Darling Ingredients Inc. (DAR) Q4 2015 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the Darling Ingredients, Inc. Conference Call to discuss the Company’s Fourth Quarter and Year-End 2015 Financial Results. With us today are Mr. Randall Stuewe, Chairman and Chief Executive Officer of Darling Ingredients; and Mr. John Muse, Executive Vice President and Chief Financial Officer. 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. [Operator Instructions] I would now like to turn the call over to Melissa Gaither, Vice President, Investor Relations and Global Communications for Darling Ingredients. Please go ahead.

Thank you, Andrew. Good morning and thank you for joining us to review Darling’s earnings results for the fourth quarter and year-end 2015, ended January 2, 2016. To augment management’s formal presentation, please refer to the Presentations section of our IR website for the earnings slide deck. Randall Stuewe, our Chairman and CEO, will begin today’s call with an overview of our fourth quarter and full year operational and financial performance and discuss some of the trends impacting our business. John Muse, Executive Vice President and Chief Financial Officer, will then provide additional details about our financial results. Please see the full disclosure of our non-U.S. GAAP measures in both our earnings release and the earnings slide deck presentation. Finally, Randy will conclude the prepared portion of the call with some general remarks about the business and the year ahead, after which we will be happy to answer your questions. Now, for the Safe Harbor statement. This conference will contain forward-looking statements regarding Darling Ingredients’ business opportunities and anticipated results of operations. Please bear in mind that forward-looking information is subject to many risks and uncertainties, and actual results may differ materially from what is projected. Many of these risks and uncertainties are described in Darling’s Annual Report on Form 10-K for the year ending January 2, 2016, our recent press release announced yesterday, and our other filings with the SEC. Forward-looking statements in this conference call are based on our current expectations and beliefs, and we do not undertake any duty to update any of the forward-looking statements made in this conference call or otherwise. With that, I’d like to turn the call over to Randy.

Thanks, Melissa. Good morning, everyone and thanks for joining us. 2015 is now in the record books, and we finished strongly, in light of deflationary conditions we faced throughout the year. In 2015, we set a strategy to delever and grow, to control what we could control by lowering costs, improving margins, paying down debt and improving our working capital. On all fronts, our team executed superbly, and we have now set the stage for what we believe, will be an improved 2016. To cap off the year, Diamond Green Diesel had a record year. We started up three new plants, brought on major gelatin expansions in the USA and China, and recently announced the joint venture within Intrexon to commercialize insect proteins. In the fourth quarter, additionally, we saw an outstanding performance in our international operations while our U.S. operations were reacting to massive price declines in their finished product portfolio. Thankfully, these pricing movements in the USA have already reversed early in the first quarter of ‘16. Our fourth quarter results underscore the importance of what we have assembled here at Darling Ingredients in the past several years. A diversified global business that is not 100% ruled by pricing conditions in anyone geography, business unit or segment. We saw it in the fourth quarter as one geography experienced unfavorable conditions, other geographies and segments performed well. This diversification will enable us to continue implementing our delever and grow strategy as we look ahead. During the fourth quarter, our feed segment within the USA endured significant pricing pressures due to strong raw material volumes and reluctant consumer demands. Finished goods pricings declined to levels not seen since early 2000s. Our spreads, our margins, and our earnings reflected this pressure. The good news is that prices for fats, proteins and pet food ingredients have rebounded sharply during first quarter, and we expect further improvements throughout the year. The food segment on the other hand, had a tremendous performance, led by our Rousselot gelatin unit. Strong demand, improved margins, and