Q4 2020 Darling Ingredients Inc Earnings Call
Okay.
Good morning, and welcome to the Darling Ingredients, Inc conference call to discuss the company's fourth quarter and fiscal year 2020 results.
After the Speakers' prepared remarks, there will be a question and answer period and instructions to ask a question will be given at that time.
Today's call is being recorded I would now like to turn the call over to Mr. Jim Stark. Please go ahead.
Thanks Alicia.
Welcome to the Darling ingredients Q4, and fiscal year end earnings call.
<unk> on the call. This morning are Mr. Randall C Stuewe, Li our chairman and Chief Executive Officer.
Mr. Brad Phillips, our Chief Financial Officer, and Mr. John Bullock, our Chief strategy Officer.
There is a slide presentation available and you can find that 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.
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 factors section of our form 10-K, 10-Q, and other reported filings with the Securities 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, everybody and thanks for joining US 2020 was a year with many facets. We started the year confident that the commodity price headwinds faced over the past several years would ultimately transform into tailwind than.
And then a pandemic hit and basically turned all of our world's upside down like most other public companies have started in the earnings cycle navigating the choppy waters of 2020 was truly a challenge.
Our priorities during the COVID-19 pandemic continue to be protecting the health and safety of our employees, while continuing to provide our essential services to the industries and communities. We serve we implemented significant changes in safety protocols across our global operations to protect our employees serve our customers and.
Ensure business continuity, we did incur direct costs of about seven and a half million related to these actions to protect our employees from Covid. This doesn't include the plant disruptions production slow downs or customer order delays.
As a result of our efforts allowed us to continue our operations through our own physical 2020 with minimal disruption. So a big thank you to all our employees for going above and beyond last year.
Your hard work made 'twenty 'twenty, one of our best years in Darlings long history.
Okay. We finished the year strong with a combined EBITDA adjusted EBITDA of $214 5 million in fourth quarter all of our segments in our global ingredients platform put up solid results as the $146 3 million of EBITDA in the base business was the best quarterly performance of 2020.
And reflected the growing momentum of an improved pricing cycle.
The feed segment ended the year with a solid performance of $90 2 million of EBITDA, driven by the higher raw material volumes and better prices in both proteins and fats for the quarter. The commodity price momentum has certainly carried into 2021 as prices are close to their tenure mean reversion average we believe that 2021 results for the feedstock.
<unk> should increase significantly over the previous year I'll dive into that a little later in the call. Our food segment continued to show strength, finishing 2020 with its best quarterly performance in our history, our collagen peptide sales drove better results posting approximately $50 million of EBITDA for fourth quarter with our three new pet.
And facilities online last year, we anticipate solid growth in this segment for 2021.
Now as we had indicated on our third quarter call Diamond Green diesel had its turnaround in early fourth quarter, which led to D. G. D selling approximately 57 million gallons of renewable diesel at $2 40 per gallon or contributing $68 2 million of EBITDA at a darling during fourth quarter for the year.
D. G D certainly met our expectations selling 288 million gallons of renewable diesel at an average of $2 34 per gallon Darling share of EBITDA from D. G. D. For 2020 was $337 3 million or European Bioenergy business reported another solid quarter, which we believe.
He will be steady through 2021.
As we stated in our earnings release yesterday Darling has shut down its two biodiesel facilities located in Montreal, Quebec and Butler, Kentucky. This decision was based on the go forward unfavorable industry economics for biodiesel are action does free up valuable low carbon feedstocks that can be sold to D. G D and <unk>.
Also it helps us focus our energy on making D. G D. The best low cost renewable diesel producer in the world.
Brad will cover the particulars of the asset impairment charge related to the shutdowns a little later in the call.
Our current take on the economic recovery is bullish AG commodity markets are experiencing very favorable pricing environment. The energy market also was stronger than a year ago with U S. D trading above where it was at the end of February 2020. These two together make for a strong operating environment for Darling N D. G D. We believe.
As the U S and world economies reopen later this summer demand for eating out taking road trips will help us to maintain a good percentage of the improved commodity price environment. We have experienced a day so with that now I'd like to turn call over to Brad to take us through some financial highlights and then I'll come back to you and talk about the outlook and guidance were willing to give for $2000.
Only one brand okay. Thanks, Randy at the top we'd like to point out that our fiscal 2020 was a 53 week year with the extra week in our fourth quarter.
