Darling Ingredients Inc. (DAR) Q3 2012 Earnings Report, Transcript and Summary

Good morning everyone, and welcome to the Darling International Conference Call to Discuss the Company's Fiscal 2012 Third Quarter Financial Results. With us today are Mr. Randall C. Stuewe, Chairman and Chief Executive Officer of Darling International; and Mr. John Muse, Executive Vice President and Chief Administrative Officer; and Mr. Colin Stevenson, Executive Vice President and Chief Financial Officer. After the speakers' opening remarks, there will be a question-and-answer period. And instructions to ask a question will be given at that time. This call is being recorded and your participation implies consent to our recording this call. If you do not agree to these terms, simply drop off the line. I would now like to turn the conference over to Mrs. Melissa Gaither, Director of Investor Relations for Darling International. Please go ahead. Thank you, Emily. Good morning. Thank you for joining us to review Darling's Third Quarter 2012 Earnings Results. Randy Stuewe, our Chairman and CEO, will begin today's call with an overview of our third quarter financial performance and discuss some of the trends that impacted the outcome. John Muse, Executive Vice President and chief administrative officer will lead the review of our financial results. Also with us today is our newly appointed executive vice president and chief financial officer, Colin Stevenson who joined Darling late in the third quarter and will be leading the review of our financial result in future quarters. Randy will conclude the prepared portion on 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 assessments of, and are subject to, a variety of risks and uncertainties beyond its control, including disturbances in world, financial, credit, commodities and stock markets, a decline in consumer confidence and discretionary spending, the general performance of the U.S. in global economy, global demands for biofuels, and grain and oil seed commodities, which have exhibited volatility, and can impact the costs for feed for cattle, hogs, and poultry, thus affecting availability of rendering feedstocks. Risks including future expenditures related to Darling's joint venture with Valero Energy Corporation to construct and complete a renewable diesel plant in Norco, Louisiana and possible difficulties completing and obtaining operational viability with the plant, risks relating to possible third-party claims of intellectual property infringement, economic disruptions resulting from the European debt crisis and continued or escalated conflict in the Middle East, each of which could cause actual results to differ materially from those projected in such forward-looking statements. Other risks and uncertainties regarding Darling, its business and the industry in which it operates are referenced from time to time in the company's filings with the Securities and Exchange Commission. Darling is under no obligation to and expressly disclaims any 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. Thanks for joining us. It's my pleasure to welcome you to the Darling International's earnings call to discuss our financial results for the company's third quarter. Our third quarter showed a slight improvement over a performance in second quarter. On the surface the improvement was small, but our third quarter had many moving parts contributed both positively and negatively to the final outcome. Most notably, we watched the continuing saga of a record global drought play out causing extreme volatility in our finished products and competing ingredients. Ultimately, challenging traditional and historical pricing relationships. Let's look at some of the key drivers for a business and their impact on our performance. During the quarter, we experienced the perfect storm in regard to our pricing dynamics, starting with the drought that quickly destroyed the predicted record corn and soybean crops. Historically, high corn markets result in high fat and grease prices but to the contrary, we experienced lower selling prices due to several coinciding market disruptions. The increased supply of competing fats particularly corn oil from the ethanol industry entered the market in addition to sluggish exports and slowing biofuel demand. Adding to the mix, an economically challenged animal production industry anticipating higher input costs, which forced feed formulators to select alternatives to reduce fat inclusion rates in animal diets well beyond the typical summer reduction. Overall, we saw a breakdown of historical pricing relationships but clean corn and rendered fats and greases. On the finished product protein front, overall prices improved year-over-year but lag begins to run up in soybean meal until late in the quarter. Protein prices improved, but the respective value added premiums compressed as [agriculture] volumes never really materialized and pet food demand remained slow. On the meat and bone meal side, given the strong slaughter we saw supplied push into an already saturated market that still has depressed demand from the poultry sector and slow exports. For Darling, California markets remained depressed without the Indonesian export markets. From a volume perspective, we operated at modestly improved levels year-over-year and substantially higher than second quarter due to strong beef and hog slaughters and the addition of several new poultry suppliers. This year summer temperature remained consistently hot throughout the season, which produced the normal dead stock volume rather than peak volumes when temperatures more volatile. This hot summer temperatures created the normal quality issues on raw material resulting in some downgrade animal fats produced. Used cooking oil collection volumes remained flat compared to the second quarter 2012, with restaurant traffics still showing signs of the economic pressure. Our bakery byproducts business performed well with higher selling prices consistent with the corn market and volumes returning to more historical levels. Now, before we discussed Diamond Green Diesel, I'd like to address the effects of hurricane Sandy on our Newark, New Jersey facility, which many of you recently visited during our September Investor Day. We are grateful that none of our employees were seriously harmed by the storm and although physical damage to the facility was not significant. The loss of power and damage to the region in general has impacted our ability to collect in process raw material to plan. We were able to mitigate these damages by diverting raw material to other processing facilities. In addition, we're protected by a comprehensive flood damage and business interruption insurance policy until we are back up and running. At this point, we don't believe that the impact of the hurricane will have a material impact on our operations. I should also note that none of our other processing facilities were directly impacted by hurricane Sandy. Lastly, our Diamond Green Diesel joint venture with Valero is nearing final phases of construction and should begin commissioning in phases starting in early January. All phases of the project are in their final stages and at this time we see very little risk to our budget. From a timing perspective, we did lose several weeks to hurricane Isaac and the resulting effects on labor availability. From an economic perspective, Diamond Green Diesel continues to work favorable in lighter of even a declining RIN market. One must keep in mind that RINs ultimately affect the ability of our industry to supply to mandate and once the mandate is fulfilled, the value of the RINs decline. For the biomass-based diesel market this year fulfillment of the mandate was accomplished in late third quarter, while this has a slowing effect on the profitability of Diamond Green Diesel, it in no way calls in to question our investment thesis. Let's put this in perspective, if Diamond Green Diesel had been operating at planned capacity in the third quarter and assuming the feedstock equivalent to our average selling price of fat delivered Norco, Louisiana and the selling price for ultra-low sulfur diesel at the Gulf, minus $0.10 a gallon, plus a full RIN value, our EPS would've been approximately $0.08 to $0.09 per share higher during the quarter. While clearly fourth quarter could be weaker for Diamond Green Diesel on a pro forma basis, given the same assumption basis, the annual EBITDA for the facility still makes it a highly attracted investment. I'd now like to turn the call over to John Muse for the financial review and ultimately welcome Colin Stevenson to our team. As a press release announced this summer, Colin joined us in September as CFO and Executive Vice President after a successful career with Pricewaterhouse. As Melissa mentioned Colin will be presenting the financial reviews on future earnings calls. Once, John concludes, I'd like to provide a few closing remarks and then we will move into Q&A where we'll address all your questions. John.

