call are based on our current expectations and beliefs, and we do not undertake any duty to update any of the forward-looking statements made in this conference call or otherwise.

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

Thanks Melissa. Good morning everyone and thanks for joining us. 2015 is now in the record books, and we finished strongly in light of deflationary conditions we faced throughout the year.

In 2015, we set a strategy to delever and grow, to control what we could control by lowering costs, improving margins, paying down debt and improving our working capital. On all fronts, our team executed superbly, and we have now set the stage for what we believe will be an improved 2016.

To cap off the year, Diamond Green Diesel had a record year. We started up three new plants, brought on major gelatin expansions in the USA and China, and recently announced a joint venture with Intrexon to commercialize insect proteins.

In the fourth quarter additionally, we saw an outstanding performance in our international operations while our US operations were reacting to massive price declines in their finished product portfolio. Thankfully, these pricing movements in the USA have already reversed early in the first quarter of 2016.

Our fourth-quarter results underscore the importance of what we have assembled here at Darling Ingredients in the past several years, a diversified global business that is not 100% ruled by pricing conditions in any one geography, business unit, or segment. We saw it in the fourth quarter as one geography experienced unfavorable conditions, other geographies and segments performed well. This diversification will enable us to continue implementing our delever and growth strategy as we look ahead.

During the fourth quarter, our feed segment within the USA endured significant pricing pressures due to strong raw materials volumes and reluctant consumer demands. Finished goods pricing declined to levels not seen since early 2000s. Our spreads, our margins and our earnings reflected this pressure.

The good news is that prices for fats, proteins and pet food ingredients have rebounded sharply during the first quarter, and we expect further improvements throughout the year. The food segment on the other hand had a tremendous performance led by our Rousselot gelatin unit. Strong demand, improved margins and commissioning of major expansions in the USA and China augmented this performance. In the fuels segment, the reinstatement of the Blenders Tax Credit for Rothsay along with the consistent and growing performance in our Rendac unit explain the improved results.

Now moving to Diamond Green Diesel, Diamond Green Diesel produced 159 million gallons of renewable diesel and reported an EBITDA of $177 million, both of which are records. We have proven two things this year. First, DGD offers a viable and realistic hedge to our core North American business, meaning that fat prices decline, the earnings in DGD more than offset. And secondly, the technology we have developed with Valero is capable of consistently processing the waste fats and greases we produce and making a superior product the petroleum industry prefers.

Darling continues to be optimistic about both our biofuels business and our core businesses due to the ongoing implementation of the low carbon fuel standard programs in California, British Columbia, Ontario, possibly Quebec, and potentially down the road Oregon, Washington and maybe even the northeastern parts of the United States.

As we have discussed in the past, these programs are particularly beneficial to Darling as they are carbon intensity programs. That means unlike RFS2 where all forms of biomass-based diesel are treated equally, meaning the same RIN value, once a minimum threshold of carbon emissions is achieved, biomass-based diesel from the feedstocks that have the greatest carbon intensity reduction will receive a premium over feedstocks which have less carbon intensity reduction.

For Darling, that is good news because the products which have the greatest carbon intensity reduction and therefore received the greatest green premiums are the feedstocks we produce in our core business and utilize as feedstocks at both Diamond Green Diesel and our biodiesel facilities in the USA and Canada.

What does this mean for Darling? It means that our fats, used cooking oil and animal fats will be preferred from the biodiesel and biofuels industry. More importantly, it means the third green premium, the first two green premiums being the RFS2 program and including RINs and the federal tax credit will now be augmented by the LCFS credit. This should favor the types of fuels that we produce at our biomass-based diesel facilities.

When will this happen? When does this happen? Well, we are beginning to see the effects now. LCFS premiums are encouraging our non-committed production to go west today.

All the programs are in their infancy though, and it will take some time for the value proposition to be clarified and to set up the supply chains to hit these various markets. We should see improvement in the back half of 2016 and sharply into 2017, and for our business we should be fully engaged in 2018 and beyond.

Now let me briefly comment about our new joint venture with Intrexon. While very early in the process, we believe we have identified a significant new potential source of fat and protein for the world's growing population.

Our interest in this area started nearly two years ago at the grassroots level as we funded R&D and a basic pilot plant to grow black soldier flies. Our vision is simple: to economically produce sustainable source protein and fat by converting various feedstock streams to their highest and best use. Another way of saying this is to take feedstock that is being landfilled or composted today and make a value-added ingredient.

