Q3 2020 Darling Ingredients Inc Earnings Call
Good morning, and welcome to the Darling ingredients Inc. conference call to discuss the company's third quarter 2020 resolved.
After the speakers prepared remarks, there will be a question and answer period and instructions to ask questions will be given at that time.
Today's call is being recorded.
I'd like now to turn the call over to Mr., Jim Stark. Please go ahead.
Thanks, Matt.
Welcome to the Darling ingredients earnings call.
That's on the call. This morning are Randall C., Stewie, our chairman and Chief Executive Officer, Brad Phillips, Chief Financial Officer, and John Bullock, Our Chief strategy Officer, and a few other senior executives of Darling ingredients.
There is a slide presentation available and you can find a presentation on the investor page under the events and presentations link on our corporate website.
During this call we will be making forward looking statements, which are predictions projections or other statements about future events.
These statements are based on current expectations and assumptions that are subject to risks and uncertainties actual results could materially differ because of factors discussed in yesterday's press release and the comments made during this conference call and in the risk factor section of our form 10-K, 10-Q, and other reported filings with the secure.
Ladies and Exchange Commission.
We do not undertake any duty to update any forward looking statement.
Now I would like to turn the call over to Randy.
Thanks, Jim.
Good morning, everyone and thanks for joining us on the day after the election first off let me. Thank our 10000, plus darlene employees around the World COVID-19 remains a constant in our daily work at home lives. Our team has been able to rapidly adapt to a very dynamic situation and I sincerely appreciate their ongoing.
Efforts to deliver the products and services, we provide to our customers around the world.
For the third quarter of 2020, our combined adjusted EBITDA was 218.5 million as our global ingredients platform continues to be resilient or health nutrient and bio energy businesses continue to prosper and make the necessary adjustments to keep our momentum for a record 2020 and set the stage for.
Even a better 2021.
Our fuel segment and our food segment showed improvement year over year and grow sequentially to the second quarter of 2020 overall, we continued to see an improving and positive trend on our gross margin percentages across our business lines.
As I talked with you back in May we continue to work diligently on cost control measures and widening our gross margins. Thus improving our returns are U.S.A. team has done an exceptional job as expected our feed segment for the third quarter decline from the strong performance, we had in the second quarter as protein prices in the third quarter.
Her moved lower sequentially compared to Q2 and prices for Q3 2020 were also lower when you compare it to 2019.
With the positive upward movement in the grain and oilseed complex, we're experiencing a better pricing environment for a protein products and for our fats and oil products in the fourth quarter and this should provide a positive catalyst heading into 2021 in the food segment. There was a nice recovery of hydrolyze College in sales for the quarter.
We're in the process of commissioning, our third new college and peptide production facility in president They epitaxial, Brazil, as we speak which broadens our ability to supply this on trend food ingredient to our customers worldwide.
Food segment led by Russolillo, the number one college and provider in the World is poised to provide meaningful earnings growth in 2021.
The fuel segment performance was significantly better than a year ago, both in or international Green energy businesses and at Diamond Green diesel Diamond Green diesel achieved a 241 per gallon EBITDA margin on record sales of 80 million gallons for the quarter. We recorded 96.4 million of EBITDA, which is darling share.
More of the joint venture the.
The energy market did show some improvements from a demand standpoint during the quarter, although oil and diesel prices remain significantly lower than the same time a year ago diesel is currently trading 80 cents a gallon under Q4 of 2019 on the positive side, the green premium we're able to capture for the renewable diesel.
It's offset the majority of this downward price in the current environment.
We noted in our press release yesterday, the turnaround at Diamond Green diesel was completed on time and the plant is running at full capacity and we expect that Diamond Green will sell between 55, and 60 million gallons of renewable diesel in the fourth quarter and should average between 230 into 40, a gallon for those gallons sold on a.
Year to date basis Darling has generated 627 million of combined adjusted EBITDA for the company, putting us on pace to finish what most everyone considers to be a challenging year with record results. We currently believe that we can finish 2020 with combined adjusted EBITDA between 808 hundred $10 million we.
Certainly believe this gives us a solid platform as we move into 2021 for what we believe will be a transformative year as the 400 million gallon expansion or what's known as DGD. Two comes online in late 2021 if.
If you've not had a chance to look at our refreshed corporate website or read our 2020 years do you report I encourage you to do so our easiest GE team did an excellent job in publishing our 2020 fact sheet, which gives us an exciting story to build on as we move forward it outlines our goals and initiatives and how Darling will play.
Yes significant role in the de Carbonization of our planet for Darling, We take great Pride in our Green leadership position in the World and we plan to do our part and conserving water energy and reducing greenhouse gas emissions directly and indirectly fire DGD business, producing more low carbon renewable fuels for the world to consume.
So that completes my comments and I'd like to turn it over to Brad to give us a few financial highlights Brad Okay. Randy Thanks, Okay.
Okay, everyone I'll touch base on a few of the highlights.
So this quarter and year to date net income for the third quarter of 2020 totaled $101.1 million or 61 cents per diluted share compared to a net income of 25.7 million or 15 cents per diluted share for the 2019 third quarter.
For the first nine months of 2020, net income was 252.1 million or a $1.51 cents per diluted share compared to 70 million or 40 42 cents per diluted share for the same period of 2019.
As Randy mentioned earlier, our gross margin continues to show improvement as we reported 24.9% for the third quarter of 2020 compared to 22.5% for the same period in 2019 as net sales increased $8.5 million in cost of sales and operating expenses decreased 14.6 million operating income.
