Q2 2020 Darling Ingredients Inc Earnings Call
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First call what conference would you like.
I would like to June for Darling ingredients.
Thank you your name is please.
David Brown.
And your company.
IRA.
Thank you.
Yes.
One thing only mode. It is being recorded.
Inc.
Okay.
The 2020 that'll turn it back over to you Randy.
Yes, Brad.
We're past the halfway point of a barrier radek year, our feed segment performed well by processing significant tonnage of the populated animals. During the second quarter again hats off to our operations personnel for managing through this unusual event all the while the covert pandemic was exploding all around US we believe the commissioning of to college and peptide production.
Facilities in Europe gives us a solid base was capacity to meet the growing consumer trends and the hydrolyze College and products market. We anticipate the facility in Brazil to be commissioned in October this year barring any further interruption to construction related to covert 19.
Energy markets seem to have stabilized center, showing some improvement in the back half of 2020, the volatility which took place in the second quarter with something not experienced in over a decade ultra low sulfur diesel prices remain 37% lower than they were a year ago and 27 earned 20% lower than during the first quarter.
With the resilient spot margin combined with the first half performance of DGD, we're holding to our guidance of EBITDA per gallon in arranged to 30 to 240 for DGD for the full year of 2020, we anticipate selling approximately 280 million to 285 million gallons of renewable diesel for the year with a plant turnaround coming into my.
As of October.
Our share of the 2020 DGD earnings should be approximately 335 million based on the ranges I just laid out for you with the strength, we have seen in our feed segment and an improving food segment in the back half of the year. We believe we can produce core EBITDA of approximately 450 to 465 during 2020, combining our CFO.
For estimated EBITDA with our share of DPG gives us approximately 785 to 800 million of EBITDA on a combined pro forma basis for 2020.
That is a significant earnings milestone for Darling better than 2019, when you remove the retroactive blenders tax credit and particularly in a year. There has been so much up people. We continue to continue to monitor all things that can affect our business, whether its flooding in China currency fluctuations in Brazil, or the effects of a worldwide pandemic.
Our focus is to have a steady hand on the controls of this global platform and focus on the long term growth opportunities in front of us I remind everyone that we're now 16 months away from commissioning 400 million gallons of additional renewable diesel capacity at DGD and Norco, Louisiana as others have delayed work.
Standard or even abandoned their projects and renewable diesel Darling and our joint venture partner have kept the wheels, turning on this new and exciting project.
As I mentioned earlier Darling has received $413 million of cash distributions from the JV, which has more than three times. The initial cash outlay. We made in the original project to think that in 2022 Diamond Green diesel can produce 675 million gallons of renewable diesel and a conservative to dollar and 25.
Two dollar and 25 cents EBITDA per gallon is a significant contribution and growth to darlings earnings.
And don't forget DGD will reduce Billy producing approximately 60 million gallons of renewable Napa and that will contribute 15 cents a gallon margin to the 675 million gallons already produced.
Now the rendering of animals doesn't graham headlines around the world or even get people excited to own Darling.
Is the key ingredient that makes diamond green diesel the leader in renewable diesel market today, our ability to be the largest collector and processor of animal fats and oils to provide feedstock to DGD is of high value and is why our vertical integration will enhance DGD his ability to be the best low cost producer of the greenest.
Fuel on the planet with that let's go ahead and open it up to Q anyway.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before passing the key to withdraw from the question Q. Please press Star then Tim.
Our first question is from Heather Jones, Heather Jones Research LLC. Please go ahead.
Good morning, congratulations great quarter.
Hi, Thanks Heather.
Thank you.
So quickly.
Thank you for the color regarding the second half outlook.
I just wonder if you could give us a sense of maybe was an incredibly strong quarter for feed.
So just trying to get a sense of how much of that was.
Due to the help from depopulate.
Hogs and.
I know you probably won't give an exact number but just trying to get a sense of.
How much that help.
No you know I think number one we want to point out that we have always said that within the business model as you look at it over the last five years that there was pretty much there were significant implied optionality built in that feed segment and that optionality exist everywhere in the U.S.
Canada, and the Europe rendering model so while the de populating the Hans we took in about 40 million pounds of hogs during the quarter that wasn't all of it. It was a Canada turned in a very very nice performance Europe had 12 months in a row now have a very strong performance.
