Omega Protein's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Omega Protein (OME)

Omega Protein Corporation (NYSE:OME)

Q4 2013 Earnings Conference Call

March 10, 2014 08:30 AM ET

Executives

John Held - EVP and General Counsel

Bret Scholtes - President and CEO

Andrew Johannesen - EVP and CFO

Analysts

Mitch Pinheiro - Imperial Capital

Tyson Bauer - KC Capital

James Fronda - Sidoti & Co.

Operator

Greetings, and welcome to the Omega Protein Fourth Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host John Held, Executive Vice President & General Counsel. Thank you, Mr. Held. You may begin.

John Held

Good morning and welcome to Omega Protein’s fourth quarter and full year 2013 earnings conference call. By now everyone should have had access to the earnings release for the fourth quarter and year-ended December 31, 2013. For a copy of the release, please visit Omega Protein’s website at www.omegaprotein.com under Investor Relations. This call is being webcast and a replay will be available on the Company’s website for 30 days.

Before we begin, we would like to remind everyone that comments made by Management during today’s call will contain forward-looking statements. These forward-looking statements discuss plans, expectations, estimates, and projections that might involve significant risks and uncertainties. Actual results may differ materially from the results discussed in these forward-looking statements. Additional information about risk factors and the uncertainties associated with Omega Protein’s forward-looking statements can be found in the Company’s fourth-quarter and year ended December 31, 2013 earnings release, our Form 10-K for the full year 2013 and in the Company’s other filings with the SEC. Because of these risks and uncertainties, investors should not place undue reliance on forward-looking statements. Omega Protein disclaims any intention or obligation to update or revise any forward-looking statements.

Please also note that on today’s call, Management will be referring to non-GAAP financial measures, including adjusted EBITDA. Historical non-GAAP financial measures are reconciled to the most directly comparable GAAP measures in our press release which is available on our website. Some of the information presented is derived from third-party sources and while we believe this information to be reliable, we made no independent investigation of these third-party sources or attempted to verify the veracity of the third-party data in anyway.

I would now like to turn the call over to our President and Chief Executive Officer, Bret Scholtes for opening remarks.

Bret Scholtes

Thanks, John. Good morning, everyone. Thank you for joining us today. This morning I will begin with a brief discussion of our business and performance for the fourth quarter and full year. Our CFO, Andrew Johannesen, will then review the financial results in more detail. Finally, I will discuss key drivers impacting our business in 2014 and then we will take your questions.

We’re pleased with the progress made on our strategic objectives in 2013 as we continue to build a stronger nutrition company, focused on providing value added products. Highlights include our entry into the dairy protein market via the acquisition of Wisconsin Specialty Protein, consolidating our Gulf fishing operations and more than doubling the amount of omega-3 fish oil sold for direct human consumption. We also recorded solid financial results during the year that included increased revenues and record gross profits and adjusted EBITDA. In the fourth quarter these contributions helped us generate $27 million of adjusted EBITDA and $0.45 of earnings per diluted share.

I would now like to discuss our two business segments in more detail, starting with our animal nutrition business. As a reminder, this segment includes sales of protein and lipid ingredients for the production of animal diets and pet food.

In the fourth quarter, this business generated very strong results. We continue to benefit from elevated pricing primarily from four contracts we entered into earlier in 2013. The strong prices realized in 2013 were driven by reduced global supply of fish meal and fish oil in late 2013 and early 2013.

The strong segment results were also driven by a successful fishing season that concluded last November. We finished the year with 190,000 tons of production, which was slightly below last year but in line with historical five year average. Production is a key driver because it not only provides the inventory we sell but also impacts our unit costs.

Now moving to our human nutrition business, where we continue to be excited by both the progress we are making and our growth opportunities. As we’ve discussed on prior calls the sale of nutritional products for direct human consumption is a key component of our strategy to access new higher value markets.

During 2013, we expanded customer relationships and continue to invest for future growth, particularly in production capacity, capabilities and product development. In the quarter, human nutrition revenues increased 88% from a year ago to $9.4 million, the segment’s highest quarterly revenue. We continue to see strong demand for our daily protein products, which contributed 34% of the segment revenues and our portfolio of nutraceutical ingredients posted a strong sales quarter.