commissioning of major expansions in USA and China augmented this performance. In the fuel segment, the reinstatement of the blenders tax credit for Rothsay along with the consistent and growing performance in our Rendac unit explain the improved results. Now, moving to Diamond Green Diesel, Diamond Green Diesel produced 159 million gallons of renewable diesel and reported an EBITDA of $177 million, both which are records. We have proven two things this year: First, DGD offers a viable and realistic hedge to our core North American business, meaning if that price is declined, the earnings in DGD more than offset. And secondly, the technology we have developed with Valero is capable of consistently processing the waste fats and greases we produce and making a superior product, the petroleum industry prefers. Darling continues to be optimistic about both our biofuels business and our core businesses due to the ongoing implementation of the low carbon fuel standard programs in California, British Columbia, Ontario, possibly Quebec and potentially down the road Oregon, Washington and maybe even the North Eastern parts of the United States. As we’ve discussed in the past, these programs are particularly beneficial to Darling as they are carbon intensity programs. That means unlike RFS2 where all forms of biomass-based diesel are treated equally, meaning the same RIN value, once a minimum threshold of carbon emission is achieved, biomass-based diesel from the feedstocks that have the greatest carbon intensity reduction, will receive a premium, over feedstocks which have less carbon intensity reduction. For Darling that is good news because the products which have the greatest carbon intensity reduction and therefore receive the greatest green premiums are the feedstocks we produce in our core business and utilize those feedstocks to both Diamond Green Diesel and our biodiesel facilities in the USA and Canada. What does this mean for Darling? It means that our fats use cooking oil and animal fats will be preferred from the biodiesel and biofuels industry. More importantly, it means the third green premium, the first two green premiums be in the RFS2 program including RINs and the federal tax credit will now be augmented by the LCFS credit. This should favor the types of fuels that we produce at our biomass-based diesel facilities. When well this happen, when does this happen? Well, we are beginning to see the effects now. LCFS premiums are encouraging our non-committed production to go west today. All the programs are in their infancy though, and it will take some time for the value proposition to be clarified and to set the supply chain to hit these various markets. We should see improvement in the back half of 2016 and sharply into 2007. And for our businesses, we should be fully engaged in 2018 and beyond. Now, let me briefly comment about our new joint venture with Intrexon. While very early in the process, we believe we have identified a significant new potential source of fat and protein for the world’s growing population. Our interest in this area started nearly two years ago at the grassroots level as we funded R&D and a basic pilot plant to grow black soldier flies. Our vision is simple, to economically produce sustainable source of protein and fat by converting various feedstock streams to their highest and best use. Another way of saying this is to take feedstock that has been landfilled or composted today and make a value-added ingredient. Our new venture will attempt to commercialize this vision and even make it better. Intrexon brings us sophistication and knowledge to improve the black soldier fly that we’ve never possessed. This in itself will create opportunities as Intrexon’s reputation of building concepts and companies is well-documented. At this point, we are moving towards the initial commercialization stage that involves jointly building our first scalable plant. It’s very exciting, but these are unchartered grounds, and we will share more with you as we learn more over the coming periods. In closing out the quarter and the year, we exit 2015 a stronger company with more efficient operations, newly constructed operations, visions for new businesses, and a stronger balance sheet. As we move into 2016, we will continue to focus on deleveraging the balance sheet while pursuing prudent and profitable growth. I’ll talk a little more about this and the year ahead, as John concludes his remarks. With that John, do you want to give the financial update here?