Also I will speak to several adjusted amounts, which reflect the shutdown of our two biodiesel plants with the restructuring and asset impairment charge recorded in the fourth quarter of 2020 and also adjusting the Q4 19 in fiscal year 2019 results for the retroactive blenders tax credits related to two.
And in 18 and 2019, all being recorded in our fourth quarter 2019 results rethink this will give a better comparison of our results period to period.
The previously mentioned pre tax restructuring and asset impairment charge of $38 2 million related to the shutdown of the two biodiesel facilities.
Included a goodwill impairment charge of $31 6 million other long lived asset charges of $6 2 million and <unk> 4 million of restructuring charges now for a few of the highlights net income for the fourth quarter of 2020 totaled $44 7 million or 27 cents per diluted.
Share compared to a net income of $242 6 million or $1 44 per diluted share for the 2019 fourth quarter.
Net income for fiscal 2020 was $296 8 million or $1 78 per diluted share compared to $312 6 million or $1 86 per diluted share for fiscal 2019 in the fourth quarter of 2020, we recorded a $36 million after tax.
Net restructuring and asset impairment charge related to the shutdown of our Canada and U S. Biodiesel facilities. Excluding this charge adjusted net income was 73 point.
$75 3 million or <unk> 45 per diluted share. Additionally, the fourth quarter of fiscal 2019 included retroactive blenders tax credits related to 2018 as well as for all of 2019, excluding these credits for periods prior to the fourth quarter of 2019 results.
And an adjusted net income for the fourth quarter of 2019 of $50 1 million or <unk> 30 per diluted share.
Excluding the restructuring and asset impairment charge related to the shutdown of the two biodiesel facilities. Adjusted net income for fiscal 2020 was $327 4 million or $1 96 per diluted share excluding the retroactive blenders tax credits related to 2018 adjusted net income for fiscal 2019.
Was $226 million or $1 34 per diluted share.
Now turning to our operating income we recorded $74 4 million of operating income for the fourth quarter of 2020 compared to $293 3 million for the fourth quarter of 2019 exclude.
Excluding the pre tax $38 2 million restructuring and asset impairment charge adjusted operating income for the fourth quarter of 2020 was $112 5 million.
Excluding the retroactively reinstated blenders tax credits recorded in the fourth quarter of 2019 for prior periods. The adjusted operating income for the fourth quarter of 2019.
$100 million, therefore on a comparative basis, the fourth quarter of 2020, adjusted operating income improved $12 5 million over the fourth quarter of 2019.
The fourth quarter 2020, gross margin increased $29 8 million over the prior year amount, which partially offset the $38 2 million impairment charge and a $10 million increase in depreciation depreciation and amortization, which was partially attributable to the Belgian group and Marengo acquisition.
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Assets added in the fourth quarter of 2020 operating income for fiscal 2020 was $430 9 million as compared to $475 8 million for fiscal 2019.
Excluding the $38 2 million in restructuring and impairment charge. The adjusted operating income for fiscal 2020 was $469 1 million.
Operating income for fiscal 2019 was 475.8 million, excluding the retroactive blenders tax credits related to 2018 adjusted operating income for fiscal 2019 was $389 2 million to $79 9 million increase in adjusted.
Operating income for fiscal 2020 as compared to fiscal 2019 was primarily due to a gross margin increase of $108 3 million and a larger contribution in equity earnings from our renewable diesel joint venture Diamond Green diesel these improvements more than offset a $20 million increase in SG&A asset sales.
Gains of $20 6 million in fiscal 2019, and a $24 7 million increase in depreciation and amortization SG&A increased $20 million in fiscal 2020 as compared to fiscal 2019, primarily due to increases in insurance premiums labor cost COVID-19 related costs and foreign currency effect.
Which were partially offset by lower travel cost.
Interest expense declined $1 7 million for the fourth quarter 2020, as compared to the 2019 fourth quarter amount and declined $6 million for fiscal 2020 as compared to fiscal 2019.
Turning to income taxes, the company's 2020 effective tax rate of 15, 1% is lower than the federal statutory rate of 21% primarily due to the biofuel tax incentives.
Tax expense and cash tax payments for 2020 were $53 3 million and $36 8 million respectively.
For 2021, we are projecting the effective tax rate to be 20% and cash taxes of approximately $40 million.