Our new venture will attempt to commercialize this vision and even make it better. Intrexon brings the sophistication and knowledge to improve the black soldier fly that we have never possessed. This in itself will create opportunities as Intrexon's reputation of building concepts and companies is well-documented.

At this point, we are moving towards the initial commercialization stage that involves jointly building our first scalable plant. It's very exciting, but these are uncharted grounds, and we will share more with you as we learn more over the coming periods.

In closing out the quarter and the year, we exit 2015 a stronger Company with more efficient operations, newly constructed operations, visions for new businesses and a stronger balance sheet. As we move into 2016, we will continue to focus on deleveraging the balance sheet while pursuing prudent and profitable growth.

I will talk a little more about this and the year ahead as John concludes his remarks. With that, John, do you want to give the financial update here?

Okay, thanks Randy. Our primary focus and initiatives here during 2015 have been on debt reduction, margin enhancement, reducing working capital, cost reductions in both operating and SG&A expenses and monitoring CapEx deployment.

As Randy mentioned, our main focus is on debt reduction and delevering. In the fourth quarter, we repaid $42.4 million of debt, bringing our 2015 total debt paydown to $118 million. Our target going into 2015 was $100 million of debt reduction.

We ended 2015 with a debt to EBITDA leverage ratio of 4.32. We intend to repay an additional $125 million to $150 million of debt in 2016, and at the end of 2016 have a debt to EBITDA ratio of less than 4.0. We continue to focus on EBITDA margins in all three business segments and cost reductions in face of broad commodity price declines.

We reduced headcount in our Corporation by over 10% in 2015. We delivered cost reductions in 2015 including $52 million in SG&A reductions year over year. Moving forward, we expect SG&A expenses to run in the range of $83.5 million to $84.5 million on a quarterly basis, taking into account our three new plants that we just constructed and the two new rendering operations that will be coming on in the last half of 2016.

We have committed to reducing working capital in our business. This is a primary focus on our operating and marketing groups. Sequentially, we improved our working capital. This was done by lowering inventories, managing payables, and being better stewards of our receivables.

We reduced working capital by $31 million in 2015, achieving our goal of a $20 million reduction. Change in working capital in 2015 over 2014 improved by $72 million.

We spent approximately $230 million in CapEx in 2015. Our 2015 expenditures included the funding of three new plants, a bakery and two wet pet food, and one major expansion in our Dubuque, Iowa gelatin facility. CapEx for 2016 is projected to be in the $210 million to $220 million range.

Now I will go onto some financial results for the fourth quarter and for the year ended January 2, 2016. For the fourth quarter of 2015, the Company reported net sales of $810 million as compared to net sales of $1 billion for the fourth quarter of 2014. The $190 million decrease in net sales is primarily attributable to lower finished product prices primarily in the global fats and protein markets.

Net sales for 2015 were $3.4 billion as compared to 2014 net sales of almost $4 billion. The $559 million decrease in sales is primarily attributable to lower finished product prices and foreign exchange rate impact of a weak euro and Canadian dollar. Overall, global raw material volumes were stronger year over year for both North America and our international businesses.

Net income for the fourth quarter of 2015 was $84.4 million or $0.52 per diluted share and $0.54 per non-GAAP adjusted diluted share compared to net income of $69.9 million or $0.42 per diluted share in 2014 fourth quarter. For the 2015 year, we reported net income of $78.5 million or $0.48 per diluted share compared to 2014 net income of $64.2 million or $0.39 per diluted share. The fourth-quarter increase in net income of $14.5 million or $0.10 per diluted share reflects improved results from Diamond Green Diesel and increased earnings from our food segment.

As you notice, our other expense was $6.1 million in the fourth quarter of 2015 compared to a profit of $300,000 in the same period of 2014. This $6.4 million increased in expense was primarily due to fourth-quarter fire and casualty losses in the Netherlands and Brazil of approximately $3 million and the legal settlement of approximately $1.8 million.

Sequentially, adjusted EBITDA for the fourth quarter 2015 decreased to $102.7 million compared to $106.1 million in the third quarter 2015, a decrease of $3.4 million. The decrease was driven by lower earnings in the feed segment, which was partially offset by improved earnings in both our food and fuels segments.

Adjusted EBITDA for 2015 was $412 million compared to $434 million in 2014. The decrease is largely due to the lower finished product prices.

Now I'd like to move on to our operating segments. On a sequential quarterly results breakout of these are shown in our slide deck that is out on our website. On sequential quarter, segment operating income was $32.7 million in the fourth quarter of 2015 versus $38.8 million in the third quarter 2015.