Thanks, Randy. For the 2012 third quarter ended September 29, company reported net sales of $452.7 million compared to $455.9 million in the year-ago period. The $3.2 million decrease in that sales is primarily attributable to lower finished product selling prices and the rendering segment lead by changes of supply demanded both domestic and export markets for commodity fat. Net income for the 2012 third quarter decreased to $37.2 million or $0.31 per share on a fully diluted basis as compared to a net income of $41.1 million or $0.35 per share for the 2011 comparable period. As noted in our press release, the $3.9 million decrease in net income for the third quarter resulted from lower [finished product] selling prices that were offset by substantially improved raw material volumes, compared to the 2012 second quarter net income was sequentially flat as finished product prices remained at lower levels. In addition, to the decrease in pricing, our aggregate expenses for SG&A and depreciation increased in the 2012 third quarter compared to our prior quarter average expenses. The SG&A increase reflects additional account management staffing, ERP expense and change in incentive compensation allocation. The increase in depreciation expense was primarily due to general increases in capital expenditures. Interest expense was $5.9 million there in the quarter compared to $7.4 million for last year third quarter, a decrease of $1.5 million. This is primarily was due to a decrease in debt outstanding as a result of prior year and current year payoffs of the company's term debt facility. Other income was $0.2 million ended 2012 third quarter compared to $0.8 million of expense in a year ago. The increase is primarily due to insurance recovery proceeds or prior year bylaws received in the 2012 third quarter compared to no such proceeds in a year ago. Operating income decrease by $8.8 million in the third quarter 2012 compared to third quarter of 2011. The decrease resulted primarily from lower finished product prices net of reduced raw material cost, which were partially offset by increased raw material volumes and lower energy cost. The Company recorded income tax expense of $21 million for the third quarter compared to $25 million recorded in the year ago period, representing an increase of $2.9 million and this was due to pre-tax lower pre-tax earnings in the third quarter 2011. At the segment level, rendering generated net sales of $368 million for the third quarter and $8.2 million decrease compared to the $376.3 million in the 2011 third quarter. Bakery by-product sales contributed $84.6 million to the third quarter compared to $79.5 million in the year-ago period, primarily was due to higher prices in the commodity markets and improved volumes. Relative to the Company's investment in our Diamond Green Diesel joint venture with Valero, on the balance sheet, we reported an investment of $54.4 million at September 29, 2012 as compared to $21.7 million on December 31, 2011. And the statement of operations reports a net loss of $833,000 to the third quarter. Again, this loss is largely due to non-capitalizable expenses as we proceed through the construction phase. For the nine months ended September 29, the company reported net sales of $1.27 billion as compared to $1.36 billion for the 2011 comparable period. The $89.9 million decrease in sales is primarily attributable to lower product pricing followed by lower raw material volumes mainly realized in the first six months of the year. Our rendering sales generated $1.06 billion for the nine month period in 2012 as compared to $1.14 billion in the 2011 period. The $78 million decrease in rendering sales was primarily due to lower finished product prices and a decrease in biofuel demand for yellow Greece. Bakery segment net sales decline to $214.6 million for the 2012 nine month period from $225.8 million in a year ago period. Due to lower finished product prices were Bakery by-products as a result of lower corn prices in the first half of the year. For the nine months ended September 29th 2012, the company reported net income of $102 million or 86 cents per share as compared to $139.9 million over a $22 per share for the 2011 period. This $37.9 million decrease resulted primarily from over finished product selling prices and decrease volunteer volumes. Now moving over to balance sheet of September 29th 2012, the company had working capital of $139.4 million and working ratio was 2.0321 compared to working capital of $92.4 million and working capital ratio of 1.7321 on December 31, 2011. At September 29th the company had unrestricted cash of $87.7 million and funds available on revolving credit facility of $384.6 million compared to unrestricted cash of $38.9 million and funds available on revolver of $391 million at December 31, '11. And lastly our capital expenditures of $84.2 million were made during the first nine months of 2012 compared to $44 million in the comparable period of 2011 the significant increase of $40.2 million in CapEx was primarily due to planned capital expenditures included associated cost with the Company's initiation of our new ERP System implementation of which is expected to be faced in over next two and half years. Now I will turn call back over to Randy.