On the Omega 3 side, sales rebounded nicely in the fourth quarter and closed up the year 142% higher than 2012. While we’re pleased with the strong demand for our products, fourth quarter margins were way down by higher dairy, protein input costs and the product mix that favor lower margin ingredients.

With that business overview, I would now like to turn call over to our Executive Vice President, CFO, Andrew Johannesen to discuss our financial results in more detail.

Andrew Johannesen

Thank you, Bret, and good morning everyone. I will begin by discussing our fourth quarter results followed by some observations on our full year performance and balance sheet. In the fourth quarter, revenues increased 4% from the same period a year ago to $63 million, as growth in our Human Nutrition segment outpaced the modest reduction in animal nutrition revenues. On the animal nutrition side, revenues decreased 3% from the same period a year ago to $57 million. This reflects the impact of lower fish catch in 2013, as fish meal sales volumes declined 33%. Largely offsetting this decline was a 109% increase in fish oil sales volumes, reflecting higher 2013 oil yields and sales price increases of 19% for fish meal and 15% for fish oil.

We have seen quarterly prices increased over prior year periods throughout 2013, thanks in large part to higher priced forward contracts that were entered into near the beginning of the year. As expected, the favorable impact of these forward contracts has begun to taper as the contracts expire and new generally lower priced contracts are signed.

Compared to the third quarter of 2013 for example, fish meal prices fell 5%. Fish oil prices did rise 30% over the same period, although this was due largely to higher average prices and relatively low crude oil sales volumes and a higher proportion of sales from our more valuable refined oil.

Turning our Human Nutrition segment, we established another quarterly revenue record of $9.4 million. This 88% increase from the same period a year ago, reflects contributions from our first quarter dairy protein acquisition as well as higher sales of omega-3 fish oils and other nutraceuticals. More recently, human nutrition sales increased 20% from the third quarter of 2013, as our OmegaActiv fish oil had its first $1 million sales quarter and sales of other nutraceuticals also increased.

Before discussing our gross profit results, I would like to explain the financial impact of our very successful fourth quarter fish catch. As many of you know, the unit cost of our current year fish meal and fish oil production are estimated for the second, third quarters by dividing expected full-season fishing costs by expected full-season production. Actual fourth quarter catch, which outpaced the five year fourth quarter average by over 30% exceeded our previous estimates, resulting in final unit costs of 2013 production that were lower than we had assumed earlier in the year.

Consistent with past practice, the fourth quarter results therefore include a $4.4 million reduction in costs to adjust second and third quarter cost of sales. Consolidated gross profit for the fourth quarter was $28 million or $23 million excluding the adjustment for second and third quarter costs, up from $13 million in the fourth quarter of 2012. As a percentage of revenues, gross profit was 42.2% in the fourth quarter or 35.7% excluding the cost adjustment, up from both 20.5% a year ago and 33.6% in the third quarter of 2013. This improvement was driven primarily by the Animal Nutrition segment where gross profit as a percentage of revenues was 47.1% in the fourth quarter or 39.3% excluding the cost adjustment, up from 20.1% a year ago and 34.5% in the third quarter of 2013.

The margin expansion versus a year ago reflects the higher fish oil and fish meal sales prices. In the Human Nutrition segment, gross profit as a percentage of revenues was 13.6% in the fourth quarter, a decrease from 24.9% a year ago and 24.6% in the third quarter. The decrease reflects a combination of factors, including product mix and higher feedstock costs in our dairy protein business, due to a global supply shortage of certain dairy products.

Selling, general and administrative expenses for the fourth quarter increased $0.5 million to $5.9 million, compared to the same period a year ago, due to expenses related to our first quarter protein products acquisition. As a result of the previously announced closure of our Cameron plant, we recorded a $6.6 million charge in the fourth quarter. Nearly $5 million of this charge related to the impairment of property, plant and equipment.

Looking ahead, we anticipate future charges of roughly $1 million for severance and lease termination costs and up to $2.5 for additional impairment and equipment related charges. We expect to recognize most of these additional charges in 2014, although a portion may not be recognizable until 2015 or later. We plan to call these out on our 2014 income statement as we have this quarter. Adjusted EBITDA, which excludes the plant closure costs totaled $27 million for the fourth quarter, up from 12 million in the same period last year, and flat with the third quarter.