The feed segment operating income was $10 million in the fourth quarter of 2015 versus $35.6 million in the third quarter of 2015. Feed operating income for 2015 was $116 million compared to $192 million in 2014.

The $25.6 million decrease in operating income for the fourth quarter was primarily due to significant finished product declines in proteins, fats and used cooking oil. Also contributing to the decline was our startup costs associated with our new wet pet food facilities.

In the US, operations, lower earnings related primarily to declines in finished product prices particularly in our non-formula business. International operations were down only slightly due to strong volumes in raw material cost reductions which offset lower finished product prices. In addition, for the 2015 year, the feed segment operating income was negatively impacted by foreign exchange translation by approximately $16.4 million when using prior-year average exchange rates.

The food segment operating income was $23.3 million in the fourth quarter of 2015 versus $11.6 million in the third quarter of 2015, an increase of $11.6 million in operating income. Foods operating income for 2015 was $61 million while taking into account the non-cash inventory set up adjustment in 2014, the operating income year-over-year was basically flat.

The gelatin business improved compared to prior year as a result of increased demand in China and lower raw material prices in Europe. The European edible fats business also improved year over year. The main difference was the food segment's operating income was negatively impacted by FX translation by approximately $24.4 million when used in prior-year average exchange rates.

The fuel segment operating income was $12.5 million in the fourth quarter compared to $0.2 million in the third quarter 2015. This increase was primarily due to the receipt of the biofuels tax credits in the fourth quarter and strong operating results from our European fuel segment.

Now I'd like to cover some of our balance sheet and tax highlights. As mentioned, we continue to tighten our working capital resources and fortify our balance sheet to maintain sound liquidity long term. We have positioned our capital structure to provide stability and financial flexibility to meet our long-term goals and are fully compliant with all our bank debt covenant ratios at the end of 2015.

Total debt at the end of 2015 was $1.96 billion compared to $2.15 billion for 2014. The net debt reduction from 2014 to 2015 when taking into account our available cash on the balance sheet will show a reduction of debt of $240 million. As mentioned earlier on the call, we've improved our working capital investments in 2015 over 2014 and ended the year with a current ratio 2.1 to 1.

Now let's take a little dive in deeper review of our effective tax rate and cash taxes, which has been moving around all year. During 2015, we have discussed the impact on our effective tax rate that the tax extenders package not being reenacted for 2015 had on the Company.

In the fourth quarter 2015, Congress approved the tax extenders package for 2015 and for the next five years. The blenders tax credit was also passed in the fourth quarter of 2015, which not only reinstated the credit for 2015, but also passed it for 2016. The passage of both the tax extenders package and the blenders tax credit will enable the Company to report a more consistent effective tax rate quarterly through 2016.

The Company reported negative net income tax expense of $13.5 million for 2015 compared to $13.1 million of income tax expense for 2014. The effective tax rate for 2015 was 13.7% and 16.1% for 2014.

Cash taxes for 2015 was a net refund of $3 million compared to a payment of $28 million in 2014. For 2016, we are projecting an effective tax rate of 22.5% and cash taxes of approximately $30 million. I will now turn the call back over to Randy.

Thanks John. We exit 2015 a stronger Company with lower debt, stronger cash flows and strategic investments in new plants and many operating efficiencies.

I'd like to close my remarks with some comments about the year ahead. The finished product price implosion we saw in the USA in the fourth quarter is behind us.

Global raw material volumes remain strong, and finished product prices have improved and are now actually above third-quarter levels for most fats and some proteins. Gelatin volumes and pricing are out of the block strong for 2016 while our fuel segment is being supported by the prospective tax credit.

Our focus for 2016 will be to continue on the momentum we carried in, to improve our operating costs globally, to finish the construction and begin operating our two new USA rendering plants, to repay $150 million of debt and to improve our working capital again by $25 million. And most importantly, to continue our improved safety record around the world.

With that, I'd like to open it up now to questions and answers.

(Operator Instructions)

Dan Mannes, Avondale Partners.

Thanks good morning, nice quarter.

Thanks Dan.

Sure. I have a couple quick questions. First on Diamond Green, you had some commentary in your PowerPoint about an update on the expansion. Can you maybe give us a little bit more color on where you are in the process of planning, what the ultimate size is and when that could be a contributor, particularly as it relates to the opportunity to maybe more extensively sell into the LCFS market?

Okay. Let me give you quite a bit of color there. I think first off, it should be noted that we went down in January 29 for about 16 days, for our first planned turnaround of that facility for catalyst change out, and then some piping or metallurgical improvements that we felt were necessary for both safety and continuous operations. So that's been completed, the plant is back up and running successfully and operating at the 12,000 plus barrel a day level now. So that's point number one.

