Darling Ingredients Inc. (DAR) Q4 2013 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 2013 financial results. With us today are Mr. Randall Stuewe, Chairman and Chief Executive Officer of Darling International; and Mr. Colin Stevenson, Executive Vice President, Global 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 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 fourth quarter and fiscal 2013 earnings results. Randy Stuewe, our Chairman and CEO, will begin today's call with an overview of our fourth quarter and full year financial performance and discuss some of the trends that impacted our results. Colin Stevenson, Executive Vice President, Global 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. This conference call will contain forward-looking statements regarding Darling International's business opportunities and anticipated results of operation. Please bear in mind that forward-looking information is subject to many risks and uncertainties, and actual results may differ materially from what is projected. Many of these risks and uncertainties are described in Darling's annual report on Form 10-K for the year ending December 28, 2013, our recent press release announced yesterday and our other filings with the SEC. Forward-looking statements in this conference call are based on our current expectations and beliefs, and we do not undertake any duty to update any of the forward-looking statements made in this conference call or otherwise. And now I'd 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 earnings call to discuss our financial results for the fourth quarter and our fiscal year that ended on December 28. I would characterize fiscal 2013 as one of the most pivotal years in the company's 131-year history. It was a strong year and one that focused on transformative global growth, diversification and long-term opportunities while navigating through a difficult and volatile price resetting environment. Overall, our 2013 top line growth was attributable to improved volumes in both Rendering and Bakery segments, 9 weeks of contribution from our October close of Rothsay and increased sales from our food residuals business known as Terra Renewal Services. Earnings performance moderated year-over-year, but even with this challenging commodity environment, we achieved the third best year in our company's history. Let's dissect a few of the major fourth quarter dynamics and our annual performance, and then I'll turn my discussion to our progress on Diamond Green Diesel and our recent acquisitions. During the fourth quarter, commodity market values continued their downward spiral from third quarter and impacted our finished product pricing across the board. Fats and used cooking oil took a sharp decline of more than 20%. This was primarily due to a global replenishment of feed grain and oilseed crops, along with uncertainties surrounding the RFS2 biomass-based diesel-mandated volumes for 2014 and 2015. Overall, in our Rendering segment, our processing formulas worked. However, given the severity of the price resetting, some lag was expected. Additionally, buyers' reluctance to purchase forward further exacerbated the inventories, which increased at higher prices in the following market. For the most part, our protein ingredients followed suit in sympathy with the soybean complex but has since rebounded nicely. In the Bakery by-product segment, volumes were in line with expectations, but earnings were sharply impacted by the steep decline -- decrease in corn prices of nearly $1.76 per bushel or $0.29 during the quarter on a sequential basis. The good news is that although we experienced a lag in the resetting of our formula pricing, we were modestly protected by our existing derivatives position. Overall, operationally, both operating segments performed well in light of the major swings in commodity markets and the unpredictable government policy related to biofuel mandates. On a net income basis for the quarter, we delivered $22.5 million or $0.18 a share as compared to $28.8 million or $0.24 a share in the comparable 2012 period. The decrease was primarily related to lower earnings in the Bakery by-product section and transaction-related expenses. Now shifting to Diamond Green Diesel, which commissioned in late June of 2013. For the quarter, the plant continued in shape-down mode. As you know, we experienced a series of heat exchanger failures late this summer and early this fall, and the resulting disruption caused a major supply change challenge. As we are learning to operate all the facets of the plant, the most significant challenge for us has been to keep an adequate and uninterrupted supply of feedstock available. As the plant commissioned late this summer and successfully ramped up to nameplate capacity, we became confident and filled the pipeline with forward purchases to support the plant. As we discussed, fat prices collapsed late this fall. Given the large amount of forward purchases to support the intended run rates and the reduced input rates the plant operated at while waiting for the new exchangers to be fabricated and installed, we carried forward significant quantities of fat into a collapsing inverse, and therefore, we could not take advantage of the replacement margins. These supply chain issues are