Net income for the fourth quarter was $10 million, a $0.45 per diluted share compared to a net loss of $0.5 million or a $0.03 per diluted share for the same period last year, and net income of $14 million or $0.66 per diluted share for the third quarter of 2013. Excluding the Cameron closure charges and net gain on disposal of assets, net income for the fourth quarter of 2013 would have been $14 million or $0.66 per diluted share. This includes $0.14 per share related to the second and third quarter cost adjustments.

Turning to our year-end results; 2013 revenues increased 4% to $144 million. The revenue growth was driven by $9 million increase in human nutrition revenues, as animal nutrition revenues were flat. We reported an all-time record high gross profit of $83 million, roughly doubling 2012 gross profit of $42 million and handily beating our prior record of $55 million. Gross profit as a percentage of revenue also set a record, coming in at 33.9%. This compares to 17.8% in 2012, and it’s the first time since the 1990s, that we exceeded 30% for a full year.

The increase in gross profit as a percentage of revenue was due to an increase in animal nutrition segment gross profit as a percentage of revenues from 17.3% to 36.2%. Animal segment revenue per ton increased 30% during the year, from $1,043 in 2012 to $1,355 a ton in 2013. This compares to only a 1% increase in cost per ton from $859 to $867.

Human Nutrition gross profit increased 13% to $5.7 million. Although human gross profit as a percentage of revenue declined from 22.8% to 18.2%, as product mix had slightly lower margins on other nutraceutical ingredients, more than offset contributions from our diary protein business. Adjusted EBITDA totaled a record $76 million for the year ended December 31, 2013; an increase from $36 million last year, and our prior record of $46 million.

Net income for the year ended December 31, 2013 was $31 million, or $1.45 per diluted share. Excluding the Cameron closure charges and net loss on disposal of assets, adjusted net income would have been $35 million or $1.66 per diluted share. This compares favorably to 2012 adjusted net income of $10 million or $0.52 per diluted share.

Moving to our balance sheet, the Company’s year-end cash balance did $34 million, a $22 million production from December 31, 2012. This decrease was primarily due to the acquisition of Wisconsin Specialty Protein, Capital Expenditures and inventory build partially offset by operating cash flows.

Total debt decreased $3 million from the prior year to $24 million at the end of 2013, stockholders’ equity increased $42 million during the year to $247 million, and book value per share increased from $10.34 last year end to $11.88 at the end of 2013.

Looking ahead, we carried significantly more inventory into 2014 than we carried into either 2013 or 2012. The elevated inventory levels reflect our strong fourth-quarter fish cash and a 2013 recovery in oil yields. Year-end 2013 fish meal inventory volumes well about 20% higher than 2012 ending volumes and in line with 2011 ending levels. Fish oil inventories ended 2013 at roughly double the ending volumes in 2012 and 2011.

That includes our financial review. I will now turn the call back to Bret for some additional perspectives on the year ahead.

Bret Scholtes

Thanks Andrew. I would now like to make a few comments about 2014 before turning to your questions. We think the financial results in 2014 will be a function of five key drivers. The first three relate primarily to our Animal Nutrition segment and the last two impact our Human Nutrition segment.

The first driver, production of fish meal and fish oil, will be determined by our 2014 fishing results including fish catch and oil yields. Our Gulf operation is expected to start fishing on April 21 and our Atlantic operation in early June. As a reminder we announced a restructuring in December that reallocated four vessels to our other Gulf facilities, retired three vessels and closed our Cameron processing plant.

The second driver, revenue per ton for animal nutrition products will depend on the price received for products sold this year. As of late February, we have sold or sold forward approximately 85,000 tons of product at prices in line to modestly below those realized in 2013. Most of the forward sales are expected to be recognized in the first two quarters of 2014. The remaining sales will be at prices determined later in the year and are expected to be driven by global supply and demand.