Okay, thanks Randy. Our primary focus and initiatives during 2015 have been on debt reduction, margin enhancement, reducing working capital, cost reductions in both operating and SG&A expenses and monitoring CapEx deployment. As Randy mentioned, our main focus is on debt reduction and delevering. In the fourth quarter we repaid $42.4 million of debt, bringing our 2015 total debt pay-down to $118 million. Our target going into 2015 was $100 million of debt reduction. We ended 2015 with a debt to EBITDA leverage ratio of 4.32. We intend to repay an additional $125 million to $150 million of debt in 2016 and to end of 2016 have a debt to EBITDA ratio of less than 4.0. We continue to focus on EBITDA margins in all three business segments and cost reductions in face of broad commodity price declines. We’ve reduced headcount at our corporation by over 10% in 2015; we delivered cost reductions in 2015 including $52 million in SG&A reductions year-over-year. Moving forward, we expect SG&A expenses to run in the range of $83.5 million to $84.5 million on a quarterly basis, taking into account our three new plants that we just constructed and the two new rendering operations that would be coming on in the last half of 2016. We have committed to reducing working capital in our business. This is a primary focus on operating and marketing groups. Sequentially, we improved our working capital. This was done by lowering inventories, managing payables, and being better stewards of our receivables. We reduced working capital by $31 million in 2015, achieving our goal of $20 million reduction. Change in the working capital in 2015 over 2014 improved by $72 million. We spent approximately $230 million in CapEx in 2015. Our 2015 expenditures included the funding of three new plants at bakery and two wet pet food, and one major expansion in our Dubuque, Iowa gelatin facility. CapEx for 2016 is projected to be in the $210 million to $220 million range. Now, I’ll go on to some financial results for the fourth quarter and for the year ended January 2, 2016. For the fourth quarter of 2015, the Company reported net sales of $810 million as compared to net sales of $1 billion for the fourth quarter of 2014. A $190 million decrease in net sales is primarily attributable to lower finished product prices, primarily in the global fats and protein markets. Net sales for 2015 were $3.4 billion as compared to 2014 net sales of almost $4 billion. The $559 million decrease in sales is primarily attributable to lower finished product prices and foreign exchange rate impact of a weak euro and Canadian dollar. Overall, global raw material volumes were stronger year-over-year for both North America and our international businesses. Net income for the fourth quarter 2015 was $84.4 million or $0.52 per diluted share and $0.54 per non-GAAP adjusted diluted share, compared to net income of $69.9 million or $0.42 per diluted share in 2014 fourth quarter. For the 2015 year, we recorded net income of $78.5 million or $0.48 per diluted share, compared to 2014 net income was $64.2 million or $0.39 per diluted share. The fourth quarter increase in net income of $14.5 million or $0.10 per diluted share reflects improved result from Diamond Green Diesel and increased earnings from our food segment. As you notice, our other expense was $6.1 million in the fourth quarter of 2015, compared to a profit of $300,000 the same period of ‘14. This $6.4 million increase in expense was primarily due to fourth quarter fire and casualty losses in the Netherlands and Brazil of approximately $3 million and a legal settlement of approximately $1.8 million. Sequentially, adjusted EBITDA for the fourth quarter of 2015 decreased to $102.7 million compared to $106.1 million in the third quarter ‘15, a decrease of $3.4 million. The decrease was driven by lower earnings in the feed segment which was partially offset by improved earnings in both our food and fuel segments. Adjusted EBITDA for 2015 was $412 million compared to $434 million in 2014. The decrease is largely due to the lower finished product prices. Now, I would like to move on to our operating segments. Sequential quarterly results breakouts of these are shown in our slide deck that’s on our website. Our sequential quarter segment operating income was $32.7 million in the fourth quarter of 2015 versus $38.8 million in the third quarter of ‘15. The feed segment operating income was $10 million in the fourth quarter of ‘15 versus $35.6 million in the third quarter of 2015. Feed operating income for 2015 was $116 million compared to $192 million in ‘14. The $25.6 million decreased in operating income for the fourth quarter was primarily due to significant finished product declines and proteins, fats and used cooking oil, also contributing to decline was our start up cost associated with our new wet pet food facilities. In the U.S. operations, lower earnings related primarily to declines in finished product prices, particularly in our non-formula business. The international operations were down only slightly due to strong volumes in raw material cost reductions which offset lower finished product prices. In addition for the 2015 year, the feed segment operating income was negatively impacted by foreign exchange translation by approximately $16.4 million when using prior year average exchange rates. The food segment operating income was $23.3 million in the fourth quarter of 2015 versus $11.6 million in the third quarter of 2015, an increase of $11.6 million in operating income. Food’s operating income for 2015 was $61 million. While taking into account the non-cash inventory setup adjustment in 2014, operating income year-over-year was basically flat. The gelatin business improved compared to prior year, as a result of increased demand in China and lower raw material prices in Europe. The European edible fats business also improved year-over-year. The main difference was the food segment’s operating income was negatively impacted by FX translation by approximately $24.4 million, when using prior year average exchange rates. The fuel segment operating income was $12.5 million in the fourth quarter compared to $0.2 million in the third quarter of 2015. This increase was primarily due to the receipt of the biofuels tax credits in the fourth quarter and strong operating results from our European fuel segment. Now, I’d like to cover some of our balance sheet and tax highlights. As mentioned, we continue to tighten our working capital resources and fortify our balance sheet to maintain sound liquidity, long-term. We have positioned our capital structure to provide stability and financial flexibility to meet our long-term goals and our fully compliant with all our bank debt covenant ratios at the end of 2015. Total debt at the end of 2015 was $1.96 billion compared to $2.15 billion for 2014. The net debt reduction from ‘14 to ‘15 when taking into account our available cash on the balance sheet would show a reduction of debt of $240 million. As mentioned earlier on the call, we’ve improved our working capital investments in ‘15 over ‘14 and ended the year with a current ratio of 2.1 to 1. Now, let’s take a little dive and deeper review of our effective tax rate and cash taxes, which has been moving around all year. In our 2015, we have discussed the impact on our effective tax rate that the Tax Extenders package not being reenacted for 2015 had on the Company. In the fourth quarter of 2015 Congress approved the Tax Extenders package with 2015 and for the next five years. The blenders tax credit was also passed in the fourth quarter of 2015, which not only reinstated the credit for ‘15 but also passed it for 2016. The passage of both the Tax Extenders package and the blenders tax credit will enable the Company to report a more consistent effective tax rate quarterly through 2016. The Company reported net income tax expense of $13.5 million for 2015 compared to $13.1 million of income tax expense for 2014. The effective tax rate for 2015 was 13.7% and 16.1% for 2014. Cash taxes for 2015 was a net refund of $3 million compared to a payment of $28 million in 2014. For 2016, we are projecting an effective tax rate of 22.5% and cash taxes of approximately $30 million. I’ll now turn the call back over to Randy.