Point number two is Valero is our partner in that facility. Valero engineering is now moving towards what I'm going to call a plus or minus 10% cost estimate level on the expansion. To narrow it in much more than that right now is premature. We are targeting an expansion of somewhere around up to 18,000 barrels a day, which will be an additional 6000 barrels a day from where we are at today.

Timing for that right now is looking to -- the early estimates that I saw would be towards the back half of 2017, meaning the fourth quarter of 2017 would be the official tie-in, and it would be fully operational in the sense of the new capacity in most of if not all of 2018 right now. That's the early thing.

The second thing is I want to comment, and maybe this will answer several questions on the LCFS. When we build Diamond Green Diesel and the economics and the view we had at the time with RFS, was that it was built as a road fuel plant and the economics were based on replacing the ultra low sulfur diesel in road fuel. And so there was a significant portion of the plant that is committed to customers for several years here, that is at road fuel prices.

As the LCFS evolved here, we have been able to free up some of the excess barrels and we will continue to have more barrels available in later 2016 and more in 2017 to fulfill the LCFS. I don't want to give a number of barrels to date that is, Dan, but it is a significant amount here towards 2016 and 2017 that will start to head west and up north to Canada as we move forward.

Great. On another topic, really impressed with the results in food. Can you walk through a little bit on the sequential improvement there and how sustainable that is? It sounds like most of it was due to incremental facility, and if that's the case, is this the new run rate for where food could be at?

Fourth quarter for the food segment was very strong, and really there are three businesses within that segment that are reported with Rousselot being the primary piece of that segment. Rousselot, the gelatin business continues to do quite well around the world, both from a demand and a margin management perspective.

As always, as you look at that business, you look at raw material availability. Raw materials is in the form of pigskin, beside, beef loan, pork bone as we make the different collagen compounds out of those. So as slaughter remains strong, raw material volumes became more available in a sense lesser cost in some cases, and we were able to widen margins.

Demand remains strong, especially in China. We got the devaluation in Argentina that helped us there a little bit. We brought on the new capacity in Dubuque, Iowa for a major customer in the USA, and we were able to start up and ramp up our capacity in Wenzhou, China.

So we remain optimistic about the volumes. And December was particularly strong in that business for us. Remember the Chinese new year came a little bit earlier this year, so a little bit of stocking from the Chinese demand there.

But at the end of the day, I think we're pretty optimistic that segment in the sense of the edible fat melting business, volumes have backed off a little bit as the marketplace tends to take a few more of the products back to the primary consumer meat business. But the margins have widened there to where they are back to normal.

Then our CTH business, our casings business finally had a quarter where it wasn't disrupted by trade barriers in Hong Kong or China and just more of a normal. So where third quarter had a lot of noise in it, fourth quarter is what I would say is more realistic of that business unit. And then that is provided I would say the gelatin demand remains as strong as we forecasted to be in 2016.

And my final question, black soldier flies, it sounds really interesting, obviously it is early stage. I guess the one question I think we have and others probably share is what spend is implied on that in the near-term and is that already embedded in the CapEx guidance?

Yes. Number one, this is a project -- let me comment a little bit about that and maybe put a little overall view on both R&D and EnviroFlight. For Darling, every year we commit a certain amount of funds within our capital programs to explore new technologies. When I say new technologies, if you think of the gelatin business, it's about yield and throughput read and nanofiltration. And we spend money in that area to make those plants more efficient.

In our core rendering businesses, we look at energy transfer, evaporation and fat recovery, and we invest in that area. Our Hampton hexane plant down in Florida is one that was built led to recover -- use solvent to recover fat and protein from wastewater streams. We've proven that works quite well, it's commercialized, it's ready to roll out depending on how the Food Safety Modernization Act is developed in the US here.

Then finally, about in 2014, we were brought the EnviroFlight idea from an entrepreneur in Ohio that had been working on the concept, wanted our expertise in the supply chain origination of different feeds stocks. We committed around $3 million of capital to build the pilot plant, or expand, or modernize the pilot plant, and then we had another -- about another $1 million of operating losses in that business as we have developed the technology.

Here about mid year, in mid to late year in 2015, Intrexon approached our partner and decided to acquire it. Intrexon is a synthetic biology company that is a master at gene manipulation, DNA stuff, this is way out of my fairway, but they think they can improve the black soldier flies' both productivity and potentially its properties as we go forward. So from that perspective, Intrexon and Darling decided to form a joint venture to commercialize insect protein.