Thanks, John, in summary we worried about deliver solid results despite the challenges of a unusual volunteer volatile commodity market. Our operations team did a great job this summer and continues to execute well. Our plans are in great shape and we are never been proud of their appearance, we are positioned well to navigate the fourth quarter. The Darling and Valero teams have worked harder over the last year as we near initial commissioning of Darling Green Diesel. On behalf of senior management we like to thank our investors and shareholders for their support, but we also want to say thanks to all the folks at our New York facility they work so hard over the last ten days to bring that facility back on line. With that let's go head Henry and opened it up to Q&A

(Operator instructions) Our first question comes from Farha Aslam from Stephens, please go ahead.

Hi, Good morning.

Good morning, Farha.

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

On the surface, no I mean as we reference in the call here, there is a blend of volume increases here I think from slaughter perspective we see very, very strong in our packer accounts continue what, I think what you guys had referred to it as a liquidation of herd here strong beefs, strong pork. And then the poultry side just continues to operate very well and we've been fortunate enough to add several new large accounts in locations there and that's got our volume increase, but as far as anything negative out there relative to volume declines, we are not seen it yet. I think you know as I said that the green prices probably will challenge the production on the front half of 2013 obviously from a meat production standpoint poultry as positioned very well to come back when that cycle does turn its green prices possibly could decline. So I think overall it's a solid quarter, it's set well for fourth quarter and we've not seen any cutbacks and in fact as we going in the fourth quarter here the volumes have remained where we thought they would be.