now largely behind us. Additionally, RINs rapidly declined as the mandate was filled, and the outlook for a mandate increase was quelled when an EPA draft memo was leaked, suggesting that the RFS and the renewable volume obligations would be held constant for 2014 and 2015. Overall, we are extremely pleased with the performance of the plant, and we proved out that the technology works both for pretreatment and the ecofining process. Sales of the product are on target, and we can sell more. The plant is proven and is capable of handling multiple feedstocks and has been operating at nameplate capacity since the first of the year. Now turning to Rothsay in Canada. We are pleased with the integration, which is going well. The 5 rendering plants and biodiesel plants are now fully integrated. Management is aligned, and forward momentum is happening. Volumes are on plan, and margins came under some pressure as we experienced similar price resetting due to a rapidly adjusting ingredient prices in Canada. Rothsay biodiesel operations are currently facing similar pricing challenges as the marketplace awaits the final RFS ruling. Overall, our team has identified both cost and revenue synergies and is developing a formal execution plan. Let's now turn our focus to activities taking place in the first quarter of 2014. As you know, we closed on Netherlands-based VION Ingredients in early January, propelling Darling's Rendering and Bakery operations into its natural next step, a global food, feed and fuel ingredients company focused on meeting the needs of the growing population. We are in process of establishing a new identity, and we'll shortly be asking the shareholders to approve the changing of the company's name to Darling Ingredients Inc. with operating units of Darling USA, Darling Canada and Darling International. With our new company, we have established a global ingredients footprint across 5 continents, with 200 operating facilities and a diversified product portfolio of more than 400 offerings. Our global presence provides access to raw material sourcing in the USA, Europe, Australia, South America and China, delivering value-added products to world-class brands in the gelatin, casings, pet food and aquaculture ingredients and specialty products markets. As Colin will detail in his comments, we are -- we more than doubled the enterprise value of the company from $1.7 billion in revenue to approximately $4 billion, and now we'll operate across 3 principal segments: food, feed and fuel. We have a uniquely diversified portfolio, broad in scope with a focus on innovation and R&D, which are now at the core of the company's strategic mission. I'd like to provide a little additional color now on the first quarter and what we are seeing in our domestic markets in Canada and in our international markets. State side, we've had a very tough winter so far in the Upper Midwest. Volumes look stable in animal by-product processing. However, we are clearly seeing a slowing of the beef complex. In the Bakery and restaurant services area, we've remained optimistic that volumes will be as planned. Finished product pricing of our ingredients has dramatically improved, with proteins leading the way and fats seasonally slow, but we should see improvement as the biofuel demand begins to pick up. Bakery has leveled off at the current run rate, and the corn market is now actually showing signs of life. As I mentioned earlier, Diamond Green Diesel has been operating at capacity, with the supply chain issues largely behind us. RINs are improving, and we are hearing some optimistic chatter out of D.C. that we may see mandate increases for the RFS biomass-based diesel and possibly even a restatement of the dollar per gallon tax credit. In Canada, by-product processing volumes and margins have returned to expectation post the price resetting. Biodiesel is still filling the impact of the lower RINs value and winter pricing, but spring is just around the corner. On the international front, animal by-product processing volumes are steady in Europe. We felt a little price resetting in fourth quarter, but pricing has since stabilized and improved, with pet food ingredient and plasma prices remaining solid. Our gelatin business remains very good. Volumes are as expected in the U.S., South America, Europe and China. Pricing is adjusted to reflect the lower raw material costs, but margins remain as planned. Integration is progressing nicely and focused now on Q1 reporting. Expert teams have been formed, and synergies are being identified. As you can see, our lens is focused towards global growth by strengthening our current position and capturing growth opportunities that are both organic and acquisitive in nature. And we will accomplish this by the following: identifying the world's population changing for food, feed and fuel needs; maximizing the valuation of our raw materials and focusing on the best and highest use for them; developing new products and applications; and continuing to grow geographically to answer those needs. And we're going to measure success by our ability to consistently provide maximum supply chain value. With that, I would like to turn it over to Colin. And then after Colin concludes, I'll come back with a few closing remarks, and then we'll go to Q&A. Colin?