Our view of the world is pretty simple in that area. And we carry a long-term view for both Darling and that business.

The view is one of the world does not have enough arable land or water to continue to grow enough crops and proteins to feed the beef, pork, chicken and fish of the world going forward. And if you can find a way to create a sustainable and effective low-cost protein, which we believe insect proteins potentially can be -- it's very early in that analysis -- then it's pretty cool.

And so what we've got with Intrexon is a chance to build the first plant, which we have both committed to do for the -- I believe somewhere here in late 2016. We don't have a site, we have an idea. And I believe each one of us I think, I believe I have seen the number somewhere would commit up to $4 million to $5 million each, $10 million, to build the first operation and discover it's viability going forward.

So that's about what we can tell you today. We don't know what we don't know. It's pretty exciting stuff, but its first-generation, as we said.

Sounds great, thanks Randy.

You bet, Dan.

Heather Jones, BB&T Capital Markets.

Good morning.

Good morning.

Congratulations on the quarter, and appreciate all the detail. Before I get into my real questions, I just had a housekeeping question. That tax rate, the 22% to 23%, should that be pretty even quarter to quarter?

Yes, it should. That with the extender package being approved and with the blenders tax credit being there, we will be able to book that as we go forward.

So that would be the recommendation we make to use that. Heather, it could move up and down a little bit, but we will not be looking at 3%, 3000% effective tax rate.

That's good to hear. Going to the product pricing, we've seen this big as you noted rebound in fats pricing.

Interestingly, it seems like this is coming at what is typically a weaker demand from a seasonal perspective, demand period. And was wondering if you could comment on that and given, if you agree with that assertion, what do you think pricing could do as we move through the year particularly given the mandate and the pull from the LCFS market?

Okay Heather, this is Randy. Let me comment always globally, and as we work around the globe here, Europe fat prices have improved. They were more steady in Q4 than they were in the USA. They have continue to improve here into Q1.

Protein felt was more stable in Europe in Q4, feels a little heavy in Q1. Predominately the poultry protein much as we see here, but they feel pretty stable, and we are pretty optimistic there.

As you come back to North America, the visibility and transparency that the analyst community, investor community has is to the trade publications., And trade publications meaning the Jacobsen, or USDA, or the Yellow Sheet or Urner Barry, all of those give directional values and reflections of what prices are being reported. It doesn't necessarily at time reflect the different cash prices that are being traded within any one130 locations in the North America here.

The challenge in Q4, and I want to set the table, was we had strong slaughter and predominately in the poultry area and also in the beef and to a degree even in pork throughout the quarter. That put a lot of fat and a lot of protein on the market. Protein in the poultry area was slow to be exported out of the country because of potential beliefs of avian influenza, which hasn't surfaced.

It was also the time of the year that the pet food companies slow down their supply chains. Their contracts are made annually, and they were waiting until January to pull. You had what I call a glut of protein coming on the market in Q4 looking for homes. At the same time, we had entered in December -- as I remind people, the holidays in Dallas, I think Christmas day was 80 degrees down here. It was still quite warm, so we never really entered the winter feeding season even in mid-December, which is very atypical.

So you look at that, you then look back and say that the facts, the biodiesel industry slowed down rapidly in September, October and really didn't have much pull in the fourth quarter from us, along with there were very little exports given the strength of the dollar. Everybody seemed to be waiting for the bearish moment to come on in first quarter here.

What we saw what we came in on New Year's Day was then a resurgence of orders, demand, and used cooking oil has continued to increase even as of last night. Proteins and the pet food grade proteins -- and remember in that area, we're creating special ingredients for the different pet food companies. And when you can't sell it as pet food, you are forced to put it back into commodity animal feed. And those spreads can be -- can narrow very rapidly for us in the fourth quarter.

They have rebounded nicely to what we expected them to be and what they have been historical in the first quarter. The one that has a little bit of work yet to do is meat and bone meal from our bovine plants here mainly in the Midwest, but that market seems to be coming back sharply. And it came back sharply because meat and bone meal relies heavily on getting a small percentage, 10% of so of its production out of the country to balance the supply and demand. And while exports have been slow, we saw meat and bone meal go to a $100 a ton discount plus to soybean meal.

We knew it wasn't sustainable, it's just a typical cycle that can happen in this business. And we saw here in January the large pork integrator's come back in and order that product. We've now seen it rebound nicely to where cash prices are near soybean meal levels again in that area.