Thanks, John. We exited 2015 a stronger company with lower debt, stronger cash flows, and strategic investments in new plants, and many operating efficiencies. I’d like to close my remarks with some comments about the year ahead. The finished product price implosion we saw in the USA in the fourth quarter is behind us. Global raw material volumes remain strong and finished product prices have improved and now are actually above third quarter levels for most fats and some protein. Gelatin volumes and pricing are out of the box strong for 2016 while our fuel segment has been supported by the prospective tax credit. Our focus for 2016 will be to continue on the momentum we’ve carried in, to improve our operating cost globally, to finish the construction and begin operating in our two new USA rendering plants, to repay a $150 million of debt, and to improve our working capital again by $25 million, and most importantly to continue our improved safety record around the world. With that, I’d like open it up now to questions and answers.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Dan Mannes of Avondale Partners. Please go ahead.

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

Okay. Yes, I think -- let me give you quite a bit of color there. I think first off, it should be noted that we went down in January 29 to about 16 days for our first kind of planned turnaround of that facility for catalyst change-out and then some piping or metallurgical improvements that we felt were necessary to -- for both safety and continuous operation. So that’s been completed; the plant is back up and running successfully and operating at the 12,000 plus barrel a day level now. So that’s point number one. Point number two is Valero is our partner in that facility. Valero engineering is now moving towards, what I’m going to call, plus or minus 10% cost estimate level on the expansion. To narrow it in much more than that right now is premature. We’re targeting an expansion of somewhere around up to 18,000 barrels a day, which would be an additional 6,000 barrels a day from where we’re at today. Timing for that right now is looking to, the early estimates that I saw would be towards the back half of ‘17, meaning the fourth quarter ‘17 would be the official tie-ins and it would be fully operational in the sense of the new capacity; and most of it, not all of 18 right now. That’s the early thing. The second thing is -- I want to comment and this will maybe answer several questions on the LCFS. When we built Diamond Green Diesel, and the economics and the view that we had at the time with RFS was that it was built as a road fuel plant and the economics were based on replacing ultralow sulfur diesel in road fuel. And so, there was a significant portion of the plant that’s committed to customers for several years here that is at road fuel prices. As the LCFS evolved here, we have been able to free up some of the excess barrels. And we’ll continue to have more barrels available in later ‘16 and more in ‘17 to fulfill the LCFS. I don’t want to give a number of barrels today that is Dan, but it is a significant amount here towards ‘16 and ‘17 that will start to head west and up north to Canada, as we move forward.

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

Fourth quarter for the food segment was very strong. And really there is three businesses within that segment that reported that with Rousselot being the primary piece of that segment. Rousselot, the gelatin business continues to do quite well around the world, both from a demand and a margin management perspective. And as always, as you look at that business, you look at raw material availability. Raw material is in the form of pigskin, beef-hide, beef bone, pork bone, and as we make the different colors and compounds out of those. So, as slaughter remains strong, raw material volumes became more available in a sense lesser cost in some cases. And we were able to widen margins. Demand remained strong, especially in China. We got the devaluation in Argentina that helped us there a little bit. We brought on the new capacity in Dubuque, Iowa for a major customer in the USA. And then we were able to start up and ramp up our capacity in Wenzhou, China. So, we remain optimistic about the volumes. And December was particularly strong in that business for us. Remember the Chinese New Year came a little bit earlier this year, so a little bit of stocking in from the Chinese demand there. But at the end of the day, I think we’re pretty optimistic that segment in the sense of the edible fat melting business, volumes have backed off a little bit, as the marketplace tends to take a few more of the products back to the primary consumer meet business. But the margins have widened there to where they are back to normal. And then our CTH business, our casings business finally had a quarter where it wasn’t disrupted by trade barriers in Hong Kong or China and just more of a normal. So, where third quarter had a lot of noise in it, fourth quarter is what I would say is more realistic of that business unit. And then that’s provided, I would say -- the gelatin demand remains, as we forecasted to be in 2016.

