Darling Ingredients' (DAR) CEO Randall Stuewe on Q3 2016 Results - Earnings Call Transcript

| About: Darling Ingredients (DAR)

Darling Ingredients, Inc. (NYSE:DAR)

Q3 2016 Earnings Conference Call

November 11, 2016, 08:30 ET

Executives

John Muse - EVP & CFO

Melissa Gaither - VP of IR & Global Communications

Randall Stuewe - Chairman & CEO

Analysts

Chip Moore - Canaccord Genuity

Dan Mannes - Avondale Partners

Ken Zaslow - Bank of Montreal

Adam Samuelson - Goldman Sachs

Tom Palmer - JPMorgan

Craig Irwin - ROTH Capital Partners

Jeff Gates - Gates Capital

William Baldwin - Baldwin Anthony Securities Inc.

Operator

Welcome to the Darling Ingredients Inc. conference call to discuss the Company's Third Quarter 2016 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. [Operator Instructions].

Today's call is being recorded. 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.

Melissa Gaither

Thank you, Amy. Good morning, everyone and thank you for joining us to discuss Darling's earnings results for the third quarter 2016 ended October 1, 2016. To augment management's formal presentation, please refer to the presentation section of our IR website for the earnings call slide deck. Randall Stuewe, our Chairman and CEO, will begin today's call with an overview of our third quarter 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 at the end of the earnings slide presentation. Finally, Randy will conclude the prepared portion of the call with some general remarks about the business and the rest of the year, after which we will be happy to answer your questions.

Now for the Safe Harbor statement. This conference call 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 Darlings' annual report on Form 10-K for the year ending January 2, 2016, our recent press release announced yesterday and our 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 would like to turn the call over to Randy.

Randall Stuewe

Thanks, Melissa. Good morning, everyone and thank you for joining us today. As we discussed in our last call, we anticipated some seasonal tempering of core business earnings after a strong Q2. Seasonal softening, alongside production and market adjustments within our gelatin business, account for the majority of this decline. Our DGD investment performed exceptionally well once again, providing a counter hedge to lower prices of fats and greases. All in all, we're carrying good momentum into fourth quarter and into the coming year.

Now let's look at the segments. In the Food segment on a sequential basis our performance dropped sharply, attributable primarily to Rousselot, our gelatin business. During the quarter, China and U.S.A plants took major annual turnarounds for maintenance, we had a temporary production interruption at our Angouleme, France, plant and demand declines for low-bloom gelatin in China drove an inventory write-down charge. Interestingly enough, I must point out that, year over year, we're only down modestly in the quarter. And this is predominantly related to the inventory write-down charge.

In the Feed segment, results sequentially softened, but held up nicely considering volatile and sharply declining fat prices. European and Canadian rendering margins held solidly, while the U.S.A chased the declining values of fats and greases in their formulas. Fat prices continue to be resilient, supported by world demand, as India and China consume more along with growing global biodemand. Protein prices for the quarter were steady, but late in September the pressures of the largest harvest on record began to weigh on values. Raw material volumes were strong around the globe. And this continues to put abundant protein supplies on the market. Our global blood business came in slightly lower but remained strong in China, as demand for plasma for piglet feed continues to be robust, along with strong hemoglobin demand in the aqua culture sector.

Our restaurant services business in the U.S.A continues to enjoy tonnage growth. Our improved go-to-market strategy for this unit continues to show promise and should pay nice dividends in our Fuels business, as this is the preferred feedstock from a carbon intensity standpoint. The U.S.A bakery feeds business tonnage is up year over year. And through prudent and smart risk management, earnings have improved in light of lower corn prices. Additionally our premium proteins group which includes pet food blending, wet pet food and fertilizer, all delivered consistent results. Our new wet pet food plants turned the corner and should be contributing at expected rates by the end of the year.

Finally, our Fuel segment turned in a steady performance during a normally light seasonality. Tonnage shipped to Rendac, our European-based waste energy business and Ecoson, our Euro-based digesting and refining business, were sequentially lower, thus third quarter earnings declined slightly. However, improved volumes and solid operating performance contributed to year-over-year increases. Our Canadian biodiesel profitability came in slightly less sequentially but delivered on target and ahead of last year.

Operating at capacity, Diamond Green Diesel demonstrated outstanding earnings power and reported its strongest earnings contribution to date, improving EBITDA by 23% from the previous quarter. Our model once again proved viable by capitalizing on lower fat prices in the quarter, arbitraged into higher earnings at Diamond Green Diesel. We also loaded a RIN-less vessel shipment on the last day of the month. RINs are marked to zero until they are sold. Therefore we anticipate roughly $9 million of earnings will shift into Q4. As I mentioned earlier, most of our products are now moving to the LCFS markets. And we expect a strong Q4. Building on this momentum, we expect solid margins heading into 2017.

