Darling Ingredients Inc.
Q4 2017 Earnings Call Transcript

Published:

  • Operator:
    Good morning, everyone, and welcome to the Darling Ingredients Inc. Conference Call to discuss the company's Fourth Quarter and Year-End 2017 Financial Results. With us today are Randall Stuewe, Chairman and Chief Executive Officer of Darling Ingredients; and Brad Phillips, Executive Vice President and Chief Financial Officer. After the speaker's opening remarks, there will be a question-and-answer period and instructions will be given at that time. Today's call is being recorded. I now would like to turn the conference over to Melissa Gaither, Vice President of Investor Relations and Global Communications for Darling Ingredients. Please go ahead.
  • Melissa A. Gaither:
    Thank you, Keith. Good morning, everyone, and thank you for joining us to discuss Darling Ingredients earnings results for the fourth quarter and fiscal year ended December 30, 2017. To augment management's formal presentation, please refer to the presentations section of our IR website for the earnings slide presentation. Randall Stuewe, our Chairman and CEO will begin today's call with an overview of our fourth quarter and year-end operational and financial performances focusing on year-over-year comparisons and will discuss some of the trends impacting our business. Brad Phillips, Executive Vice President and Chief Financial Officer will then provide additional details about our financial results. Please see the full disclosure of our non-GAAP U.S. GAAP measures in both our earnings release and earnings slide 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 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 Darling's Annual Report on the Form 10-K for the year ending December 30, 2017, 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 take 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.
  • Randall C. Stuewe:
    Thanks, Melissa. Good morning, everyone. Thanks for joining us. Before I begin, I'd like to welcome Brad Phillips and congratulate him on his well-deserved promotion as our new Chief Financial Officer. As many of you know, Brad has a long tenure with Darling dating back to 1988 and has managed our Investor Relations effort for many years alongside his Treasury role since 1993. He has proven public company expertise, knows our culture, our operations and our businesses intimately. As you may recall, we reorganized and split the roles between CFO and Chief Administrative Officer, John Muse, our 20-year veteran CFO has opted not to retire and will fill the CAO role responsible for streamlining and integrating our global IT, global HR, global risk management and global internal audit functions, while Brad will be responsible for global accounting, treasury and tax. We are confident in the leadership of both individuals, and their contributions will be vital as we execute our long-term growth strategy. Now, turning to our overall performance. We delivered on target for fourth quarter, topping off a strong 2017 marked with several notable financial and operational achievements, executed our world of growth strategy. As reported, our earnings reflect the impact of the tax reform legislation passed in late December. Fourth quarter and full year results benefited significantly from a net tax benefit of $75 million or $0.45 a share. We also benefited from changes in European tax laws of $13.9 million or $0.08 a share. Brad's going to share you a little more detail about our new tax provisions during his financial review. Now, let's review some of our most important operational achievements and milestones of 2017. First, we grew our total system raw material volumes by 3.1% over 2016. We delivered adjusted EBITDA of $438.9 million without the blenders tax credit. Adding back the North American blenders tax credit would have added an additional $12.6 million to our results. Diamond Green Diesel recorded an entity EBITDA of $86.4 million or $0.54 per gallon without the tax credit. As noted, the BTC was made retro in February, and we have submitted a claim for $160.4 million, which we anticipate receiving later this spring. Our first quarter results will most likely reflect our share of the BTC or approximately $0.56 per share. Our balance sheet continued to improve as we made net debt pay-downs totaling $112.5 million, exceeding our $100 million target and lowering our debt-to-EBITDA ratio to 3.47 from 3.69 in 2016. We improved our working capital utilization by $61.8 million for fiscal year 2017. We refinanced and lowered the cost of borrowing on our term loan B and extended the maturity. On the CapEx front, we deployed $274 million across our Food, Feed, and Fuel segments funding new construction and expansions to support our world of growth strategy. You can view this list of projects on our earnings call slide number 3. We also completed three small acquisitions to capitalize on demand in North America and in China, both strong markets for our products and services. We acquired a New Jersey-based American