You know what you saw was a combination of of alignment issues. There number one you saw slaughterhouses that werent predominantly server Darling doesn't serve as the big names out there that we're having to covert 19 issues in a sense of being able to staff and we talked about those adjustments and several other calls.
They would have to make well when they reduce the supply of really protein to the market and to a degree the fats also during the month of really may.
So we had a little bit of an uptick in the protein markets in the month of May all around the World and then you also had the major disruption in the ethanol the the shut ins or curtailments of those ethanol plants. It took us a whole bunch of dgs off the market during during the quarter. There you know that was that's deposit.
Have you had disruptions of trade around the world again between China and engineered but nonetheless, you saw really the the markets were driven in the second quarter by a run up in protein while fat prices were actually down we've now seen as we go forward protein prices have stabilized, although a little lower than they were in Q2.
But fat prices seem to have improved around the world as a as the world digests, how much palm oil there is going to be available in China seems to continue to replenish their their stockpile. So I mean, well I don't know that I guess I'm not totally answering your question hogs played a little bit part of it but.
Maybe we shouldn't have put it out there is the major driver. It was all those items around the world what we're seeing right now in the raw material markets around the World is were very strong in Canada, we continue to be strong in the U.S. right now.
As as the slaughterhouses are all running especially the beef aside guys are running really hard.
Time of the year that we did a lot of breakdown tonnage on they just can't seem to keep their plants and conditioned to handle it all and so we're we're full in the U.S. came in a Europe.
Margins remain good and spreads remain good in that business, although the tonnage is off a little bit now for us.
Minus step back in and is taking out pig skin and some of the lower grade ounces that we're going into the quote rendering process in Q2. So overall, it's we're probably steady when you net it all out but I would say our breakdown tonnage in the U.S. is pretty much offset most of the hog impact.
In Q2.
So when I'm thinking about Q3 for the core feed business.
And now that meat and bone meal prices have come back down.
Volumes have normalized.
But given the tighter fat markets.
Within the core business in Q3, a year on year.
Year over year, I think way I would would answer that is I think we put out guidance of 450 to for 65 for the year, which would tell you that we think that the Q3 the feed segment could be a little softer than than Q2 because of the lower protein prices.
And remember Q3 globally for us as always the challenge with with Hot Summer temperatures, you've got 10 days in Europe now.
Record heat going on in the U.S. is not much different so.
That's always a little bit of a challenge or what were what we're trying to us to telegraph is that we hope that the foods segments that the consumer demand starts to continue to pick up as it has.
We've we've in then that's in our food segment.
Really with our ruse low business I think interesting also then and the feed segment is where our used cooking oil collection businesses, while we said that hit a low about April 15.
We still have a couple locations that are that you can imagine with note.
You didn't dining in the northeast that are off 25%, but for the most part where now off around the country between 10 and 15% year over year. So that's moved back nicely, which should help us a little more within the in the feed segment in Q3.
Okay. Thank you for the answer.
The next question is from Craig Irwin up Roth Capital Partners. Please go ahead.
Hi, good morning, and congratulations on a really solid quarter again.
Randy.
I wanted to ask about the commodity environment. So many of my clients think we're heading into an inflationary environment watching all the central banks globally printing money as fast as they can.
You've had to deal with the weight on your EBITDA in the core platform from a deflationary commodity environment over the last several years can you maybe I remind us what you did to keep the EBITDA.
Centrally flat now announced inflecting up in that business a little bit.
And how this translates forward to leverage if we do see a positive cycled await the way it looks like where we're facing one now.
Thanks, Craig I.
Thanks, It's an academic discussion to a degree I think number one the prices of our finished products and that do compete in the in the nutrient markets are still well under the 10 year average so as we said we still believe there's there's implied optionality as those improve we have a funding.
Mental belief in this room that commodities, if you want to call him that all seem to retrace to their their 10 year averages over time.
So that's number one number two we've seen weak currencies.
From a from the euro side.
The Brazilian real is as we look at it the Euro is I think when I look. This morning was 119, you know that's up from 110 or 111 in the first quarter. So you know that translates back to do better GAAP earnings in the U.S.