So going forward, I am more bullish on fat prices in the USA that is driven by strong biofuel demand, augmented by the LCFS. We have seen a nice rebound in used cooking oil. In my script I talk, and I'm trying to make sure I laid the breadcrumb trail that the products from Darling's core North American business are going to be preferred for carbon intensity as the LCFS ramps up. It is still very early in that, but we are clearly seeing our products being pulled on for that.

So I think you're going to see a continued movement of used cooking oil and animal fats throughout the year as we go forward. I think the RINs are going to have to do some more, and I think at the end of the day the market will be driven by the California, and Ontario, and British Columbia demand that is now developing.

Okay, so nice rebound from Q4, but further to go in your view.

I am still -- I'm happy that it balanced, I am feeling good about that, and I am friendly going forward from where we are at today.

Okay, I have two more questions. You mentioned the pet food spread, it has recovered I think -- we are using Jacobsen data, but it troughed in the low 70[%], and Q4 is now call it 250[%] to 260[%]. That's a huge rebound and honestly it is up year over year. I'm wondering if you could give us a sense of what has driven -- that magnitude of recovery particularly given the year-on-year improvement.

I didn't -- I can tell you what drove -- the oversupply drove the fourth-quarter implosion that I referred to. We're looking know that it from a cash perspective, that spread will stay in that 270[%] to 300[%], 320[%] range.

Very strong pet food demand and a very strong preference for the low ash chicken products into those streams. And that's what we have been positioning all of our plants around the Southeast for. We are at capacity, and I think those premiums will stay there this year.

Okay, and my final question, and this is a fast-forward on the expansion DGD, you mentioned you freed up some barrels to ship now and that should accelerate as we move into late 2016 and 2017. But I know that one of the issues has been getting a product out there because of rail. I wonder if you could give us the updated thoughts on when you expand Diamond Green, what are your thoughts on putting in or whatever that would make it easier to access those end markets?

Heather, this is Jon Bullock. Our intention would be by the time we have the expansion of the Diamond Green Diesel, we would have rail capability to California.

Perfect. Thank you so much.

Ken Zaslow, Bank of Montreal.

Can you hear me?

Yes, you are breaking up there.

I had a couple questions, just wanted to follow up on Heather. When you think about the fourth quarter in terms of EBITDA, it sounds like you think this is the bottom and there seems to be some material improvement sequentially. But how do you think about it as by the end of the year, are we talking about a run rate closer to the $450 million, $500 million? How do you think about that?

I think you asked and answered your question there, but we are thinking that Ken. When we look at it, we saw in fourth quarter meat and bone meal trade down with a [1] in it.

We've seen meat and bone meal come back in North America in the mid-2[%]s from a cash perspective. We saw animal fat being sold out of the major slaughterhouses down at $0.14 in December. We haven't seen those prices since early 2000.

You will see the feed segment rebound nicely. The food segment we've talked about. Right now out of January, we had a very nice performance in the gelatin business around the world. The demand seems to be holding, the margins seems to be remaining where we expect them. Then we get to bring in the fuel segment with the credits in it quarter to quarter now.

The fuel segment as we said is Rendac, it's our Ecoson unit in Canada and our Butler biodiesel plant. The fuel segment should be fairly consistent, but at the end of the day, remember the fourth quarter had the one-time credit that flows through that. You got to normalize that, food segment feels pretty darn good going into it, and the feed segment should rebound from the improved pricing here and pricing going forward.

At this point, you can extrapolate that type of run rate going forward. We've got a lot of work to do and a lot of execution to make sure we get done, but that is how we view the world today.

Two other questions, one is yellow grease prices, yellow grease has been a bigger component in biodiesel demand that it's been in a long time. Is there a reason there's been a big pickup in the use of yellow grease in biodiesel?

It was floundering for a while and then all of a sudden there's a pickup in demand. Is there something to know about that?

Again this is John, actually yellow grease has been a key component for the biofuel usage fairly consistently for the past three years. That market moves around for some other reasons as well, and sometimes you've had disruptions on the biofuel slide, because like last year, we didn't know what the tax credit was going to be and we didn't know what the RFS2 volumes were going to be.

I think you see some wavering occasionally inside the biofuel industry, but yellow grease is a key component for the industry.

Okay, I can be mistaken. My last question when I think about the new bakery feed plants and the two pet food plants, is that worth about $20 million to $30 million of EBITDA for 2016? Is that a reasonable run rate?

This is John. What we've been consistently pointing out, the two rendering plants at the end of the year, but the two wet food plants and the bakery plant, that's in the $20 million range of EBITDA that we would be seeing this year coming out of those facilities.