On the DGD expansion front, final engineering is complete which at full capacity will increase our annual production from 160 million gallons to 275 million gallons. We made modifications to allow for additional flexibility on raw materials and product shipping that creep the scope and the cost of the facility. Our final cost estimate is $190 million. And construction is now scheduled to be completed and start up in early second quarter 2018. We remain net debt free in the joint venture. And our obligation to our partner is to retain the cash necessary to fund the extension. All said, no matter what your view is on the tax credit extension, we will be debt free in early 2018. And we will then have the freedom and opportunity to issue dividends, as prudent.

Looking ahead, we expect the fourth quarter to deliver another strong DGD performance. Rousselot should also rebound. And the rendering business will continue to make adjustments to manage the volatile pricing environment due to the globally ample crops and continuing strong animal slaughter. All of our new assets are up and performing nicely. And we've commenced construction of two additional plants, one in Mering, Germany, for blood and a new digester in Denderleeuw, Belgium.

As John will outline further, we will continue to strengthen our balance sheet and are well on our way to our $150 million debt reduction target for 2016. Our leverage ratio has now broken the 4 market. And additionally we continue to improve working capital usage while deploying capital to grow and maintain our world-class infrastructure. So with that, I'll let John take you through some financial highlights and I'll come back with a few closing comments. John?

John Muse

Thanks, Randy. Through the first nine months of 2016 we continue our focus on debt reduction, reducing working capital, cost reductions in both operating and SG&A expenses and monitoring CapEx deployment. During the third quarter 2016 this is kind of how we performed. We continued our focus on debt repayment and paid down $60 million in debt in third quarter. Year to date we have paid debt down by $105 million. And our debt reduction target for 2016, as Randy indicated, remains at $150 million. We remain committed to reducing working capital in our business in 2016 over 2015 levels. We're focused on lowering inventories and managing payables and receivables. For 2016, we remain on target for a $20 million improvement in working capital. At the end of the third quarter, working capital over 2015 has improved by $13 million.

For the third quarter 2016, SG&A expenses were $76.5 million. SG&A was lower in the third quarter due to gains in currency hedges and capitalized expenses. We expect SG&A to run in the range of $80 million to $81 million in the fourth quarter of 2016. Our CapEx target for 2016 is $225 million and our third quarter CapEx spend was $58.8 million. In regard to significant CapEx deployments, we have completed construction and are running raw material in the two new U.S. rendering plants. We will see the impact of these facilities in the fourth quarter.

Now on to our financial results for the third quarter ended October 1, 2016. For the third quarter of 2016, the Company reported net sales of $853.9 million compared to net sales of $853.7 million for the third quarter of 2015. Net sales were basically flat year over year. Finished products sales were mixed year over year, with raw material volumes up. Overall, global raw material volumes in the Feed Ingredients segment were stronger year over year. The Food ingredients segment raw material volumes were significantly flat -- essentially flat, I'm sorry.

Net income for the third quarter 2016 was $28.7 million or $0.17 per diluted share, compared to a net loss of $9.1 million or a loss of $0.06 per diluted share, in the third quarter of 2015. The increase is primarily attributable to higher earnings from Diamond Green Diesel due to the inclusion of the blenders tax credit which was not available as of the end of the third quarter of 2015.

Adjusted EBITDA for Darling in the third quarter was $106.2 million compared to adjusted EBITDA of $106.1 million for the third quarter of 2015. The third quarter adjusted EBITDA of $106.2 million was down $17.8 million from the second quarter of 2016 adjusted EBITDA of $124 million. The decrease in the third quarter compared to the second quarter was primarily attributable to lower earnings in the Food Ingredients segment. This was the result of limited availability of pig skins in China, reduced low-bloom gelatin demand in the China food market which created an inventory write-down and the annual maintenance turnaround at plants in both China and the U.S.A.

As we move onto the operating segments, a sequential quarter result breakdown of each is included in the slide deck that we have provided. Feed segment operating income in the third quarter was $35.3 million, a decrease of $0.4 million compared to the third quarter of 2015. Earnings for the segment were lower due to a decrease in fats and used cooking oil finished product prices which did offset increase production volumes due to higher raw material supply. On a sequential basis, third quarter operating income decreased by $6.1 million over the second quarter of 2016. This was due to lower fat protein and bakery finished-product prices.

Food segment operating income for the third quarter of 2016 was $7.9 million, a decrease of $3.6 million compared to the third quarter of 2015 which were down significantly sequentially from the $19.7 in the second quarter of 2016. The sequential decrease in earnings is mainly attributable to the reduced low-bloom gelatin demand in China which drove inventory write-downs.