Improved $67.7 million in the third quarter 2020, as compared to the prior year, reaching $127.5 million for the third quarter and totaled $356.6 million year to date 2020 compared to $182.5 million for the 2019 period.
In addition to the improved gross margin improvement in operating income benefited from a 59.1 million increase in borrowings equity and net income from Diamond Green diesel.
Yes, DNA expense was higher by 6.4 million in the quarter, partially attributable to the higher cost related to covert night chain certain insurance increases as we recently renewed our coverages across the business and higher benefits more than offsetting lower travel costs interest expense was $18.8 million for the third quarter of 22.
Many compared to $19.4 million for the prior year period.
We currently project quarterly interest expense to be approximately 15 million per quarter over the next several quarters.
The company reported income tax expense of $4.8 million for the three months ended September 26, 2020 the effects.
Thank you attach rate is 4.5%, which differs from the federal statutory rate of 21% due primarily to the biofuel tax incentives the relative mix of earnings among jurisdictions with different tax rates and discrete items, including the recognition of previously unrecognized tax benefit and the favorable impact of certain us Treasury regulations.
Issued during the quarter.
For the nine months ended September 26, 2020, the company recorded income tax expense of 43.1 million with an effective tax rate of 14.5%.
Excluding discrete items the year to date effective tax rate is 18.2%. The company also pay $24.9 million of income taxes as of the end of the third quarter.
For the remainder of the year, we project the effective tax rate to be about 20% with cash taxes for the year totaling approximately $35 million.
For the three and nine months of 2020 Darling share of Diamond Green diesel is earnings was 91.1 million to 252.4 million as compared to 32 million and $94.4 million for the same period of 2019 reminded that there was no BTC and place a recognized during 2019 until the fourth quarter.
Capital expenditures of 184.9 million were made for the nine months of 2020 as we continue to take a disciplined approach during the pandemic prioritizing compliance and safety needs of the business and our and our reduced capex spend.
Now turning to the balance sheet in the third quarter, we were successful in amending and extending our $1 billion revolving credit facility with favorable terms. The amendment extends the maturity date of the revolving credit facility under the credit agreement from December 16th 2021 to September 18, 2025. In addition.
Pay down our term loan balance by $145 million to new balance of 350 million outstanding at the end of the quarter.
With our improved financial results and the Paydown of the term loan B, Our bank Covenant leverage ratio for Q3 was 1.93 to one we continue to make progress toward achieving investment grade rating.
Our liquidity remains very strong with approximately 934 million available under our revolving credit facility at the end of Q3, providing strategic flexibility while at the same time, maintaining a very solid capital structure turn it back to you Randy Hey, Thanks, Brad as I mentioned earlier, our share of the 2020 DGD earned.
Earnings should be approximately 330 million based on the range as I laid out for you with the strong performance of Q3 and prices for our products improving as we work through the fourth quarter. We believe we can produce EBITDA of approximately 470 to 480 in 2020 in our global ingredients business that is back in line with the guidance we were in.
Dissipating back in February of this year pre covance as.
As you saw in the press release, we issued last week the gated development process of DGD three to be located in Port Arthur Texas remains on track for both joint venture partners boards of directors to be in a position to approve moving forward with the project in early 2021, the permitting process for these types of facility.
He is no easy task and I once again, thank our teams, especially Valeros engineering and construction team for knocking this huge hurdle out of the way once approved construction should begin immediately putting DGD three in a position to be operational in early 2024.
We understand that there is theres concern with oversupply of renewable diesel and potentially a show a shortage of low carbon feedstocks in the future.
Our simple answer is we plan to take advantage of the first mover position, we have to be the largest low cost producer of renewable diesel in North America, while others are trying to figure out how to build or convert existing 80 year old refineries to renewable diesel we continue to focus on building new facilities with the lowest operating cost structure.
The latest technologies, incorporating the trade secrets, we've learned over the last seven years of operating our plants.
Darlings vertically integrated supply chain will continue to provide DGD with superior low cost feedstock, which enhances that first mover advantage for DGD and finally as you may have read in our earnings release yesterday, we were successful in acquiring a three plant, Belgium, poultry rendering profit process or in a food waste recycling business.
This was especially challenging for diligence given COVID-19 protocols, but our euro team did a nice job and we expect even while small this acquisition to strengthen our already successful Belgian system and immediately be accretive with that let's go ahead, Matt and open it up to Q and a.
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 are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question. That's been addressed and you would like to withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our Oscar.
Our first question comes from Adam Samuelson with Goldman Sachs. Please go ahead.
Yes. Thank you good morning, everyone.
Good morning, Adam.
All right. So I guess first question, maybe just thinking about diamond Green phase three a little bit.
As we get closer to final investment decision.
More color on potential financing and.
Likelihood or possibility of.
Structured finance.
But to get that done to.
Cash flow from the JV construct leading up to the parent.
Sooner than than 2024.
Yes, Adam this is Brad.
There is that possibility we are we're talking to the partner our partner regarding that so.
Yep, that's something that could become a possibility.
Okay, and then just more broadly on phase three any any more color you could have on the low carbon feedstock sourcing there just kind of how you think about the golf position.
So the base rent for imports and just where you think.
You can get the feedstock that others building in the market can't.