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

Yes. Number one, this is a project -- and let me comment a little bit about that and then maybe put a little overall view on both, R&D and EnviroFlight. I mean for Darling, every year we commit a certain amount of funds within our capital programs to explore new technologies. And when I say new technologies, if you think of the gelatin business, it’s about yield and throughput read [ph] and nanofiltration. And we spend money in that area to make those plants more efficient. In our core rendering businesses, we look at energy transfer evaporation and fat recovery, and we invest in that area. Our Hampton hexanes plant down in Florida is one that was built to recover -- used solvent to recover fat and protein from waste water streams. We’ve proven that that works quite well. It’s commercialized; it’s ready to roll out, depending on how the food safety modernization act is developed in the U.S. here. And then finally, about in 2014, we were brought the EnviroFlight idea from an entrepreneur in Ohio that had been working on the concept. One at our expertise and the supply chain origination of different feedstocks, we committed, I don’t know, around $3 million of capital to build the pilot plant to expand or modernize the pilot plant. And then we had about another $1 million of operating losses in that business, as we developed the technology. Here, about mid-year in -- mid to late year in ‘15 Intrexon approached our partner and decided to acquire it. Intrexon is a synthetic biology company that is a master at gene manipulation, DNA stuff; this is a way out of my fairway. But they think they can improve the black soldier flies, both productivity and potentially its properties as we go forward. So from that perspective Intrexon and Darling decided to form a joint venture to commercialize insect protein. Our view of world is pretty simple in that area. And we carry a long term view for both, Darling and that business. The view is one that the world does not have enough arable land or water to continue to grow enough crops and proteins to feed the beef, pork, chicken and fish of the world going forward. And if you can find the way to create a sustainable and effective low cost protein, which we believe insect proteins potentially can be, it’s very early in that analysis, then it’s pretty cool. And so, what we’ve got with Intrexon is a chance to build the first plant, which we have both committed to do for the -- I believe and somewhere here in late ‘16, we don’t have a sight, we have an idea, and then I believe that each one of us I think I believe I have seen the numbers somewhere would commit up to $4 million to $5 million each, $10 million to build the first operation and discover its viability going forward. So that’s about we can tell you today. We don’t know what we don’t know. It’s pretty exciting stuff. But it’s first generation, as we said.

The next question comes from Heather Jones of BB&T. Please go ahead.

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

Yes, it’s should.

Okay.

That with the Extenders package being approved and with the blenders tax credit being there, we will be able to book that as we go forward. So that would be the recommendation we would make to use that. Heather, it could move up and down a little bit, but we won’t be looking at 3% -- 3,000% the effective tax rate.

That’s good to hear. Going to the product pricing, so we’ve see this big -- as you noted, big rebound in fats pricing. Interestingly, it seems like this is coming at what is typically a weaker demand from a seasonal perspective, demand period, and was wondering if you could comment on that. And given -- if that -- if you agree with that assertion, what do you think pricing could, as we move through the year, particularly given the mandate and the pull from the LCFS market?

Okay, this is Randy. Let me comment. Always globally, and as we kind of work around the globe here, I mean Europe fat prices have improved; they were more steady in Q4 than they were in the USA. They continued to improve here into Q1. Protein felt, was more stable in Europe in Q4, feels a little heavy in Q1, predominantly the poultry protein as much as we see here, but they feel pretty stable and we’re pretty optimistic there. As you come back to North America, the visibility and transparency that the analyst community and investor community has is to the trade publications. And publications meaning the Jacobson or the USDA or the Yellow Sheet or Urner Barry, all of those give directional values and reflections of what prices are being reported. It doesn’t necessarily at time reflect the different cash prices that are being traded within any one of our 130 locations in the North America here. So, the challenge in Q4, and I want to kind of set the table, was we had strong slaughter and predominantly in the poultry area and also in the beef and to a degree even in pork, throughout the quarter; that’s put a lot of fat and lot of protein on the market. Protein in the poultry area was being -- was slow to be exported out of the country because of potential beliefs of avian influenza which hasn’t surfaced. It was also the time of the year that the pet food companies slow down their supply chains, their contracts are made annually, and they were waiting till January to pull. So, you had what I call a glut of protein coming on the market in Q4, looking for homes. At the same time, we had entered in December, as I remind people, the holidays in Dallas, so I think Christmas day was 80 degrees down here; it was still quite warm. So, we never really entered the winter -- the winter feeding season even in mid December, which is very atypical. So look at that, then look back and say that the fast -- the biodiesel industry slowed down rapidly in September, October and really didn’t have much pull in the fourth quarter from us along with there were very little exports, given the strength of the dollar. Everybody seemed to be waiting for the bearish moment and to come on in first quarter here. What we saw when we came in on our New Year’s day was then a resurgence of orders, demand; and used cooking oil has continued to increase, even as of last night. Proteins and the pet food grade proteins, and remember in that area we’re creating especial ingredients for the different pet food companies. And when you can’t sell it as pet food, you’re forced to put it back into commodity animal feed and those spreads can be -- can narrow very rapidly for us. In the fourth quarter, they have rebounded nicely to what we expected them to be and what they’ve been historical in the fourth and in the first quarter. The one that has a little bit of work yet to do is meat and bone meal from our bovine plants here and mainly in the Midwest but that market seems to be coming back sharply. And it came back sharply because meat and bone meal relies heavily on getting a small percentage, 10% or so of its production out of the country to balance the supply and demand. And while exports have been slow, we saw meat and bone meal go to $100 a ton discount plus to soybean meal. We knew it wasn’t sustainable; it’s just a typical cycle that can happen in this business. And then we saw here in January the large pork integrators come back in and order that product. We’ve now seen it rebound nicely to where cash prices are near soybean meal levels, again in that area. So going forward, I’m more bullish on fat prices in the USA that’s driven by strong biofuel demand, augmented by the LCFS. We’ve seen a nice rebound in used cooking oil. In my script, I talk, and I’m trying to make sure that I lay the breadcrumb trail that the products from Darling’s core North American business are going to be preferred for carbon intensity as the LCFS ramps up. It’s still very early in that but we are clearly seeing our products being pulled on for that. So, I think, you’re going to see a continued movement of used cooking oil and animal fats throughout the year. As we go forward, I think that the RINs are going to have to do some work. And I think at the end of the day, the market will be driven by the California and Ontario and British Columbia demand that’s now developing.