Thanks, Randy. I'd like to point out that during fiscal 2013, we operated solely in North America, and our financials were organized around our historical business segments: Rendering or animal by-products and Bakery by-products. With the recent closing of the VION Ingredients transaction, beginning with our first quarter 2014 report, we will be organized into 3 new reporting segments: Food Ingredients. This segment will include our business units that principally produce gelatin, food-grade fats, casings and heparin, which are sold into a worldwide ingredients market for inclusion and products in the pharmaceutical, food and technical industries. Feed Ingredients. This segment will be the largest of our segments and will include our business units that principally produce fats, protein meals, plasma meals, tallow and hides for the pet food, animal feed, biofuels, fertilizer, leather and oleo-chemical industries, both domestically and internationally. This segment will include Darling's former segments of Rendering and Bakery by-products. And finally, Fuel Ingredients. This segment will include our business units that principally produce renewable diesel, biofuels, green electricity and gas, biophosphates and other green energy from organic residuals, animal by-products and used cooking oils. This segment will also include our equity investment joint venture in Diamond Green Diesel. Please reference our annual report on Form 10-K for additional details on our brand activities within these newly formed reporting segments. Additionally, I'd like to quickly recap the various capital market transactions that were recently completed. First, the 46 million shares secondary offering; the $1.3 billion term loan B facility; and finally, the 500 million 5 3/8% senior notes offering. As a result of the Rothsay transaction that we completed on October 28, 2013, we began including the Rothsay operations in our consolidated financial statements, and fiscal 2013 results include 9 weeks of contribution. With respect to Terra Renewal Services, our fiscal 2013 results included 18 weeks of contributions. Before I jump into the financial review, I would like to acknowledge that our fourth quarter results contained a significant amount of non-operational noise related to the acquisitions and associated financings, a foreign exchange contract position related to VION and a tax benefit associated with the biofuels tax incentive. Now for the quarterly and annual financial review. For the fourth quarter, the company reported net sales of $428.7 million compared to $424.9 million in the year-ago period. The $3.8 million increase in net sales is primarily attributable to the inclusion of sales from Rothsay and TRS and improved raw material volumes in both the Rendering and Bakery segments when compared to the fourth quarter of 2012. However, these increases were largely offset by significant reductions in finished product prices for both fats and proteins. In the Bakery segment, we experienced a sharp decline of finished product pricing due to an unprecedented reduction in corn prices, which dropped approximately $1.76 per bushel or 29% during the quarter on a sequential basis or $3.12 per bushel or 41% relative to the fourth quarter of 2012. As Randy mentioned, on a sequential basis from the third quarter 2013, fat prices declined more than 20%, primarily due to a global replenishment of feed grain and oilseed crops and the uncertainties surrounding expectations for RFS2 mandated volumes in 2014. Net income for the fiscal 2013 fourth quarter was $22.5 million or $0.18 per share on a fully diluted basis as compared to net income of $28.8 million or $0.24 per share for the 2012 comparable period. As noted in our press release, the $6.3 million decrease in net income for the fourth quarter resulted from lower finished product pricing, primarily in the Bakery by-products segment; transaction-related cost of $14.4 million; the write-off of a $13 million bridge loan fee; and higher depreciation and amortization expenses related to a general increase in CapEx and from the purchase accounting step-up associated with our recent acquisitions. These items were partially offset by a $27.5 million gain on a foreign exchange contract related to the VION acquisition, the inclusion of our recent acquisitions and a tax benefit associated with the biofuels tax incentive. At the segment level, Rendering generated net sales of $377.8 million for the fourth quarter as compared to $344.1 million in the fourth quarter of 2012. Bakery sales contributed $51 million to the fourth quarter compared to $80.4 million in the year-ago period. Both segments experienced primarily lower finished product prices that were partially offset by improved volumes during the quarter. Now turning to our results for the full year ended December 28, 2013. Darling reported net sales of $1.723 billion as compared to $1.701 billion during fiscal 2012. The $22 million increase in sales resulted primarily from the acquisitions of Rothsay and TRS, increased raw material volumes in both segments and increase in finished product prices for MBM and feed-grade poultry meal. These increases were partially offset by reductions in finished product prices for fats, Cookie Meal and pet food-grade poultry meal and a reduction in finished product yield caused by a shift in the mix of raw materials collected. Net income for fiscal 2013 was $109 million or $0.91 per share as compared to $130.8 million or $1.11 per share for the 2012 comparable period. Similar to the fiscal 2013 fourth quarter, the $21.8 million decrease in net income for 2013 resulted primarily from transaction-related costs, increased SG&A, lower finished product selling prices, particularly within the Bakery segment, and higher depreciation and amortization costs. These items were partially offset by the significant foreign exchange contract gain, the inclusion of operating results for Rothsay and TRS and the tax benefit associated with the biofuels tax incentive. Interest expense was $38.1 million during fiscal 2013 compared to $24.1 million last year, an increase of $14 million, which was primarily related to the write-off of the bridge loan fee and an increase in interest expense resulting from additional bank debt outstanding as a result of the Rothsay transaction. Other expense was $3.5 million in 2013 as compared to other income of $1.8 million last year. The $5.3 million decrease in other income is due to lower insurance recovery proceeds in the current year compared to the prior year of approximately $1.9 million and a $2.4 million payment to reimburse the former Griffin shareholders for certain income tax liabilities resulting from the company's section 338(h)(10) election made in connection with that acquisition. At the segment level, Rendering generated net sales of $1.457 billion in 2013 as compared to $1.406 billion in the comparable 2012 period. The $51 million increase in net sales resulted from the acquisition of Rothsay and TRS, increased raw material volumes and increase in finished product prices from meat and bone meal and feed-grade poultry meal. These increases were offset in part by lower finished product prices for pet food grade poultry meal and fats and a reduction in the finished product yield caused by a shift in the mix of raw materials collected. Bakery segment net sales declined by $29.5 million to $265.9 million for fiscal 2013 compared to $295.4 million in the year-ago period with significantly lower corn prices impacting our finished product prices for Cookie Meal. The finished product price reductions were partially offset by improved raw material volumes year-over-year. As Randy mentioned, to partially mitigate the sharp decline in corn prices, we executed a derivatives program for our Bakery segment, which we carried out until the summer of 2014. Relative to the company's investment in our joint venture with Valero, on the balance sheet, we reported an investment of $115.1 million as of December 28, 2013, as compared to $62.5 million at December 29, 2012. The statement of operations reported net income of $7.7 million for fiscal 2013 compared to a net loss of $2.7 million in the comparable period a year ago. The $10.4 million improvement is a direct result of the facility commencing production in late June and the sale of renewable diesel thereafter as compared to noncapitalized expenses during the construction phase in the prior year. Let me provide some additional balance sheet detail. On December 28, 2013, the company had net working capital of $950.7 million and its working capital ratio was 6.4:1 compared to working capital of $158.6 million and a working capital ratio of 2.2:1 on December 29, 2012. The increase in working capital is principally due to an increase in cash from the net proceeds of our secondary stock offering. At December 28, 2013, the company had unrestricted cash of $870.9 million and funds available under the revolving credit facility of $680.7 million compared to unrestricted cash of $103.2 million and funds available under the revolving credit facility of $384.9 million at December 29, 2012. During fiscal 2013, the company incurred capital expenditures of $118.3 million as compared to $115.4 million in fiscal 2012, an increase of $2.9 million. The implementation of our new ERP system is ongoing, and we expect to complete the project in 2015. Finally, while we do not generally provide guidance, in the first quarter of 2014, I anticipate the following transaction-related costs to hit our P&L: number one, $27.3 million redemption premium associated with the repurchase of our previously outstanding 8.5% notes; number two, approximately $14 million to $18 million of acquisition-related costs for investment banking fees, professional fees and similar other costs; and finally, number three, a $12.6 million loss on the foreign exchange contract related to the acquisition of VION Ingredients. I will now turn the call back over to Randy.