Yes, Adam this is John block I think the we have discussed this a lot with everybody out there. The feedstock supply is one of really two critical analysis, we run from a commercial standpoint, we always feel that we are in a unique and advantaged position because quite frankly, we have an enormous supply of low carbon feedstock.
So we control within our system and are able to branded Diamond Green diesel as Diamond Green diesel needs that feedstock overall, our assessment is while its something that everybody needs to watch that wants to get in the renewable diesel business, we feel comfortable that if we move forward with Diamond Green diesel Trey we are going to have the supply of low.
Carbon feedstocks, we need to supply that facility, but I must emphasize one of the reasons, we look at it probably differently than everybody else in the world. This.
We are the only company that has a large source of low carbon feedstocks in our control and we have a renewable diesel facility that were partnered with Valero on.
Okay, Great I appreciate the color I'll pass it on thank you.
Our next question comes from Donald Mclee with Baron Capital markets. Please go ahead.
Good morning, guys can you hear me.
Morning sure.
So just to touch on the acquisition of those rendering plants a bit can you talk about how that fits in your overall strategy and maybe what type of capabilities at a lots with the recently commissioned.
As in Pep in print production plants there.
Yeah. This is Randy it's a rather small by tonnage acquisition.
As we described over the years and and been around the business a long time still western Europe is still a little bit of the wild west with still a lot of small family Onesies Twosies rendering plants and this was just a series of brothers. It had three three small little rendering plants that will.
Be consolidated into our much larger Belgian system today, So it's a nice fit as these family succession businesses come we and they are priced right. Then we'll pull them in if it meets our strategy of both controlling fat and protein and to a degree rendering.
Production within different geographies around the world and so this was just a nice natural bolt on for US I would tell you I don't get that excited about moving the needle, but it was nice it is accretive and we'd like to have 10 more of these if we can find them. It gives us more fat more protein and once again gives us more control in the in the.
Belgian poultry rendering market and poultry rendering is puts out a series of products that are premium products to the high end pet food ingredient business. So not only do you get the fat that can go into different food applications and also into fuel applications you get the proteins.
Okay. That's helpful. And then just looking at the fuel segment. There was some pretty significant topline growth and margin expansion, there, which it sounds like from your comments with different driven by some of the performance of the international fuel segment, but I was wondering if you could maybe provide more color on what some of the specific underlying dynamics for that supported that strength.
Yeah. This is Randy again.
Within the fuel segment, obviously, we roll up Diamond group into the operating income side, there, but above that is really the predominantly our mortality processing business in Europe, and then our are digesting business, where we take food waste pigment newer and produce green energy.
And put it into the grid both of those businesses had very strong.
Earnings in the quarter, the what we call the Rendac business, which is our seven plant mortality disposal or destruction business. It was a very hot summer. If you remember in Europe. This summer and we just had a lot of extra tonnage in there that flowed through with good pricing and demand for.
They are considered to be cat, one fast to go back into bio fuels into renewable diesel in Europe. So we had that was the primary driver of those businesses along with the strong DGD performance.
Okay. Thanks, and then last one from me. So there is clearly a big push into renewable diesel with all the growth going on at the JV and I was just curious.
What do you think about the longer term fit of the biology biodiesel business just given the emphasis on renewable diesel.
Let me clarify the question, you're asking what's the long term fit a biodiesel in the industry versus renewable diesel.
Within the company.
Well within the company.
You know clearly we've been on a strategy to expand the renewable diesel business you know clearly from a logistics earnings.
Transport ability and product demand standpoint, it's a superior product.
We only operate the small facility up in Montreal today, and then I have a very very tiny facility in Butler, Kentucky today.
Clearly, though those businesses in the quarter were very very challenged again as as biodiesel margins were.
Sometimes below breakeven and very not even really contributing to fix so.
Ultimately, we're going to have to make a decision there on on Montreal and as John Bullock said, given the location of Diamond Green diesel to Diamond Green diesel three we now have a home for the fat out of Montreal out of Ontario to move South and we're looking at those economics, all the time, whether it makes more so.
Hence the arbitrage the fat into the USA versus leaving it up north so good question Donald clear.
Clearly renewable diesel is a more fungible superior, earning investment than a biodiesel plant in Montreal today.
All right. Thanks, guys Thats all my questions I appreciate it.
Our next question comes from men have Gupta with credit Suisse. Please go ahead.
Thanks for taking my question in your opening remarks, you had mentioned that did on a number of fine I'm, just trying to figure that out how to retrofit and fix that you'd be in order to sign of these goods producing new leases can you elaborate on it and it doesn't EBITDA skepticism. There. That's just it's too so all of these projects.
Really do come on line. So can you help us understand what some of the volumes these refineries might run into as they try and entered into the wood leases, which they have never done before.
Yeah, I'll take a little stab here and then I'll, let John Bullock kind of clean up the mess that I start.
Number one we spend no time worrying about other people entering the business because of our vertically integrated supply chain and the location economics of DGD, one two and soon to be number three and that's both outbound and inbound keep in mind the low carbon fuel.
We'll standard is simply not a California program every one of those retrofitted or to be retrofitted or to be engineered or to be studied or to be permitted facilities that they are talking about our old out of place locations with high cost that they are trying to.
Robert over it has nothing to do in my opinion with the longevity of putting an asset in the right place with the right economics. That's number one number two when you look at what it takes to be effective in this business look at the the carbon intensity scores of the feedstocks that each one of these places.