Overall demand I mean, and then you look at the weaker dollar that should in sent additional buying of our products and make a more competitive around the world I mean, clearly covert 19 has disrupted trade clearly that the tension in China has has made it a challenging environment to get permits to bring different products in.
But nonetheless, we're starting to see pretty nice demand around the world I mean, the pet food side, you know at the end of the day, we've seen it remains strong. It's finally backing off just a little bit.
Hopefully that's that's not that's not a trend, but nonetheless, the typical seasonality in the pet food business in Q2 as now carried stronger into Q3. So overall I think it at the end of the day, we're we're seeing a nice resurgence of our business here I mean, if the criticisms that we have taken over the past of cash.
Capital deployed we were expanding at a time when we have the capability to expand to capture the growth in tonnage now drives our system and our supply chain to Diamond Green diesel that's starting to pay off number two we made a conscious effort to look at ourselves in the mere and say we haven't done as good a job.
Rob as we should have on recapturing the shareholders monies, we deployed and there has been an initiative all around the world to widen out margins to shutdown different processes that don't make sense and and the you know really I, while I hate the word optimize thats, what I would use here to try to enhance.
The margins and that the U.S. team and the North American team and the European team have done a really nice job in that area looking at what products were making what we should be charging form and getting rewarded for being an essential supplier of services. So to sum it up Craig we've got getting back.
The 10 year averages FX, that's it that's attractive to earnings FX, it's attractive to exports and then margin enhancement that we've consciously done to pay for the new capacity we brought online.
Great. Thank you for that so on it on a totally different subject right Diamond Green diesel Cobot 19 was it was it was an issue for everybody in the energy markets.
Some more than others right. So that construction diamond to has there been any impact on the out of the capex, there or the potential capex in the second half of the year and you did reiterate the two 220 to 40, but Tom is there is there any.
Thing you can maybe say about potential dividends in the back ended the year.
Given that the cash flows in that business or are really fantastic right now.
Yeah first off you know our hats go off to the construction teams down at Saint Charles You know that we have been fortunate to have construction be uninterrupted.
For US we are on time on budget on plan.
Everything is due at this point in time knock on wood the Hurricanes keep taken right turns.
So were but we still have to hurricane seasons to go through so at the end of the day. The construction team has done just a fabulous job down there were also bless that the rest of the petroleum industry has been a curtailed on their capex, which makes a lot of great labor at great values available to us to to keep the.
Project move and we were down last week I think on Jim put out on a picture is out there the latest greatest maybe within the last two weeks of the pictures steel is coming up out of the ground. The tanks are up equipments being set a reactors should be in here. Later. This this fall or later this summer early fall and why.
We're right on time, so everything looks good.
We gave and at a margin environment of 230 to 40 for the balance of the year. It feels that way unless we get another cobot interruption within the petroleum industry, but as you go back and look at gasoline demand now, it's running 10, 11% off from a year ago. So things are more normal than they've been but.
None of those nonetheless it.
Right now margins still doable, possibly some upside to them and if we get a little bit of upside. That's number one we could have a second dividend out of this although it would probably be small as as you know the second year of construction or takes 32 months here magically versus what other people think they can do and a year.
But at the end of the day, the big spending will come heavily starting here in fourth quarter and about the first three quarters of next year. So I think a dividend is probably.
It's hopeful, but I don't know that I would predict it out there however, if in a.
Covance four in the in Washington, DC, there's some fun legislations out there that might send to a few additional dollars are weighing if that comes our way than I think a dividend could be likely.
Excellent congratulations again, thanks for taking my questions.
The next question is from Adam Samuelson of Goldman Sachs. Please go ahead.
Yes, thanks, good morning, everyone.
Good morning on so.
So I guess.
My first question is thinking about.
And the preliminary views on on phase three in Port Arthur and just I know Thats still undergoing engineering review, but if we think about kind of the base plan from a capital intensity perspective and kind of.
The investment case margins that you're you're looking to underwrite anyway a framing.
Difference is that they would that would be present relative to two what you have in Louisiana and.
Good trying to get to handle on how you how feedstock sourcing night.
The different into Texas product markets.
In California anymore, I, how you're framing and evaluating this the supply demand of renewable diesel around the world.
Maybe we will start there.