Thanks, Colin. As you can see, we closed on a very active fiscal '13 on many fronts while navigating through an extremely volatile finished product market. Once again, our operations team did an outstanding job, our formulas endured, our Diamond Green Diesel technology is proved out, our capital structure strengthened and our long-term global growth plan is now commenced. Finally, we intend to apply these values and principles that have carried us forward to the next years of our 131-year history. We have a strong management team in place, deepened industry knowledge and expertise. They're aligned and motivated, and they will help lead us to the next level of global growth. On behalf of our entire Board, we'd like to welcome our new members to the Darling family. I'd also like to thank our entire staff in the USA who rose to the challenges and opportunities that arose in 2013 and helped us deliver another solid year. With that, I'd like to open it up now to Q&A. Emily?

[Operator Instructions] And our first question is from John Quealy of Canaccord Genuity.

So first question on Diamond Green. Can you talk about -- in terms of the finished product, do we know if it's going down into the California market? As you know, with the low carbon fuel standard, it seems like a durable demand market regardless of RFS. So if you could speak to that. And then also, did coldness do anything to Diamond Green? Or was it just the forward bio-fats that dropped it down? And then I've got a follow-up.

No, I think it's a perfect time to address the Diamond Green performance, I mean, to try to categorize the different actions that happened. I'll address that, John. I mean, at the end of the day, if you think through and trying to find the right words to describe it, we kind of call it the perfect storm in the sense that we had -- as the plant ramped up in late this summer and got up to nameplate capacity, the plant consumes 3 million to 3.5 million pounds of fat a day. And at the end of the day, trying to build the supply chain to fill the pipeline was a pretty significant task undertaken by the management team. They filled it up in anticipation of running. So as you can imagine, the forward ownership of that plant is somewhere outwards of 100 days in order to keep the pipeline filled. So when you get that much fat bought and the prices were in the low 40s at that time and then it collapsed on us, and then at the end of the day, the plant ramped back from 10,000 to 6,000 to 6,500 barrels a day due to the heat exchanger failures, and so there was just an extended roll forward of ownership there. Additionally, that fat was hedged in heating oil. Heating oil ran up on us at the end of the year. And then also, the third thing is, RINs collapsed once the RFS mandate was filled. That wasn't totally not anticipated by us, but it was exacerbated by the fact that the draft memo leaked no increase of production for the mandate for '14 and '15. We really had a bias that we were going to get an increase there going forward. So that's kind of the perfect storm of what hit us in a 3-way fashion. And then at the end of the year, you end up taking some inventory to market with the lower RINs. And so between a hedge loss, inventory write-down and then the operating expenses that flowed through with the exchange out of the heat exchangers, you've got the perfect storm to where it adds up to where it's at. And from an LCS standpoint, that is something we are absolutely focused on. The challenge has been the markets are efficient enough to price freight at what it takes to get the product to California right now. So we're working -- I don't want to give away our hand, what we're up to, but I can certainly assure you that we'll have product in California in 2014 here as it's part of our growth strategy to capture the premium that's being achieved out there. Additionally, I think you can comment and think through that the challenge in California is this low carbon fuel standards out there. The reality is, is CARB has not given us a positive ruling on biodiesel out there yet. But on renewable diesel, they love the product. So I think it's going to be a more and significant market once we get freight lined up to move it out there for the spring.

And then as a follow-up, Randy, I don't know if it's you or Colin, but -- and I know this is an unusual one because you don't talk about guidance. But with the new segments of Feed, Food and Fuel, can you just talk to us how the year will be characterized, maybe a seasonality perspective for those 3, just so we can at least be pointed in the right direction?

There is some seasonality associated with the Food segment. And as we go forward into Q1, we will attempt to provide some guidance for that.

Yes. It's pretty limited. The -- when we start to look at the portfolio around the world, it's pretty limited seasonality, John. I mean, the most seasonality we're seeing is in the biofuels side in Canada right now, a little bit of the restaurant services in the USA, you get a little bit in Bakery. Pretty similar type of seasonality mirrors us in Europe. And then also, given that the Rousselot business services, both the food and pharmaceutical, you get a little seasonality there. We'll try to do a little better job of addressing that, but I would tell you, it's not material at this time.

Our next question is from Adam Samuelson of Goldman Sachs.

Maybe first, I mean, there's a lot of moving pieces in the 4Q numbers. And clearly, you alluded to the formula pricing holding, but holding with a lag, where you weren't able to fully offset the declining upward prices with a little bit cheaper inputs in the quarter. Any way you can comment on kind of how much that impacted the 4Q results as you -- how much the very quick follow-on commodity prices really hurt the results before you got the right way again on your formula contracts? I just look at 2014 and you see some similar dynamics in the soybean market with the very inverted futures curve that some of these things can maybe repeat a little bit as we move through the balance of this year.

