I confess to a certain wariness prior to my recent visit to J.J. Smith’s rendering plant in Winchester, Va. If you have ever been near a rendering plant — which turns dead animals and their byproducts into liquid grease and protein-packed dry powder — you know what I mean.
The smell can be pretty foul.
But what drew me to Smith’s Valley Proteins is its virtue as a cash machine. It is something you might see in Warren Buffett’s portfolio: an essential, highly profitable, yet unglamorous businesses — with a big moat surrounding it to deter would-be competitors.
“Food companies every day throw away 30 to 40 percent of the animal,” said Smith, who is the company president as well as a spokesman for his industry. Everything — from the excess fat around your rib-eye steak to the bones left over in the butcher’s shop — makes its way to Valley Proteins.
“If you don’t have somebody like us hauling byproducts away, you would fill up landfills faster. If our business didn’t open its doors some Monday, a lot of the meat production in this part of the United States would just stop.”
Privately owned Valley Proteins, which runs 12 rendering plants from Pennsylvania to North Carolina and west to Texas, grosses around $500 million a year. Its profit margins are about 10 percent, which means it throws off about $50 million in cash. It has about 1,400 employees.
Smith owns slightly more than 50 percent of the company; his brother Mike, who is vice president, owns the rest.
Similar companies are selling for about one time annual revenue, which means the Smith brothers are sitting on a half-billion-dollar asset. Valley Proteins is the third-largest rendering plant in the United States that is not aligned with a meat, poultry or hog producer, Smith said.
He is an accountant by training (Wake Forest, Class of 1983), who knows his business to the penny. He can tell you that his revenue is 16 cents per pound, 4 cents of which is spent processing the product. The remaining 12 cents covers the purchase of product and transportation. What’s left after that is profit.
During several hours of interviews at Valley Proteins headquarters amid rolling fields outside Winchester, he talked about his business values and thoughts on family wealth, work ethic, philanthropy and management. They were so interesting that I am going to write another column focusing on those subjects in the near future.
Smith describes rendering as something akin to frying a pound of bacon in your kitchen. You burn off most of the fat and water, leaving grease and meat behind.
Daily, the company’s fleet of 400 trucks hauls thousands of tons of chicken, beef, turkey and hog scraps from butcher shops, grocery stores and slaughterhouses. Even road kill finds its way to the plant. You know that dead deer you saw on the side of Interstate 66 the other day? There’s a good chance it ended up at a Valley Proteins plant.
Valley Proteins processes 40,000 pounds of product per hour. The dry powder and most of the grease are sold back to poultry, hog, fish and pet food companies. The powder is mixed with animal feed to create more protein.
One of the high-margin sectors of Smith’s business is collecting used cooking oil that restaurants and other food preparers throw away.
In all, the company collects 7 million pounds of used cooking oil a week from 55,000 locations. The oil, in fact, is worth so much money that it is locked down until Smith’s fleet picks it up.
The vast majority of the oil and liquid grease is shipped in tanker trucks that keep it heated at 130 degrees. The grease is delivered to customers to serve as a calorie supplement in animal feeds. About 10 percent of the liquid grease is used as a biofuel and blended in with regular petroleum, which is an expanding part of Smith’s business.
There are a couple of keys to the success of the business. First, the barrier to entry is high because rendering plants, with their potential for foul odors and truck traffic, are difficult to get approved by local governments.
That makes the rights to operate a plant very valuable.
Smith summed it up this way: “Do you know anyone who wants a rendering plant near their home?”
Only 250 rendering plants operate in the country, and Valley Proteins has built only five in the past three decades.
“I will give you $5 million and five years and see if you can get one built within eight miles of your house. I don’t think you can.”
The second key to success is the existing relationship that Valley Proteins has with the slaughterhouses and butchers and grocery stores and restaurants that supply it with raw product. Those relationships have been built up over six decades. Without that product, Smith’s plants are pretty much worthless.
So Smith walks a fine line on pricing, keeping his profit margins healthy but not gouging his product suppliers for fear that they may have incentive to build their own rendering plant.
It all started in the late 1940s, when his grandfather, Clyde, who drove trucks for a Pennsylvania rendering plant, decided to go into business for himself and plopped the rendering plant — then just a barn with no industrial power lines — in the field near Winchester. His family, including his wife and seven children, all followed in 1952.
Clyde died in 1968. He was succeeded by his son Jerry, who bought out six siblings and eventually took over the company, which J.J. Smith estimates was worth around $100,000 at the time.
Jerry, who died in 2003, turned out to be a smart, visionary businessman who rebuilt the Winchester plant. He expanded and modernized the company’s truck fleet so it could collect more product. He replaced family members with professional managers and studied the latest European rendering techniques.
He took risks, including difficult acquisitions that ultimately expanded Valley Proteins’ geographic footprint, resulting in greater economies of scale.
Not everything has gone smoothly.
About 10 years ago, the company had a brush with bankruptcy when it suffered a cash flow squeeze brought on by several factors, including the outcry over mad cow disease, an ill-timed acquisition at a high price and a stranded freighter that tied up a boatload of grease bound for South America.
But the freighter eventually delivered its goods, and Smith weathered the crisis.
Boy, did he weather the crisis.
Smith gets around by corporate aircraft. He owns a home along the ocean in Georgia, as well as the one in Winchester. He gives to charities, and he endowed the local high school with a teaching position named for one of Smith’s favorite high school English educators. His one obvious accouterment of wealth is a high-performance BMW that he bought in Germany.
His long-term vision for the company these days is preoccupied with succession, and whether he and his brother can convince their children that the unglamorous rendering business is worth loving — and keeping in the family.
“My dad always told me it was most profitable to be in a business most people do not want to be associated with.”