The Fuel segment, exclusive of Diamond Green Diesel Joint Venture, generated third quarter operating income of $6 million, a decrease of $0.6 million as compared to the second quarter of 2016. The decrease is due to slightly lower earnings at Ecoson and Rendac which offset improved Canadian biodiesel earnings. Darling's share of Diamond Green Diesel's Joint Venture third quarter EBITDA was $22.5 million. Lower fat prices, stable heating oil prices and rising RIN values supported improved earnings.

At the conclusion of the third quarter, Darling's total debt-to-EBITDA ratio was 3.97 compared to our covenant requirement of 5.5. Our secured debt ratio was 1.64 compared to a covenant requirement of 3.25. Now let's take a look at our effective tax rate, cash taxes and depreciation. The income tax expense for the nine months ended October 1, 2016, was $9.1 million compared to $9.8 for the income tax expense for the six months ended July 2. Accordingly, the Company recorded an income tax benefit of $0.7 million for the third quarter, three months ended.

The effective tax rate for the first nine months ended October 1, 2016, is 12.2% which is lower than the U.S. statutory tax rate of 35%, primarily due to biofuel tax incentive. The quarterly income tax expense is based upon the Company's estimate of its expected tax rate for the full year and discrete items recognized during the period. We expect our effective tax rate for 2016 to be about the same as last year which was around 14%.

I want to briefly mention our cash taxes. For the first nine months the Company paid, net of refunds, $14 million into the taxing authorities. We anticipate tax payments of $5 million to $7 million for the next quarter, bringing our cash taxes for 2016 to around $20 million. Depreciation and amortization remains in the $70 million to $71 range on a quarterly basis for the remainder of 2016. I will now turn the call back over to Randy.

Randall Stuewe

Thanks, John. All in all, Darling Ingredients delivered the performance we expected in third quarter. We remain laser focused on executing against our 2016 strategy to delever, grow, manage costs and widen margin. Our growth strategy is on pace with four new plants currently online, two more under construction and our pipeline of long term growth opportunities remains robust. We remain committed to maintaining a strong balance sheet. And once again, we're carrying good momentum into 2017. So with that, let's open it up to questions, Amy.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is from Adam Samuelson of Goldman Sachs.

Adam Samuelson

So maybe first on the Food segment. You gave a lot of detail for reasons why the results did tick down sequentially and year over year. And they were closer to flat year over year ex the inventory write-down.

Would it then be fair to assume that if, as the seasonality kind of turns back more normally, that the fourth quarter ends up looking more like last year? And which would end up being pretty similar to the run rate you were at in the first half of the year? Or are some of the market issues in China something that you expect to persist that's going to weigh on the performance for a couple of more quarters?

Randall Stuewe

Clearly they are going to improve over Q3 for seasonality, inventory write-down and several other operating issues that were out there. I suspect there will be a little softer than fourth quarter last year. We were carrying really strong momentum in Q4 last year with Chinese demand.

The China situation and not to spend a whole lot of time and give color on it because it's fairly complicated. The China plants, we were in multiple plants in China, one on beef bone -- or a couple on beef bone and one on pig skin.

The pig or pork availability in China continues to tighten because of the reduction in the herd. And what we've seen, Adam, is a run up in pig skin prices. Remember, pig skin can either be eaten as food, fried or it can go into make gelatin.

Prices of pig skin rose rapidly in the third quarter as the amount of hogs that came to market went less and less. And so as you try to move your gelatin spread margins up, you tempered demand a little bit there. And then you forced a switch over to an alternative way to make gelatin out of hides.

So you had a little bit of consternation in the switch over; plants that can do it, plants that couldn't, some different values as you convinced customers to take a little different product. While most of it is homogenous, it is a little different in application.

So like I said, fairly complicated way of saying, I think the Chinese issue will continue to move a little bit more into fourth quarter for us. It won't come back as strongly as it was a year ago. But we're moving margins up in China again to reflect the higher raw material cost.

So overall I think we'll pick up good momentum into Q4 or towards the end of Q4 and then into Q1. And I think as we look forward to next year, we see a pretty is similar performance in that business unit next year. So just really a third quarter interruption with a whole bunch of moving parts. Back to normal in fourth quarter, picking up momentum into Q1.

Adam Samuelson

That's some really helpful color. And then maybe switching gears over to the Feed segment. Just your thoughts on the fat markets right now? Because I think it's interesting how frankly healthy the global vegetable oil complex has been with soybean oil prices up near $0.35, palm oil has been pretty tight recently and making some multi-year highs and the yellow grease market domestically has been pretty stagnant. And I'd love to hear your thoughts on drivers there, especially against an RFS mandate that's still pretty ambitious on the advanced biofuel and biodiesel side?

Randall Stuewe

John, do you want to comment on that?