Yes, I mean -- Adam, this is Randy. I mean, we won't quantify that. It gets -- it'd be really difficult to come through and say exactly what that number is. But anytime that you get a 20% to 25% decline, it just is really difficult. Some of our -- if you think about the world, and then this is the way we'll talk to you going forward, it's really when we say the word formula, it's about margin, and it's about how we procure raw material around the world. And really, at the end of the day, in the U.S.A., we buy raw material on today's price, bring it into our plant and then hope to sell it. In some cases, we buy it on the average of last week's price. So there's a blend of that type of procurement that goes on here. The -- what happens to you in rapidly declining or rapidly increasing markets is that you're buying it today, and at the end of the day, in a declining market, buyers are also smart. They don't want to buy the product, so they extend out. So you end up building inventory, hoping to sell that higher priced raw material at a lower finished product price on the way down. It went down so rapidly in October, kind of stabilized, and then buyers kept waiting to come back in to buy. In Europe, it's basically you're a 30- to 60-day look forward to adjust raw material prices. And in Canada, it's a 90-day look forward. So you get a little bit of whipsaw in action here as you go forward. But over time, it works out. I mean, what we've now seen in January, January, we saw further declines in the prices of fats, and proteins were fairly stable. But in February here, we've seen everything come roaring back pretty sharply now. So it doesn't mean we won't see a fall off here in the back half of the year, quite possibly, but at the end of the day, it looks pretty positive going on out here for the near future.

Okay, that's helpful. And then maybe switching gears to VION. You've now owned it about 2 months. You provided a little -- some brief commentary on the prepared remarks, so maybe some comments on how VION performed in the quarter, kind of impressions now that you've controlled the business for nearly 2 months. And maybe some key milestones or markers that you're looking for that we can look for through 2014 and into '15 on performance and synergy realization.

Yes, I think the first thing to be clear of is we didn't control anything until January 8. And at the end of the day, it's been about a little over 30 days, 40 days now of just learning the business and learning the operations team. As I mentioned in my comments here, we saw a little bit of price resetting in the proteins and fats area as the markets tried to find equilibrium. One of the things is we see the connections around the globe of our businesses. When we slow down, they slow down. A lot of their fats end up into biofuels, ended up into Neste that was exporting to the West Coast of the United States. And for -- to meet the low-carbon fuel standard when the $1/gallon credit went away, the import stopped on the West Coast, so that backed up fats a little bit in Europe. And so you start to see the global synchronizations that happen with our businesses. For the most part, as I've looked through the business and now what I'm seeing in Europe and in Canada, we're right on plan of where we thought we would be, given where the markets are. So not a lot of color there as we don't typically give any guidance. From a synergy opportunity, as we've articulated to shareholders and we did at the JPMorgan meeting this week, we look at a couple areas of synergy opportunities. I would say, at the end of the day, there's very limited, if any, cost synergies with the Euro team. As they were part of a larger holding company, we've had to add back some functions in order to have -- help it become an autonomous operating unit. And so from a cost standpoint, there's very little there. From a revenue standpoint, we continue to tour facilities both in the U.S. and abroad and find products that we think we can do a little different or make a little better or we can make products here, they can make products there. Those plans are being implemented at this time with the formation of what I call expert teams in the area of technology, environment, operations, administration. They're all working on ideas. The most important thing, as we look around in the synergy opportunities, is understanding how each of us buys raw material, what the opportunities are for how we price and manage the risk there and the margin opportunities. I think it's safe to say, as we look around from the pro formas, that there are some pretty significant margin differences around the globe. And we're in the learning curve today to try to understand what the competition is in each one of the areas around the world and whether or not we can see some margin improvement. My goal would be to have some margin improvement out there as we learn each other's business and capture some of those operating synergies that I think are truly apparent going forward.

Okay, that's helpful. Then maybe just quick one last for me. I know you don't give forward guidance per se, but any chance you can give us some color on some of the modeling items for the -- for 2014, so that everyone's models are closer to the same page, D&A, interest, tax rate, CapEx, just some color there to help us all get kind of equally calibrated?

Adam, this is Colin. Let me -- there's a couple of those we can provide some general guidance on. There's a few others we're still in the process of mapping and aligning how they report to -- how Darling reports with the SEC in our public reporting. So I think with respect to a tax rate, if you were looking to model, I would model somewhere in the 32% to 33% range on a blended basis across the platform. SG&A, I won't be able to answer that until the first quarter because that really is about our mapping exercise to ensure that VION, or now Darling Ingredients International, allocates or considers costs in the same way that we consider them. So it'll be a little later before I can give you that answer. On a CapEx basis, I think you should model nominally about $250 million for 2014.

Okay. And D&A? Just last one.

I'm sorry. What?

D&A?

Can't answer that until we're finished with the mapping exercise because I -- we don't have their system mapped into the way we determine what goes into cost of goods sold versus how they consider SG&A. So that will be another -- that will be a Q1 reporting exercise that we're near knee-deep in right now.

The next question is from Ken Zaslow of BMO Capital Markets.

This is Andrew Strelzik for Ken. First question, can you talk about how you think about the earnings power with the new business model? And if you could provide some color kind of step by step how you build that up.

