Darling Ingredients Inc. (DAR) Q4 2011 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the Darling International Conference Call to discuss the company's fiscal fourth quarter and full year 2011 financial results. With us today are Mr. Randall Stuewe, Chairman and Chief Executive Officer of Darling International; and Mr. John Muse, Executive Vice President, Finance and Administration. [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. I would now like to turn the conference over to Mrs. Melissa Gaither, Director of Investor Relations of Darling International. Please go ahead, ma'am.

Thank you, Emily. Good morning. Thank you for joining us for Darling's Fourth Quarter Fiscal 2011 Earnings Call. 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 impact our results. John Muse, Executive Vice President Finance and Administration, will then provide you with additional details about our financial results. Randy will conclude the prepared portion of the call with some general remarks about the business, after which time, we will be happy to answer your questions. Before we begin, I need to remind everyone that this conference call will contain certain forward-looking statements regarding the business operations of Darling and the industry in which it operates. These statements are identified by words such as may, will, begin, look forward, expect, believe, intend, anticipate, should, estimate, continue, momentum and other words referring to events to occur in the future. These statements reflect Darling's current view of future events and are based on its assessment of and are subject to a variety of risks and uncertainties beyond its control, including disturbances in world financial, credit, commodities and stock markets; a decline in consumer confidence and discretionary spending; the general performance of the U.S. and global economy; potential changes in U.S. and foreign regulations affecting our products; and global demands for biofuels and grain and oil seed commodities, which have exhibited volatility and can impact the cost of feed for cattle, hogs and poultry, thus affecting available rendering feedstocks. Risks include future expenditures relating to the Darling's joint venture, Valero Energy Corporation, to construct and complete a renewable diesel plant in Norco, Louisiana, and possible difficulties completing and obtaining operational viability with the plant on a timely basis or at all; economic disruptions resulting from the European debt crisis and continued or an escalation of conflict in the Middle East; each of which could cause actual results to differ materially from those projected in such forward-looking statements. Other risks and uncertainties regarding Darling, its business and the industry in which it operates are referenced from time to time in the company's filings with the Securities and Exchange Commission. Darling is under no obligation to and expressly disclaims any such obligations to update or alter its forward-looking statements whether as a result of new information, future events or otherwise. With that, I would like to turn the call over to Randy.

Thanks, Melissa. Good morning, everyone, and thanks for joining us today. It's my pleasure to welcome you to the Darling International Earnings Call to discuss our financial results for our fourth quarter and our fiscal year, which ended on December 31. 2011 will go down in the records books as an exceptional year for Darling. We set new records for revenue, EBITDA and earnings per share, the highest in our 129-year history. While the fourth quarter numbers may not have exceeded expectations, they solidly support the rationale for our investment in Diamond Green Diesel. Our risk management models worked, our formula pricing arrangements remain true, but we simply couldn't offset the significance of the decline in protein and fat values. Driving our earnings performance were strong finished products throughout most of the year, resulting from improving global economies, strong Chinese demand and continued implementation of global biofuel mandates. This tempered in the back half of the year, as poultry numbers declined, European economic conditions deteriorated and seasonal reductions in demand for our feedstock occurred. All of this tempered our opportunity to maximize earnings potential in the quarter. However, this is the perfect time to demonstrate the opportunity our Diamond Green Diesel investment will give us to offset declining fat prices. To put this in perspective, if Diamond Green Diesel had been operating in the 2011 fourth quarter, based on average raw material cost and finished product prices for fourth quarter 2011, and assuming that the plant operates as anticipated and at capacity, our earnings per share would have been approximately $0.11 per share higher. For the year of 2011, our EPS would have benefited by approximately $0.30 per share based on the same input assumptions. Now let's go to the segments. In the Rendering segment, our input tonnage improved throughout the year and most of the quarter. Our diversification across the meat spectrum clearly benefited us. These supplies were strong throughout most of the year but began to decline in late fourth quarter, as consumer inventories built and excess cow slaughter of the drought-impacted areas subsided. On the Poultry front, our tonnage reflected cutbacks associated with higher input costs and an industry challenged with profitability starting in late third quarter, but stabilized for most of the fourth quarter. On the Restaurant front, grease volumes were on the rise, driven by a rebounding U.S. economy and more normalized eating-out occasions. Theft remains a concern, but now with our national reach, we are gaining traction in improving all facets of our service and potential for new customer growth. From a new product standpoint, we have recently launched an alternative equipment system for fresh oil delivery and used oil collection. It is state-of-the-art system that now provides an economic alternative to other existing systems. Our Bakery Feeds division had a very solid performance for the year and quarter and contributed nicely to our earnings performance. Input volumes grew year-over-year and general economic conditions in the commercial bakeries improved as they operated longer hours. Energy declined for most of the year and natural gas aided our performance. However, we must note that diesel costs are now under pressure and are starting to escalate and will give us some pressure going forward. Plant operating costs were well managed, and the synergies associated with the Griffin acquisition continue to benefit us. Now for an update on our Diamond Green Diesel project with Valero. As you recall, we announced midyear that financing had been secured via a subsidiary of Valero, a strong testament to the validity and viability of the technology. The construction phase is progressing extremely well, on time and on budget. We are approximately 33% complete at this time and, as I mentioned earlier, on target for commissioning it either late at the end of 2012 or early in the year 2013. As a reminder, the facility will be capable of producing approximately 137 million gallons of renewable diesel and approximately 21 million in gallons of green gases, naphta and butane. With that, I'd like to turn the call over to John Muse. And after John concludes, I'll provide a few closing remarks, and then we'll move to Q&A. John?