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

I am not sure I'd differentiate between the two of them it's what I would tell you is the you know the structure and the thesis of that investment from day one was to align with petroleum refiner such that we had the lowest cost access to distribution in United States. We're on the pipelines, [sit down] and St. Charles, therefore given that the majority if not all that product will move out in the most favorable way which would be pipeline making the customers of that product most likely the large whale companies so it will move out as UOSD in some blend typically R5, R10 blends as we call it. We do have the ability to move out R100 in specific pipelines and re destination blending available but as we look at the business and I think it's a good point far is as you compare we look at business built up from economic basis as ULSB minus its small distribution premium plus the rent times 1.7. We do compare against the B100 market but the B100 market is predominantly soybean oil driven business for some fast increases in there but it's very different product in a very different distribution scenario

Okay great Thank you so much

Our next question is from John Quealy of Canaccord Genuity, please go ahead

Hey, good morning folks, just two questions first Randy I picked from your comments on the Jersey facility in sandy we shouldn't see any material impact next quarter for that one upon consolidated numbers is that the correct impression

That would be what we would tell you I mean we are I mean it has been true challenge out there I did had the honor of going out there I guess you call it honor to be with the employees we are still bound today predominantly you know the facility did go under water the office was a total loss the plant was in very good shape with minor damage what we did was major electrical systems predominantly transformer that had to be sent out those start to arrive in today to be reinstalled. The biggest challenge we're having right now is the plant, opportunistically, sets adjacent to the [Persaic valley] sewer plant the fifth largest in United States and its still running on limited capacity there today is it, it catches up on [tready neflon], so the bad news is for us even if the electrical systems were ready to start today which were in intending to start bumping motors tonight tomorrow we still can start any shape so from operations perspective we bought in generation. We've been transloading our fat and bone, we've been running routes since last Friday we been running routes successfully for grease and fat and bone, transloading material to other facilities so from operation perspective very minor impact, from a financial perspective, we are well insured with flood insurance and business interruption insurance, and so with very limited deductible on a material basis. So at the end of the day it should have if we've done it properly, it won't have any impact on the financials of the fourth quarter in any material way.

And In terms of volumes and truck rolls, I imagine they got pulled back a little bit, but again not a big deal for your folks, given the skills that you have now?

Right, it's just not material in the scope of the things. It was disruptive for a few days but you know in the NorthEast, there if you are impacted it's a major deal, but in the mid-town and some of the areas, it was like nothing happened.

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

Yeah, okay. First off, a couple of things here one, you got to go back to the configuration of the design and its facility as we talk about Diamond Green Diesel. We've got a very significant tank farm that allows for segregation of specific fats and greases coming in. Number two we've built the most robust pretreatment facility of it's kind in the world meaning we can refine out the impurities that are necessary before we feed the third component been the eco fining itself those three components are really critical to making a good product from a supply stand point we align with literal has many, many positives for us, Number one is obviously is there operating expertise but number two there ability to originate corn oil from their number of ethanol plants that they have. The blend right now that we're looking at is a blend of waste fats and greases, predominantly used cooking oil from the Darling System located between the Appalachians and the Rockies, plus corn oil out of the Midwest. The economics of corn oil, are favorable, I said that kind of tongue I cheek, because that's what pressured used cooking oil, because it has so limited uses. It's a difficult product to run in classic bio-diesel plants because of the waxes, as it gets cold the product clouds over again. But from our perspective it goes through our facility that does molecularly change the product at least at the testing level that we performed the Texas A&M on a very very easy basis, relatively speaking to other fats and greases. So corn oil is something that will be part of the Diamond Green mix. As we build the thesis if you will, I keep using that word, the business model, the assumptions, for Diamond Green Diesel, four years ago it was probably a little tiny sub-point when we said what's one of the risks to the facility was the availability of corn oil. Corn oil is real now, it's probably in the total of about a $1 billion, maybe creeping on up to a $1.5 billion as some of these dry mills go to fine drying. That's all very much an opportunity for Diamond Green Diesel. As we talked about on the last call, we were successful in acquiring a small facility in Iowa, located on the river in Muscatine, Iowa. Part of the investment rationale for acquiring the Muscatine, Iowa facility was the 10,000 or 12,000 tons of storage that's there right in the middle of the ethanol production areas to accumulate ethanol to feed on down the Diamond Green Diesel. So at the end of the day it will be used cooking oil, it will be corn oil and then we'll feel opportunistically the next strata of any alignment that will go to it will be poultry fat. And then from there as we learn to run the product we'll fit in the high-acid waste – animal fats out of the Midwest into there – and go from there.