By-Products Recyclers for used cooking oil, a small rendering company called Tallow Masters in Medley, Florida, and we purchased the remaining minority shareholders interest in our blood business in China. Now, let's turn a little bit and review the segment performance. Feed segment saw strong global raw material tonnage with North American volumes exceeding 2016 levels by 3.4%, while our international tonnage grew by 2% on strong slaughter volumes. We managed through continued deflationary finished product pricing markets and delivered consistent margins. For the year, feed-grade protein prices weakened due to strong supply of alternative ingredients and fats improved, driven by strong biofuel demand for our low-carbon feedstocks. Strengthened fat prices during the year was also supported in part by favorable legislation in California and by anti-dumping duties imposed on Argentine and Indonesian biodiesel imports. Our specialty proteins continued to see robust demand. Our two wet pet food plants commissioned in 2016 ran strong and delivered projected earnings. We are also in the final planning stages to commence construction of a Cat 1, Cat 2 expansion in (00
  • Brad Phillips:
    Thanks, Randy. It's a pleasure to join you all on this earnings call. I'll begin with our balance sheet, where our cash position ended at $107 million, down from $115 million at the end of 2016. Despite spending approximately $37 million during 2017 for the three acquisitions Randy previously referenced, we were able to pay down $43 million in debt during the fourth quarter, and we exceeded our 2017 targeted pay-down of $100 million with the total pay down of $112.5 million. At year-end, our liquidity remained strong with approximately $976 million of availability under our senior revolving credit loan facility. We continue to focus on our working capital position as it improved by $61.8 million since year-end 2016, as reported in the statement of cash flows, which excludes the impacts of foreign exchange. In 2018, we will continue to target $20 million to $25 million worth of positive cash flow for the full year from further working capital improvements. CapEx was $77.7 million for the fourth quarter of 2017 compared to $47.1 million for the same period in 2016. We ended the year with CapEx of $274.2 million, exceeding the target of between $240 million and $250 million for the full year due to several new plant constructions and global plant expansions to meet expanding volumes and new suppliers worldwide. We expect the flow of expansion projects to continue in 2018, where we expect about $219 million for the more routine maintenance and compliance expenditures, another $114 million for new construction, which will bring our total CapEx to approximately an anticipated $333 million for 2018. Gross margin in the fourth quarter was 21.7% compared to 22.3% for the same period last year. Gross margin compression was driven by weaker protein pricing during 2017 compared to 2016, in addition to the absence of the BTC. Increased global sales volumes and higher fat prices helped to offset a significant portion of those challenges. SG&A during the quarter and the year was higher compared to the same quarter and fiscal year 2016. Totals for the fourth quarter were $91 million, up $11.1 million from the same period last year. For the full year, SG&A expenses were $347.5 million compared to $314 million in 2016. Hired levels during the year were driven by expenses related to changes to our equity award agreements to address employee retirements, IT costs for rolling out new IT upgrades to the international business as well as domestic legacy systems in the U.S., some increased fringe benefits and a reduction in currency hedge gains in 2017 versus 2016. As we look forward here in 2018, we project our SG&A expenses to be in the $88 million to $90 million range per quarter. Depreciation and amortization totals were higher for the year, as a result of the facilities and equipment put into service during 2018. Interest expense declined $5.3 million to $88.9 million for fiscal 2017, as we continue to reduce debt. I'll now provide a bit more color on the impact of the recent U.S. Tax Cuts and Jobs Act enacted into law on December 22, 2017. Fourth quarter 2017 results included net tax benefit of $75 million or $0.45 per share. The net benefit includes $101.2 million tax benefit for the write-down of net deferred tax liabilities offset by a $26.2 million tax expense for the mandatory one-time deemed repatriation of non-U.S. earnings. No material cash impact is expected from the deemed repatriation due to existing tax loss carry-forwards. The company also realized a tax benefit of $13.9 million due to tax law changes in Belgium and France. As a result of these combined changes, the effective tax rate for fiscal 2017 is negative 107.7%. Without the effect from these various tax law changes, the effective tax rate would have been approximately 30.8% for 2017. Lastly, we estimate cash taxes for 2018 will be approximately $25 million.