Quote says they're going to run we've not seen anybody put in pretreatment necessary as we call. It the secret sauce to make this business work. So when you start to look at businesses and you say well, they're going to run soybean oil. That's great. However, you got to look at the price differential of refined bleach soy today.
It's probably anywhere from eight.
Eight to 10 cents, a pound premium to waste fats and greases today that doesn't mean that waste fats and greases won't come up in the future our core business will benefit and and ultimately we will have some some gain there too but the other side is then when you look at the net effect of the carbon intensity score EPS.
Using a soybean oil between the cost of the raw material and the C.I. differential you're.
We're talking anywhere from a buck to a buck and a half a gallon difference to diamond Green diesel running today and so you look at that and you say well how does this work as the business goes forward number one.
Today, the economics look good because the blenders tax credits there it may be there in the future. It's been there for a lot of years since 2007, so it's hard to handicap, but if it's not there a soybean oil based out of position retrofit. It Doesnt look also good on paper as as you go forward and so that's how we.
We're kind of looking at we spend no time worrying about who's doing what all we know is we're under construction will be up before the end of 2021 here on number two number three is progressing nicely with the permit which was a big hurdle and hopefully will come online within a couple of years of pushing dirt here, John you want to add yes.
It's important to realize we evaluated California's location for renewable diesel facility and chose Port Arthur Although we're trying to do anything in California, We did that for a number of reasons one the cost of doing anything in California is a 1.5 to two times, what you're doing and in Texas and quite frankly.
Good morning, as a lockout sequel, which is the process you have to go through to permit a facility or revised facility in California.
Difficult process with a lot of public comment.
Add and evidently the cequent process in California takes folks longer than you think it's going to take to be able to get it done.
We felt speed to market was important and the reason we felt speed to market was important was not only because of the increasing CDAI or carbon requirements in California, but.
What we see rapidly developing markets in New York, Canada, potentially Washington State potentially Oregon are under under Red two in Europe, we see rapidly developing markets. There. So we know that there are folks out there that are either thinking about.
Trying to or might put additional renewable capacity and we like where we are located we liked the technology that we're using and it is really important for everybody to understand that while a part of a renewable diesel facility looks like a traditional petroleum facility that is a bit of a mirage.
It only looks like a really a diesel facility, it's a quite different technology and from our perspective anybody the bills. One of these things that Doesnt hook, a pretreatment system up and all the supply logistics around that requires is not developing a competitive facility going forward. So we know there's going to be competition out there quite frankly, there needs to be additional color.
Passenger with the demand for credits that's going to be coming on from these new markets that are developing we're really comfortable with one of our position our partner our technology, our vertically integrated feed supply work.
We're building Diamond Green diesel to compete not only now but for 510 15 years into the future.
Thank you so much that was of a comprehensive moneta.
Follow up can you give us some idea collected to date lucky as seen with protein prices fat prices in other income.
Ingredients. So you kind of make up this segment income so like any update on Cuattro DP pricing fats and proteins.
Yes.
I think what we this is Randy again on fats and proteins around the world. If you think back we came into two though in January February and Cove. It hit you saw a lot of shuttering of slaughterhouse capacity in both North America, and Europe as it reacted to covert protocols.
That's a different way of saying that the some of these large slaughterhouses were curtailed in their production and thus we saw protein and fat prices because of the reduction in supply run up very rapidly towards the end of Q2 or mid Q2, and then fall off as.
We saw the slaughterhouses restart in Q3, we kind of hit the bottom we've now seen the grain and oilseed complex, meaning the price of corn soybean palm oil all start to feel like they have hit a bottom here and are starting to move back up to where we thought they would be.
And so were carrying pretty good momentum, we're carrying really good momentum into Q4, both here, Canada, nor and in Europe today as we go forward I mean, ultimately I think at the Chinese demand out there for grains and oilseeds continues to be.
Unbelievably large I don't see that to tailing off anytime soon and that goes to the the hog herd replenishment I mean, our trance.
Our ability our transparency to animal production in China is pretty pretty.
Pretty optic and what I mean by that is we're a big buyer of pig skin animal bones hi.
Also blood in China, and we have just not seen animal numbers come back yet in China. However, we know that they are now the animals are under production and being grown. So we're probably a year to 18 months out that bodes well for continued demand of soybeans and corn into China as we go forward here.
John you want to add anything to that I think nobody should underestimate that tremendous power of that.
In the US economy, one turning around and looking like it's performing very strong and to the fact that they are reconstituting their peak are but not only are they reconstituting their bigger but they are also doing more of it in concentrated large growing that will use more of the meals and the corns as opposed to the garbage and waste that was.
Being fed by the small private family farm. This is a fundamental shift and that dynamic has a tremendous impact on the world and clearly China needs to come to the United States to buy those products and they are and massive quantities its going to take a year or two to reconstitute that pig hard in China. So we would anticipate the demand is going to remain extremely good.
For all of those products as well as meat out of the United States and the term of pork and poultry, which is very good for the volumes we handle in the us.
Thank you for taking my questions.
Our next question comes from Ben the NVO with Stephens. Please go ahead.
Hey, Thanks, good morning, everybody.
Good morning, Ben.
I want to ask a follow up to that to Adam's question about DGD three.
You announced the the air permit for Port Arthur You said that was a big milestone can you help us think about what other critical milestones are in front of us on the critical path to two.
I think thats facility approved.
I'm more focused on the external.
Critical path and the internal deliberations that you might have once it would be monitoring going forward. Thanks.