Thanks, Randy. For the fourth quarter, the company reported net sales of $430.9 million compared to $227.2 million in the year ago period. The $203.7 million increase in sales primarily resulted from higher selling prices for our finished products and a full-year sales contribution from the Griffin acquisition. As Randy mentioned, during the fourth quarter as compared to the third quarter of 2011, fat and protein prices declined more than 10% and 12%, respectively, due primarily to lower export demand from European biodiesel and a softening demand for protein meal as a result of cutbacks by poultry producers. Net income for the 2011 fourth quarter increased to $29.5 million or $0.25 a share on a fully diluted basis as compared to net income of $10 million or $0.12 a share for the 2010 comparable period. As noted in our press release, the $19.5 million increase in net income for the fourth quarter resulted primarily from the acquisition of Griffin Industries, as well as higher selling prices for our finished product. Fourth quarter net income compared to 2011 third quarter was negatively impacted by the decrease in both fat and protein finished product prices, which impacted margins in our non-formula business. In addition to the decrease in pricing, our aggregate expenses for depreciation, income taxes and SG&A increased by more than $0.04 per share in the 2011 fourth quarter as compared to our prior quarterly average expenses. Depreciation expense increased primarily due to an unusual large number of capital projects being completed and placed into full service in the fourth quarter. Darling's policy is to record a half year of booked depreciation on capitalized products, which resulted in depreciation and expense increasing by $2 million in the fourth quarter of 2011. These capitalized projects increased our tax bonus depreciation, which in turn, impacted our effective tax rate because it reduced the production credit deduction. This, along with increases in state and foreign income taxes, increased our effective tax rate by $2 million for the fourth quarter. Approximately $9 million of the $17 million income tax return that you noticed on the balance sheet relates to these book and tax depreciation adjustments. And finally, our SG&A expenses were up approximately $2.5 million related to health benefit accruals and workers comp actuarial true-ups and increased consulting expenses. At the segment level, Rendering generated net sales of $360.7 million for the fourth quarter as compared to $217 million in the fourth quarter of 2010. Bakery by-product sales contributed $70.2 million the fourth quarter of '11. Now turning to the results for the full year ended December 31, 2011. Darling reported net sales of $1.79 billion as compared to $724 million during fiscal 2010. The $1 billion increase in sales primarily resulted from higher selling prices for our finished products and from 52 weeks of contribution from the acquisition of Griffin Industries compared to a 2-week contribution in the prior year period. Net income for 2011 was $169.4 million or $1.47 per share as compared to $44.2 million or $0.53 per share for the 2010 comparable period. The $125.2 million increase in net income for 2011 resulted primarily from higher finished product prices and contributions from the Griffin acquisition. Interest expense was $37.2 million during 2011 compared to $8.7 million last year, an increase of $28.5 million. This primarily is due to an increase in debt outstanding as a result of the Griffin acquisition in December 2010. Other expenses was $3.6 million in 2011, a $0.2 million increase over the $3.4 million reported last year. The increase is primarily due to an increase in unused bank fee commitments that more than offset the decrease in costs incurred in the prior year from losses reported due to fires at 2 plant locations and write-off of deferred loan costs due to the termination of the previous credit agreement. At the segment level, Rendering generated net sales of $1.5 billion in 2011 as compared to $714 million in the comparable 2010 period. The Griffin acquisition accounted for $583.4 million of rendering net sales as a result of a 52-week contribution, and higher finished product prices contributed $210.7 million to the increase. Keep in mind that our Rendering segment includes our used cooking oil removal service and our grease trap services. Bakery segment sales accounted for $296 million of sales for 2011. As discussed in our third quarter call, we are now separately reporting the company's investment in our joint venture with Valero, as an investment in the unconsolidated sub on both the statement of operations and on our balance sheet. On the balance sheet, we reported an investment of $21.7 million at December 31, 2011, and the statement of operation reports a net loss of $1.6 million for 2011. These losses are largely due to non-capitalized expenses as we proceeded through the construction phase. Let me provide some additional balance sheet detail now. On December 31, 2011, the company had working capital of $92.4 million, and our working capital ratio was 1.73:1 compared to working capital of $3.8 million and a working capital ratio of 1.2:1 on January 1, 2011. The increase in working capital is primarily due to increases in commodity prices and increase in inventory volumes. At December 31, 2011, the company had unrestricted cash of $38.9 million, and funds are available under our revolving credit facility of $391.6 million compared to unrestricted cash of $9.2 million and funds available under the facility of $141 million at January 1, 2011. We voluntarily prepaid $30 million on a term loan during the fourth quarter, and subsequent to yearend, we paid off the remaining $30 million of the term loan B. The only thing that's open now is our $250 million of our debt. Capital expenditures of $60.2 million were made during 2011 as compared to 24.6 -- $24.7 million in 2010, a significant increase of $35.5 million. The increase is due primarily to capital expenditures by Griffin, which was acquired in December '10, compared to prior year CapEx, which included only 2 weeks of Griffin. I will now turn the call back over to Randy.

Thanks, John. Let me end by saying that 2011 was another milestone for Darling, and we're all very proud of our results. We successfully integrated Griffin Industries into our family, and we have a robust balance sheet and capital structure for future growth. With the integration efforts largely behind us, coupled with the support and commitment from our joint venture partner for our Diamond Green Diesel project, we believe we have jumpstarted and repositioned Darling for future success. Without question, we have solidified our leading market position as North America's oldest, largest and most innovative recycling solutions company. I'd like to take a moment and thank our entire team for their contributions and the superb performance in 2011. Our team is second to none, and we can count on them to continue to drive growth and deliver best performance possible for all for the future. With that, I'd like to open it up for Q&A now. Operator?

[Operator Instructions] And our first question comes from Lindsay Drucker Mann of Goldman Sachs.

With all the uncertainty about ag commodity prices, that's been coloring the market of late, I was hoping you guys could walk through as you think about your underlying earnings power in the event we do see corn and soybean prices move lower post the new crop?

Okay. I think -- couple things here, and then I think part of this could segue into a discussion of how commodity prices impact the business. And I'll see if John can help us walk through a little bit of that. Essentially, what we've set up this year is -- and if you think of the fourth quarter, we saw prices both in protein and fat drop off pretty significantly. And that's both at the reported trade publication level, and then probably more importantly, at the cash level. Exports backed off for us significantly with our big coastal plants because Europe just didn't buy the fat that they'd been buying throughout the summer. They, in turn, had their worlds rocked a little bit in the economic crisis, but more importantly, they started buying lower market methyl esters from the Pac Rim countries and South America and backed off on the fat here a little bit. So we saw yellow grease prices drop off pretty tremendously, while corn kind of moved up and down. So they almost decoupled. The protein prices, we saw the poultry protein prices kind of hold in there, backed off a little bit. But the meat and bone meal from the ruminant side backed off sharply because of lower poultry demand here and then fewer exports into the Pac Rim countries in the back half of the year. So we felt a pretty good brunt of things here in the fourth quarter that impacted results. As I said, the formulas work, the pricing relationships we have in there. But I think it's important that we go through and try to help you guys reconcile this a little bit. And that will kind of answer how you should look at the back half of the year, Lindsay, because I kind of share that with you right now. I said the market looks pretty solid at $6.50; corn, $13. But if you remotely buy into USDA numbers of that size of acreage of corn and that trend-line yield, this thing could back off pretty sharply in the back half of the year. But a lot of things have to go right for that. But hey, John, why don't you walk them through a way to look at this here.