  • Randall C. Stuewe:
    Thanks, Brad. We continue to execute well, diversify our global platform and deploy prudently our growth capital. During the second quarter of 2018, we look forward to bringing the expanded Diamond Green Diesel facility online boosting production to 275 million gallons. The team is also anxious to move forward with Valero on evaluating the expansion of DGD's production capacity to 550 million gallons. We expect this business to continue to provide robust returns even with the absence of the blenders tax credit in 2018. Rousselot also turned the corner during 2017 and is now positioned to take well – positioned well to take full advantage of the growing global demand for its gelatin products. Macroeconomic conditions in South America appear to have stabilized, which should enable us to improve returns in those markets that we have on the other three continents in which the company operates. On a regulatory basis, we will continue to lend our support to the state and federal regulations to help support our biodiesel operations. As we implement our growth and diversification strategies, we'll continue to find ways to aggressively manage our balance sheet, grow our earnings, and reinforce our financial positions. With that, Keith, let's go ahead and open it up to questions.
  • Operator:
    Yes. Thank you. We will now begin the question-and-answer session. And the first question comes from Adam Samuelson with Goldman Sachs.
  • Adam Samuelson:
    Yes. Thanks. Good morning, everyone.
  • Randall C. Stuewe:
    Good morning, Adam.
  • Adam Samuelson:
    So, a couple of questions. Randy, maybe first, would love to get your perspective on kind of the policy landscape as we sit here today, some recent changes to the LCFS cadence in California, new discussion in the White House in Washington on the RFS seems to be more focused on the ethanol side, kind of the lack of blunders credit for 2018. Just how you think the regulatory environment is shaping up as you look over the next 12 to 18 months.
  • Randall C. Stuewe:
    Okay. Hey, John Bullock, you want to chime in here for us?
  • John Bullock:
    Yeah. I think as we look at what CARB just recently did with the LCFS, I think they called it smoothing. We knew that they were coming out with what they were going to have as their targets from 2020 to 2030. In the process of announcing them, they also changed slightly the LCFS targets for 2019, 2020, and 2021 essentially before the 10% target was at 2020 and now they moved that up to (00
  • Adam Samuelson:
    Okay. I appreciate that color. And then maybe, just a clarification on something that was in the prepared comments, I think Randy you alluded to Diamond Green Diesel EBITDA margin running at or above $1.25 a gallon. I just wanted to clarify, is that inclusive of the retroactive blenders credit for the first quarter? And if it's – and either way, can you help just bridge kind of the key components between LCFS (00
  • Randall C. Stuewe:
    John, you want to take that or you want me to?
  • John Bullock:
    Well, I mean the $1.25, the answer on that is – the $1.25 is exclusive of the tax credit. So, whether we have the tax credit during the year, we don't know. But I think, Randy your prepared comments were anticipating $1.25 or better in the first quarter, and kind of what our expectation for the year was, but you may want to comment on that too.
  • Randall C. Stuewe:
    Yeah. And that's right. And that, Adam, number one, we're not counting on the blenders tax credit for 2018. I mean there is much political noise around that whether or not it can be resurrected here in the one of the appropriations bills in March or even later this spring, we'll see how that plays out. But the current LCFS market, as John alluded, even though they have come down a little bit with the smoothing of the inclusion or the reduction curve there, still provide us with where we're structured with our freight, our logistics, current RIN values, we're in excess of that $1.25 today for Q1. That's what we're – just like last year, we said we'd step out around $0.55 for the year without the $1 a gallon. We achieved $0.54, pretty good crystal ball on our part at the end of the day. And so, we look at this year given that all of our production now is now headed to low-carbon markets, we believe we'll be able to achieve $1.25. That's a combination of whatever RIN assumption you want to make. Whatever LCFS function – value you want to make. So, we're telling to use 190 million, 200 million gallons. Why would it be 190 million gallons? Well, if we don't – if we're not ready to go down in mid-May because of some construction delay possibly related to weather, then we'll make less gallons at the higher rate in the back half of the year. So, that's kind of the forecast as we see it today.
  • Adam Samuelson:
    Okay. And then, maybe just one final one for me, been a big focus across a lot of different sectors in the first quarter about rising logistics and transportation costs, are you seeing any of that impacting your business?
  • Randall C. Stuewe:
    Yeah. We absolutely do, and I mean I read a lot of those statements out there. There's a significant difference here for us, we run our own – majority of the rendering North American rendering business our own trucking fleet and then all of our contracts other than some of our route contracts have the ability to pass on those fuel charges. The biggest issue you're facing out there today in North America is just the driver shortage. And we are at full employment in this country of at least people that want to work that have the skills necessary for those jobs. And so, that's the biggest challenge is – for us within our system today.
  • Adam Samuelson:
    Okay. Okay. Appreciate the color. I'll pass it on.