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

Hey, good morning, everyone.

Good morning, Dan.

Good morning.

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

Well, couple things. And I think as try to succinctly or not so succinctly say in my opening comments, we saw in our historical and traditional pricing relationships that we've preached over the last 10 years, that John and I have been on the calls with you guys, thrown out the door. And really if you had to look it, the couple things I think contributed to that, I'm not sure I can give you the precise answer to it. But the one that would tell them has happened, is as we've seen fats and greases move up and down very volatile-ly here, over the last two or three or four years. That's number one. Number two, enzymes have come into diets allowing the dip-feeding of different feed stuffs in order to capture energy out of those ingredients. So I would put enzymes up there number 1, and then number 2 was the volatility – number three there is no push to get animals to market today and so as we've always referred to fats in the diet here, fats were what we called in a MacDonald's vocabulary, a super-sized component of the ration, and so as they slow and make smaller birds, and they don't want them to market is [quirky] take the fat out, the enzymes allow a longer more consistent conversion. And then you put in the final piece, here, Dan that I'd say as you put in the corn oil component and given it's very-very limited market acceptance, it's put a lot of pressure on it. And then in the summer here we've seen the summer heat and then the typical slowdown I diets. Now all that says is when it gets cool it should come back. If you look historically it works fast and prices should be – we should be in that mid-40s to high $0.40 on a 3 to 3.5 basis on the [colored] conversion of corn, going home we're in the mid-30s right now. So there is some pressure here that we haven't seen, but at the end of the day, it bode well for having the Diamond Green Diesel finishing alternatives.

Absolutely, that makes a lot of sense. So real quick, just segueing over to Diamond Green Diesel, first of all, can you walk through a little bit of the commissioning, I think you said you hope to start commissioning maybe in the January timeframe. Any thoughts maybe on the timeframe for because I assume run refine products like soybean oil first, and then as it ramps you'll start introducing some of the other stuff. Can you maybe just walk us through, the current timeline there.

Yeah, the current timeline and of course, always from a public company perspective give a little bit of an out as something changes here, but then what we presented to our board, is that the plant will come on in three phases, the initial commissioning will be the tank farm, and the unloading. We expect and anticipate to start shipping raw material down there in December, to start unloading and getting it in position we have a really large tank farm down there capable of holding around a 100 million pounds. Once that's in line about mid January, late – mid to late January, we're going to bring up the pre-treatment facility and start to bring it online, and then towards March, late February-March we will start commissioning, the [eco finding] unit and anticipate making product in some form the facility has the ability to be turned down a little bit, but not a lot. So it's really – it's either on or off, in a sense and it will come on line here towards the end of March would be the target line right now. We don't see anything there as far equipment, holding us up, we're in that final instrumentation and electrical phase. But overall that's how it's going to come on. So as we've said in our prior calls, first quarter is the commissioning and start-up with the belief that we'll be in some type of production of scale in second quarter.

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

Dan, it's John. We would anticipate that we'll up probably another $20 million in fourth quarter and best may be $25 million and then we'll add another $20 million or so in the first quarter to be in that $100 million to $105 million range.

And that's inclusive of the working capital, because it sounded like that will be a big key.

Both from our investment standpoint, that's correct. And that's consistent with what we've kind of told you guys.

Yep, that's help a lot. Thanks guys.

Okay, thanks Dan.

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

Good morning, everyone.

Good morning.

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

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

So do you think that sequentially you'll be higher, on an operating profit basis?

I'm not going to answer that, Ken.

Okay. The second question I have is in terms of, what the issues were between the relationship, when do you think the relationship between, commodities and rendering will actually be restored? How do you think about it, where – we're going to be back to typical or the [structural] relationship, so do you think in the quarter, and what are the key drivers that you're actually waiting to see, is it Indonesia, how do we look at it?