We expect strong global demand for our animal nutrition ingredients in 2014 and we plan to update you on global supply as the year progresses. The third driver is the production cost per ton for animal nutrition products. We carried inventory into 2014, a cost associated with the 2013 production and we expect most of these volumes to be sold in the first half of the year. Cost per ton for 2014 production, which we expect to be sold primarily in the second half of the year will be a function of the cost to catch and process the fish in the total number of tons produced.

The fourth driver is human nutrition sales. We expect another year of growth from this segment driven by stronger customer relationships, expanded capacity and increased capabilities. As a reminder we expect to complete an expansion of our Reedsburg, Wisconsin facility midyear that will allow us to produce and sell additional products.

Finally, our fifth driver is the gross margin for our human nutrition segment. Near term we expect some continued quarter-over-quarter margin volatility as the business develops, but dairy margins should improve over time as the supply and demand fundamentals for dairy products stabilize. Longer term we expect margins to improve as we grow revenues, increase dairy protein production, increase capacity utilization and develop value added products to meet our customers’ needs.

We believe our strategy will continue to provide us with strong financial results over the long term. Additionally our team will continue to review avenues for strategic growth and prudently invest in value creating opportunities through organic growth and/or acquisition. We remain optimistic about this long term outlook for both fish meal and fish oil as key global trends support consumption of our animal nutrition products. These include a growing global population and increased standard of living and consumer's growing understanding of the benefits of the Omega-3s for farm fish and pet food.

We’re equally optimistic about our human nutrition business due to increased awareness of the benefits of basic nutrition and a demand for pure sustainable products. We continue to see a robust demand for our products and our team remains focused on maintaining control over the manufacturing process, creating avenues for organic growth and developing additional value added products.

That concludes our prepared remarks for today. On behalf of Andrew, John and I, we’d like to thank everyone for their interest in the Omega Protein team. The three of us, along with other members of our management team are now available to take your questions. Operator?

Question-And-Answer Session

Operator

Thank you. We’ll now be conducting the question-and-answer session. (Operator Instructions). Our first question is coming from the line of Mitch Pinheiro of Imperial Capital. Please go ahead with your question.

Mitch Pinheiro - Imperial Capital

So couple of questions on the quarter and then some on 2014. As for the quarter, so did I hear you right that the gross profit -- your cost of goods adjustment was $0.14 a share? I had calculated it higher than that but….

Bret Scholtes

It’s correct Mitch. It was -- $4.4 million pretax was the amount of earnings recognized in the fourth quarter that related to adjusting cost per ton on volumes sold in Q2 and Q3.

Mitch Pinheiro - Imperial Capital

What’s actually, using 32%?

Bret Scholtes

No it’s closer to 34%.

Mitch Pinheiro - Imperial Capital

And then when you look at -- as it relates to the cost per ton in Q4; is that -- is the cost per ton -- is that always a carry forward into the first half as you sell the 85,000 tons of inventory that you have? Is that the right cost level?

Bret Scholtes

A couple of points there Mitch. First of all generally speaking yes; the cost per ton that we saw in the fourth quarter represents the cost per ton for the ‘13 production and that is largely, but not exclusively what we’ll be selling in the first and second quarters.

Now the actual cost per ton may fluctuate based on the mix of product in terms of meal and refining crude oils that within product categories, those costs ought to be fairly consistent. I just want to clarify, the 85,000 that’s what we have sold and sold forward to date which is similar than little different from the actually inventory carry over. Some of those forward sales will be applied to ‘14 production. And some of the ‘13 products will be sold at prices not yet determined.

Mitch Pinheiro - Imperial Capital

So what was your year-end carry in inventory?

Bret Scholtes

We don’t provide the total aggregate volumes but I think you can get some insight into that if you look at just the dollar value of finished product and the inventory volumes and how that changed from year to the next. And then also as we noted, the meal is up about 20% versus the carry-in from last year or from end of ’12 and fish oil is about double.

Mitch Pinheiro - Imperial Capital

Okay, that’s helpful. And then for 2014, could you talk about how the reduction of those three retired vessels in the Gulf, how that should play out in the second half?