Looking at the balance sheet at year end in January 2021 debt was reduced $141 4 million during the year with a net pay down of $189 eight.
$8 million the bank Covenant leverage ratio ended the year at one nine O.
Capital expenditures totaled $280 1 million for 2020, as we plan to spend approximately $312 million on capital expenditures in fiscal 2021 the.
The company received $205 2 million in cash distributions in 2020 from our Diamond Green diesel joint venture.
Lastly, we repurchased approximately two 2 million shares of common stock totaling $55 million during fiscal 2020 and paid approximately $29 8 million in cash in the fourth quarter of 2020 for the Belgian group in Marengo acquisitions with that I'll turn it back over to you Randy.
Thanks, Brad now diving into 2021, what's the commodity price improvement and continued strong raw material volumes, we believe that our food feed and fuel segments prior to adding diamond Green diesel should generate between 565% and 600 million of EBITDA. That's a conservative 12 months to 20% improvement over 2020.
D. G D. We believe we'll be able to earn at least to $2 25, a gallon EBITDA in 2021 and ship and should produce between 300 and 310 million gallons this year, which would generate between 335 and $350 million of EBITDA for Darling share as we outline on slide five of the invest.
Your presentation, our guidance is for the range in 2021 is $900 million to $950 million combined adjusted EBITDA. This range does not include any additional upside for renewable diesel gallons that could be produced in 2020 one as the $400 million gallon expansion is on track to commission in early Q4.
We should know better in the middle of the year the exact timing of when the norco expansion will be approximately online now the D. G D Port Arthur location is making excellent progress with all key long lead equipment items ordered and site work nearing completion. This 470 million gallon renewable diesel facilities should be operate.
<unk> by the back half of 2023, securing diamond Green diesels leadership position as the largest low cost producer of renewable diesel in North America, we anticipate all costs of both expansion projects will be funded by the internal cash flow of Diamond Green diesel. However, we still anticipate D. G D, putting a nonrecourse rebar.
All of our in place shortly.
Now, let's do something different in terms of the feedstock question I will try and answer this question now, but but sure you will ask it again during that during the Q&A Darling believes there is adequate low carbon feedstocks to supply the $1 2 billion gallon renewable diesel platform of D. G. D. We do expect growth in animal fats and certainly think that used cooking.
While we will recover a little this year and grow in the future years, our approach for keeping our feedstock advantage for D. G. D is twofold, what can darling due to render or collect more out of our footprint today, either through processor technology improvements or competitive positioning and what are the bolt on opportunities to grow our volumes of Ann.
Fast and waste oils around the world.
We do believe there are multiple avenues for us to pursue and expanding our feedstock footprint and we have faith that our large global presence will put us on a pathway to get results that others might not be able to achieve.
Operating animal byproduct businesses on five continents allows us to see what no one else no one else can see and provide supply chain arbitrage is that will make our renewable diesel platform second to no one.
As we grow another year older and wiser, we continue to position our company in the best place to take advantage of the changing times. We are excited about our outlook for 2021 encouraged by the growth of our low carbon fuel standards around the world and we are doubly pleased with the great progress at Diamond Green diesel and our joint venture partner Valero.
As we are now inside of nine months of the biggest renewable diesel project in North America is starting up so with analysts. So let's go ahead and open it up to question and answers.
Thank you we will now begin the question and answer session. You'll 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 to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question from Adam Samuelson.
With Goldman Sachs. Please go ahead.
Yes, thanks, good morning, everyone.
Adam Good morning, So I guess first I want to appreciate.
Giving kind of more clear kind of EBITDA guidance, it's much appreciated by the analysts and investors alike, but I wanted to just hone in a little bit on the assumptions underneath that and in the base business. If you could specifically in the feed business Randy.
Just thinking about the commodity environment.
Hey.
We would to me suggests that three.
$3 80 to 400 of EBITDA and feed does not seem like a terribly high bar, even embedding current commodity prices persist through the year. So what.
What commodity prices are actually embedded in the three eight to 400 and if you could just remind us, especially on the fat side kind of the leverage that the fat prices as they potentially could move higher in the back half of the year with all the startups.
Yeah, Adam Great question.
But for us, it's a big step to try to sit out there and frame guidance, but we also understand our responsibility to try to provide some outlook there.