John Muse

Yes. This is John. You're exactly right. You hit the drivers dead on. We see really good palm prices and quite frankly it doesn't look like that's going to stop any time soon. I think you can expect that market's going to remain pretty tight. We have a really large supply of soybean oil, but the demand is just excellent, is the only way to describe it. But you also have to remember on the animal fats, we have a lot of production. I think we've shown our volumes are up substantially. And as those animals get slaughtered, that means that there's a lot of fat on the marketplace. But that fat is being absorbed extremely well by the biofuel sector at this point in time. And I think the final component we have is obviously a lot of our fat also goes into the feed channels.

You know the corn market, despite the fact that we're going to produce over 15 billion bushels worth of corn in the United States, has remained extremely strong through this harvest at the $3.50 range. And so fats really now are in a position where they can be well supported by the Feed and the Fuel segments.

So looks like we have pretty good demand here at this point in time. And quite frankly, while it has lagged a little bit behind, that's primarily been because corn's dropped down and some of the feed demand we were too high for awhile. But right now with the way the corn is holding through harvest, we both got feed demand and energy demand for our fat. So it looks pretty good position right now.

Operator

The next question is from Tom Palmer at JPMorgan.

Tom Palmer

What are your thoughts on the extension of the blenders tax credit for next year? Do you think it gets passed in the lame duck session or is it more likely to be addressed in 2017? Finally, although not part of the proposal at this point, has there been any recent discussion about switching to a producers credit?

John Muse

Yes this is John. Frankly, I hate guessing on what Congress is going to do, particularly in a lame duck session of Congress. I know there's a lot of discussion back in Washington DC about both an extenders package in general and specifically about the biodiesel tax credit. It's going to be an issue that's certainly going to be brought up.

I hesitate to really give you a guess on whether or not it's going to be prospective or retroactive. What I've always continued to believe and what I've always said I think to everyone is, that the farm community strongly supports the biodiesel tax credit. And so whether it comes in prospectively or retroactively, we believe that there's strong political momentum to eventually have it in place.

But there's a lot of discussion. And there's a lot of discussion on changing it from a blenders to a producers tax credit, as well. Generally in Washington DC once you have something, particularly a tax program in effect in a particular manner, it's hard to change it. And so while I know or I strongly believe, nobody knows what Washington DC will do. But I strongly believe that we will have a tax credit either, prospectively or retroactively, for next year.

The chances of it actually being converted to a producers tax credit are probably less solid than the fact that it does actually get implemented as a blenders, just because you're changing the format and there's always resistance to change any time you try to do something like that.

Tom Palmer

And just a quick follow-up. Could you provide any update on the CFO search? Have you been interviewing candidates? Can you discuss some of the traits you're looking for?

Randall Stuewe

Obviously that's something we're working diligently on. John celebrated a birthday here this last week. And I promised him shortly that I'd have the new John Muse clone onboard. So frankly, I don't really want to say any more than that. But John's shoes are very, very hard to fill. He's an exceptionally talented guy. And hopefully we're getting close to moving forward there.

Operator

The next question is from Chip Moore at Canaccord.

Chip Moore

Could you talk broad strokes on CapEx for next year? The model here is demonstrated some good stability in pretty volatile environment, deleveraging is running ahead of plan. Can you just remind us what's in the pipeline? And then would you consider accelerating anything?

Randall Stuewe

Pretty much, Chip, we're looking at next year pretty much the same as we've got going on this year. Right now we're in what we call our budgetary strategy and planning time of the year. We completed Canada a week ago, U.S. rendering this week, specialty Monday and then head to Europe Monday night.

All in all the global CapEx plan's rolling up right now at about $225 million for next year. Of course, that includes the maintenance CapEx piece, that includes the Mering blood plant and the Denderleeuw Ecoson plant. And then also we're rebuilding a new plant in Wahoo, Nebraska and finishing up an expansion and modernization in Los Angeles. So that's all in there for next year.

Our approach into next year is once again to be cautious. We're optimistic of an improved situation for next year because we have the new assets that we built this last year and the Pocahontas plant, the Waynesbugger Ohio plant, the two wet pet food plants. We have an acquisition, the Bosland acquisition in Holland. They are all onboard performing. The Dubuque gelatin expansion, the Wenzhou gelatin expansion. So all of that stuff is lending towards what appears to be right now on the onset a more optimistic view of both margins and earnings.

We're going to go at the CapEx side from a $225 million standpoint. We're going to go low and slow in the first quarter and make sure, as we've got a new administration in DC there aren't any surprises on anything. We don't foresee that. But we'll work from that perspective with, then, a view of paying down additional debt next year and then continuing to delever it.

I'll comment a little bit on -- given my other comments on a robust pipeline. We continue to see an incredible amount of opportunities around the world to invest in. As we've said, we look for projects that can put us in a top three market position within five years or bolt-ons that give us a 15% to 20% ROSI. We're starting to see those again as the values and the agriculture markets moderated around the world, so have expectations. So once again, I think at by mid-2017, early 2017 here, we've got the balance sheet in a very stable place.