Yes. This is John Bullock I'm not sure you can distinguish between the two we are on track with our cost estimate the detailed phase three engineering.
We are on track with the analysis, we always update or analysis from a commercial perspective, both companies do we will be in a position to make a final decision on Diamond Green diesel three and January February of 2021, just as we said.
I will tell you everything is going on track just exactly as we had hoped it would the analysis continues to show that we should be moving in a positive direction at that facility.
And we see the marketplace is being very good and where we're going to be very well positioned at port Arthur We love the location, we love the logistics flexibility, we're going to have down there. It is just a fabulous location as a second overall logistics site for our Diamond Green diesel system.
Okay, Great and second question is as it relates to the debt Paydown on term loan b the refinancing of the.
The revolver.
You guys already are at a pretty low.
Modest leverage level.
You've got more cash coming given the the increase in production and presumably the.
On the inflow of cash from the JV, we're coming down the road what are your priorities on cash deployment.
And given that it's going to ramp pretty meaningfully or here over the next few years.
Yeah, and this is Randy and and Brad will help me out here I mean, our our priorities Havent changed I mean, we're we're on and ingress investment grade glide slope here clearly the timing whether outflows as it as relative to DGD.
To hear as we approach.
Approach 2021.
And then the margin structure as we come into next year I mean, we're thinking we're going to get a fourth quarter startup God.
God willing and then whether willing into into next year could put up some extra gallons next year higher than the 285 this year and we see the margin structure again somewhere between two and a quarter into 50, we don't see much changing they're coming into next year, so relative to cash out of DGD next year.
It will depend on the timing of the construction in the aggressiveness that goes there along with as Brad kind of telegraphed clearly the momentum for outside finance on DGD, two and three has more momentum than it's had in the past and we remain very optimistic that the leadership.
The team at Valero understands the importance of that cash availability to Darling interesting as the oil.
Crack spread cycle cash becomes important to them too so for for the first time in seven years I think were absolutely aligned that cash is king so hopefully that will lend itself to a positive outcome. So with that comes Brad Brad paid down 140 on the on the term loan B, We've got 350 of pre payable.
Debt left out there today 960 or something left on a revolver. If we ever found something that was wonderful.
And then at the end of the day.
Kind of.
Tighten or purse strings, I mean, we listen to our shareholders or investors on deploying cash the last several years, we were building out our supply chain and expanding with our customers on on rendering we're getting the margins back in that business now where we thought we would they dipped down people always have to remember this business is still from a from the commodity.
Closure side, we're still way below the 10 year averages on fats and proteins in this business and obviously, if you came back in and modeled it at those levels you would see some pretty tremendous.
Growth in the the base ingredient business. So with that comes due I think we'll continue with the 350 I think next spring or summer.
The Euro bond comes callable at one in seven eight.
If we can get to get the rating agencies to give us the respect that Brad and I believe we deserve.
Then we might go back out and put some longer term capital underneath this in a very attractive interest rate as we go forward, but we've got a lot a lot of things that have to happen here in the next six months for for that to become a reality otherwise, it's just keep paying down the term b and manage it from there Brad anything you want to handle that.
Good Randy Okay.
That's great color, Thanks, and best of luck guys.
Our next question comes from Craig Irwin with Roth Capital Partners. Please go ahead.
Good morning, and thanks for taking my questions.
Randy you had $30 million in EBITDA upside in the second quarter and it sounds like you're pretty much keep in the guide.
You've been talking about for a while eight to 810 for the full year.
Is there anything in the fourth quarter and maybe.
Extended turnaround for diamond green longer than than you know that the couple of weeks Weve seen previously or on the margin side or often on the operational side that maybe.
As you a little bit more conservative about the fourth quarter or should we interpret this as maybe you could be a little bit conservative as you as you guide to that eight to 10.
Yes.
First off Craig I think number one we try to be conservative in the view here fourth quarter had has three major things in there. It has two holidays between Thanksgiving and Christmas not sure how the slaughterhouses in here in Europe will run during what's been a very challenging year for their employees. So we're going to have to.
See how tonnage really holds in there were.
We're optimistic about the feed segment improving in Q4 versus Q3 Q3 was it came off of the utilization of the 40 loads of hogs a day in Q2, and a nice price run up.
We got on the backside of if you will in Q3, that's come back prices have improved and career, Canada and Europe. So the feed segment feels more positive for Q4, the food segment, absolutely fills the orders I feel very good in that business now.
It's still challenging around the world I mean, our China operations are doing quite well, but finding raw material in China continues to be challenging in South America were were still dealing with lots of Cove and related absences, but we are we're doing quite well and in Europe now, we're getting the benefit with with Germany being shut.
From shipping.
Pork material into China, It's that's allowed pig skin to get cheaper in Europe. So now we're going to have some improved margins. There. So the feeds the food segment feels very good and then the fuel segment, we did take down 18% to 20 days here came up nice and strong I think we'll be around that 60 million gallon level, maybe a little more.
For for for Q4, we'll just see how we run through it John anything you want to add on the fuel segment here know Diamond Green diesel is turnaround was excellent. The guys did a great job you know we had a hurricane come close to us during the middle of our turnaround and yet they still managed to bring that turn it around a day or two in earlier than we thought it was going to be and the facility is operating.
Please post club post turnaround.
Great great.
So feed feed had margins up 150 basis points year over year, we all understand the gyrations from coated.
In the second and third quarters this year, but it seems like your initiatives in their things like you know.
Yes.