  • Randall C. Stuewe:
    Thank you.
  • Operator:
    Thank you. And the next question comes from Tom Palmer with JPMorgan.
  • Thomas Hinsdale Palmer:
    Good morning. Thanks for taking my question.
  • Randall C. Stuewe:
    Good morning, Tom.
  • Thomas Hinsdale Palmer:
    First, I just wanted to ask about the $75 million dividend that looks like it could flow through this year both the (00
  • Randall C. Stuewe:
    Yeah. I mean, Tom, it's just a little bit like I was answering Adam. You kind of just sit there and you take the $123 million of cash that's sitting down in Diamond Green. You've got $53 million of debt that's down there, and then you throw in the balance of the expansion and then you look at running 200 million gallons at $1.25. So, another generation of $2.50 (00
  • Thomas Hinsdale Palmer:
    Okay. Thank you. That's really helpful. Also, just wanted to ask quickly on Diamond Green Diesel's cost structure as we head into 2018. You've talked about the opportunity to capture a larger portion of the green premium in LCFS markets, also lower distribution costs as pipeline contracts roll off. Is this like a step function that occurs as we begin 2018 or is this more a gradual improvement as the year progresses and how are those negotiations coming along.
  • Randall C. Stuewe:
    Well, I think, first off, here in January, we rolled off the last of the pipeline contract. So, there's a little bit of a ramp-up there, and we're obviously built in that $1.25 guidance forecast for 2018. That has that assumption in it of lower freight, better negotiated discounts on LCFS, et cetera. So, that's all built in there, Tom. But I think over time if we're successful, given the demand profile that we see in California and with the growth of the low-carbon fuel standard out there and around the world, we'll be able to even glean a higher portion of that premium over time. That would be at least what we expect and we see today.
  • Thomas Hinsdale Palmer:
    Okay. Thank you.
  • Operator:
    Thank you. And the next question comes from Heather Jones of Vertical Group.
  • Heather Jones:
    Good morning.
  • Randall C. Stuewe:
    Morning.
  • Brad Phillips:
    Good morning.
  • Heather Jones:
    Nice quarter. So, I guess a couple of questions. First, I don't know if I missed this. So, if I did, I apologize. But could you give us color on what you're thinking about Feed and Food for 2018? You mentioned Rousselot, it turned the corner. And 2017, Feed, obviously some of the fats complexes weaker, but meat and bone meal started to accelerate lately. So, could you give us some color on what you're thinking about those two segments for 2018 versus 2017?
  • Randall C. Stuewe:
    Sure. And, yeah, probably should have added in the (00
  • Heather Jones:
    So, looking at Feed, given the headwinds and the tailwinds, as well as at least for half of 2018, you should have a better currency environment year-on-year and then you've got these capital growth projects it sound like those are steadily improving. Should we expect the full year improvement in Feed versus 2017, maybe a sluggish start, on a full-year basis should we expect Feed to be up year-on-year?
  • Randall C. Stuewe:
    As I look at it, what I'm seeing in Europe today and Canada, we're in a sluggish start here in January, but my expectation would be that we're going to come out at or equivalent to where we were last year by the end of the year.
  • Heather Jones:
    Okay. And then going to – I'm glad you mentioned the discounted waste products and all. So, I just wanted you to, one, see if I'm doing some math correctly. So, if you all would do this expansion to 550 million gallons, I estimate that Darling would go from being net exposed – net long fats to net short via its 50% interest in Diamond Green. So one, wondering if that is – if our math is correct. And two, I agree with you guys that CARB's decision made sense, but I'm wondering given that their decision seemed to surprise the market, does it change your calculus as far as moving forward that expansion, given that there – is there any concern that they will make further changes that would derail the investment thesis for that?
  • Randall C. Stuewe:
    John, I'll let you answer that. I mean, the answer is no, it will not derail the investment thesis. We're actually more positive on it now. But John, go ahead and give some more color please.
  • John Bullock:
    Yeah, I think CARB does really nice job of thinking through their programs and all they were seeing I believe was that (00
  • Heather Jones:
    Okay. Thank you so much.
  • Randall C. Stuewe:
    Thanks, Heather.
  • Operator:
    Thank you. And the next question comes from Ken Zaslow with Bank of Montreal.
  • Ken Zaslow:
    Hey. Good morning, everyone.
  • Randall C. Stuewe:
    Good morning, Ken.