Diamond Green Diesel is the big earner for us as we look into the future. And so as you start to model and think through the business and hopefully I'm answering some other questions here. As you look through it, as Diamond Green comes on in early 2018 with both its shutdown and then its new capacity expansion, once you start to go to that 275 million gallon rate, you look at the low carbon fuel markets, you look at our ability to serve more and more of those versus what we're doing today. And you can clearly come up with cash dividends out of that unit on a completely delevered basis of anywhere from a $100 million to $150 million a year, if the margin structures hold that we see today.

So then you've got the current operating run rate plus that. That then puts us into a position to once again either delever or really accelerate our growth again.

Chip Moore

And maybe one more on the collections business. Tonnage up again. Can you just sort of contrast that with some of the mix things we've see in fast food traffic and the outlook there? Thanks, guys.

John Muse

Yes, this is John. Yes, we have continued to see our volume grow on a Restaurant Services side through the last year. I think part of it is the prices have been a little lower so there's a little less theft out there than may think has been. And the other part of it is, at least I hope, it's because we've got a more effective outreach strategy to the restaurants now and are doing a little better job connecting with them and getting our fair share of that product out of the back end of the facilities. But we're optimistic, even with the restaurant business slowing down a little bit. We're optimistic that we'll be able to continue to maintain volume growth on that segment.

Operator

Our next question is from Dan Mannes of Avondale Partners.

Dan Mannes

A couple questions here. Some of them will hopefully be quick. Can you walk through a little bit more on the food inventory issue? Was this a situation where the product -- whether either demand was low enough that there wasn't any value in the product or given the switch over in feedstock? Can you just maybe explain that a little bit more, the $3.5 million?

Randall Stuewe

I'll do my best, Dan. Like I said, it's fairly complicated. The reality is, is when you operate a gelatin factory you do three general extractions in our configuration and you produce a high quality, a medium quality and a low quality which is phrased high bloom, medium bloom, low bloom.

The high bloom is the preferential product used in many applications of high end pharmaceuticals, high end confectionaries. The medium more so into the confectionary. And the low bloom into the dairy industry.

We moved prices up as we tried to maintain spreads into the Chinese market and maintain our margin structure. Like we said, it is a spread business. We moved our prices up. At the same time, while some other manufactures switched over to high gelatin.

That high gelatin then hit the market. And as we went to move some of our low bloom inventory into the marketplace, where we had it valued versus where we could sell it became a significant difference. And via accounting policies, we wrote it down. If it comes back, we write it up. But at this time we wrote it down.

Dan Mannes

The other thing, just in terms of a clarification. In terms of the RIN-less vessel, is this more of just -- I guess I'm trying to understand, did you take credit for the sale of the diesel itself but not the RIN and the RIN is only at the point of blending? If you could just walk me through the mechanics there as well? That was a little confusing.

John Muse

Dan, this is John. We occasionally sell a vessel. Because we're a blender and we ship everything out as a blended product, we're able to separate the RIN. And occasionally we have vessels, not very often in our markets, in which we separate the RINs out.

We do take and recognize in the revenue associated with the sale of the fuel itself, but because of the income recognition rules from the accounting folks, we're unable to put the RINs that we separated out, that are then are attached to future sales within a few weeks. We're unable to actually account for them to have fee value at that point in time. So when that happens, we just carry it forward.

Dan Mannes

But that's not something you do frequently? This is an infrequent occasion, where you sell the RIN-less gallons?

John Muse

Fairly infrequently, I'd say yes. In fact, it doesn't happen very often. But it does happen from time to time. And obviously it usually doesn't matter when you load one of those on the last day of the month and you're able to recognize the diesel fuel price. But you aren't able to recognize the RIN value.

Dan Mannes

Got it. And then this is, I guess, for Randy or for John. In your goals to make biodiesel -- or in this place, the green diesel business great again, I was hoping you could prognosticate just a little bit on maybe how RFS2 may or may not change, given the incoming administration?

John Muse

Yes, this is John. I don't know that we know. I think the Trump Administration has announced their top priorities and energy activity was not amongst the top priorities. During the campaign Candidate Trump was extremely effusive on his support of RFS2.

Whether or not that continues into his administration we will see. However, I think there is always a question of whether RFS2 be repealed, probably not because you need 60 votes in the United States Senate and this tends to be a geographic as well as along party lines type of an issue.

How the EPA administers RFS2 going forward, we really aren't going to have any turn impact on that until we see what they do with the -- this time next year when they are actually doing the next round of offsetting of the obligations. But it's the current administration that's going to set the obligations that we're going to see for next year and for biomass-based diesel for 2018.