Well, I want to break down to the fats and the proteins, proteins are pretty easy to discuss. We've already seen the proteins on the poultry side, react and readjusted their normal historical relationships, we're moving into the pet food pricing time of the year, it's looking like that has some positive growth opportunities and margin opportunities. The meat and bone meal side, as of last night we are still as we said in second quarter, on the way to third quarter here waiting for Indonesia to try to get everything in order here. People have to keep in mind the corn delivered in the US is still $8 a bushel in the feed lots in the most feeding areas I the country. That will force use of other proteins. And at the state dollars here it's a heck a lot more around the world. So Indonesia has an incredible backlog of material there. We should see that start to be unloaded here in fourth quarter and allow meat and bone meal to come back more to what I would call it, historical relationship in the last five years. Meat and bone meal has pressured anywhere from $52 million to $100 million under soybean meal and then we anticipate that it will come back in a more of a historical relationship. The fat side is one that's probably has a little more concern for us. Traditionally you see in commodity markets, over reaction whether it's on the upside or downside, before normalcy returns. There's just a lot of supply being put on the market right now with the beef slaughter, the hog slaughter, and the chicken side is running good. And then the limited amount of exports that continue to be very sluggish in this country. So there's just a backlog of rendered fats that have traditionally been exported, competing with corn oil for share of market here in the animal production industry. The animal production industry, once the formulator re-look at fats, we'll probably start to put them back in here in pretty good style here in fourth quarter. They're just too attractive, not to. So we should get a little bit of a bounce here. From a trading perspective, it's giving us an opportunity to fill up our tanks space, in anticipation of bringing up Diamond Green Diesel. So I think the fact that we're bringing on a new entrant called Diamond Green Diesel for 10% of the US market here, and it's now a reality within 60 to 90 days, our storage and the fact that it's – the fats are just too cheap, we should see them rebound here nicely.

And my last question – actually two questions, one is the insurance settlement. I'm assuming [was nominal], in the quarter?

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

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

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

Great. I really appreciated it. Thank you.

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

Good morning. Thanks for taking the question.

Thank you.

First question is about Diamond Green Diesel. Can you share with us, what your projected operating cost for that, [firstly] meaning fixed salaries, insurance all those type of things altogether?

JinMing, we have been projecting and giving indications that we're in that $0.38 a gallon range for operating cost for that facility.

Okay. And then with respect to the commodity supply, [latest] discussion that potentially EPA may wave the RF standard for next year because of what happened to the corn harvest – corn crop this year. If that happens what impact do you think will have on your revenue?

Well, first off, one has to ask you do you we believe that they're going to wave RFS II? No. Given the conclusion of the election for sure, the reality is if RFS was waived or backed down a little bit it would truly have an impact on corn. So the way it was coming - the way the corn going down. People have to keep in mind that biomass space diesel does not have a waver provision to it. And so it was 1 billion gallons this year, it will be a 1.28 billion next year, in '13. And we are being told that that number could go on up to 1.6 billion in '14 if not higher. There is some discussion right now in Washington of since the dream of cellulosic fuels is not developing, that some of that volume maybe put over into the advanced and the biomass space diesel, so long answer is that we don't see much risk as the RFS or any waiver, you start to look forward next year, at grain production the S&Ds of whether it's corn or soybean acreage continue to require full production and you can plug all kinds of yields from historicals to trends lines to and you've got to have big production next year, just to fulfill both the feed demand and the fuel demand.

Okay, thanks a lot.

Our next question is from [Roman Kuznetsev] of Case Capital Management. Please go ahead.

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

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

Also along the lines of capital allocation the – what was the CapEx spend at the parent company, be in '12 and looking out to '13, directionally, where's that going and secondly when might the board consider again initiating a dividend?

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

And where's that capital going by the way, besides ERPs?

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

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

And the other component is in our fleet, we are making a concerted effort to take a little bit of strength down the average life span on our fleet a little bit. So that's the other component.

And to address your second question on capital allocation after we paid for maintenance and upgrades. As you know before we release the Q the Board gets together and the topic of dividend and buyback continues to be a deep discussion point for us. The cash build on the balance sheet continues to grow. If you are even looking out and saying if you look at the Chicago Board of Trade as a base in pricing for corn, soybean meal, soybean oil next year, it's not hard to come up with a fairly optimistic look at the earnings stream again underneath this business and a the cash build. The reality of that discussion is and the conservative nature of both myself John and the Board is we are going to take a very low key approach here, make sure the Diamond Green Diesel comes up here in first quarter, make sure that there aren't any big misses on capital needs there and so by the time we get closer and see things work and see what the year is going to turnout that's when that discussion will turn to some type of, either keep it in the war chest because we found something to grow with or consider returning a portion of it either in the form of buyback or dividend.