  • Brad Phillips:
    Good morning.
  • Ken Zaslow:
    I have two questions. One is, I remember you guys saying on the expansion in the bolt-on acquisition for 2018 would be – expansion is about $19 million of incremental EBITDA and bolt-on about $4 million to $5 million. Is that still the case?
  • Randall C. Stuewe:
    I think that's pretty close, Ken. I don't have those numbers in front of me. I mean, we brought on several start-ups this year, and then they'll be on the back half of this year. I mean, we'll be bringing on Mering and Denderleeuw, and then the Grapeland plant will be ready to run right at the end of the year or so. And then Los Angeles and the Wahoo red meat plant are now fully scale online and will ramp up during the year. So, I think that's pretty close.
  • Ken Zaslow:
    And then, as you were saying to Heather, the core line businesses (00
  • Randall C. Stuewe:
    Yeah. It's – for us, it's really a timing. As I said, protein – if you had asked me in December, November, I was really worried about meat and bone meal pricing at least in the U.S.A. and North America. And now, I'm more worried that winter fat is going to come back here. It's just hard to believe that we're once again at (00
  • Ken Zaslow:
    Okay. And then on the LCFS credit, can you explain to us how much of that is included in your margin? How that actually incorporate (00
  • Randall C. Stuewe:
    John, you want to answer that to the degree you can?
  • John Bullock:
    Yeah. I mean, we don't – this is a contractual negotiation between this – us and the people who buy the product for us. And obviously, that's a proprietary thing that we would not want to talk about in the open market. I think what I can say is that every time we've met a new negotiation or we've come to a new negotiation on supply out of the LCFS markets, we've gotten a substantially greater percentage of that LCFS as the supplier. What is materially different this year versus last year, and one of the reasons why we think we can make $1.25 with reasonably priced LCFS and rent prices this year, well last year we only made $0.55 or $0.60, is because we simply don't have anything under the old pipeline contracts anymore. So before, there was the issue of what percentage of the LCFS we got and then there was the issue of what we had to essentially reimburse the folks that we were taking out of the pipeline. We don't have to do that anymore, at least after January, and that means that we're getting the full share of the LCFS as we negotiated with our customers and that's been (00
  • Randall C. Stuewe:
    So, John, you would say that our fair share is 100%, right though?
  • John Bullock:
    Well, that's our perspective, but...
  • Randall C. Stuewe:
    Okay. Agree with that.
  • Ken Zaslow:
    And the logistics, I know you changed logistics. Has that really reduced your cost structure? And where is that with getting shipping out to California?
  • Randall C. Stuewe:
    Yeah. John, go ahead.
  • John Bullock:
    We are getting much more efficient at moving the product to California, and obviously, to the extent that we can cut the freight bill down that benefits both us and our suppliers and allows for greater sharing by our suppliers to us of the LCFS premium.
  • Ken Zaslow:
    And how do we kind of think about that? How much do they (00
  • John Bullock:
    Yeah, I mean at one point in time I think we had said that we thought $0.40 to $0.50 was kind of the freight to California. So, that was primarily U.S. flag going around to California. Obviously, we have rail capability out of Diamond. Those prices are somewhere to a third to a half of what the old vessel freights were. And we're working on other things that we think might be able to reduce that a little bit further as we go forward, so a big change.
  • Ken Zaslow:
    Great. Thank you.
  • Operator:
    Thank you. And the next question comes from Chip Moore with Canaccord.
  • Chip Moore:
    Yeah. Good morning. Thanks. Maybe we can go back to capital allocation just a little bit. Obviously no shortage of organic efforts here and continuing to de-lever, maybe what you're seeing on the M&A pipeline, and if you'd start to look at larger type deals, and then extending that buyback another two years, is that just more to give you flexibility or how are you thinking about that. Thanks.
  • Randall C. Stuewe:
    Yeah. No, I think what you're seeing is that we're taking a three to five-year view out now. I mean as I feel very, very confident, we have – our model has been tried, tested and it's true out (00
  • Chip Moore:
    That's perfect. Thanks, Randy. That's great color.
  • Randall C. Stuewe:
    Okay.
  • Operator:
    Thank you. And the next question comes from David Katter with Baird.
  • David Katter:
    Good morning, guys. Thank you for taking the question. After all the acquisitions in recent years, I was wondering how much room you guys see to reduce costs on the OpEx front? Yeah.