So to some degree the category that we're in is really going to be handled in the next few weeks here, once the EPA comes out with their forward final rule on that subject. And then we'll just have to see how the Trump Administration handles RFS2 as they take the reins.

Dan Mannes

So conceivable in May we could see a proposal for 2019 for biomass-based diesel?

John Muse

No, you'll see it -- that's correct. You'll see a proposal in May for 2019 biomass-based diesel and of the 2018 advanced and total renewable.

Operator

The next question is from Craig Irwin at ROTH Capital Partners.

Craig Irwin

So there's been some pretty active discussion out there in the biofuels industry about the imports from Singapore and obviously Argentina, of biodiesel, green diesel. And many people in the industry are advocating an FTC complaint which sounds like it's gaining potential momentum. Have you discussed potential for an FTC complaint internally? And would you view this as a bullish thing for Diamond Green if there was one that was filed maybe in the first quarter?

John Muse

Yes, this is John again. A question, this has been discussed by the industry for some period of time. I suspect that the industry will move forward. It probably targets more specifically Argentina than it does the renewable diesel coming in from Norway or from Asia.

The question here with this is it's a very long process and it will take a long time for it to actually implement. So while I think it may ultimately catch some ground, I'm not so sure that it does anything for us in the short term. But if it does and they do put anti-dumping tariffs on some of the stuff coming in, obviously that's going to be extremely supportive for the U.S. industry.

Craig Irwin

Great. Second question is about the U.S. fats market. So from a macro perspective, it looks like we've got a lot more animals on feed in feed lots. Available supply seems to be very healthy versus where it was a couple years ago. Can you say whether or not this is likely to impact available pricing for you over the next number of quarters? Or do you feel that there are other factors that are helping support price and obviously profitability?

Randall Stuewe

Well I think Craig, I think your read on it is the same as ours. I guess we get to see it every day, our rendering plants across the country in the U.S.A and in Europe are as full as they've ever been. We're near capacity or at capacity across the country with several expansions underway now.

With that comes both protein and fat. The fat is supported and seems very resilient, being held up to a degree, if you will, by $0.35 bean oil and $750 a ton palm oil, all good news. I think as John talked about it earlier, not only is feed demand good. Consumer demand around the world for palm oil and soybean oil remains robust, predominantly really in India. India is leading the way this year.

So you've got a pretty tight S&D of veg oils and fats and greases around the world. And then to accelerate that or support it even more, is as we showed our Board, that the list of biofuel programs around the world, the list continues to grow and grow with people adding 1% or 2%. I mean Malaysia added now a 7% demand, takes another million tons out of the market next year.

So all in all, that stuff continues to support predominantly and specifically back to the U.S.. We're going to have to -- the challenge we get into with animal fats is, feed demand is fairly good when it gets cold. When it gets warm, it gets a little less. But offsetting that is strong biofuel demand. There's some counter seasonality there.

We've got a lot of fat to move. The question will be as we continue to slaughter both a lot of chicken right now, where does the poultry fat move? A lot of that doesn't move into biofuels today. And so we'll see.

There is a pretty -- that's kind of the reason you're seeing the discounts. I don't know, I would have probably bet you years ago that we would have never seen used cooking oil as a premium to animal fat, but it is. That probably will maintain its way because of the low carbon fuel standard and the carbon intensity value. But I suspect this will all tighten up a little bit as expansions happen within Diamond Green Diesel and the fight for low carbon feedstock intensifies over the coming year.

Craig Irwin

And then my last question is, the subject of aviation fuels sounds like it's sort of creeping its way into the discussion around of next generation RFS. Green Diesel is a particularly good fit for blending into jet fuel, at even moderate consumption rates per gallon.

Can you comment about whether or not you have any active programs working with any airlines? Whether or not you deal with airlines frequently, often, introducing them to your capabilities and your longer term plans? And whether or not addressing this market is something that you think credibly the industry can do over the next number of years?

John Muse

Yes, this is John. We talk to the airlines quite often about the subject of renewable diesel. And clearly we could convert some of the production from Diamond Green Diesel if we wanted, it'd take a little capital but we could do it.

The focus is on the renewable jet industry. I think that it is going to be an extremely strong demand component; however, the reality is in today's economics, we can make more money selling renewable diesel to the road than we can of the jet fuel industry. And there's a number of factors associated with that.

But in today's economics if I had the choice to have Diamond Green Diesel running as a road fuel producer or a jet fuel producer, I would just as soon that they'd be making road fuel. Now, that may change as these programs and as some of these protocols become stronger, like flying into Europe where a certain percentage of your fuel has to be renewable and so forth.

That may change and the economics may change and we're going to be able to adapt to that change fairly quickly. But certainly there's a lot of talk about it. There's more focus on it. And it may become the market to target.