Okay, thank you. And John I just want to wish you all the best in the next chapter.

Okay.

He got two years left Jeff. Don't think which and I am ask him soon.

I know but he is planning for it now.

Okay, he stays, I got to get to [add it.]

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

Good morning gentlemen.

Good morning Bill.

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

Well first of I think it's fairly safe to say that the biomass based diesel RIN market has come through kind of a treacherous and tumultuous last year, year and half and it's a very immature market with a lot of people getting their hands burned with fraud. Ultimately that speaks well for what I am going to call, platinum producers here which we would be with Valero, knowing that the product is both being made and certified. The RIN market as I said, it's an immature market. As you see in the ethanol business when the mandate is fulfilled and there is no blending advantage those RINs can go down very rapidly. My belief here a little bit is that it was over done as people got their fulfillment. There is a little bit of betting going on as to what next year will bring, but ultimately you have to go back say what are the wet downs that have to be produced next year and what technology and what feedstock's are available to do it. You got to rely on the fact that probably 65% to 75% of that mandate is going to be fulfilled by soybean oil and those economics today look like that the bio-classic, Biodiesel industry and when I say classic integrated biodiesel industry that's Cargill, Bunge, ADM, Louis Dreyfus with the integrated soybean crushers. Those guys are not running those plants, they are running that somewhere between $0.80 and a $1 a gallon [rad] right now. So you should see rents come back and ultimately you have either got to bring rents back, bring the price of ultra low sulfur diesel up which we won't, we don't have any control on that or bring down the value of soybean oil to make it attractive to make it which the Board of Trade would tell you that's not going to happen. So when you come into January, I would suspect you will see some type of rebound of RIN values. Now the only question that becomes relevant is how quickly does the industry fulfill the mandate, the wet mandate again next year, obviously there has always been a lot of excess capacity out there, but at the end of the day that excess capacity is soybean oil and at the end of the day it's got to be at a level where it makes economic sense to happen. So, at the end of the day if you look back at Q1, Q2, Q3 pro forma earnings and we have always looked back and back cast to the same and said how would we have done, it's still a very favorable business and we anticipate that the RIN or the base economic of the business will react accordingly in Q1, which I wish we would be up in order to maximize.

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

Great job, gentlemen.

Thanks, Tyson.

Actually in last years call you gave us a product degradation effect on the EPS, which was $0.07. Do you have that comparable adverse impact this quarter also?

The answer is as I mentioned in our script early on weather changes are what effect the number of dead animals or mortalities out there. Basically it turned hot in about last February and never changed. So the number of mortalities was very traditional and we didn't get slugged with big events this year. So once you don't get hit big events you are able to get it through the plant. Make no mistake we did have a few issues out there, but we were able to [borne and dock] the material to minimize the impacts. So, last year we talked in third quarter of making capital investments in the way that our cookers and our products are processed. We were able to complete that in a majority of the plants there is a couple of exceptions out there yet, but it will be completed here this fall or in the winter in preparation for the next year, but the impact was very minimal at this time.

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

Well in my conversations with god he has told me I don't have control over the weather.

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

Yeah, I mean, you have seen and that's you brought up a couple of really good points there. Number one, what weighed on the fast markets globally has been the production cycle of palm oil and I probably should have mentioned that earlier. Traditionally you'll see that cycle and the stocks will come down there. Number two, you talked about Europe and the biofuel, clearly there is a move to find a feedstock that doesn't harm the environment both from an environmental perspective and a land use perspective. Waste, fats and greases predominately used cooking oil in our case is that feedstock is going to get favorable treatment if that legislation moves forward. Conversely you always have to remember is that the Europeans both lead and follow in the sense here our belief is that they will move to some type of favorable nation perspective to used cooking oil, which will help our business here. So long-term we believe or long-term probably next year we'll start to see a resurgence of used cooking oil exports. There is lots of discussion that's how you keep from cheating there and sneaking in animal fats. They clearly don't want animal fats in there. So if that was the case, the perfect [spoon] for us would be to export used cooking oil out of our east coast facilities in Tampa and [New York] and then ultimately the feedstock that would be replaced out of here then would be our higher asset animal fats that would end up down in at Diamond Green Diesel. So overall I think that there is probably more upside to a European modification and is downside right now, because downside is we are basically exporting zero.