So this is Jon block, we continue to part with our analysis on Diamond Green diesel is right.
Heading towards the completion of the phase three engineering and a decision on whether or not to ultimately move forward with the plant early next year I will have everything looks very favorable at this point in time.
Just a fabulous location for our renewable diesel flat as we site. These plants and the signing of English applies we've talked about in the past is massively complicated you have to have your supply chain ride chat debit capabilities right gapped out of the flexibility to be able to both get the raw material and effectively and get it out.
To the marketplace and have flexibility to go to the various l. CFS markets that are currently in place and that are developing around the world Port Arthur has all of those capabilities is just an ideal second location puts us on the western railroads with the European BN service to the facility.
She has also really good currently we have kfcs and as we put diamond Green diesel to on Barbara going to have CN capability will have water capabilities are I MTT deal at Saint Charles So we can bring in both wherever barges and fat internationally, if we want to bring that fat in.
We have ability on the out downside to go by water by rail and by pipeline.
Both facility, so excellent excellent flexibility and as we think about the marketplace going forward.
We have a massively experienced team as we were Randy mentioned, we were down at our construction meeting on Diamond Green diesel to a couple of weeks ago and as you look around the room. The team. This building diamond Green diesel to the team that's going to build diamond Green diesel tray belts and reduce alon expanded it but all the logistics capabilities and are now in the process of design.
Mining and engineering Diamond Green diesel three [noise].
A massively experience team is a massively complicated facilities, if you're just going to startup facility and say I'm not going to have any pre treatment I'm not going to have the right logistics capability around it.
No you're entering the contest with one hand time, we headed back and so that's going to be difficult. Pete we say at all the time, we're building Diamond Green diesel three to be at a low cost most flexible lowest CDAI.
Most suite of finished products that meet the renewable markets going forward and if we have that in position with the growing markets that are happening in the United States and around the World, Canada and other places we feel we're going to be excellently positioned to be able to compete in that marketplace going forward. We're building diamond for the long haul not for a quick Buck if we can.
You get it in place and time to pick up about tax credit.
Really tried it is something that Seth.
That's more for the long haul.
That's a that's very helpful. And then just one clarification question as we start thing what project economics.
You talked about to 25, a gallon in 22 with the blenders credit on the 675 and renewable diesel.
We also think on the 60 million of renewable nap that that separately.
As $1.20 thought a gallon for 60 on top or how do we think about the renewable NAFTA economics on top of the existing renewable diesel economics.
I think for the timing it probably include the nap and that to 25 number I mean, obviously.
When we got out to 2020 feel we're talking about a projection here, but at this point in time, the NAFTA helps improve the baseline profitability of that facility, maybe it will be additive on top of that but if you are thinking about it right now to 25, probably a pretty good all in number.
Okay. That's very helpful. I appreciate the color. Thank you.
The next question is from Donald Mclee of bearing Burke. Please go ahead.
Good morning, guys.
Kick things off I'm curious to know how comfortable you are with the overall level of capacity additions in the U.S. market that are expected over the next couple of years.
And any potential oversupply and then with within that backdrop of increasing competition do you think that could highlight some differentiation within the space between dialing in its peers.
Donald This is Randy first off thank you for initiating coverage on as we sincerely appreciate and you've done a really nice job for us so.
I.
We spent a lot of time.
Thinking about the world and where the demand is going to be in the points and then we spent no time or little time thinking about competition, because as John highlighted earlier.
So it's really a real estate game location location location.
You have hydrogen are you on the pipeline are you on the water can you bring in barge can you bring in a shift can you bring in up to railroads. So number one as John said, we're not focused on other people were focused on what products we can make.
Around the world them to meet the growing needs of both road fuel marine fuel Arctic grade fuel jet fuels that we see happening over the world and ultimately that's what's going to drive future expansion for the supply chain that we built here with the with the rendering business with the oil collection the waste.
Collection businesses give just a significant no advantage for anybody going forward.
Now all said, we believe that nonetheless, if were correct on these margins, which you know as John said they are predictions, but we also seem to have been able to predict them now for about the last the 789 years. So I think we've got a pretty good feel with our team of how to price products, where the demand is et cetera.
It will encourage people to take a take a shot at it.