Okay. So nice rebound from Q4 but further to go in your view?

I’m still -- I’m happy that it bounced. I’m feeling good about that and I’m friendly going forward from where we are at today.

Okay. I have two more questions. You mentioned the pet food spread, it has recovered. I think it -- I mean we’re using Jacobson data but it troughed like low 70s and Q4 is now call it 250 or 260. That’s a huge rebound and it’s honestly is up even year on year. So, I was just wondering, if you could give us a sense of what is driven that magnitude of recovery, particularly given the year on year improvement?

I didn’t see -- I can tell you what drove -- the oversupply drove the fourth quarter implosion that I referred to. We’re looking now -- we think that from a cash perspective that spread will stay in that 270 to 300, 320 range, very, very strong pet food demand and a very strong preference for the low ash chicken products into those streams. And that’s what we’ve been positioning all of our plants in the southeast for; we’re at capacity and I think those premium will stay there this year.

Okay. And, my final question, and this is just a fast forward on the expansion on DGD. So, you mentioned you’ve freed up some barrels to ship now and then that should accelerate as we move into late ‘16 and ‘17. But I know that one of the issues has been getting the product out there because of rail. So, I was wondering if you could give us updated thoughts on when you expand Diamond Green, what are your thoughts on putting in [Technical Difficulty] or whatever that would help make it easier to access those end markets?

Heather, this is John Bullock here. Our attention would be by the time we have the expansion in the Diamond Green Diesel, we will have rail capability to California.

The next question comes from Ken Zaslow of Bank of Montreal. Please go ahead.

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

I think you kind of asked and answered your own question there. But we’re thinking that Dan. I mean Ken, I’m sorry. When we look at it, I mean we saw in fourth quarter meat and bone meal trade down with a one in it. We’ve seen meat and bone meal come back in North America in the mid-twos from a cash perspective. We saw animal fat being sold out at the major slaughter houses down at $0.14 in December. We haven’t seen those prices since early 2000. So, you’re going to see the feed segment rebound nicely. The food segment, we’ve talked about, right now out of January, we had a very nice performance in the gelatin business around the world, the demand seems to be holding, the margins seem to be remaining where we expect them. And then we get to bring in the fuel segment with the credits in it, quarter-to-quarter now. The fuel segment, as we said really is Rendac, it’s our Ecoson unit in Canada and our Butler biodiesel plant. The fuel segment should be fairly consistent. But at the end of the day, remember the fourth quarter had the one-time credit that flows through that. So, you got to normalize that. Food segment feels pretty darn good going into it. And the feed segment should rebound from the improved pricing here and pricing going forward. So, at this point, yes, I mean you can extrapolate that type of run rate going forward. We’ve got a lot of work to do and a lot of execution to make sure we get done, but that is how we view the world today.

And then two other questions, one is yellow grease prices -- I’m sorry yellow grease has been a bigger component to biodiesel demand that has been the long time. Is there a reason that there has been a big deal, similarly [ph] a big pickup in the use of yellow grease and biodiesel? It seems like it was floundering for a while and also there was a pickup in demand; is there something to know about that?

Again, this is John. Actually yellow grease has been a key component for the biofuel usage, fairly consistently for the past three years. That market moves around for some other reasons as well and sometimes you’ve had disruptions on the biofuel side, because like last year, we didn’t know what the tax credit was going to be and we didn’t know what the RFS2 volumes were going to be. So, I think you see some wavering occasionally inside the biofuel industry, but yellow grease is a key component for that industry.