Making.
And.
Converting to college in versus gelatin.
Having a little little bit of a nice margin bump in that segment can you maybe describe how this is likely to fall through do we have the potential for 950 basis points over the next year.
[music].
Any any other color on the on the margin growth in the segment would be helpful.
Yes, and Craig I think we'll talk the feed segment we.
We came into the year and challenged our global operating team.
We said look we have deployed a $1 billion of capital into these plants over the last five years, we've got it.
We need to be paid for it it's becoming increasingly expensive to run these businesses because of environmental waste water steel costs et cetera, and so what used to be in a historically all business. If you will a fair margin doesn't work anymore and so as we started.
To look at our North American and our in our European business, we looked at where we could if you will push the envelope from a standpoint of processing margins, where do we where do we have a key leverageable location. We challenged each of the teams to figure out how to take out you know 235% of their operating costs out.
Out of this.
And so you know at the end of the day you either figure out how to get a better return or you're not getting capital. It was a little bit of a chicken and egg here and then then ultimately we started charging in different businesses more for our services and some of it was cove and related it really when Cove. It hit any became an essential service and you had to.
Pay a little more per hour or you had that you had 25% absenteeism is in some locations around North America, you really got to see your cost structure and action very rapidly and transparently and so we were able to react to that and so yes, I think I think where we're at in the feed segment as we look forward.
And the margin structure, clearly, there's commodity risk there that goes up and down a 100 points or so but at the end of the day I think we still got more room and more work to do in there as we come into 2021 and the teams will be challenged in the food segment clearly the demand destruction, we saw of our near consumer.
Product in our Pep in line was very obvious to US. We went in the April may part of June period, basically without any orders with new plants coming online. Those are now commissioned online approvals and we're going to carry some pretty nice momentum into into next year and.
So you can start to look back on the food segment and you look at the EBITDA.
Basically now around 39 to 40 million per quarter.
As Weve telegraphed in the past as those peptide investments come online we think the food segment over the next year and a half will trend on up towards the 200, maybe north of 200 level, so you'd be 50 million a quarter there as as we look forward and then the full fuel segment is really just as it is it's probably it's a tariff.
Related business and very very transparent other than diamond Green and as we said for 2021, if we can get number two online here with good weather.
Instead of 285, maybe we make 300 million gallons next year, maybe make a little more we see the margin structure similar between two and a quarter into 50 for the year. So.
As you start to put this together you can you can start to see why we're talking and an 808 10 total here maybe it maybe it ends up being a little higher than that in with the strong Q4, but we got that same momentum into next year.
It will even should show us even better earnings next year provided the we've got the market's forecasted right here.
Great well congrats on the impressive results.
Thanks.
Our next question comes from Ken Zaslow with Bank of Montreal. Please go ahead.
Morning, guys.
Good morning.
My first question is.
How much demand the Lcs EPS.
Is available soak up any new supply that comes on how do we frame that.
Yes, Ken this is John block I think.
Obviously, California is extremely important and I have to remind everybody, California is heading to a 20% carbon reduction by 2030 on a steady path all the way up I think today were at less than 8% in that total so we got long ways to go in California. That's a huge market. In addition to that though Washington State has been very close to.
Putting in an L. CFS Thats again possible. This year, New York is going to put in an L. CFS. We believe that's an enormous market up there and could lead to an even bigger market at the entire northeast decides to put our CFS program.
The clean fuel standard in Canada is in place and is in process of the rules being promulgated and we believe that's going to be online in 2022 2023, that's again, an enormous market that it goes for an under Red two we see strong increases in renewable diesel demand and all of the Nordic countries and potentially as well in.
Germany, potentially France, potentially Spain, potentially Italy, so I think it's a mistake for everybody to just look at all the production capacity coming online and look at that versus today's demand what makes us. Most excited about this business is the fact that carbon reduction is a thing and it's a thing going forward.
Card and quite frankly that means there's going to be a lot more demand.
A person that can supply renewable credits to that marketplace and so we look at that supply and demand balance all the time. It's the other critical thing we look at before we make a final investment decision, we're very comfortable with the way that this market is developing.
So so how much would you frame that would you say you could absorb it.
2 billion 1 billion, how much renewable diesel can be absorbed the next couple of years.
How do I think about it how do we all think about it I agree with you I just kind of thing.
Mathematically what youre thinking of the demand.
The LCFS market is different than a traditional bio diesel our biofuel mandate market like RFS II.
You are looking to reduce carbon emissions in these various marketplaces and they allow the various products to compete tool to reduce those emissions. So the analysis on how you determine what the LCFS demand is complicated you have to go and dig into the weeds and look at how the LCFS credits are generated under each.
The programs and how many deficits are going to be generated underneath the programs quite frankly, it's something that we've looked at for a long period of time, but it's not something that I necessarily want to start to throw gallon estimates out there on.
We believe that there is plenty of demand for everything were building plus a lot of the stuff that other people might building out there too and I think we've said that consistently Ken for a long period of time.
And as.
Short a period of time as two or three years ago. We had tons of people that said all there is just not going to be enough demand for this product there's plenty of demand for this product today, we've got great demand into 2021 2022 and forward.
We see the market, we're selling obligation is what we're doing and compliance we see the market as being very very good for our product as we look forward.
And my second question I have is.
When you think about the.
Base of your business rendering business then you have obviously, the 50% of the timing.
In diesel at this point higher input prices are good for you.
You want higher fat prices higher.