All those facilities. And then I have to net out what the start up cost of the new facilities in the back half of the year. So was it a net of $10 million to $15 million?

The number I threw out were the three facilities that are online now. We've still got -- one of the pet food plants is up and going full speed. We have a little delay on one of the others, but we are still making product at the old location that we are shutting down. But the Bryan, Texas facility is u[p and running, and that was almost a $4 million savings a year in freight alone by having that facility in place when we were moving the product around.

The two rendering plants, one will start early third quarter, because of taking on the raw material from one of the suppliers. The other plant will be closer to fourth quarter, so those will have a smaller impact in 2015, but should be up and running full speed in 2016.

So net-net, the impact of the new facilities is about $20 million for 2016?

We are using $15 million to $20 million run rate for 2015 or 2016, I'm sorry, and $25 million for 2017.

I appreciate it, thank you guys very much.

You bet.

Tom Palmer, JPMorgan.

Hi, thanks for taking my questions. How much would the expanded Diamond Green Diesel facility cost? And how does the decision to expand affect dividend payments to Darling beyond the first quarter of 2016? For instance, if you go ahead with this facility, would it change what we could see later in 2016 or in the first quarter of 2017?

Tom, we don't have the final cost on that at this time. We are still narrowing that down because we moved it from a plus or minus [$0.30], we're heading to a plus or minus [$0.10] that we will have later this spring. We're not prepared to put a number out there today.

What we are willing to look at is that would take the facility from 160 million to around 245 million gallons, and we believe a margin structure in that business will maintain itself anywhere from $1 on the low side to $1.50 on the high side with the improvement of the LCFS standard. As far as dividends out of the year, John, you have a thought?

Last year we declared -- the joint venture declared a dividend of $50 million. This year we will be getting $158 million back on the credit at the end of March or first of April. The other thing this year, we are going -- we can apply for the dollar credit as we go through the year. So we will be generating a lot more cash during the year within the joint venture.

Those monies will be available for the expansion of facilities, so there won't be any required funding from either partner at the joint venture and should leave adequate money for a dividend as well for 2016 and 2017. Until we get the final number on the expansion of what that would be, we don't want to really talk a whole lot about what the net cash impact is going to be.

Understood, thank you. Just had a follow-up regarding the fuel ingredients segment, pretty significant rebound in the segment both from the revenue and gross profit line.

Could you provide a little more detail on the factors that drove the strength? And also with regards to the insurance accrual on the Ecoson facility, maybe the magnitude of that and how that flowed through?

Yes. The Ecoson facility first of all, the fire that we had there that was reported, when you look at the other income and expense, what we did, that was a fully insured event with our insurance carrier, plus we have business interruption insurance. So that can -- that will cover us from our operating cost as we go forward plus loss of profits.

We did book the deductibility or the insurance deductibility portion of that in other income and expense as we did in Brazil. So that is where that cost factor is. That is not in the segment, that is reported below the line for GAAP purposes.

The fourth quarter as you indicated, revenue was up and operating income was up. That was both -- remember in the fourth quarter, when the government passed the bio credit, we were able to book that US activity and our Canadian activity into the fuel segment. That was booked in the fourth quarter.

That's where a large part of that came from. Plus our Rendac had a very strong fourth quarter in Europe. Strong volumes in Europe and revenue coming out of that.

The main difference if you go back and look at 2014 fourth quarter, that's where the biofuel credit comes in the fourth quarter. The good news is in 2016, we will build to take that on a quarterly basis going forward, which will give everyone a much better feel for what the fuel segment really looks like.

Great, thank you.

Adam Samuelson, Goldman Sachs.

Yes thanks, good morning everyone. A lot of ground has been covered. Maybe first going back into the feed segment, I know Randy, you talked about a bottom and finished product pricing where we are.

Want to understand how pricing got this low in the fourth quarter. A, in the poultry industry, I'm wondering did you benefit or were you hurt by the industry eventually running leg quarters through rendering for the first time in a number of years? And on the fat side, as the seasonality bio-diesel demand uncertainty on the credit. You haven't seen a big spike yet in yellow grease pricing, at least on the [gins trade] press.

I know you talked about the cash prices. Can you talk about where the scope for that Jacobsen yellow grease price to really move higher as you get into summer driving and summer bio-diesel demand picks up?

Yes I think -- very well said Adam. If you think about the fourth quarter, the slaughter was strong and we're talking North America specifically or even out to Canada, the slaughter just remained very strong especially in the poultry side. Our plants were running at capacity.