Clearly theres been a lot of announcements out there I mean, everybody Jim had any read through you know three or four petroleum companies and all seem to have wonderful renewables.
Visions, but theres not one of them that has either got to permit broken ground or made a customer sale, yet or bought a pound of feedstock and as I said earlier permitting is one to one and a half years and construction to do it right is somewhere between 30 and 36 months and that's that's true.
Given out by Us by next day and by totality in in Europe. So Nonetheless, I suspect somebody will take a shot at it given these margins you're seeing some of these refineries that are in the wrong place. If you will logistically for crude oil now magically think there in the right place to buys vegetable oil.
Hi, CDAI vegetable oil to be in the in the business. Good luck. We we welcome the competition as John says we're in it for the long haul.
Okay. Thank that Thats really helpful. Then just one more on the feed and food side of the business can you talk a bit about where you think livestock inventory level and it at the.
Ended up wind it up at the end of the quarter relative to historical levels. Following that round of depopulation in Q2 and is there any concern about a potential headwind from from reduced near term demand amid all that population.
Yeah, I mean good question.
I would point everybody just simply if you look at the frozen inventories out there they have really been knocked down some if somebody is buying everything that we can process out there remember you've got slaughterhouses that aren't back to full too high or to ship five day six day a week.
City, and there's still dealing with some labor issues et cetera, but nonetheless, the beef business is really very strong out there right now I think it was a shared with me and I know that there's enough cattle on feed or in the feed lots for the process every Saturday for another year or six day.
A year the port side, what what's interesting the portside and I'll comment both here in North America is the demand remains very robust for for the finished product while cut out margins are down you know.
At the end of the day producer margins et cetera at the end today. The demand is really strong and while we even while we de populated animals that really should have gone to the food chain and it was tragic that they had to be rendered if you will but remember we make some great products out of that ultimately end up.
In the circular economy again, but at the end of the day, we weren't de populating the south hurt so at the end of the day. They were just making room for the next letter.
Next litter to come into the system. So the hogs system seems to remain very very strong right now the chicken side.
The ended the day you still have.
You read Us foods.
Foodservice call script, you can go look at it they're down there is still saying their distribution systems down 40% to 46% from a year ago. If I remember the numbers right. So it's not back so you're really pack your from a chicken side, you're doing a retail pack and you're still not getting the foodservice, although wing prices. It now.
Come back up to where they were nearly a year ago, but that remains fairly strong in Europe.
Like I said, we've seen a little bit of Chinese diversion of the product of the cheap cuts and then if you move all the way around the world to China. What's interesting is we're now we didn't even have a discussion on African swine fever, and our scrip or call. It still out there and at the end of the.
Hey, what you've now seen is what I believe and obviously no data out of China is can be relied on here.
But at the end of the day, what you've seen is it appears that the Salford got hit by NSF in China, because there are Chinese numbers of animals.
Has not improved from where they were six months ago, a year ago, even though some of the media says it's up it may be but it's not obvious to us and how do we know that well as we operate three gelatin plants. There you know pig skin is not available animal hides that we make a high gelatin product aren't available our five blood process.
Messing plants, there are still running limited hours Theres, just really not any the commercial slaughterhouses don't have any availability to picks or maybe a few more in the backyard, but they aren't in the commercial system. Yet. So overall I know I gave you a little too much color there, but at the end of the they meet supplies around the world and in South America everything seems.
Very robust still and I don't see any change in of that as we as we go forward here. We're in the middle of barbecue season, and North America and in Europe.
And we'll keep moving forward here I don't end the if the numbers to produce an animal are very attractive right now also.
Okay. Thanks, Thats really insightful I'll stop there and I appreciate you taking my questions.
Your next question is from Tom Palmer of JP Morgan. Please go ahead.
Good morning, and thanks for the question.
You talked earlier about some tweaks to how you think about capital deployment I know this year as Capex is lighter given the uncertainty, but going forward how might we think about your capex plans were you, suggesting capex might be lower than in past years or is it more that you're changing the types of projects that you're investing in or or maybe.
How you're thinking about the project that you would invest that.
I think it's all the above Tom This is Randy I mean number one we came into a very uncertain erratic year.