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

Now look as Randy said, we're the first point the asset has to be being used. They are being completed, but they need to be put into service, which by the end of the year that will be the rail unloading facility and the tanks and the mix tanks. We'll not get any benefit from the pre-treatment or [eco] finding units. So that and from a dollar standpoint that is by far the lowest investment site, component of the facility. We are working with Valero on that, they are handling the tax side of that, which we do get 50% of the benefit of that, but we are not at this point of time related to say what that number is going to be, because it's going to be a timing thing when that product starts moving in there in December, if we're able to utilize all the tanks as a tax benefit.

And given the result of the election I guess now there is a glimmer of possibility that we could see returning the tax credit for the biodiesel product. In a nutshell is that overall favorable for you. You are such a low cost provider that could actually work in your favor and not have it and take out some of ht small guys?

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

And the last question. Are you seeing additional pressure on the west coast as we are seeing an increase in the dairy herd liquidation more so than we saw in the beef side, which primarily was last year. Is that adding to you woes on the west coast?

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

Thank you, gentlemen.

You bet.

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

Thank you, good morning.

Good morning.

I just wanted to apologize if you touched on this a bit, but going back to inedible corn oil and what's going on, dynamics of that market. I mean, (inaudible) all industry is moving in fact aggressively and everybody I talk with that hasn't added it to the plant and tends to because it's a high ROI investment for them and so as we look ahead and the opportunity for a lot of capacity coming on in edible corn oil. I am just trying to understand how that effects your business both at the renewable diesel level and in the feedstock level as that comes on and the ability to hedge internally. I am just trying to understand what that means if we have a lot of inedible corn oil and the prices are cheap relative to other feedstock?

Well first off I mean, the impact whether as they start to put in the start or the majority of the plants already has made as you have referenced the investment into the kind of centrifugal separation technology. You know the yields on that are four-tenth to six-tenth a pound per bushel. As you start to go to find grind and enzymes you are going to accrete that on eight-tenths to a pound a bushel. At the end of the day what does it mean and he total when you take the daily grind and all that and who can do what, potentially you could have come on the market here somewhere around 1.5 billion, maybe up to 2 billion of corn oil over the next two or three years. I would say they are about half a way there right now, close to about a billion pounds. That's about 10% of the marketplace for used fats and greases. The limited use of that product both domestically for feed and biofuel has been what's put pressure on this market. So at the end of the day Diamond Green Diesel will be a consumer of 1 billion to 1.25 billion pounds of fat. If corn oil is priced properly, it will move there. If it's not, it won't. So at the end of the day I think the fact that we are bringing a new consumer of roughly 10% to offset that supply push. We'll positive to both our core business and the profitability of Diamond Green Diesel.

So, you'd expect that the fat feedstock would be competitively priced with inedible corn oil. Assuming that the same capacity addition numbers, you know getting 2 billion or so, but if you are there you would expect there to be some price parity because of the industry dynamics between the fats and edible corn oil?

Well, but yes and no. The corn oil still has some challenges. There is multiple interpretations there in it. It doesn't have graph status for animal feeds yet. There is the argument if you are an ethanol producer, that BDGs have graph status therefore corn oil should, but they have also used the enzymes to transform and recover that product, which may or may not have approval yet. So part of corn oils discounting and driving a price today is it's looking for a home. So at the end of the day, it should just be another waste fats and grease that can piece forward either a calorie or a BTU and it's got just some limited market uses right now. In biofuels, because of the waxes it has got some challenges, people are putting it in small percentages. I am sure as in any market over time, people figure out how to use a little more, but at the end of the day, you know if you think about it if we call the waste, fats and greases 9 billion pounds, 9.5 billion this year, add another 1 billion, 1.5 billion, we're up to 11 billion pounds of products that will have the chance to go on to biofuels. So it, ultimately for us, your scenario is correct with the additional supply it makes for consideration of expansion of Diamond Green Diesel the true opportunity to consider.

Great, thank you.

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

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

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