Bret Scholtes

Sure Mitch. What we’re talking about is for -- just for everyone's benefit is the decision to reorganize the Gulf operations and now it’s driven by the decision -- we’re constantly we’re looking at the assets that we have in place and trying to make sure that we’re returning the proper amount to our inventors. And as we looked out this year and we looked at the capital intensity, continuing to maintain all of our assets and looking at the opportunities, we felt that the prudent thing was to utilize excess capacity in our other Gulf facilities at the Abbeville, Moss Point and also instead of having two plants on the western side of the Gulf, consolidate those into one, reallocate some vessels or retire some vessels.

So the actual -- now it is difficult to say exactly what the impact would mean by taking, what was seven vessels, reallocating four and retiring three if you just went through, you’d say we would catch those fish as a result of having those vessels. But the actual amount that will be reduced is going to depend on how easy it is for those boats to get turned. It’s going to also -- we’re going from a plant that process slower at Cameron plant to a plant that's processing faster at Abbeville. And so it’s difficult to say for sure the impact, it’s likely to the less -- about whether it’s actually going to be half of the Cameron amount or not, it’s difficult to say at this point.

Andrew Johannesen

Now I would just say, just to add to that Mitch. First of all your question was spot on in terms of it being really kind of second half of the year that we would expect to see the bulk of the impact of the Cameron closure. As you know our first half of the year will be mostly carry over inventory and so we probably won't see much of an impact until late Q2. The way I would think about it too is that as Bret said, we would expect less catch in production. There will be some offset to that in terms of reduced operating costs with the closed plant and the retired vessels.

Part of the rationale for the decision was also maintenance CapEx and we expect that to be lower on a run rate than it would have been by removing the Cameron plant and retiring a few vessels. That’s reflective of a continuing focus on just overall capital efficiency in the organization.

The benefit of that and how it hits the P&L, that will take probably more time to bleed in just in terms of if you reduce -- obviously if you reduce CapEx this year, that doesn’t all go immediately to the bottom line but comes in over time through depreciation. So there is a -- the cash impact may be more noticeable than the P&L impact in that regard.

Mitch Pinheiro - Imperial Capital

Okay, that’s helpful. Last question and I’ll get back in the queue, is on the human side. For 2014, so you have this new capacity coming online mid-year some time and your business is going pretty well there but you’re going to have to absorb that capacity. So I'm assuming somewhere in the middle of the year you’ll feel that cost impact because you have this new plant on but you don’t really have the revenue with that. Is that the right way to think about the Human side?

Andrew Johannesen

I think that’s right Mitch. When the expansion is complete -- the way the accounting works on the depreciation is once a product is complete, the CapEx moves out of construction and progress and the PP&E and we start depreciating it. And so if you will, kind of the day we flip it on, we’ll start depreciating the full amount of that capacity expansion and will for a number of years. And then over time we would expect the production and the capacity utilization to increase. So there is some over time, some leveraging if you will of the depreciation amount that comes through on that.

Mitch Pinheiro - Imperial Capital

Yes. And it sounds like -- I was just at the Natural Foods Expo West and it sounds like I'm seeing a lot of your new product at Tera's Whey hitting the shelves. I see lot of new products in the pipeline there. So how quickly does -- can you fill? Do you have a lot of this presold already, this new capacity or how should we think about that?

Bret Scholtes

Sure. You’re right, we’ve got the chance and we’ve experienced some of the products that are coming to market and that’s, what we’re doing right now is working on the supply of the products to make sure that we can fill it up as much as possible for supply that we’ll need for demand. There’s definitely demand for all the products that we have, especially what we’re seeing on the organic side and in particular just unbelievable amount of demand.

So as the year progresses we’ll just start to figure out exactly how much we’re going to be able to produce out of that interest from the demand standpoint. I think we’ll have a pretty high capacity utilization by the back half of the year. The other important thing I think about this new plant is that not only is it adding capacity but it’s also adding capabilities.

So, in a quarter like last quarter and unfortunately the first quarter probably similar, you saw the employee costs that we had run up quite a bit due to fairly an unusual event going on with WPC 34 market, which was difficult to pass it on to the customers. And one of the challenges that we’ve had in the past is that we take that product and we make one product for the most part, WPC 80 that comes out and so to the experience that the supply-demand for WPC 80 doesn’t match what’s going on with the input cost, those spreads taken down for a certain period of time. But having more capabilities at that plant, that’s going to give us the ability to -- few more things to produce what the market values more and I think that that will also help with some of these margin squeezes that unfortunately ran into the fourth quarter and for the first quarter as well.