Clearly we were responding to our board and looking at Doomsday scenarios and then we were at the end of the day. These are very capital intensive businesses to be in.
Both from a truck fleet, where we have to haul our own material in most cases to to the plants, where it's just very corrosive. So essentially we came into the first half of the year and said, we want to watch and make sure that our business model works in this environment and so I think for the first half of the year 100 2100.
25 million I see about the same thing maybe just a little bit more in the back half of the year, we're finishing out the two peptide plants that are commissioning the the epitaxial, Brazil is in those numbers, but no. We're taking a cautious approach still to the balance of the year also trying to to make sure that our operations and.
Management team I understand that so that we were kind of move in the bar on them a little bit to make sure that we get a return on the capital and we're doing that's part of the margin enhancement program. So going forward I really look for a number closer due to the to 75 and that's all in going forward would be my target is.
As we go forward, we've always said that it really takes about a 170 585 to maintain the business and really when you got 215 or 18 plants now around the world. When you do the divisor on that it's not a lot of capital per plant and then the trucking fleet. If we try to maintain a seven eight years.
Your age on that trucking fleet takes 50 million. The rest is then competition for good projects that will will meet the 15% to 20% internal hurdle rate for us. So that's how I'd look at it going forward.
Thanks for that.
I also I wanted to follow up on the New College and plants opening could you just reminded how much youre production capacity of college in increases what you're assuming in terms of volume growth as we think about the second half of the year and including the ramp and then on just what you're seeing on the on the demand side to support that supply growth.
Thank you.
Thanks, Tom I'll take a stab and of John wants to jump in and help me here. If I you know number one.
What we're adding is a process to an existing process.
Around the world, we have the the peptide plants, the two pep implants, and Amparo, Brazil today that are that are running near capacity.
We just commission get Belgium, and earn commissioning the and expanding angle in France, that's a fish pep than plant predominantly geared towards the Asian countries and then we're bringing on another plant and epitaxial, Brazil. So we're trying what we're trying to do is capture a trend or a move.
Within the global College and market. If you say gelatin is college and and peptide as we call is hydrolyzed called and or a fancy word has seen its sprayed right. So you can either send the gelatin down or the college and down a belt dryer and you have gelatin or you can diverted to an enzymatic process and sprayed right.
So it's a balancing of production capacity force, it's obviously being driven by the margin structure in it. It's also optimizing our product mix around the world, where maybe we're making too much of a lower grade college and that can now be spray dryer moved into a different market remember that the absolutely.
Within the business for us our that this is a water soluble product that goes into health and nutrition in beauty.
And that's what's key about it for us and it's really as we embark on a multiyear strategy in our ruse low business that this is the next processing step for us in college and in a sense as we talk about college and peptides and Thats, where the brand Pep than came out of and you will see additional health and beauty.
The nutrition uses as we isolate the deferred peptides and find the market's form I think we've also made an announcement during the quarter.
Our ex pure product, which is a low endotoxin product is very very exciting.
For us and clearly we're putting these products out or competitively, we're not going to tell you the margins on and we're going to show you. The results here over the next coming quarters, but really for US. The system is going to run the same amount of tonnage in it it's just going to be which markets. It goes through and that's going to be allowed us to move our product mix around relative.
Through the markets and if you think through the second quarter here.
We made a less peptide because that's a little step closer to the consumer consumer that's a big box retailers the customers had to move that to an online system. It took a most of the quarter to get there. It's now there.
But Conversely, we saw significant growth in demand of basic gelatin to go into the gel cap business and that was really really a positive thing as as everybody staying at homes looking for that magic pill to take now to keep them safe and so we'll see that happen and then.
I suspect, we will probably move a little bit of that capacity back to the us in Europe away from China overtime, but nonetheless, it's an optimization of product mix for us.
Okay. Thanks for all that you've already.
Okay.
The next question is from Ben Kallo of Baird. Please go ahead.
Hey, good morning, Bob Congrats on the quarter.
So just to clarify the last question. It's the same you're basically the same process.
For gelatin add your call June is that when I heard you just you add it gives us a.
Different processing line.
Yes, and additional processing line to existing plants, that's why we could build for plans for whatever was 120 $560 million.
Okay. The only reason I ask about that because theres, a worry of the gets more commoditized or.