  • Randall C. Stuewe:
    That – I don't know. It's a very difficult question to throw you a number out. I mean, the guys and the team are globally challenged each year to get their per ton operating cost down. And we set some goals in Europe this year that are pretty stretched goals. Once again, they were put in place in the U.S. to continue. You can either get your tonnage up or your cost down per unit. So, that's – I'd say, we continue to work on that everywhere in the world. Today, it's just difficult to quantify and explain that more so than what goes on normally each year within the business units.
  • David Katter:
    Got it. That makes sense. Thanks. And then another quick one, and then I'll hop back in queue. How big is California in the overall LCFS market? What percentage (00
  • Randall C. Stuewe:
    Hey, John.
  • John Bullock:
    California is the most significant LCSF market simply because of the size of California. There's a whole lot of folks that live in that state. The others as a group though, while individually much smaller, add up to a fairly good demand when you take Oregon, British Columbia, Ontario, and then we have QuΓ©bec, and potentially Washington State coming on with programs. And then they're talking about having a national type of program in Canada as well. So, all of those others are compared to California much, much smaller. When you add them up, they start to add up to a fairly significant amount of demand. And then, of course, the demand in Europe is equal to or greater than what the demand in North America is for this product.
  • David Katter:
    Great. That's helpful. Thanks guys.
  • Operator:
    Thank you. And the next question comes from Craig Irwin with ROTH Capital Partners.
  • Craig Irwin:
    Hi. Good morning. And thanks for taking my questions. So the first one is Diamond Green. You gave us a really healthy result this quarter. You're pointing to improving strength in the March quarter, and obviously in 2018. But when we look at the conversion costs in the fourth quarter, they were kind of at the high end of the range where you've been the last couple of years. Can you comment about whether this is something like a timing issue, feedstock costs, feedstock mix? And if you would expect to be more in line with your more recent trend as you complete the first quarter and then work your way through the rest of 2018?
  • Randall C. Stuewe:
    John, do you want to take it?
  • John Bullock:
    Yeah. I'm not exactly sure what the question was. I think what you're saying is that our – is that our – is the spread between what we're selling our finished products or buying our fats for were at a pretty healthy level in Q4, and that's one of the things that contributed to our profitability. I think you will continue to see a good spread there, in part because what you saw in Q4 was us still having to buy ourselves out of a fair bit of a pipeline business. And obviously, while we have to do that in January, we no longer have to do that, but I think we had a small trail of one little contract into the first 10 days of February, but we're essentially done with that now. And so, we're getting the full value as we negotiate with our partners out of the LCFS. There is no discount to get ourselves out of the pipeline contracts anymore. And that's a significant incremental contributor to that spread or margin that you talked about.
  • Craig Irwin:
    Great. Thank you for that. The second thing I wanted to ask about is the naphtha and LPG contribution. So, we can do basic math based on naphtha prices out there, but nobody publishes a price for Green naphtha, and it seems that you're getting some pretty healthy margins on those products, healthy profit contribution. Can you maybe describe the potential of this market. If we do see you go to 550 million or 1 billion gallons in the future, is that a market that you expect to be very deep where you can continue to price at a premium, or is this something where we would expect once we get a good deal larger that there will be, maybe more in line with commodity now for naphtha and LPG? (00
  • John Bullock:
    First of all, the intermediate gasoline market is huge. So, in terms of a supply-and-demand basis, as long as you got the proper (00
  • Craig Irwin:
    Great. And then last question, if I may. That expansion to 550 million gallons, can you maybe frame out for us the conversations that are happening with your joint venture partner about potentially financing this third phase, establishing firm timing? What we should look for from the investment side of the house to see sort of how that likely comes together?
  • Randall C. Stuewe:
    Yeah. I'll take that one, John. Valero has been a very special partner for us for a number of years, and it's been a very successful relationship. We always remind people Valero was there and provided the debt financing to create the technology and make the venture successful, and that's the last piece of the $53.7 million that will be repaid here shortly. As we go forward, then the proceeds from the operating rate, the blenders tax credit being received here this spring will pay for the expansion to 275 million and then provide opportunities if the operating rates that we predict are real to continue to finance and payout dividends to the partners, so it will become a very, very nice improved equity return to us. The 550 million gallon or let's just say the doubling from 275 million to 275 million, that's a parallel plant built adjacent to the existing plant. It's going to have improved, if you will, infrastructure. It's going to have the ability to come in off of the second railroad. We're going to be piped to the water so we can bring in by – bring in by water and exit by water. There's just a lot of neat improvements that we learn from serial number 01 that will be implemented in 02. Valero has a very staged and gated engineering and decision-making process. We're part of that. And the design is done. And it's now into the cost estimating and – process that that takes it down to a plus or minus (00
  • Craig Irwin:
    Thank you for that. Thanks again for taking my questions.