Okay. I thought it picked up in December. Okay, I could have mistaken. Last question is when I think about the new bakery feed plant and then two pet food plants; is that worth about $20 million to $30 million of EBITDA for 2016; is that a reasonable run rate?

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

Out of those facilities? And then I have to net out what you’re -- the startup cost of the new facilities in the back half of the year, so is it like net of 10 to 15…

Those -- well, the number I threw out were the three facilities that are on line now. We still got -- one of the pet food plants is up and going full speed, we have some little delay, one of the others. But we’re still making product at the old location that we were shutting down. But the Bryan, Texas facility is up and running and we’re -- that was almost the $4 million a year savings and paid a loan by having that facility in place when we were moving the products around. The two rendering plants, one will start our early third quarter because of the taking on the raw material from one of the suppliers, the other plant will be closer to fourth quarter. So, those will have a smaller impact in ‘15, but should be up and running full speed in 2016.

Okay. So net-net, the impact from the new facility’s about $20 million for 2016?

Yes. We’re using $15 million to $20 million run rate for 2015 -- or 2016, I’m sorry, and then $25 million for 2017.

The next question comes from Tom Palmer of JP Morgan. Please go ahead.

How much would be expanded Diamond Green Diesel facility costs? And how does the decision to expand effective and payments to Darling beyond the first quarter of 2016? So, for instance, if you go ahead with this facility, would it change maybe what we could see later in 2016 or in the first quarter of ‘17?

Hey Tom, we don’t have the final cost on that at this time. We are still narrowing that down because we moved it from a plus or minus 30, we’re heading to a plus or minus 10 that we will have later this spring. So really, we are not prepared to put a number out there today on that. What we are willing to look at is, is that would take the facility from a 160 million to around 245 million gallons. And we believe a margin structure in that business will maintain itself anywhere from a buck on the low side to a buck and a half on the high side with the improvement of the LCFS standard. As far as dividends, out of the year, John, you got a thought on…?

Yes. Last year, we declared -- the joint venture declared a dividend of $50 million. This year, we will be getting approximately $158 million back on the credit at the end of March or 1st of April. The other thing this year, we are going -- we can apply for the dollar credit as we go through the year. So, we will be generating a lot more cash during the year within the joint venture. But those moneys will be available for the expansion of facilities. So, there won’t be any required funding from either partner of the joint venture and should leave adequate money for dividend as well for ‘16 and ‘17. But until we get the final number on the expansion of what that would be, we don’t want to really talk a whole lot about what the net cash impact is going to be.

Understood, thank you. And just had a follow-up regarding the fuel ingredient segment, pretty significant rebound in the segment, both in the revenue and gross profit line. Could you provide a little more detail on the factors that drove this strength? And then also with regards to the insurance accrual on the Ecoson facility, maybe the magnitude of that, and how that flowed through?

Yes. The Ecoson facility, first of all we acquired [ph] we had there, reported. When you look at the other income and expense, what we did, that is a fully insured bet with our insurance carrier plus we have business interruption insurance, so that can -- will cover us from our operating costs as going forward plus also profits. We did book the deductibility or the insurance deductibility portion of that in other income and expense, as we did in Brazil. So that’s where that cost factor is. In the segment that is reported below the line for GAAP purposes. The fourth quarter, as you indicated, revenue was up and operating income was up, that was both -- remember in the fourth quarter when the government passed the credit, we did -- we were able to book that U.S. activity and our Canadian activity into fuel segment. So that was booked in the fourth quarter, that’s where a large part of that came from. Plus our Rendac had a very strong fourth quarter in Europe, strong volumes in Europe and the revenue coming out of that. But the main difference, if you go back and look at ‘14 fourth quarter and everything, that’ where the biofuel credit comes in, in the fourth quarter. The good news is in ‘16, we will be able to take that on a quarterly basis going forward, which will give everyone a much feel of what the fuel segment really looks like.

The next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.

So, I mean a lot of ground to be covered, maybe first going back into the feed segment. I know Randy, you talked about a bottom in finished product pricing where we are. I wanted to just understand how pricing got to slow in the fourth quarter? A, in the poultry industry I am wondering, did you benefit or were you hurt by the industry eventually running like quarters [ph] through rendering for the first time in a number of years? And then on the fat side, as you -- seasonality of the biodiesel demand and uncertainty on the credit, I mean you haven’t seen a big kind of spike yet in yellow grease pricing, at least from the June’s trade press and talked about the cash prices. But could you talk about where the scope for that Jacobson yellow grease price to really move higher as you get into summer driving -- summer and biodiesel demand picks up?