In addition, the brokers were out there trying to sell all the different parts that typically go to what we call the hotdog or the hotdog squeezer industry, that shut down in late third quarter, early fourth quarter. And all those different parts that aren't traditionally in the rendered truck or rendered barrel ended up in our plants. You couple that extra tonnage with the pet food companies scaling way back and warm weather for just feeding and you just set up a perfect situation.

On top you have the -- you can't decouple our products if you will from both poultry, pork and beef against the global oil seed complex. You saw the crush running strong, and we have been in a protein driven market for the last four or five years. You have seen crush margins within the oil seed industry, the ADMs, Bunges, Cargills and Dreyfuss' of the world.

It's well know that the crush margins have contracted and why did they contract? It's being driven by the excess amount of protein or the lack of protein demand around the world for soybean meal, and that spilled over.

So we've got that industry now, running now at a reasonable rate. We've got the excess tonnage that was pushed our way in fourth quarter now sold and moved either out of the country, or to the local feed markets today. And the pet food industry ramped back up for their supply chain after the first of the year.

So the protein situation righted itself. As we've always said in the commodities business, the cure to high prices is higher prices and the cure to low prices is lower prices. And we had to push low before it pushed back into formulation, and now it's come back to the realistic levels that it should be at.

Now in the fat side, the biofuel industry slowed down tremendously in Q4, on top of the fact that you had warm weather for feeding. Now we are in full scale winter in most parts of the country, and we are seeing demand pick up there.

Additionally remember, we were right sizing our supply chain into Diamond Green Diesel for our two-week shutdown that we had at the end of January. All of this contributed to a little bit of excess supply, a supply push. The chemical companies slowed down so they weren't buying the packer tallow in Q4, they have come back strongly here.

So everything is I think what was said by Heather a little bit, this is a nontraditional time to see demand pick up, but it's picking up, prices are moving. I am fairly optimistic from where I sit today and from what I hear, we will see prices move on up for our products even more here. And we will feel the impacts for sure in the second quarter here.

That is helpful. And in the fourth quarter, any way to quantify the impact your formula lags would've had -- just to think about in a falling prices environment like you saw, and a weak demand environment that is very well supplied, I'd imagine those formulas were a healthy net negative on the quarterly performance. Just want to quantify that.

This is John. We spent a quite a bit of time looking at that, but it is -- in the fourth quarter, that impact was in the $7.5 million to $10 million range of impact.

Okay. That's very helpful. And finally on the cash flow side for 2016, and the working capital performance in the fourth quarter in particular, it was very impressive. Do you think there is more scope of the working capital side to get some cash, or do you think you are about done on the opportunity set there?

No, we are still focusing on it. We made tremendous progress from a negative working capital in 2014, to the positive in 2015. And we would like to -- we are targeting between $20 million and $25 million improvement in working capital in 2016. And that goes across the board in inventory receivables and accounts payable including expenses as well.

So we are still focusing on that. We're trying to get back to the levels, and improvement levels from before -- at the time we made the acquisition. That is our main focus this year, and we are going to try to really hit that $20 million to $25 million improvement in 2016.

That's very helpful and will pass it along. Thanks.

Bill Baldwin, Baldwin Anthony Securities.

Just a quick one here. On the Diamond Green Diesel focus you have been doing, John and Randy on the recapitalization, now with the big tax credit coming in, how does that look to you? How do you think that's going to play out over the next year or so?

We are on -- when the facility was built and the credit agreement was set up, it mirrored what the Department of Energy was going to be providing. And the essence of it was for a facility about the size it is today.

Now that we are looking at a new facility, expansion and everything with the cash coming off of that, we are talking to Valero about making some changes to that agreement. And hopefully we can just do that with making some simple amendments to it without having to go out and do a complete refinancing, and achieve the same results without spending a lot of money to do that.

Just to keep it internal and not go to third-party financing.

Well, all of those options are out there, but in looking at it, there are some sections of the agreement if we would amend that, we would be in pretty good shape.

You've got the ability to pay it down. I guess your current portion of long-term debt that is due in the next 12 months is $62 million. Once you pay that down, you don't have a whole lot on there. I think $45 million, $50 million.

You are right on. Where the debt is today and how the current agreement works, the debt would be paid off very rapidly. And during an expansion, the board within the JV is going to be looking at that and make the right decision as to how to manage the cash flows.

Okay. Thank you very much.

Okay, thank you.

All right, I guess that concludes the call. I appreciate everybody's questions today, and we look forward to talking to you in May and updating you on our progress. Thank you.

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