Well, I mean, I think I'd reference you out a little bit to the JPMorgan presentation that was done this week. The only thing that we've released out there at this time is the kind of the pro forma look-back at how we rolled the businesses together that nominally give a $650-type million of EBITDA on a 12 and a trailing 12 type -- or 2012 on a trailing 12-month type number there. And you can see how that rolls up off of that presentation. I mean, the integration opportunities we've spoken to, I mean, Canada is clearly one that we're spending a lot of time in the operations area, streamlining that. We see some real opportunities to move products across border here and to improve the kind of the supply chain that's up in Canada right now. They do a great job and -- at procuring raw material and working with their customers. We think there's some pretty good opportunity there on finished product movement and adding some value there. The European and the Darling Ingredients International group is really -- for -- is going to operate autonomously as we learn the business. The Rousselot business continues to grow. It has a leading position in the gelatin business with a significant focus on the pharmaceutical area and the food area. They've done a great job of maintaining relationships with customers, with a focus on growth. I think we will see that business to continue to organically grow at a 3% to 4% rate going forward. The European Rendering business, as we call it, or animal by-products processing, you always have to keep in mind that the Rendac business is what we call disposal or waste rendering, meaning that none of it or very little of it can end up into the feed or food chain that has to be processed, pasteurized, sterilized and then put into the fuel chain. Very, very limited opportunity for margin widening there in the sense of that it is a relationship and a contract with the Belgium government, the Netherlands government and the Southern Germany provinces to provide that service, what's a fee-for-service business with limited risk. And then you get into the Sonac business, which is our brand in Europe and the U.S.A. and China and South America for, basically, core rendering activities, edible fats, blood. And at the end of the day, those businesses have similar margins to the U.S.A., with similar opportunities to grow both volume, add bolt-on opportunities of plants. I mean, we're looking at the blood business, especially in the U.S.A. right now, there the plasma business, it has very attractive margins. It's a supply chain that we have a pretty unique position in as Darling U.S.A. right now, and looking at and taking the Ingredients International kind of mantra of taking products to the higher and -- highest and best use in value-adds. So I think you'll see us -- as we talk about the baseline of the business, we'd say the baseline you're seeing out there is about $650 million. At the end of the day, you got to think forward now a little bit with Diamond Green Diesel, what it can do. It doesn't go into the EBITDA line. It will and should provide better performance next year for us. The rest of it is something that is kind of work in progress, and we'll talk more about it in Q1 here when we open up an earnings call in May.

But it's fair to say you have a $650 million baseline, plus Diamond Green Diesel, obviously, going forward, and that is a level at which you are thinking about growing that EBITDA line over time. That's kind of what I'm hearing, right?

Yes, well, be careful. You're going to put words in my mouth. The $650 million, you got to remember what went into that. You got Bakery out there resetting now with lower corn prices. So we've talked in the past that you got to re-extrapolate the earnings of Bakery to the -- to $4.50 corn, not the $7 corn. And so if you can run those numbers, so you've got to basically deduct that and add back then a full year of Diamond Green Diesel in there. So to a degree, they both, say, net out at this time going forward to a close enough. And then we start to put the businesses together and then try to find the synergies and the growth opportunities that will develop.

Got it. And then just my last question, can you talk about what the impact was of the purchase accounting in the quarter?

The impact to purchase accounting really would've been, vis-a-vis Rothsay, for the most part, it was -- I would tell you, nominally, it was in around the $5 million range. That's for Q4.

Our next question is from Dan Mannes of Avondale Partners.

A couple of follow-ups. You talked a lot -- and this is going to relate, to some degree, both to Diamond Green and Bakery. I mean, both of them obviously had pretty difficult operating environments in the fourth quarter. Given what you've seen so far, and I'm going to ask about both of them, on Diamond Green, as you worked your way through the high cost inventory, is it fair to say that margins should be more normal or outright normal in the first quarter? Because as we look at the fourth quarter numbers, clearly, it's more than just $0.08 or $0.09 higher fat prices. Clearly, the downtime seemed to have had more impact on you.

Right. I mean, if you go back and reconcile fourth quarter, you've got the fat prices you mentioned, you got the collapse in RINs, you got the hedge loss that happened with the heating oil hedge that was out there, and then you got the inventory impact. And you add all of them up, and it truly does tie out. The pass-through of the higher inventory should -- we ran on through January with some of that. RINs continued to stay weak in January. February, we're seeing a little bit of life come in to it. And then all of the high priced inventories out of the system now and values have moved back up, though, in fat. So the good news is it's gone. The bad news is replacement values of fat have moved back up, which is good for our base business. But I think, in a word, and not trying to telegraph anything here, but I would just say that it's going to be, hopefully, a more normal earnings stream. January was a little more of the same, and then it should pick up from there.

But on the operational side, given what you did with the heat exchangers, when you look back at sort of the previous benchmarks you gave us in terms of throughputs, in terms of leverage to pricing and the way to think through spreads as it relates to fats, is there any reason to think that has changed over time, given the changes you've made or what your experiences have been since you've operated it?

Not really. I mean, we -- John Bullock, who oversees that business unit for us, is -- it is doing what we thought it would do. I mean, we've got upside down, and it just -- the things happened. And that -- but overall, at end of the day, it's doing what we said it would. I mean, the plant's running well, yields, performance, we continue to -- as we've said, it's in the learning mode. The issues that have been down there, the team continues to really just knock them out as they happen. The real opportunity for that team now is to move from shakedown mode into optimization mode and see if we can -- as to creep on up, the capacity, get the logistics outbound, get some product to California at wider spreads and see what it can truly do now going forward as we move forward.

Okay. And similarly, on the Bakery side, obviously, it was a difficult environment in the fourth quarter, given what's going on with corn. It certainly hit the revenues. And I think the surprising thing for us was how hard it hit the margins. As you look to a more stable corn environment, I don't expect the revenue come back, but should we assume at least more normal margins on the revenues that you do generate in that business?