Yes, I think very well said, Adam. I mean if you think about the fourth quarter, the slaughter was strong and we are talking North America specifically or even up to Canada, the slaughter just remained very, very strong, especially in the poultry side. Our plants were running at capacity. In addition, the brokers were out there trying to sell all the different parts to typically go to what we call the hotdog or the hotdog squeezer industry. That shut down in the late third quarter or early fourth quarter. And all those different parts that aren’t traditionally in the renderer truck or renderer barrel ended up in our plants. You couple that extra tonnage with the pet food companies to scale and weigh back, and warm weather for just feeding, and you just set up the perfect situation. On top you have -- you always can’t decouple our products, if you will, from both poultry, pork and beef against the global oil seed complex. You saw the crush running strong and we’ve been in a protein driven market for the last four to five years, you have seen crush margins within the oil seed industry, the ADMs, Bunges, Cargills and Dreyfuses of the world. It’s well known that crush margins have contracted and why did they contract. It’s really being driven by the excess amount of protein or the lack of protein demand around the world for soybean meal and that spilled over. So we’ve got that industry now, it looks like running now at reasonable rate. We’ve got the access tonnage that was pushed our way in fourth quarter now sold and moved, either out of the country or to the local feed markets today. And the pet food industry ramps back up for their supply chain after the first in year. So the protein situation righted itself, as we’ve always said in the commodities business, the tier to high prices is higher prices and the tier to low prices is lower prices. And we had to push low before it pushed back into formulations and now it’s come back to the realistic levels that it should be at. Now, in the fat side, the biofuel industry slowed down tremendously in Q4, on top of the fact that you had warm weather for feeding. Now we’re in full scale winter in most parts of the country and we’ve seen demand pick up there. Additionally remember we were writing up -- rightsizing our supply chain in the Diamond Green Diesel for our two-week shutdown that we had at the end of January. So, all of this stuff contributed to a little bit of excess supply or supply push. The chemical companies slowed down, so they weren’t buying the packer tallow in Q4, they’ve come back strongly here. So everything is kind of what I think said by Heather a little bit was, this is a nontraditional time to see demand pick up but it’s picking up. Prices are moving. I’m fairly optimistic from where I sit today and what I hear that we’re going to see prices move on up for our products, even more here and we’ll feel the impacts for sure in the second quarter here.

That’s helpful. And in the fourth quarter, anyway to quantify the impact that you’re formula lags would have had, just to think about falling price environment like you saw and weak demand environment that is very well supplied? I’d imagine those formulas were healthy than negative on the quarterly performance, just trying to quantify that.

We spend a quite a bit of time looking at that. But yes, it’s -- in the fourth quarter that impact was in the $7.5 million to $10 million range of impact.

Okay, that’s very helpful. And then finally, on the cash flow side for ‘16, the working capital performance in the fourth quarter in particular was very impressive. Do you think there’s more scope on the working capital side to get some cash out or you think you’re about done on the opportunities out there?

No, we’re still focusing on it. We made tremendous progress from a negative working capital in ‘14 to positive in ‘15. We’d like to -- we’re targeting between $20 million and $25 million improvement in working capital in 2016. And that goes across the board and that inventory receivables and accounts payable and crude expenses as well. So, we’re still focusing on that. We’re trying to get back to the levels and improvement levels from -- before at the time, we made the acquisition. That’s our main focus this year. And we’re going to try to really hit that $20 million to $25 million improvement in ‘16.

And due to time constraints, the last question will come from Bill Baldwin of Baldwin Anthony Securities. Please go ahead.

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

When the facility was built and the credit agreement was set up, it was kind of -- it mirrors [ph] pretty much what the Department of Energy was going to be providing. And it hasn’t [ph] that was basically for a facility about the size it is today. Now that we’re looking at a new facility expansion and everything with the cash coming off of that, we are talking to Valero about making some changes to that agreement. And hopefully, we can just do that with making some simple amendments to it without having to go out and do a complete refinancing and achieve the same results without spending a lot of money to do that.

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

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

You’ve got the ability to pay down, I guess your current portion of long-term debt that is due the next 12 months, it’s about $62 million. Why don’t you pay that down; you don’t have a whole lot left on there. I think 45…

Bill, you are right on. Yes, it’s -- where the debt is today and with how the current agreement works that would be paid off fairly rapidly and during an expansion. The board within the JV is going to be looking at that and make the right decision as to how to manage the cash flows.

Alright. I guess that concludes the call. I appreciate everybody’s question today. And we look forward to talking to you again in May and updating you on our progress Thank you.

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