For now, frankly, we have more demand at our current run rate or at a expanded run rate to hit the road fuel market. So we really don't have to drive into the jet fuel market. We're only going to go there if we can make more money doing it than we currently do with road fuel.

Operator

The next question is from [indiscernible] at Gates Capital. Please go ahead with your question.

Jeff Gates

Yes, hi this is Jeff. I have a couple questions. You alluded to the oversupply of proteins hurting profitability. And I'm just wondering, did that materially hurt profitability? Because I thought most of that was formula. That's the first question.

The second one is, if you didn't is have a tax credit next year, what margin per gallon do you think Diamond Green Diesel could earn? And how long do you think it would take for the RIN prices to transition higher?

And then my third question is with regard to bakery volume that you noted was strong. And I'm wondering, was the market that strong for bakery or are you gaining market share? Or what's happening in that business?

Randall Stuewe

Okay. Well Jeff, this is Randy. I'll try to answer all three of them and see if I can get some help here. The protein situation is one that's evolving here. And what we're seeing on the protein situation -- someone needs to -- Amy, can you turn his mic off? There we go. Let's try again.

So the protein situation is one that's evolving here with the large corn crop. Remember, the animal slaughter numbers are way up right now. We're running anywhere from 2% to 5% higher. The year-over-year animal weights are still pretty heavy. So the animal byproduct business finds its way into either pet foods or animal feeds. And that's whether it's domestic or exported. So we saw a strong push of animal proteins here towards the end of September that are struggling to find markets.

And you've got a couple things. I wouldn't say it impacted the Q3 a lot, but coming into October here meat and bone meal fell off hard. It's come back a little bit. I think our team feels around the world that we probably -- we bounced.

I don't know. I always hate calling bottoms on it, but we're starting to see a little more demand around the world for animal proteins. And it's coming from the export side. Any time that you have historically large crops like we have, the world buyers tend to go to the sidelines and then try to pick a low.

They've now seen, as John Bullock said, we saw corn really light $3.50 a bushel. There were people thinking it was going lower. It's held. So now people are coming back in and buying protein.

We've got soybeans meal holding in the low $300s. And meat and bone meal at a discount to it. Traditionally it should be either a premium or equal. I think we'll see an improvement in that area.

The chicken proteins, continue to be a lot of chicken protein out there. That you're in the is seasonality mix between aquaculture and pet food again. That should bounce. So that's really the protein situation. I looked at it. We're still -- we're about where we were in fourth quarter last year. Fats are a lot better than they were in fourth quarter last year. But the protein situation is equal to or better and especially on the feather meal area.

So we'll try to take the second question then which was the $1 a gallon, what happens. I mean, if you look at the margin structure out there today, you're somewhere at and I'm not talking biodiesel, I'm talking Diamond Green. Diamond Green's margins are anywhere from $1.25 to $1.45 a gallon. So if you took the $1 away you'd then say, running next year you'd be $0.25 to $0.45. But traditionally or typically when we've seen that $1 kind of disappear, RINs will react a little bit to help the biodiesel guy.

There will be a view of whether the tax credits going to be reinstated. So there's a little bit of view of run for fun there that happens. It's a better situation to have it known than not known.

Now what's different this next year is you have a defined low carbon fuel standard market out in California, that if you can get there, will continue to pay you nice dividends to get there,. So, I mean, the challenge for us as we look forward and I know that what you're thinking, Jeff, to a degree and it is, what is the cash position at Diamond Green? It's very ample, if we get a perspective tax credit even funding the expansion, at which time then there could be a discussion of pulling dividends out of Diamond Green in 2017. If it goes retro, then there's a little bit more.

I don't think we'll have to put cash in. But I think, I'm 99% sure, pulling a dividend out would be challenging under a retroactive tax credit and bakery. John, do you want to comment a little on bakery? Volumes are just up this year.

John Muse

Yes. We just seem to have strong raw material volumes across the board. Typically we've seen that surge for a period of time. And we keep thinking that we're going to go back down to more normal levels. But quite frankly, we've been thinking that now for five months in a row and every month the volume keeps coming. So it's really not really taking a lot of additional customers out there away from anybody else. It's more just the volume's up.

Operator

The next question is Ken Zaslow of Bank of Montreal.

Ken Zaslow

Just two quick housekeeping, making sure. The inventory write-down was $3.5 million. That does not continue any further?

John Muse

We marked it down to the market value that we thought we could move the product for the coming period. If the market weakens more, then we would have to address it at that time. But we think we've got the value written down to what we can move the product at.

Ken Zaslow

Okay. And then $9 million transfer from third quarter to fourth quarter, what division was that in? I just didn't hear it. I'm sorry.

John Muse

Diamond Green Diesel.