All the rendering products.
Your point in time, where that doesn't move that way that you'd prefer to have lower input prices and that what capacity levels does that work out to be and then I'll leave it there.
I appreciate it.
It's a fascinating.
Academic question I mean, clearly the downturn in fat prices in Q2 translated to better earnings and Diamond Green diesel. So that's the model we've been trying to talk to people about as competition picks up for.
Waste fats and greases or low CDAI inputs, yes.
Yes, you are going to have to two markets ultimately that happened one you're going to have the people that can run it they have pretreatment and the people that can't run it and as Diamond Green diesel two comes online and Diamond Green diesel three we will use up to 65% of the North American supply waste.
Fats and greases. So ultimately we will be the biggest and best home between Port Arthur and Norco, Louisiana for those products as we go forward.
Who then becomes challenged in that operating environment ultimately it would be the biodiesel industry that that feedstock would initially then be diverted from because they can't compete with the margin structure. The same thing goes can and you wrote a very nice summary, as you were.
Looking at that the crushing industry make no mistake, a renewable diesel plant cannot compete with Kraft salad dressings for vegetable oil and the world's going to find out that that argument again in a very hard fashion. So ultimately the pretreatment side the.
First mover the advantage that we have I think is pretty special it'll translate into better margins in our non formulaic business in our core business. It also helps US then provides superior values to our slaughterhouses and make meet more competitive to feed the world. So there.
As a little bit of an esoteric side to it you know as we often tell people our job is to make our raw material suppliers more and more competitive so they can sell more product than we can pick up whatever is left over John anything you want to add I think it is always interesting because how that margin and diamond works over a period of time is fairly calm.
Allocated there is the price of diesel field, there's the price of fat there is what's happening with the green premiums, but all I would point out Ken is that since the LCFS markets are really developed about three or three and a half years ago. We've seen the diesel fuel market anywhere from $2.20 a gallon to 86 cents a gallon we.
You've seen the Jacobs anywhere from 18 cents, a gallon to 29 or 18 cents, a pound or 29 cents, a pound and guess what diamond Green diesel has made $2.25. When you allocate that tax credit to the appropriate here to dollars and 25 cents to $2.50 every single year. So the market adjust this is a.
Competitively advantaged product if you have the right facility with the right capability and you can get to the various LCFS markets and we have adjusted over time, we anticipate thats going to continue going forward.
Great. Thank you very much.
Our next question comes from Matthew Blair with Tudor Pickering Holt. Please go ahead.
Hey, good morning, Randy Brad and John.
Good morning, everyone.
I'd like to circle back to the pricing front earlier, there is talk that.
The fats and protein prices were up a little bit in October we know soybean prices have also moved up about 6% so far this quarter.
How does that compare to any trends you're seeing on the UCO pricing front.
UCO has is remains very strong the whole time.
Clearly, it's the preferred feedstock and they're just really isn't.
On a macro basis, all that much UCO that's out there I mean, you started to see fats and proteins move back up here as we started to rationalize what the size of the us corn crop was after the.
Straight line winds Derek show or whatever you call that thing in Iowa, and then ultimately as we started to see the global demand for being oil move back up so.
Ultimately as we look around the world it looks it looks pretty solid going into next year I mean, it looks it looks even better than where we're at today I mean, when we look at it we stop the macro world.
We look at where we see animal fat prices.
Soybean meal prices, and then where we see pet food demand for our specialty ingredients in all three of them look really really positive going into 21, John anything you want to and actually the demand the demand picture for all of the products that drilling is producing is quite frankly, the best I can remember and maybe three.
Five years.
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Sounds good and then I.
I guess on the fee side, you've highlighted previously that you talked about 40% of North America used cooking oil can you talk about efforts to protect him and potentially even grow that collection business. If you start to face more competition from.
I guess, new renewable diesel plants looking for both CIO feedstocks.
Well.
Number one the market share that you representatives is pretty close what we would say that we we collect in the us with a specialty truck fleet and 130000 customers.
I don't think Mr. New renewable diesel plant is going to go buy trucks and collect used cooking oil that's number one.
We have a value proposition that is very very.
Difficult for anybody to overcome.
If you look at the USIO market and I think this is a relatively important uptick we've seen it come back from the April Cove at Lowe's.
To about 85% to 90% of normal.
I would still tell you were off 25, 30% in the northeast as New York, New Jersey refused to open but overall the rest of the country, especially the southeast which is kind of the the king of fried foods is is really come back strong so that looks good. The second thing is is hidden within Darling.
Is a.
Changed approach to how we do business with customers and we have a have built a customer engagement.
Platform now that really takes us to a new level no longer we knocking on the door of a restaurant. So you can we buy or remove your your waist cooking oil John you want to comment a little on before together. Yes. This is something we've been working on for about four years now we've totally revised our marketing and our go to market strategy.
Associated with used cooking oil and right now quite frankly were in an operation that looks like something that Microsoft or one of the tech companies would be running as we change as we know the restaurants here is that we go out and talk to quite frankly are millennials and generation Z and they wanted to be communicated in a different way, we are doing that and act.
Actually that platform has been built has been in place now for a couple of years, we're really proud of it because it's a total review of how we are approaching our customers out there. It has strengthened our market position and quite frankly in a sustainable world than an SG world. We have the number one message to anybody that has.
As used cooking oil your product is going to be made turned into what amounts to a highly sustainable carbon reducing vertically integrated chain that darling controls that as a statement that quite frankly, most of the other people out there picking up used cooking oil cannot play.