Yes, Randy and I were talking, and before the call, and thought a good thing to do would be to walk everyone through a good way to kind of look at the business, because we talk about our formula business and so forth. But we also saw from third quarter of 2011 to fourth quarter 2011, we saw our operating income go from $74.7 million in third quarter '11 to $59.5 million in fourth quarter. That's a decrease of $15.3 million. So where did that come from? Well, if you look at the sales, sales went from $455 million in third quarter to $430 million in fourth quarter. That's a reduction of $25 million. Now we saw fat and protein prices drop 10% to 12%, but that was from the beginning to the end. If you look at this, this shows that sales were down 5.5% to 6%. So not the full amount, because we had forward sales and the lower prices were at the end. So the full impact did not hit into the fourth quarter. So -- but what you're looking at is a drop of 25%. We have constantly said that our formula business is approximately 70% of how we buy our products. So we've got a locked-in margin on that. So if you look at the sales decrease and say 70% of that, cost of sales should have dropped by $17.5 million. However, cost of sales dropped by $12 million. So there's a difference there of about $5.1 million. So if you're looking at that decrease in operating income, even with our formula business, $7.5 million or almost $8 million would have come out of our earnings because of the drop in sales, even with the formula business. You also saw depreciation go up. As I talked about, we capitalized and put assets into place that raised our book depreciation because we take a half a year, so -- and this is something no one could have seen coming on your end, of $2.2 million. And then SG&A quarter-over-quarter was only up $376,000. So if you take the $15.3 million minus the $7.5 million, minus the $2.2 million and SG&A, what you're looking at is $5.1 million of where -- why wasn't that covered? Well, part of that is that 30% that's out there. But we also got to understand how our formulas work. In an uptick market or flat markets, formulas are perfect for us, we're protected. In an up market, as prices are increasing, we're looking at -- if yellow grease is at $0.35 this week and we buy our raw material off of that, but the next week, it goes up to $0.36, we're selling that finished product at $0.01 a pound more than we bought our bases of raw material. In a declining market, when fat prices drop by 10%, you're on the backside of that. You have $0.35 grease, you're buying your raw material, it goes to $0.34, you're selling it for a $0.01 a pound less. The formula can't protect you on that. It protects you on that base acquisition. So if you look at that drop that we had during that period, and as rapidly as it dropped, we had, between fat and protein, an exposure of another $2.7 million that impacted that earnings of that $15.2 million. So that takes -- that addresses half of that $5.1 million. And this is how you really should look at it from a standpoint of quarter-to-quarter, looking at what our sales changed by and look at how our cost of sales changed, and you can see where the formulas do come in and how they do work. I hope that's not too many numbers and too much data, but I hope that clarifies where we are.

Because we wanted to use that, Lindsay, to try to help demonstrate when you've got to pick a price for fat and a price for protein in the future given the historical relationships to whatever your view is going to be of corn and soybeans, and then at that time, then you can flow it through and come up with your opinions. So with that, I'll turn it back over to you.

Okay. So just to clarify, those numbers are very helpful. What you talk about, there is sort of a lag impact that should flow into the first quarter because some of your sales are forward. And on the other hand, just like you've been playing catch-up to this falling tide of prices, if we're at a steady state, not that we're ever at a steady state, but you would expect for 75% coverage. So as you think about how the first quarter is shaping up, sequentially, are you going to take a disproportionate hit on the revenue side, as some of those forward sales that protected you in the fourth quarter start to roll off? Or are you -- is there going to be some sort of disproportionate benefit on the cost side because now we're sort of in a place where you can field the full coverage from your formula pricing?

I think the key word is there's a lag. The lowest prices we saw for 2011 happened in the last 30 days of the year, in December. The West Coast was even weaker. We saw yellow grease prices down to $0.30 a pound out there. As we've noted, and you can see in the K, inventories built pretty substantially in our coastal plants as exports were reduced. So you're going to see a little carry-forward in the January. We're starting to see the February numbers improve, maybe 2% or 3% on pricing as we saw protein uptick. And I think you're going to carry pretty good momentum out of first quarter, it'd be my guess, as we've now seen corn rebound back to $6.50, beans to $13, soybean oil in the $0.54, $0.55 range and protein at $350 a ton, when we're selling ruminant meat and bone meal out there right now at $300 to $310 a ton. So we went from a pretty significant premium to a significant discount, which means we'll just start to get the momentum. But I think the keyword is lag here. And then it'll flow through, kind of as John said, what you -- we talk about our business being 70% formula, that's both on the -- that's that meat by-product, recycling and the cooking oil recovery, but the cooking oil side is far less formula than the meat by-product side. So really, the big input here will be how do yellow grease prices recover and pick up momentum as we go into biofuel season here.

Okay. And then just one quick clarification on the protein side. Is the reason why you went from premium to discount versus soybean meal a function of your disproportionate exposure to poultry and then your lack of export markets outside of the Pacific Rim? And help us understand why those exports fell off so much.

Yes, it's -- predominantly, number one, that if you had to say, and I'll just approximate, 85% of our meat and bone meal, maybe a little more, ends up in the poultry industry, whether it's on this continent or abroad. The price swing that happens in that business is driven by 2 things. One, there was a very strong slaughter in fourth quarter of the remaining drown animals, and also, the beef side ramped very strong in the Midwest. And so you had this strong packer push of meat and bone meal that either ends up in poultry or pet food. Pet food geared down for seasonality, so they put a lot of pressure on the meat and bone meal side. If you don't get the Indonesian imports in fourth quarter for whatever reason: quota fulfilled, freight -- freight rates were moving around, as you know, pretty substantially, then that's where that backs up in the country. We've seen meat and bone meal start to perk up a little bit, but clearly, the domestic chicken numbers are down. They're the largest consumer of the product. So I think, for the most part, we're stable there. And then once we get some exports on the books again to get the residual out of the country, we'll see it pick up.

Our next question comes from Dan Mannes of Avondale Partners.

A couple of follow-up questions. But one thing I wanted to clarify is my read with the Q3 had its own issues. So using that as a sort of a starting base for the comparison fiscal, because margins were conspicuously low in the third quarter given the hot weather and the degradation. So I would have thought, all other things being equal, margins, you should have been -- at the same price level, you should have made more money in 4 than 3. So I guess I'm wondering where that sort of tailwind was or am I misreading that?

No, what -- yes, we had downgrades in the other quarter, absolutely. What the calculation I was trying to walk everyone through, Dan, was just a straight understanding that 70% of our product is under formula. When you have sales declines of $25 million and our raw material costs should have been -- reduction, should have been more under just a regular formula business. We did not have the downgrades, that you're absolutely correct, but there was also some pressure in moving some of the product during the fourth quarter because of the cutback on the poultry side. So some of that protein was sold at a little lower price.

And remember, Dan, the poultry side cut back in fourth quarter, so there was a little bit disproportionate mix of beef in there. And meat and bone meal dropped from almost $360 a ton down to $300 a ton, maybe even lower for a little while.

Yes. That's even a better point. And that remember, under our formulas, poultry is basically at a 100%. Poultry volumes were down. When I say 70%, our beef, though, is at around 50% formula. Our beef volumes were up; our poultry was down. So I use the 70%, which is annual tally number. But really, our formula business, probably during the fourth quarter, was more in the 66% to 67% range because of this proportionate movement of beef versus poultry.