Ken Zaslow

And is that 50% or is that the full credit to you?

John Muse

Full credit to us, yes.

Ken Zaslow

That's your share of it?

Randall Stuewe

That's the entity level. We have half of it. Those RINs will be sold out or attached in Q4. So you'll just have $9 million of additional earnings in the Q4.

Ken Zaslow

Okay. And then my big question is, can you frame 2017 for us of what you see the puts and pulls are? And what type of earnings power are you looking to see? Just give us some sort of framework. There seems to be a lot of transitions going on, you've got more CapEx projects, you've got more stable, maybe yellow grease prices. Just kind of how you're seeing 2017 relative to 2016 and just frame it for us?

Randall Stuewe

Yes, I'll try to articulate it real simple. Fats and oils, pretty steady to maybe higher here, at least the front half of the year next year. So I think we're in pretty good shape there. Proteins abundant. We see slaughter being heavy around the globe here. We see a little bit of slaughter material leaving Canada and Europe for China, as they just are short meat basically over there. So the rendering volume's strong.

Protein has to find some export markets. And the majority of these animal proteins end up in the Southeast Asia Pac Rim countries. That's got to continue to help us. It looks like soybean meal likes $300. So I think that it's pretty simple that you can say meat and bone meal will trade in that $280 to $320 range next year. As we look forward, then, a fairly consistent run rate from where we're at.

When I say consistent now, if you say what's our disappointments for this year? Our wet pet food plants didn't contribute what we thought they would this year. And now we have two brand new rendering plants coming on for a full year next year. So you've got to blend those in.

Like I said, we're starting -- we haven't completed our annual planning process. That completes later this week or next week in Europe. So we're looking for a slightly improved run rate from what we see right now in the world. Obviously, that can dramatically change.

We see an outstanding year for Diamond Green Diesel. I think we'll probably budget it at $1 a gallon, but right now you could sit there and make a case for $1.25 out there. We'll just have to see what happens there.

CapEx $225 million, Ken. That's pretty much what we're going to put out there for next year. And our interest payments are pretty similar to this year and cash taxes are pretty similar. So at the end of the day, we set ourselves up to once again either delever or deploy capital whichever makes sense.

Ken Zaslow

Just to make sure I understand it. So the Feed Ingredient side, this kind of run rate is, this $35 million, is more than doable for -- on a quarterly basis going forward. And then the Food Ingredient side, you have more capital projects. So this, a $20 million is not a crazy run rate on a per quarter basis. And again, you have seasonality to it and stuff like that. Is that the way to think about it in that way?

Randall Stuewe

I think so, yes.

Operator

The next question is from William Baldwin, Baldwin Anthony Securities.

William Baldwin

Good morning. Can you give us a feel for what the yields were like in your chicken and slaughter plants here in the third quarter, say, versus a year ago? I know seasonality there, they're hit with the warm weather. I just wondered how that compared with last year this time on the yield of the slaughter plants -- I mean, of the rendering plants.

John Muse

Truthfully, the yields haven't changed that much. What we did see the typical warm weather and the quality impact that did have on the fats for you do discount the fat to move it into the marketplace on the rendering side.

This year, as you're aware, it was a pretty warm summer. And we've really have yet to see that break of the warm weather through most of Midwest. We're now starting to see temps cool down a little bit. But nothing unusual on the yields, about the same.

We had a little more volume on poultry which does take the overall yield down because poultry yields more in the 33% range versus cattle in the 48% range. But from that perspective, pretty much a normal third quarter from a quality issue and a yield issue.

Randall Stuewe

Bill, we saw bird weights lighten up a little bit here, especially the big bird side. But overall the poultry side is just rocking and rolling out there. And they remain very optimistic into 2017 here. And we're running full, like we said, everywhere around the country.

William Baldwin

In that same regard, then or looking at that, is there good possibility that poultry fat could find its way to the feedstock into Diamond Green Diesel? Like you say, there's a pretty heavy supply of poultry fat out there. I just wondered if that could be used more as a biodiesel feedstock than it has been in the past?

Randall Stuewe

We can use poultry fat at Diamond Green Diesel. So yes, we will be using more poultry fat, I believe, as we go forward, particularly as we upsize the facility, we'll be using more poultry fat. A lot of poultry fat, as you well know, is sold back and is used for feed in the poultry industry. So there's not much of that is available as there might be from some of the other types of fats. But certainly we'll use more poultry fat at Diamond as we move forward.

William Baldwin

Okay. So from a technical standpoint, there's no problem using that in your plant there?

Randall Stuewe

Correct. We can use poultry fat at Diamond.

Randall Stuewe

Well, thanks folks for joining us. We'll continue to run out the year. And we carry good momentum into 2017. And we'll talk to you again in February. Thank you.

Operator

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

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