Yes, without going into a ton of detail there, remember, we buy the product off of an index called Track Central Illinois Corn [ph], and then you sell it into the Southeast United States, where the majority of your poultry and swine production is. If you think about what happened in the corn market this year, you add all of that imported Brazilian, South American corn hit the Southeast, and so it collapsed the cash corn price in the Southeast. So you're buying high in the Midwest, you're selling low in the Southeast, and that's where you got your margin compaction that happened in that business. We're seeing it return to more normalized. And what I would say is the run rate is pretty -- is very predictable and consistent here for first quarter.

Okay. And then quickly on Rothsay. When we look at the historical numbers, the 2 months or so of performance was a good chunk below what we had seen. How much of that is just seasonality, I don't know if there's less slaughter in this time of year versus how much was weakness on the biodiesel side?

At the end of the day, it pretty much hit our expectations from where it was. There was quite a bit of weakness there in the biodiesel side as we hit the end of the year here. When RINs collapsed here, it collapsed there, so as the product was moving over into the states here. So that was the majority of the impact.

But how much of that is seasonal anyways, given the weather situation and the demand for biodiesel tends to wane in the winter?

Most of it, Dan. It got exacerbated by the -- that RFS or that EPA memo. And when it fell, it fell hard.

Okay. And my last question just kind of follows up on Adam's, just to help us for modeling. Number one, can you give us pro forma for the closing of beyond your debt and cash levels. And two, I know you can't give us SG&A, but can you give us depreciation and amortization and interest on a forward look?

Yes. I mean, Dan, probably the best place to gather that would be the pro formas that were put out for the high yield. We're still in the process of the purchase accounting valuation work that's being done for the international business. And that's -- so it'll be -- that will be later this quarter before that process -- before actually I see a draft of those numbers. So the best information we have at this point was what was in the pro formas.

From the high yield deal. Okay.

Our next question is from William Bremer of Maxim.

Colin, would you happen to have an adjusted net income figure for this fourth quarter?

We did not put out an adjusted net income figure, Bill.

There's too many moving parts.

Yes, I've noticed. Okay.

That's same issue you got, Bill.

And we appreciate it, we all do. The first quarter of '14, the 3 items that you referenced, those are all pre-tax, correct?

You are correct.

Okay. And just sequentially, how are things coming through on the top line, if you could give us a little color there, even embedding VION into the first quarter? But if we took out VION, how are things progressing? We got volume, we got better pricing. Can you give us a little color as you're seeing sequentially the organic business?

Well, I mean, obviously, we spend so little time talking about top line that I even have to go look and see what the top line is sometimes. From -- we -- from a top line perspective, obviously, prices kind of stayed stagnant, went a little lower here in January. In a sense, has started to rebound. Volumes remained pretty good around the horn although in the Midwest we've had a pretty tough winter on volume up there in the standpoint it will come in, in the form of deadstock once we can unthought and find it. And at the -- from a perspective of Europe, volumes have been pretty good. Gelatin volumes have been good. So I mean, other than adjusted for a little bit of lower selling price here, everything's pretty much right in line.

Our next question is from Craig Irwin of Wedbush Securities.

Randy, can you maybe give us a little bit more color about what the feedstocks were you were running at Diamond Green, whether or not you were procuring these internally and whether or not you're making any other adjustments to the plant, either operationally or maybe some capital upgrades or changes to the formatting of the facility or anything that could impact utilization in the first quarter? And then, I guess, I probably should have asked what the utilization was in the fourth quarter as well.

Yes, I don't think -- we have not given utilization rates of the plant, and that's kind of a -- that's kind of the agreement that we have internally with the Board of Managers. We did turn it down and have to run at 6,000 barrels a day for quite a while until the heat exchangers in late November started to come back online. The feedstock mix down there, I would tell you, it doesn't matter, and we don't even spend any time thinking about it. I want to say that it's a blend of Darling's used cooking oil, Darling's yellow grease and then corn oil out of the Midwest, it's just an arbitrage of what makes the cheapest available feedstock to the plant. There really aren't any limitations there that are worth talking about. So at the end -- as we tell people, even last summer, when we got ramped up in the supply chain, the cheapest oil was degummed soybean oil located in the Gulf in a tank. And so the plants ran degummed bean oil, corn oil, we're still trying to work through some issues with poultry fat, get comfortable with it. I think we'll get comfortable with it. The guys that render poultry products tend to put a lot of different things into that poultry when they're rendering poultry products, and that ends up in the fat. And so we want to make sure that we don't have any catalyst killers out there. So that will be the only feedstock that is missing from the mix today, and we're trying to get comfortable from that. From a capital standpoint, we experienced the -- some operational shakedown stuff as we learned different operating conditions of the plant. And really, maybe some of the mathematics and science that went into it wasn't perfect as it was. Serial #1, I think those are, for the most part, in large part, behind us. Capital upgrades are being identified right now. I mean, obviously, this plant has about -- it was set up to run on about a 2-year turnaround basis. There's no signs that the catalyst is having, showing any wear that we can see at this time. And so as we're -- as I said in my earlier comments, I think we're transitioning to the full run rate and the optimization side. And just really hats off to the -- to Gary Steckel and his team and the Valero team for moving that forward. But I see we get the supply chain issues, like we said, largely behind us. I think all is good. The customer acceptance of the product is tremendous. There's limited to no pricing pressure on this product because it's so different than the classic methyl ester out there. And as I said in my earlier comments, we can clearly sell more. Our challenge is to get the plants up, optimize the capacity, and then just see how fast the race car can run here.