That goes away that we'd have some capital there. So we get that question I'm just wondering what your thoughts on on that front.
Yes. This is John so at what it was very interesting as they passed an opportunity came out because it was a rapidly rising trend.
And then nutraceutical markets nutraceutical markets have a tendency to add products have become very hot and they become very cold.
We wanted to make sure that we took advantage of the opportunity without spending a tremendous amount of capital and that's what we did by modifying essentially the backend of some of our existing units. So while we spent a fair amount of money on this if we would have tried to develop entirely new facilities to do this way to spend four times the amount of money that we did spend so we went into.
This on relatively low capital approach, we are extremely excited because we believe that peptides and hydrolyzed halogens are now mainstreaming into the marketplace and I think the proof positive on that is when we saw nestle invest in vital proteins. They are now going to be able to take the.
Levelized College, and and move that out many more platforms into many more marketplaces and quite frankly, if you've got the staff have a great consumer product have a company like Nestle say, we want to be in that business and so we are extremely excited we think we've seen a validation of hydrolyzed college, and there's going to be a lot.
As a nation and a lot more categories out there and that's going to really helped drive the growth in that category. Those products. So we went it relatively modest capital for the capability that we got and we really think now we received the staff a validation for the product category.
Okay, just two more just.
You talked about the core being for 15 for 75, I think last call you kind of walk down before a 25, there I'm just wondering what the what the changes are there the big drivers.
I was just really being conservative I mean on the back half of the year I mean, and there's still some risks there I mean it.
Is it a resurgence and some of the economy shutting down but it.
It really at the end of the day it feels like meet demand.
Food demand fuel demand is just very solid for so it's really an improvement of a back half of the year I think food pricing for us or the ruse low system also with palm oil improving and then really our tonnage mate remaining strong and it's it's really the all those things combined.
And then lastly also in this kind of has other people's questions on.
Title group.
No.
As as you well for the Port Arthur if you do or even with the.
Expansion.
The logistics, so we are getting feedstock.
Yes get more complicated.
How do we think about.
De Levered nicely, how do we think about your thoughts around you control more of feedstock.
Whether north America or or elsewhere.
Is that a priority for you or do you already have look of the.
What's unique in the core business for both of those expansions. Thanks.
Yes. This is John I mean.
We are the I think we publicly say 10% of all sought an animal buybuy apart so around the world go through a dialing facility. So we have a significant ability to source and supply.
Fast to Diamond Green diesel we will always continue to look at new opportunities to add additional capacity as Randy talked about but one of the things. We also do is we show I think great restraint on when we invest we've been buying companies, but when the multiples got too high to buy companies, we Didnt Chase.
We look to put new capacity on place and we look at what it will make on a 10 year average price.
Commodity price and if commodity prices are a little all we know we might not make quite as much in the short term, but we're building that supply base for Diamond Green diesel. So we're going to continue to be aggressive out there to build our vertically integrated platform, but we will shell financially straight and just not for all money to buy stuff at high multiples. So we don't think we can make a good return on.
Processing that material, but absolutely we'll take advantage of more growth opportunities if they become available in the market, but today, we have a tremendous supply base already for Diamond Green diesel.
Okay. Thanks, Joe with.
Your next question is from Ken Zaslow of Bank of Montreal. Please go ahead.
Hi, good morning, everyone.
Good morning.
So one quick one when you think about your leverage where do you want to get too and then once you get into a certain level. What do you plan to do with a capital and that more of a given strategy is it more of a share repurchase how do you think about starting to get to a point, where you generating significant cash and what do you.
End up dealing with that there any thoughts on that longer term.
Yes, Ken this is Randy and I'll, let Brad chime in if I don't say it right I mean towards investment grade is where we're headed.
We're we've had some challenges at the rating agencies recognizing.
DGD as part of of the whole system.
That we've had some challenges there have been big enough to be investment grade, but I think we're getting there with them clearly we set out all the conferences, we did over the last two years, we kept telling you and number two and a half Brad said 2.39 now is where we're at.
Clearly as DGD too or number three comes on or DGD to comes online we still have to fund a little bit of DGD three.