Yes.
Sounds good thanks.
Our next question comes from Ben Kallo with Baird. Please go ahead.
Hey, thanks.
Thanks, guys.
Yes.
Could you remind us about just.
Well.
Hi, guys what factors would go into.
The Port Arthur facility at school for with that in the U.S.
Yes, do you plan on on importing them.
So thats what first question my second is.
His palm oil and using that as a feedstock.
Yes, I think thats the does that how do you think of that.
Third question is.
It does it does it make sense.
For the JV to be.
Youre for or how how for government.
Oh look yet.
Strategies for being a standalone their personal goals.
Yes, I'll answer the first two and then I think I might be able to sort of start the third answer I'll, let Randy finish up yes, we anticipate that as the world gets more renewable diesel capacity, you're going to start to see some fat move around the world a little bit more at whereas today, it's mostly we just venue.
The North American based feedstocks.
We announced about Oh, I don't know seven or eight months ago that we had entered into a throughput arrangement with I. MTT and New Orleans, one of the really critical aspects of that is that gives us an excellent facility not only receive fat off of the river barge off of barges, but also to receive fat as it becomes available in the.
World to bring into and and we can directly pipe it over to Diamond Green diesel, which is absolutely wonderful. So we've got full scale capability, obviously as folks get bigger and renewable diesel capacity, a larger and larger portion of the waste fats and North America are going to go to the renewal of addition capacity, but they're all they got to go to those folks at AAP recruitment capacity.
Because if you try to run waste fats on one of these facilities why these renewable diesel plants without pretreatment facility you are not going to like the result that youre going to get in a very short period of time and we've got the fall pre treatment capability both.
Both at Diamond Green diesel, one and two and Norco and Louisiana, but also at Port Arthur we're going to have the full three treatment capability. So we're going to be buying a larger and larger percentage of waste fat I MTT gives us full flexibility to bring fat in from anywhere in the world, which we love that logistics flexibility, we think its critical moving forward to compete in this business.
You had asked Tom to your second question was.
Ben.
Paul Hello, Paul, Yes, we're not going to as possible.
Okay third question.
Why didnt band.
I am sorry, why not why not far more I guess, one other than there is on.
Our primary market as North America, and Palm oil doesn't qualify in the North American markets.
Got it.
It doesn't have a pathway ma'am.
So and your third question is.
I'm going to speak for my partner, Joe Gorder at Valero were very happy with our relationship today and how it's structured and have no intent never say never but at this time, we are going to get number three built out and then we'll see where we're at from there.
Sounds good thanks, guys.
Hi last question will come from Tom Palmer with JP Morgan. Please go ahead.
Morning. Thanks.
And then on the half a day, but since your press release said that feels much longer.
I just wanted to ask on the feedstock side.
And I know you've gotten a lot of questions about this but I just wanted to maybe revisit the mix a couple of years ago at the Investor Day, you estimated that Super diving would run I think it was 15% to 20% used cooking oil, 50% animal fats and then the remainder mostly comprising corn oil could you give.
Just an idea of what the feedstock mix would be today.
That proposed mix is kind of still how you're thinking about super Diamond and then how we might think about that mix evolving. If you do go ahead with port Arthur Thanks.
Yes. This is John as we move forward with larger sized diamonds.
What you will see is there is only so much used cooking oil out there, although it's expanding not only in the United States, but around the world you will see a greater mix of animal fat as oppose to use trucking all although we see a lot more corn oil too, but generally you'll see our usage of animal fat as a percentage increase a little bit we are fully capable of handling all those mixes.
At our pre treatment systems and both Darko on what we are building in.
And port Arthur taxes sell whatever that mix is that's one of the bureaus beauties of the system that we built and are in the process of building in port Arthur as however that mix of product works out out there. We're okay, because we're going to adjust and be able to buy what the cheapest price feedstock is.
Okay, and just to clarify does soybean oil become a factor as you think about port Arthur or you think that kind of those other three are going to continue to be the driver.
This is John again, we would think the waste fats would continue to be the driver its.
It's a possible and from time to time, indeed at Diamond Green diesel we have processed soybean oil I'm not going to say that's out of the question going forward, but our primary focus is still on the waste fats at this time Tom. It's this is Randy it's on the waste fats and really that's the reason is John continues to stress to people its logistics its not.
We're not at the end of rail line and in Cheyenne or Dickinson or or artesian, New Mexico. We're we're we're sitting on the Gulf of Mexico, where we can bring in animal fat out of Brazil, Argentina, Australia, we have a half million tons of fat in Europe today, if it works can arbitrage.
June here, depending on FX spreads so that that's what's driving the location is darlings access it's just not in North America. It's Europe, it's our presence in Australia, it's our presence in China. So our presence in South America, we have visibility to origination that is second to none here and once were.
As John said with the terminals that are going in you know, it's going to put we're putting in a little more storage because the longer lead time and boatload quantities you know lots.
Lots of flexibility here will allow us to be the best Guy on the block.
Okay. Thanks for the detail guys.
This concludes our question and answer session I would like to turn the conference back over to Randall Stuewe for any closing remarks.
Thanks, Matt appreciate it appreciate everybody's time today hope you stay safe have a wonderful holiday season, and the upcoming time with your families and hopefully as Jim gets forward here, we will have some upcoming events in our IR area. We'll keep you posted and look forward to talking to you soon again stay safe.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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