No, I got you there. I was just trying to make sure I understood the starting point in terms of the Q3 to 4 comparison. And I think I understand. I mean, your formulas certainly do work, and I think what we've seen, and correct me if I'm wrong, is over the period of a couple of quarters with a stable or slowly moving price environment, your formulas are pretty good. But we've seen this in quarters before where we have violent moves upward or down, the formulas kind of dislocate a little bit, inch or quarter. Is that a fair way to think about it?

Absolutely.

Absolutely.

I mean, you get inventory builds. They lag. What always happens, in rising markets, why do prices rise? Because people run out of product. In declining markets, why do prices go down? Because no one's buying it, so you build inventory. And so you're buying it on last week's price while the price goes down, and then you may sell it 2 or 3 weeks later out of inventory, even at a lower price in a violent, declining market.

Okay. 2 quick follow-ups. The first one, Bakery. Can you talk about -- and I know you told us sort of on total operating income from 3 to 4, but it looked like Bakery was a bit worse than we were expecting. Can you sort of walk us through maybe the volume change, because pricing looks flattish? So can you talk through the volume change, how much of that is just seasonal change versus was there anything incremental you saw in Bakery?

Nothing really incremental. In fact, the selling price was pretty stable throughout the quarter. It was really predominantly volume-driven, which as you said, is seasonality. If you think of the Baking business, you build inventory in the consumer products business to support that fourth quarter holiday bake-off season and a lot more eating-at-home occasions. And then, it just kind of falls off the Earth here about mid-December, with all the holidays and the downtime. So you'll see a volume swing there, I would say of almost 10% in the fourth quarter. First quarter, probably up a little bit from fourth quarter, but not much. And then that kind of -- then you pick up second quarter and then the third quarter. It really kind of mirrors the cooking oil business, which kind of makes sense as eating-out occasions improve and people come off those post holiday resolutions to lose weight.

Okay. And then last question. You mentioned the weakness in the export market, particularly for used cooking oil and grease at the end of Q4. Over the last couple weeks, we've seen a pretty sizable step-up in grease prices. I mean, we're seeing yellow grease, at least in Illinois, up to $0.40. You were saying as low as the low 30s. Is that something that's going to play into Q1 or does that really go to your comments on momentum into Q2 and the balance of the year?

I'm going to take the safe answer there, and I'm going to say Q2, Dan. We've got a ton of inventory to work out of. We had to carry it out of fourth quarter. Prices on the West Coast haven't moved. We've not seen the Pac Rim exports come back. But we're starting to see some repositioning as people figure out what the biofuel rules are around the world. Europe was the -- was doing a regulatory arbitrage on our cooking oil in the middle of last year. And then, all of a sudden, palm methyl ester and South American methyl ester started to make its way into the EU versus the feedstock. So that was probably the most significant effect. Now whether we see the EU return or not, I think that's kind of a coin flip right now.

Our next question comes from John Quealy of Canaccord Genuity.

It's Mark Sigal for John. A follow-up on one of Dan's question. Given the interquarter volatility in pricing, would you agree or disagree with a statement that the formulas sort of help normalize things over, call it maybe a 2-quarter period given that in any one quarter, the volatility can be hard to offset?

Mark, yes, you're absolutely correct. You understand how that works. We saw a dramatic drop in -- from third to fourth. January prices were down even a little bit from where we were in December, but as Randy said, they've come back real strong. They started moving back in February, and March, now, we're seeing much higher prices. We'll have to kind of see how those averages work out and how the demand is going and how we ship it. But it should -- Lindsay brought out a very good point, and I'm glad she brought that out. We saw decreases of prices at around 10%. What we really saw, though, was around a 6% change in our sales. This increase in pricing will help offset some of that carryover that would have moved over into the first quarter. So yes, putting 2 quarters together when you got a down, and then you start picking it back up, they should normalize a little bit.

Okay. And then in terms of the formula/non-formula split at roughly 70-30, do you guys feel comfortable at that split? I know you sort of historically run at that split post Griffin. And then, in a rising price environment, are there instances where you can be opportunistic perhaps to weigh things more toward fixed pricing, to be a bit more opportunistic there and capture more of the upside?

That's probably giving us too much credit, Mark. The reality is, it's customer-, supplier-driven. So if we land bigger customers, they go on formula. If we deal with smaller customers, they don't. So at the most part, it feels like it's a pretty comfortable position to be in. I think in the cooking oil side, we're -- the team is putting on a very strong effort to put a focus on retention of accounts and then to put them under pricing agreements. So there's a move to take more volatility out of that and secure the supply. So yes, there's a push there. The rendering side or the meat by-product, recycling side, we're probably as where we're going to be for right now.

Okay. And then switching gears to the Diamond Green Diesel project. Realizing that the plant is still 3 to 4 quarters away from commissioning, can you talk a bit about how you're viewing feedstock procurement and what you might be able to do on the forward purchase side there?

Well, I think, first off, the management team to run the joint venture have been hired and are on site. The operations manager's been on site since late third quarter, early fourth quarter. And then our commercial management team has just come on board here in February. So it's probably premature to try to put words in his mouth. I mean, obviously, the Darling system is going to backstop it. But remember, that unit is helped to -- set up to help us manage risk, both for Valero and for Darling. So forward procurement into it, just given the nature of where the feedstock comes from, probably isn't really a viable discussion to have. It's going to be a spot business, a spot-margin business, much like the petroleum business is. As we've said, in our business model, it gives us a 100 million-pound tank farm to ship to, to put in position to process and value-add in the future. So for us, the value is having somewhere to go with the product that we don't have to force into the market. So from a standpoint, from a pricing standpoint, it will be most likely priced at spot.

The way the contracts work and how the material was shipped, it's to our advantage not to do the forward. Where the exposure is going to be would be within the joint venture itself and the amount of raw material inventory they would have, and whether they would hedge that against the finished product markets as it goes forward. Because that's where the inventory is going to reside is within the JV, not within Darling.

Understood. And then just lastly, over the past call or 2, you guys would talk about implementing some Griffin best practices at several of some legacy Darling plants and some plant upgrades there. Can you just talk about is that process fully complete now? Or just what's the latest there?

Yes, I mean, we've made great progress in 2011. I mean, when you look at benefits, health, welfare, standard systems we kicked off in 2012, our new safety program, I mean, it's moving around. In the standpoint of the daily tactics to run the business, all is pretty well complete there, both organizationally and administratively. But where our focus is turning now is to value-adding. And our number one challenge is to be able to handle warm weather in the summer, and then see if we can figure out how to make meat and bone meal more valuable to the -- either the pet food side or the poultry side. So lots of projects going on there in about half a dozen plants. So too really to see if they work, but the momentum's there.

Our next question comes from Farha Aslam of Stephens.

First, just a couple of housekeeping questions. What do you expect D&A, interest expense and tax rate for 2012?

I knew you were going to ask that.