Great. And then if you could comment a little bit about biodiesel market conditions. So if we look at the data that's available out there, it seems that there's a fairly significant inventory effect as we come into the first quarter. We already see the -- seen the RIN productions for January down dramatically from year-ago levels, really, the function of the overproduction of the industry last year and some of the imports. Can you comment on whether or not this might impact your choice to run this facility at a higher utilization level in the first quarter and whether or not you see the benefit that this is driving for some of the other guys on the feedstock price potentially materializing for Darling?

Yes. I think that it's safe to say that the methyl ester biodiesel industry is enduring its normal winter challenges here. I mean, obviously, with the carry-in that was available of up to, whatever, 20%. And at the end of the day, everybody tried to make it, so they could get the $1 a gallon in carry-in here. That's weighing on it. We saw RINs come back a little bit here in February, backed off a little bit yesterday. But at the end of the day, I mean, the replacement margins then at Diamond Green Diesel are very, very attractive right now, and replacement margins at biodiesel in Canada aren't very good, and so I think we feel very, very positive and very good about the investment decision we made at Diamond Green Diesel. As I said, had we not screwed up the supply chain and had operating challenges that we had, I think this would be a whole different conversation. And you'd be seeing the sunrise like we do in the sense that this is the lowest cost technology in the marketplace capable of converting about anything and selling it for a premium relative to what methyl esters trade for in the marketplace because of its logistics, superiority, in a sense, and then also the fact that it's just a really good product. So I mean, we don't look at it in any other way that -- your comments in the past that we've been a biodiesel play here, I don't think are even remotely relevant. This is a technology for value adding the fat supply of Darling today. We can arbitrage as much fat as we want into it. It's allowing us to trade product and to maximize margins around the horn here, aside from the little bit of a noise that we had in fourth quarter.

Our next question is from Carla Casella of JPMorgan. Carla Casella - JP Morgan Chase & Co, Research Division: One question on the PED virus that's affecting the hog industry. What do you expect the impact would be on your business for 2014?

Carla, it is -- I'm glad you brought it up. It probably should have been mentioned in -- earlier in my comments. PED is something that we're spending a lot of time globally talking about. I don't know that we have a consensus opinion within the company on the impact because the impact, from a practical standpoint, is minimal. From a perception standpoint, it's kind of unknown right now. PED has been in the States, in the Lower 48 here, since, I think, about April of last year. It's affected 25 states, I think a couple of provinces in Canada. There's been some overreaction from some of the different provincial governments, some of the universities that have linked different products or tried to link products to it. But at the end of the day, it's very little impact into the Lower 48 side. At the end of the day, it affects the mortality of the baby pigs. It's a pretty high mortality rate, 90% to 100%. And at the end of the day, we're hearing it could impact some lower hog availability around the horn. But that's just not a big portion of our mix in the Lower 48. It's a larger portion of our Canadian mix. But right now, I would say the way we're talking about it, we just don't see it as a material impact to anything for us right now. We do know, and Dr. Rasu [ph] and Fred Bickens [ph] in Europe, we do know that as the weather warms up, the virus starts to, I want to say, go dormant here. And so we're hoping for warmer weather sooner here to watch it go away. But it is a very serious thing affecting animal health out there this year. Carla Casella - JP Morgan Chase & Co, Research Division: Okay, great. And then now that you got a greater presence in South America, where I think the protein markets in general are likely -- could drive more of the growth from, what do you see is the opportunity there? Would you look into greenfield opportunities for additional plants? Or are there additional opportunities with your existing facilities or other acquisition opportunities?

The -- I think, number one, we try never to comment on what we're dreaming or thinking about here. But the reality is, Brazil is -- we have a pretty strong presence in the Rousselot, in our gelatin business. It's very successful for us. Our management team down there is -- does a tremendous job, and it gives us the confidence to continue to grow down there. Our relationships with -- in the U.S.A. with different suppliers that are down there gives us a confidence that, I think, Brazil is somewhere we want to be. I think, at the end of the day, our -- as we look at the world, we look at Brazil and China as, to a degree, with populations growing, wealth growing and appetites growing. And oh by the way, they've got grains to feed animals and willingness to consume proteins. So I think for the future of our shareholders, we want to be where the animals are growing, and clearly, Brazil is there. How we enter it in the Sonac corn rendering business is yet to be determined, but it is something that the Ingredients International team has been studying for some time. So I'd keep it on the radar screen.

Our next question is from Roman Kuznetsov of Gates Capital.

It's Jeff. What was the cash balance at February 7?

Yes, that's -- we can't disclose that. It's not out in the public yet.

That's fine. I'm asking you to disclose it on this call because you gave the debt number, and the debt number's not particularly meaningful without the cash number.

What I -- the way we disclose financials, cash balance plus payables and the reduction of, I can't give you an accurate number because I don't have the 2 pieces. I only have one of the pieces.

And we've reached our allotted time, so that will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Stuewe for any closing remarks.

Thanks, Emily. With that, we'll wrap up. We appreciate everybody's questions and support here, and we look forward to talking to you in May as we put the companies together and start to tell the new and improved story. Thanks, everybody.

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