Operator

Our next question comes from the line of Tyson Bauer of KC Capital. Please go ahead with your question.

Tyson Bauer - KC Capital

Couple of quick questions. You made a comment on the tax regarding lower SG&A due to lower share count or similar of the programs for the company. Was that just a lack of any of those numbers hitting the quarter or did we actually have to reverse any amounts from prior quarters that were accrued?

Andrew Johannesen

This is Andrew. The primary reason for the reduction in the compensation related SG&A is probably a reduction in just burden costs. So, we estimate there is periodically an update and those actually came in lower than we had been approving towards at the end of the year and so we caught up on that. And then on the incentive piece, there was some kind of re-classing if you will within different parts of the organization that move some of that from SG&A to cost of goods. That was a smaller piece of it.

Tyson Bauer - KC Capital

Was that about a 200,000?

Andrew Johannesen

Probably in that order of magnitude, yes.

Tyson Bauer - KC Capital

Okay. So, between the COGS adjustment and that adjustment, relative to what we saw with the closure, you still had a -- probably negative impact of about $0.06. So you still had a great quarter anyway you split it. You talked about the late success in the fishing. I have a believe that had something to do with your strategy on the Atlantic to start later, try to get some of the larger fish, better yields. Give us a little round up about the first year of that strategy, how well that worked, and what kind of yields you were seeing late in the year.

Bret Scholtes

Thanks Tyson, that’s -- you're exactly right. So, in 2013, we did have -- the first year that we were restricted on what we can catch in the Atlantic and so the team that is responsible for harvesting the fish, sat down and then tried to look through the yield as it progresses through the year and tried to determine the right time in which to begin fishing and as you correctly noted that was brought up four weeks later in 2013 than we had traditionally done and that strategy definitely worked out to our benefit in 2013. Yields did increase more towards the back end the year. We were able to finish out the season in late November and catch 100% of the quota that was allowed to us. And so that’s something that we put in place and obviously the risk to that is that by pushing things little later in the year, you with weather a little bit in the first quarter but the team did an excellent job executing it.

Tyson Bauer - KC Capital

Okay. And since you brought it up, I’m going to hit on it, the quotas you said you had 100%. There are discussions on the scientific basis of that quota. We'll obviously have a lot more public comment periods as we go through the year on going forward on what those quotas should be. Any new mews items or things that you've heard in regards to how that’s going to be determined; what kind of benchmark or what kind of scientific benchmarks they are going to use going forward?

Bret Scholtes

The technical committee, the ASMFC is working throughout that right now. We know there has been some very productive conversations about the methods that they will use. They have done an excellent job of making sure that they have reached out to a lot of people with the experience and what the way to see -- where everything shakes out but I think that the method that they're going about makes good sense and I look forward to learning with them. Our result is probably late this year.

Tyson Bauer - KC Capital

You talked about production you had in ‘13. Given some of the operational changes you're going to do for when the new season starts midyear. How does that change your planning production volumes used for calculations? Do you go in starting X percent lower than you did in ‘13 or what kind of volume should we expect going in that you're base your new COGS program off of?

Bret Scholtes

Sure, Andrew you want to?

Andrew Johannesen

It would be -- we would anticipate some reduction in catch based on the factors that we have kind of laid out previously and in the 8-K when we announced the closure but looking at the vessel count, how many were moving to other plants and how much of that we expect to pick up. So we said that in the 8-K -- that we expected to update cover somewhere in the range of a quarter to a half of the catch that we processed in Cameron previously is a rough estimate.

Tyson Bauer - KC Capital

I am not going to get a number out of you, am I?

Andrew Johannesen

I think the quarter and a half are numbers, but probably not the one you're looking for.

Bret Scholtes

It is so difficult to determine at this point in time because of the fact that we just don’t know exactly how quickly we can produce -- process the additional volume at Abbeville, how quickly can the boats turn, what the weather is going to do as far as….

Tyson Bauer - KC Capital

I'm asking for what your volume is going to be because we have no way of knowing. I'm asking what are you planning which we will use for a basis for you COGS calculation again through the second half of the year? What’s your plan on catch?