John, would you answer her question?

I would tell you to use, for the year, on average, in that 37.5% to 37.8% range. There's not a lot that we can do with that from an effective tax rate. It's -- last year, we were right at 37%. This year, we've got a little bit in there. What we're focusing on, Farha, is from the cash side. And unfortunately, when we do more things on the cash side to reduce our cash taxes, it does increase our effective tax rate. I know that doesn't sounds like it should work that way, but that's how it is. With everything that we did in the fourth quarter, you'll notice on the balance sheet, we have a large income tax refund sitting there that will stop us from having to pay some taxes during the first part of this year. From an effective tax rate, I think if you're at the 37.5%, that would be a good number to use.

Great. And then interest and D&A?

Well, interest today, after we have paid off the debts, we're down to the $250 million, and that's at 8.5%. I'll let you go from there. But that's the only debt. We've got some LCs out that the fees will run about $1 million a year, and fees for our unused lines. So you can take that. And we'll be amortizing some of the loan costs off, but that's only about $0.5 million a year or so there. So that's where your interest number should be looked at that.

That's great. And then D&A?

SG&A...

No, no. Depreciation and amortization. Sorry, no, just D&A.

Oh, depreciation? We were up a little bit. I would say in the $20 million range a quarter.

Okay, $20 million a quarter. That's helpful. And then, Randy, you'd highlighted what Diamond Green Diesel would add in the fourth quarter, but the tax credit has expired. Could you just share with us kind of how the rent credit made up for that expiration of that tax credit? And how, if you would have run the biodiesel plant today or kind of in 2012, what that would add?

Sure. We're going to teach you how we look at the business on this. This is a very informative call for you guys today.

Okay. Look, let's go back. And Randy said, during the fourth quarter, it would have meant $0.11 per share, and on the -- for the year, $0.30. Let's move forward and just look at January itself, okay? Tallow, average prices in January were around $0.45. Yellow grease was around $0.35. Number 2 diesel was $3.09 a gallon. The RIN, even though the subsidy is gone, it's the RIN that's the driver because that makes up on the subsidy side. So if you look at that and what -- the mix going into the Diamond Green Diesel was approximately -- now this will vary from time to time based on supply and so forth, but we're looking at about 35% of the fat going into that being tallow and about 65% yellow grease. So if you take that 45% to tallow, 35% to yellow grease, that comes over to a blended average of around $0.38 to $0.39 a pound raw material going into the venture as -- in January. The average freight going down there from the various locations is a little over $0.035. So you're looking around $0.42 raw material delivery into that facility. If you look at Number 2 wholesale diesel in January, that averaged $3.09. RIN was $1.35. The multiplier against that for the Green Premium is 1.7. So that gives you your RIN value of $2.30. So the $3.09 plus the $2.30 gives you $5.39 finished product value that they would be selling out of that facility. As Randy had also said, we also have by-products coming out of the facility of naptha, propane and butane. With today's prices, and prices during January, that would add another $0.30 per gallon to the value coming out of that facility. So the sales out of that facility would be approximately $5.69 a gallon. We talked about the feedstock costs that I walked you through. That gives you a feedstock cost of $3.51 a gallon. Operating cost, we've always said we're in that $0.45 to $0.50 range in looking at it. But now, with natural gas prices being as low as they are, that drives hydrogen cost. Hydrogen cost is the largest single cost in this facility. So that has driven our hydrogen cost down substantially. So our production cost now is running in the $0.35 range on a forecasted basis. So if you do all of that, you come down to a profit per gallon in that facility of $1.83 per gallon. If you annualize that at the 136 million gallon that would go through that facility, the annual EBITDA based on January prices would be $250 million for that facility. We get half, $125 million, that's the EBITDA. What would come back to Darling would be that EBITDA number minus interest costs in that facility, less depreciation. And that's the operating income that would show up as the profit that would come in as the unconsolidated subsidiary. But if you looked at that facility in January, you saw fat prices being down in January, but you also saw petroleum prices running up. With petroleum prices running up and fat prices being where they are, the profitability of the facility on a snapshot today, that's what you'd be looking at. That is substantially different than what '11 was. '11, that number was $140 million for the year. I hope that helps.

That's very helpful. And then my final question is really on volume. Could you share with us, in Bakery what -- how much you think you for the year you can increase volume as you fill up that second plant? And then in Rendering, we've seen a huge pullback in cattle slaughter in the first quarter and in chicken slaughter. You have 2 months under your belt already in the first quarter. How much do you think volumes are going to be down for the quarter and then for the year?

Well, it's a -- the Bakery side, the new plant in North Baltimore, Ohio, has now been operating for, I don't know, 18, 19 months now. So at the end of the day, as we looked at planning our Bakery system, we're going to try to grow it. Right now, from a budgetary planning perspective, we look at it and say, we think volumes, given the economy for 2012, will be relatively flat. There's lots of opportunity out there for big accounts and some other things that come due this year that maybe we can grow it. But from our perspective, we're going into it that our plants are full. We're starting up a new transfer station on some Darling real estate here in Texas. So we're going to try to grow it, Farha. But from a planning perspective, we're saying, flat here for '12, maybe a little uptick. From our Rendering side, what we want to compare is not Q4 to Q3, but Q1 to Q1 of last year, with -- when we had Griffin underneath. We had one of the largest raw material input quarters, and especially January, in the history of the company last year. So probably won't be what we saw there because we had lots of slaughter. The chicken guys were liquidating flocks, we had tons of deadstock. Cattle guys running good. And so we're not seeing that type of volume, Q1 over Q1, but we're seeing very similar rates to what we saw in fourth quarter here. I think it's fair to say we've seen the poultry guys level off. We're feeling a little more confident that we're going to see an uptick in the back half of the year with those guys. From the beef side, we've not seen that type of slowdown yet, although what we typically see in Q1 is that -- in December through February, March, is that heavy deadstock time. And we just did not see it because we've not had those Arctic blasts, the weather changes in the Midwest that brought on the millions and millions of pounds of deadstock last year. We didn't have that. So from our perspective, it's kind of flat. Little bit of new growth in accounts there to offset some of the probably industry cutback. So from our perspective, pretty flat.

And I'm sorry, so year-over-year in the first quarter, would you expect volume to be down 5%? Is that a good number? Year-over-year, just because it's hard for me to...

Yes, I don't want to take a shot at that. Year-over-year, it's going to be down driven by the seasonality of limited deadstock this year versus kind of massive liquidation in deadstock last year.

Our next question comes from JinMing Liu of Ardour Capital.

Just to follow up on your answer to your -- to the last question. This winter so far has been very warm. You mentioned the deadstock volume. My question is whether the warm weather had some negative impact on volume in the fourth quarter and the potential impact in the first quarter.