  • Randall C. Stuewe:
    You bet, Craig.
  • Operator:
    Thank you. And the next question comes from Tyson Bauer with KC Capital.
  • Tyson Lee Bauer:
    Good morning, gentlemen, and welcome to the limelight, Brad.
  • Brad Phillips:
    Thanks, Tyson.
  • Tyson Lee Bauer:
    A couple other (00
  • Randall C. Stuewe:
    Yeah. I'll take a little bit of this, Tyson. I mean, naphtha, obviously, we're monitoring it. I mean, that's a huge trade – potential trade issue, beef, pork, corn, soybean meal, all the above, and ultimately I hope it doesn't come to some type of real (00
  • John Bullock:
    No. I think that's exactly right.
  • Randall C. Stuewe:
    Okay.
  • Tyson Lee Bauer:
    Okay. We've seen the progression where fat spreads narrow between soy and corn oil animal based fats. On the protein side, are we getting into a paradigm where we're going to see a spread widening between plant-based proteins and animal-based proteins as diets change in the formulas?
  • Randall C. Stuewe:
    Yeah. I think you kind of answered your own question in a sense that we're seeing it. We're seeing a couple things. I mean clearly there's been a move to a portion of the poultry industry that's all veg. At the end of the day, you've seen – you've got ample amounts of grains, feed (00
  • Tyson Lee Bauer:
    Okay. And one common theme in the headlines we have seen, whether it's Senator Grassley or Senator Cruz is E15. Looking at that as a vacuum, there are some impacts towards you with corn oil. Obviously, supply would eventually go up, but also the RIN effect outside of the obligated parties for D4 and D5. Have you been able to run any kind of sensitivities or what you think just an E15 would have an impact on some of your biofuels and the business as far as your feedstock cost?
  • Randall C. Stuewe:
    John, you want to take it?
  • John Bullock:
    Yeah, I think on the RIN side, obviously, the D4, the D5 will move in the advanced pool, so it will depend on what the supply and demand is in the advanced pool. But – if they didn't move to an E15, possibility of more corn ethanol production, although most of the ethanol industry is running flat out today. So, whether or not we'd see a big increase in corn oil supply from that, that's – quite frankly, we don't know the answer to that question at this point in time. But if anything, we might see a little cheaper corn oil. The D4 and D5 will depend upon what the mandates are in the biomass-based diesel and the advanced category.
  • Tyson Lee Bauer:
    All right. Thank you, gentlemen.
  • Randall C. Stuewe:
    Thanks, Tyson.
  • Operator:
    Thank you. And the next question is a follow-up from Ken Zaslow with Bank of Montreal.
  • Ken Zaslow:
    Hey. Just a quick question for housekeeping, what is the tax rate you're assuming for 2018?
  • Randall C. Stuewe:
    Ken, what is the tax what? I couldn't...
  • Ken Zaslow:
    Tax rate. Tax rate.
  • Randall C. Stuewe:
    The tax rate.
  • Ken Zaslow:
    (01
  • Randall C. Stuewe:
    With the blenders tax credit, it's going to be...
  • Brad Phillips:
    ...with 2018.
  • Randall C. Stuewe:
    In 2018, with the blenders tax credit, in 2018 it'll be around 15% is our estimate, and without, around 25% for 2018.
  • Ken Zaslow:
    Okay. Great. Thank you.
  • Randall C. Stuewe:
    You bet. Yes.
  • Operator:
    Thank you. And as there are no questions at the present time, I would like to return the call to Mr. Stuewe for any closing comments.
  • Randall C. Stuewe:
    All right. Thanks, Keith. Appreciate everybody's questions today. Great questions. We had a good quarter. We're turning good momentum into 2018 here and we look forward to talking to you after the end of the quarter in May. Take care and be safe.
  • Operator:
    Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.