Andrew Johannesen

Yes, we probably said everything we can say on that. If you look at the historical numbers, look at what we expect to change going forward and making a…

Tyson Bauer - KC Capital

So, your rolling average and that’s what we go by -- now we've got some changes in there if you're using the same methodology. Free cash flow benefit, because of the Cameron situation, obviously you won’t see it on the net income this year but you talked about reduced maintenance CapEx. I would think there is other associated costs that you'll save also on that side. So what kind of free cash flow benefit are we getting?

Andrew Johannesen

Yes, I think it’s going to vary by year based on catch levels, based on production costs and based on pricing. But I think as we think about it, and I thought about it, I think speaking in general terms the expectation is that when you take the change and all of the implications of that in terms of less production, less sales and then less cost and less CapEx, roughly speaking I think it’s -- roughly cash probably on average, roughly cash flow neutral, both less capital invested into the business which ought to accretive to return on capital but that’s generally how we thought about it.

Tyson Bauer - KC Capital

Okay. And last one from me. First half product mix should be more favorably weighted to oil as we walk into the year. Give us a little sense on what magnitude you're expecting?

Andrew Johannesen

Yes, certainly relative to what you've seen in the last few years, the meal inventory being up 20% and the oil inventory doubling versus ‘12 and we'd expect the mix of product to be more weighted towards oil than you've seen the first half of ‘12 and ‘11.

Tyson Bauer - KC Capital

And pricing obviously factoring in there on a revenue mix?

Andrew Johannesen

Exactly, so we would expect to see more oil in the revenue. At the same time, as Bret mentioned the pricing, we do expect -- we you look at individual products. Generally speaking, we would expect pricing to be off a little bit, flat to down, as we move into the first half of ‘14 versus the ‘13 levels. So, you have got obviously a couple of different levers moving in different directions there.

Operator

(Operator Instruction) The next question is from the line of James Fronda, Sidoti & Co. Please go ahead with your questions.

James Fronda - Sidoti & Co.

The 85,000 tons that have been sold forward, I’m just wondering of the prices. Is that the prices, market rates in 2013 or are you still be able to get strong pricing from earlier in the year?

Andrew Johannesen

James, the 85,000 is two things. That includes kind of what we sold to date, basically through the end of February and then also the forward sales. So most of that is going to be at pricing entered into in ’13. Some of that will be ’14 but in those -- when Bret made the comment about pricing being flat to slightly down from average '13 levels, he was speaking to those 85,000 that sold forward that we have visibility into. Obviously the balance of the volumes will be at prices to be determined.

James Fronda - Sidoti & Co.

Okay. And did the closure facility cause a strong boost in the gross margins on the quarter as well? Did that help or not?

Andrew Johannesen

The plant closure really had no impact on gross margin. There was a charge -- $6 million charge foreclosure related items, but that’s below the gross margin lines. So that had zero impact on gross margins.

James Fronda - Sidoti & Co.

Okay. And I guess, what you think we can forecast out for CapEx? Could you give guidance on that, just for ’14?

Andrew Johannesen

Yes, for ’14, we've given a range of $38 million to $45 million, which includes about $19 million roughly of carryover of the plant expansion in Wisconsin.

James Fronda - Sidoti & Co.

And I guess, lastly -- are you getting negatively impacted by rising overall milk prices on the way of business?

Bret Scholtes

That business is typically, some of the things - say kind of spread business -- we buy in the form of the way that has pretty low concentrations and then through our process concentrate it up. The rising level of milk per say is not something that definitely has hurt us. I think what has hurt us more is just the fact that if you look at the product that we buy and the product that we sell, that margin has tightened in a pretty unusual way, in a way that we think will probably continue to persist in the first quarter and probably the second quarter, but return to normal in the back half of the year. But it’s not a matter just simply of the milk itself being at a high price.

Operator

At this time I’ll turn the floor back to management for closing comments.

Bret Scholtes

Thank you. We appreciate everyone’s interest in the Company and your participation today and I look forward to speaking with many of you in the weeks ahead in the conferences that will be at later in the quarter. And with that, thank you very much. Have a great day.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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