Yes. Clearly, we haven't had the deadstock volume that we typically get in the Midwest plants this time of year. But the counter-offset to that, that you feel good about is, is you're not having to use excess natural gas to keep the plants warm this time of year, and it's harder to run plants. So John, anything I'm missing there? Any...

Increased maintenance costs and inefficiencies built in to keeping the tanks heated, with the fat tanks heated and so forth. We did not have that severe weather. So yes, we lost some volume, but we also lowered some operating costs in relationship to the prior period as well.

Okay. I noticed that during the fourth quarter, you made a small acquisition. Can you give about some clarity on that? And also, what is your overall acquisition strategy for this year?

The first thing, I'm looking at John, because I can't remember buying anything in the fourth quarter. But it's been a busy year for me, so that wouldn't surprise me.

Yes, some $1-plus million transaction show up on the cash flow. So that's why I asked.

Oh, that was the final -- yes, Brad, thank you, Brad. The final -- that was the final payout, JinMing, on the -- of the contract to buy the American Proteins grease business. That was a true-up earnout that we had, so that was the last payment. As far as future acquisition growth, I mean, those things kind of bring on themselves. I don't know that there's any real strategy other than the balance sheet's strong, the capacity to borrow is pretty incredible. And frankly, we're getting the team in position with the -- in what I'd say from an integration standpoint, that we're ready to grow again. And that's about all that I can answer for you right now. I mean, obviously, from a board perspective, we're saying, let's make sure that Diamond Green Diesel works, gets up on time and doesn't have either a technology or a massive capital overrun. So from our perspective, we're going to operate conservatively, as we've done with John and I at the helm for nearly the last 10 years of building the war chest. We won't be -- obviously, with the non-call 4 on the high-yield note, we won't be paying any debt down. So it'll just be -- it'll be a cash build until we find something else to do.

And our next question comes from Ken Zaslow of BMO Capital Markets.

So as long as you're on this education process for us today, I guess, another piece of education, if you could help us out. So once the JV has actually started, how do you guys view the impact on the JV to the rendering products? Have you been able to figure out a sensitivity to the pull-through on the demand and how that will actually affect the rendering products?

Not really. I mean, it's kind of interest -- I mean, obviously, this is going to be one of those what I'd consider to be a Harvard case study. Because as you sit there and look at it, you sit there and say, any time you create a new market for 10% to 15% of the supply of the current product, you probably are going to have a price increase on it. I think that was probably what you -- why you saw that in the soybean-oil-based methyl ester business. You crossed the equilibrium lines, crossed on food demand versus fuel. You drove the price of soybean oil up, so it all didn't go to fuel. You're not going to see that, at least in my opinion, from Diamond Green Diesel. Diamond Green Diesel will use fats and greases predominantly from our system, and if we can originate them from the outside, of stuff that is very nontraditional in use. It only ends up in animal feed. The majority of our fats only end up in animal feed. And the way that we got comfortable with that is we went through and looked at how much of our fat actually ended up in biofuels last year, and it'd surprise you. I think probably a little less than 30 million gallons equivalent ended up in biofuels out of our whole portfolio. So that substantiates that the technology can't handle the quality or the lack of quality of our feedstocks. The second thing is, and I think it's probably even more important, is one of the rationale or underlying assumptions underneath Diamond Green Diesel was that we believe that the ethanol economics were going to force everyone to put in the defatting centrifuge systems. And if you run the math -- and there's lots of people out there that can teach you better than I. But if you say, you pick up anywhere from 1/2 pound to 3/4 of a pound per bushel processed of corn oil from the ethanol process from the plants that have those systems, all of a sudden, you can end up with another 2 billion to 4 billion pounds of corn oil that's going to end up in the non-edible channels. And predominantly, because of the waxes and the colors, it's having a hard time finding homes right now. It will work very nicely into Diamond Green Diesel. And obviously, our partner Valero is putting those systems into their -- into a number of their ethanol plants right now. So at the end of the day, instead of the feedstock pool being 9.5 billion, 10 billion pounds, we see it going from 12 to 14 billion pounds. So it's even all that more important for us to have made that investment, not only to have a home for the quality feedstock we make, but for the pressure that these new fats are going to bring into the animal feed markets.

Okay, appreciate it. In terms of the JV, so on a run rate basis, it sounds like it's roughly about $0.40 to $0.45 of earnings accretion, if it was running at this current level, then the $0.11 just annualized. I guess my question to this is, over the last year, you guys have used a much lower number for -- I'll look back over the last 10 years. Do you think that this new -- this run rate is a new run rate that you guys could start saying that this is more sustainable? Do think it goes back to the historical level? Does it go up from here? Can you give a little color? Because -- well, I won't tell you my view, but you tell us what you think.

School's almost over here, Ken. The reality for what I look at here is, when we did our pro-forma projections and looked back, I mean, there was a lot of consternation and analysis and, to a degree, argument on what is that Green Premium that's out there. The value of the RIN, what's the value of the RIN with the tax credit? Without the tax credit? And so you're finally starting to get what we see with that tax credit gone, more of a clear look at what the value of this product is going to be. For us, as we look at it, when we snapshot it, I mean, there's a lot of assumptions there. Will the plant run like we think it will? Will -- what will the price of natural gas/hydrogen be? Do we have the operating costs right? So there's still risk for us. And I just don't want to put a linear piece on it. And what's petroleum going to do? The reality is, we look at this thing as I think it is got a pretty good story underneath it going forward for us. What that's going to be, as we've said, is it's going to be an offset for our base business. Whether we saw -- you can go back and look at it. What wasn't built in some of our pro formas was the 1.7 multiplier on the RIN values. Will that hold? What's going to happen in DC? Is RFS2 going to go to 1.28 billion? It's unpublished. As you saw when it came out in August, comments were due -- RFS2 is supposed to have the quantity for biomass-based diesel published in November. We're still waiting on the 2013 numbers. If that goes to 1.28 billion gallons like the industry'd like to see it, that's going to have an impact. So $108 oil, 1.28 billion gallons, more corn oil coming on. I think -- it's a margin structure that is probably going to be just as volatile but, at the end of the day, provides a new alternative for -- or an offset to our base business.

And my last question is, again, trying to stay in the schooling situation, is if I fast forward a year from now and you look at your exact quarter, say everything stayed exactly the same next year, how much higher would your numbers be based on CapEx, projects like that? And CapEx operating efficiencies, anything like that. How would you take this $0.25 number and, in exactly the same situation, what would it be in a year from now given what you're doing?

Well, we -- in the script, we said in the fourth quarter --

Not with the JV, not the JV, just the core business.

Just the base business, John.

What are you guys doing? Are you guys -- would the $0.25 be exactly $0.25? Would it be higher? Would it be lower? How do you think of that if we just fast forward exactly one year?

Pretty consistent, I think. I don't know that I'd think of it any different, Ken.