Whether that there were clearly still opening in discussions with our partner on outside finance, there and clearly the market is readily available to us to do that if we so choose and which time lenders theres significant amounts of cash that will start to pour into into Darling as you know than then theres three tranches of our.
Our of our debt structure that are out there the term b and then a couple bonds or eurobond in a us bond still are callable today, but eventually they will be but obviously the first use would be to pay off the term b and then after that I think youre going to see us look seriously and this is a board decision. So you know I asked of deferred.
To my boss is that then you would look at a dividend in a repurchase program I mean, obviously, we put the repurchase reauthorization out there.
From an opportunistic standpoint, as we go forward, but clearly we're in a different position here in about 16 months is as Jim Stark said in the script.
For it to be to be a net cash generator de lever and then to put a meaningful dividend under it and then hopefully with that comes a recognition of long term value in a shareholder that to the couldn't hold the day that can hold once there is a dividend.
Great greatly appreciate it thanks.
The next question is from Carla Casella JP Morgan. Please go ahead.
Hi, My question relates that colleagues in the other new businesses I'm just wondering what's the magnitude it does today and how big do you see those getting over the near term.
Sure.
Hey, Carla can you repeat the question you are really loud there so [laughter].
Sorry, I will stop yelling.
I'm just wondering how big does college in the other ancillary businesses are today and how big they could become.
[music].
Yeah. This is John I don't know that we really specific information about Patterson our car.
Or what are gelatin sales are.
What we see as we see the gelatin set up now showing some fairly good growth because quite frankly.
A lot of Nutraceuticals and a lot of medical pills are being taken by people as the called the crisis is upon us. So we've seen that segment show. Some so some real resilience here and then we think the hydrolyzed college and market. The aftermarket is a market that is really just beginning his process to growth as.
Is it main strains and to the large international marketing companies well see how far that goes and we'll see what type of growth that entails for us.
We believe that the in essence, what amounts to tailwinds as we get through the call the crisis and as Randy talked about there's no doubt about it peptides a little closer to the consumer and he got hit a little harder upfront with the goal the crisis, but as we work through the called the crisis and we will get out of this at some point in time.
Relatively soon when we do we think we're going to see really really good growth in that and that popped in college and business.
Okay, great. Thanks.
I know last question is from Bill Baldwin with Baldwin Anthony Securities. Please go ahead.
Thank you very much good morning folks.
On behind the.
I wanted to.
Just to get appeal.
On the used cooking oil collections.
Are there any regions of the country that are more important to you that others here at U.S. on that business.
Randy.
Yes.
Yes, Bill I mean that it's clearly the.
We have a strong presence in the northeast and a very high concentration of population in that New York Tristate area. That's that's the part that that's down.
25% right now just because dining is not open but clearly in the southeast the homa fried food is clearly an important part for us in it.
It has for the most part reopened and the high producers are your drive-thrus. Your fast your QSR is versus your sit down dining. So as we said we saw that business come back to I don't know 10, 11% off now versus last year and I suspect it will hold there as we go as we go for.
For the thing about it is we always talked about their Theres limited seasonality.
In there, but when the ballparks open you know it seem that you know the cooking oil demand pick up or used cooking oil supply picked up and clearly I those virtual fans out there aren't really in any French fries, or corn docs, now and and so but so I suspect that probably hold at the off 10% to 15%.
For the third before it reopens.
And I guess have been as it probably pretty heavily weighted towards the national chains that mcdonalds, the Burger King paper like that.
Clearly it's weighted towards the you know the heavy heavy deep priors, which are the Japan guys. If you will now right. Okay, and then Oh, the how the food ingredient segment.
Can you give a just a rough breakdown on revenue between the.
Hello brand your edible fats and.
Your sauces casing businesses.
Yes. This person we are not ever.
We've never really broken down below what we said is russolillo as a significant portion of that and we try to leave it there.
As John was answering the competitive market for for Carla you know the gelatin market is roughly 400 425000 tons globally. So it's a micro market and and we prefer to keep that pretty close to the best there Okay fair enough.
Thank you much and good job.
This concludes our question and answer your question I'd like to turn the conference back over to Randy is doing for closing remarks.
Thank you. We appreciate everyone's time today look forward to talking to you soon and if and if anything happens during the the update or the next quarter in November will will be the first to let everybody know thanks again.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.