Yes, there are some -- there was a few things that flowed through that impacted. And projecting without having the effective tax rate going up and the depreciation going up because of the unusual amount, we would have been in the $0.29 to $0.30 range. I don't think you can -- you'd be seeing those numbers flow through all the time like that. That was a cleanup on some things, some actuarial costs were increased. Even looking at fourth quarter of this year and fourth quarter of next year, if everything was the same except for some items that hit during this quarter, you'd be in that $0.29 range probably, or $0.30.

Our next question comes from Tyson Bauer of Casey Capital.

Obviously, a lot of the questions have been asked. So just a quick clarification. John, when you talk about the $2.7 million decline or related to the decline, quick decline in the pricing that you saw in Q4 and now we're starting to see that reverse as we get into February and going forward, hopefully, that will continue, that $2.7 million goes away in a steady-state environment. If we end up with an increasing pricing environment, as we're seeing in February and going into March, do we not reverse not only that $2.7 million but have the potential to gain an additional...

Absolutely. On the upside -- like I said, at a flat market, how the formulas work, they're constant. In a rising market, you're paying for raw material one week and you're selling it at a higher price the next week. So it works -- if you have a strong uptick, it's a lag, because you may have already sold out 3, 4, 5 -- 4 weeks or so on your forward sales. But yes, you get that benefit.

On the poultry, if you're looking at an increase in the second half, are we going to get the double effect kind of that worked against you in late '11, should work in your favor in the second half of '12, where we're going to see more product, but also more protein demand to help out your pricing and volumes to give you that value-added premium?

Yes, I think -- if it comes through that the poultry guys -- which have historically struggled with discipline, they seem to be at least all singing off the same hymnal right now -- do increase it, then you get the double pickup, which is, number one, you get more demand for your ruminant meat and bone meal. And then also, you get the slaughter, increased amount of slaughter raw material into your system.

John, give me just a sense of CapEx and maintenance level and where you're going to be in '12, and what those additional CapEx expenditures are going to be related to.

Yes, we -- I think on the last call, I think someone asked that as well. We ended up at $60 million this year, which is a little lower than what we were projecting for '12. We're telling everyone to be in that $70 million to $75 million range, because we've got a couple of projects that we've identified. But then, if opportunity comes along for new volume or do anything, that could increase. But we would make an announcement related to that when -- if that came along. So just normal CapEx, I would say use that $70 million to $75 million range.

Given that Darling seems to be having a significant cash balance by the end of this year, depending on what you use that for, but you've already used what you cut on the debt paydown, how does the debt associated with DGD, how is that going to be viewed? Is that just going to be paid down from the operations of that facility or can Darling basically pay off its portion with its cash flow from its base business?

Okay. Let's back up. Our commitment in 2012 is the $60-something million that is remaining on our obligation, which was $93.2 million. That is the obligation that we have to put in, and then any -- 50% of any overrun or whatever. The debt within Diamond Green Diesel is Diamond Green Diesel's. Darling has no obligation or anything for that. We have no guarantee or anything. What will happen with that debt is, as the cash is generated in that facility, we will probably start paying debt down a little bit, depending on where prices are, maybe build a little more inventory. But we'll start paying that down, and that will be a decision by the board of Diamond Green Diesel. But sure though, we will repatriate any cash needed to pay any increased taxes that would flow back into Darling at the time of the -- that facility going up and running. Depending on where the depreciation tax benefits are at the end of this year, that's why we've been trying to get this facility up because there's a huge benefit. If the government rolls that over into '13, then we would get that benefit as well, which would help us from a cash tax perspective. But within Diamond Green Diesel, I would anticipate that we would be looking at cash being used within the venture to pay down the debt.

Okay. Given the warm temperatures and climate in the Midwest here, did that also affect some of the feed formulas where the caloric intake was not as high as maybe we see in normal winters, which also lowered the demand?

Yes. Clearly, feed demand has been lower this year because of the -- we're hoping for a late winter. But hell, it's the first of March.

I think winter is not coming. And of course, that means there'll be a storm...

Yes, it'll be 82 here in Dallas today, and it was 82 in January. So nothing's making sense.

Are we looking for an increased acceleration in those prices? Obviously, we're at that discount. And once biodiesel starts to pick up in the northern states, Europe comes back in the import business, are we just as likely to see an increase in those prices continue really through the beginning of the summer?

That would -- I don't see anything different setting up this year than last year, other than kind of the wildcard would be the European demand. Do they buy methyl ester and arbitrage? Or do the Europeans, which they've historically done, shut down the avenues of imported finished product to protect their own manufacturing industry, and then they come back and look at the feedstock again. The other thing that you've got going on is you have the 3 large Neste plants that should be up and running this year. That's kind of new demand for those -- for feedstocks around the world, predominantly palm oil. So it's going to be interesting to see. Global biofuel mandates did not back off. There was a lot of rhetoric out there that people thought they would as oil creeped back. But with oil up over $100 a barrel, it feels to be pretty steady going forward.

Our next question comes from Roman Kuznetsov of Gates Capital.

It's actually Jeff. A couple softball questions here. I'm just wondering, on the Diamond Green Diesel, on the terms of the Valero debt, does it require amortization of that debt with free cash flow? Or what's the restricted payment test on that piece of debt?

There is an amortization but it's spread over 14 years, Jeff. But we do have the capability to accelerate that. We've got quite a bit of flexibility. Remember, Valero is the one that has provided the financing. So we can work with them, Tube Callie [ph] worked with them on that, whether we want to accelerate that or not. It's going to be whatever makes the most sense from a cash flow perspective, and that's the decision we'll be making. But it is a 14-year facility.

Can you review the governance of that joint venture and the management operationally? And I guess, at the board level, how many reps do you have? How many do they have? And again, I'm just kind of wondering what the -- I assume there's some restrictions in that debt on what could be dividended out before their -- I mean...

Yes. This is Randy, and John will take part of it, too. And I mean, from -- it is clearly a 50-50. It's not a 50.1 or anything like that. It's a 50-50. The 2 board members each with a rotating presidency, post construction here. The reality is that Valero has been engaged as the operating partner, and there are subagreements that have them provide different shared services and utilities to the plant. From a perspective of pulling out earnings, John, how do you want to answer that?

Jeff, with -- coming with the debt from Valero, also came confidentiality as to how that debt was structured, what the rates were and how it could be repaid. We can't disclose that. All I can say is that we do have flexibility as to how we can do the cash flows and what we could bring back. But I can't -- we're not allowed to discuss the details of that.

Okay. And then, secondly, as I look at capital allocation over the next 2 or 3 years, I know you said $70 million or $75 million of regular CapEx, and then you've got about another $65 million or $70 million, it looks like, for Diamond Green Diesel equity contribution in 2012. And I'm just wondering, beyond that, what are the capital requirements of the core business looking over the next 2 or 3 years, as you see them?

The core business, it's pretty steady, Jeff, unless we come up with some special projects. I mean, I've studied it year-in year-out. It can always be cut back a little bit if the business requires. But majority of it, from a base business side, $65 million to $75 million, plus or minus a couple of special projects.

Yes. As you saw this year, we ran right at $60 million, and around that $15 million to $16 million a quarter.

And we got a slow start last year because of the long, hard winter. So we didn't really start construction on stuff until April in the Midwest. And so actually, we've gotten to proceed with construction on a lot of the modernizations we have out there throughout most of the winter here. So that's a pretty good number to use.

And then, can you talk about your natural gas position? And just so I understand it, if I look at -- I mean, you doubled the size of your company when you brought Griffin, roughly. And would the footprint for -- I mean, would the use of natural gas on the Griffin side be somewhat less than the Darling side?

Yes, a little bit because they process a little bit less tonnage. But remember, the product that they're processing, it was more water than what we were. So at the end of the day, it's pretty close to the same. The thing about energy management within the company, we have some pretty significant exposure on the used cooking oil side on diesel because we don't have that under, in a lot of cases, a little around half, a little less, under formula. And most of the raw material agreements on the meat by-products or the rendering side, those have energy pass-throughs both for natural gas and the trucking cost. So the incentive for us to step out and say that $2.50, $2.70 natural gas is cheap, I agree with you, but the reality is, it just would be a speculation position for us rather that -- than a real risk management position, and it's just not a philosophy we adopt, so...

So I see the 6 million or whatever of buy-forwards, and then you have a few swaps. So it's not a meaningful part of your 2012 natural gas use that's really hedged at this point?

No, it's a meaningful part of the non-formula stuff.

Yes. Because remember on that 70%, as Randy says, we don't have exposure on that because the raw material contracts cover is there. We're looking at that 30% of our volume that we would be looking to cover ourselves on.

Okay. And on the acquisition side, what do you not have that would be of real strategic benefit to the company?

I'd like something to finish out the geography in North America. Canada. I'd certainly like something there. We don't have a strong presence on the kind of the East Coast there. And that's that kind of south of the Newark area onto Florida on the coastal side. So I mean, those are the 2 pieces that we'd certainly like to fill in over time. And whether we do it by building or buying, we'll just see. We've got, as you know it, a different balance sheet now and a different stamina for -- if we decide we want to greenfield a new location for a customer, that's something that we'll certainly consider.

But from what you described earlier, you're really focused on Diamond Green Diesel this year. And maybe this year, there's a bolt-on or 2 if you happen to find them at the right price. But anything significant probably wouldn't be until next year. Is that fair?

That would be my read, Jeff. I think from a board perspective, I mean, Diamond Green Diesel is a $400-million massive undertaking. And I've been down there. It's 28 acres of a massive chemical petroleum complex. And if at the end of the day, the board says, "Let's get that right, make sure it works," and then maybe we decide to put more capital into that and even grow it further.

And are most of the Griffin synergies, cost savings and all that baked into the 2011 numbers or is there more to go? And if so, what would the magnitude of those potentially be?

I think all of the -- from my perspective, the low-hanging fruit's in there now, putting the product in the right locations, moving tonnages around, moving operational responsibilities here and there, and all of that. Product marketing, we've realigned our commodity marketing group. And so now the focus turns to where can we make value-added products. We've got a couple projects underway with some capital attached to them to segregate raw material streams, which was a Griffin success. So as we've said, it's a 2012 deal when we start to bring on some of these new products. We'll see if they -- we'll see if we can get there. But from an operational perspective, it is successfully and fully integrated.

Our next question is a follow-up from Lindsay Drucker Mann of Goldman Sachs.

I just wanted to clarify on the math that you ran through with Farha as it relates to the profitability of other renewable diesel JVs. So John, when you talked about the revenue base, the sales out of the plant, you used #2 Low Sulfur Diesel plus 1.7 times this current RIN value. And in the past -- I'm sort of wondering if that's the way that we should think about it given, as I look at biodiesel prices and biodiesel...

The 100 has already got that factored in.

I think it would be helpful if you ran through that math, because biodiesel prices today, I'm looking at my sheet, at $4.56. And I know that those have 1.5 RIN values in them versus if you were eligible for the events, it would be 1.7, so yes, you could envision that...

You'd have to add another $0.21, $0.23 to that price, that's right.

But still, that's well below the $5.39 number that you mentioned before. So I get the idea that, in theory, full RIN value should be reflected as the Green Premium. But certainly, it's not in biodiesel today, based on that math. So if we were to using more practical examples of what's already being priced in the market today and using biodiesel as a proxy, can you walk us through the EBITDA of the plant? Because it seems like it would be lower than what you had originally talked about.

You would start with the B100 number. You can use -- these are the -- what we've been working with Valero, they basically look at that wholesale diesel price and that value, and that's what we're selling against when we sell that product and how our formulas will be working with them. So that and the B100. So all I've laid out is you can look at the #2 Gulf Coast wholesale diesel and the RIN, and these are all published prices, and come across or you can also look at the B100 and then bring that up to the 1.7. And yes, you're going to have -- in some cases, you're going to have a $0.15 to $0.20 a gallon differential there, absolutely, depending on the spot and where the supply-demand economics go on that, Lindsay, I agree with you.

Yes. So if I use $3.09 as the diesel price that you mentioned and a $1.35 RIN value times 1.5, that's $2.025. That would suggest bio -- B100 prices should be $5.12. And today they're $4.56. So there's a decent disconnect there between the Green Premium that's truly embedded in biodiesel prices versus diesel plus the RIN value, correct?

And that's your wintertime seasonalities, the way I would try to explain most of that. That's January, where that methyl ester doesn't work everywhere, where the plants are still trying to run. And when you've created a hydrocarbon here that's truly a hydrocarbon, there's a gap here, Lindsay. And like we said, these are approximations. We'll see what the real value of green diesel is in the pipeline versus trucks and tank car loads of methyl ester in the Midwest.

But yes, what Randy says, that price is down because they don't want that biodiesel in that product because of the cold-flow properties. If you look back in the summertime, those numbers are much closer together. This product will not have the cold-flow property issue.

Great, okay. So -- and then -- that's helpful. And then just to clarify. I was a little surprised, Randy, that you mentioned that a lot of your products aren't actually making their way into the biodiesel market currently, since it felt like there was some disproportionate exposure relative to soybean oil if 1 in 10 gallons of -- pounds of soybean oil are making their way into biodiesels. Is the math on your product that -- I think it was 235 million pounds, how much -- just remind me how much of that percentage of your total raw material that is?

A little -- 10%. Maybe a little more.

Okay. So it's generally on par, I guess, with the soybean oil's exposure to the biodiesel market.

Right.

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

Okay. With that, thank you, everybody. Great questions today. Hope we answered them. And I look forward to talking to you with our first quarter results. Thanks again.

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