The reality that we're seeing right now is and I would just say you have to for those that follow the Chicago Board of trade and follow Palm oil soybean meal soybean oil and corn, you've got one of the steepest in versus that we've seen probably I don't know in the last maybe 10 or 20 years on the March.
<unk>, meaning that today's prices are much higher than they are six to nine months for new crop now so you're the conservatism youre seen in the feed segment reflects the back half of the year and not seen what we're.
That can actually go right now I mean, if you put it in perspective on paths right now, we're seeing fat prices F O B factory and delivered Diamond Green diesel and the high forties, which puts us back into that Oh wait Oh, 10, 11 era, which I'm sure. You can you can benchmark back there I mean as we've.
Said globally, each penny improvement in fat prices put somewhere between eight and $10 million of EBITDA to the to the annual earnings. So got some really nice leverage there clearly were you know were seeing in Q1 as we came out of December you know if you.
Look at the prices in December versus November they were only up slightly and remember most of our fad heads down or half of it today, some more heads down to diamond Green diesel and it's somewhere in that 45 to 75 day pipeline or supply chain, that's always inbound to keep the keep the machine fed.
And so you will I think we'll have a better visibility of the true run rate of that feed segment here for you in Q1 clearly in January we started to get some of the leverage we saw that February.
As just ended so we haven't seen that although we.
We did have eight factories down in full transparency in February for almost four or five days with the the snow Armageddon as we phrased it down here in Texas. So I think I know, it's a long answer to your question. We feel very strongly the feed segment has the most optionality in it.
As Jim Stark put together kind of day outlook, we looked at it and said Okay. You know strong fat prices strong protein prices for the first nine months of the year and then kind of and then kind of tailing off unless there's some type of harvest disruption.
M a R or growing.
Growing disruption in the world on the back half Jim anything you want to add to that no Randy I think that covered it.
All right that's really helpful color and I guess my second question is really thinking about about capital I mean, clearly with the BTC and the margins you're targeting Diamond Green has one way to finance the expansions at the JV level.
Just one is there any thought or any update on potential what kind of financing kind of arrangement at the JV level that can accelerate cash distributions back to the parent and kind of corollary to that is how should we think be thinking about kind of capital priorities at the parent over the course of the next 12 months.
Yeah, Adam this is Brad.
Randy mentioned, we are making progress on some financing within diamond range, So kind of stay tuned for that.
The announcement weeks ago that there was the approval for the Port Arthur facility and this is kind of I think your reference point that we have two projects now.
Simultaneous underway with the margins like we said earlier.
These will will self fund however, with the timing this year in the next two or three quarters in particular, probably.
We're probably looking to be a dividend like there after number two comes up.
And assuming there is some financing in place there.
See you.
Here for the year I would I would suspect that there will be dividends.
Out in the tail end of the year or what's the cadence on this on the spends there as far as capital priorities. This year, we're looking at paying down at least $100 million in debt with where we're looking at.
On the guidance if not more and then we'll move into 2022, the dividends and the payout from the JV will be.
Much will be much greater than we've seen in the past.
Okay, I really appreciate that color I'll pass it on thank you.
Thanks Anna.
The next question is from from being Danielle with Stephens Inc. Please go ahead.
Okay.
Hi, Thanks, good morning, everybody.
One of them.
I wanted to start on.
Adam's question, focusing on the guidance, but pivoting to the feed ingredients business. Obviously has been a bright spot for you guys. As you brought on in the pet food and facilities.
We've seen margin expansion and now we're seeing volume expand as well.
What he's come online when you look to your 2021 guidance. What do you think the balance is of margin expansion versus top line growth.
Yeah.
That's really difficult to for me to answer van and without a lot of it's got a lot of moving parts and I mean as Jim put out there you know Q4 ran at $90 million. So if you take $90 million minus a little extra week that was in there. Then you know you take it back to 84 and <unk>.
<unk>, you know four quarters and you're in that three $333 40 range from where we're now pointing out that would be that 380, 400, and you know really what I want to highlight there.
That feed ingredients segment.
As the largest global exposure that we have other than the Rousselot gelatin business and as we go around the horn here improvements are going to come from better fab pricing and protein pricing in Canada.
Down in unprofitable biodiesel business, there should be no surprise, we've been telegraphing that all year, even with the dollar a gallon that business is 30 to 50 cents a gallon red with with fat pricing, where it's at so it didn't make sense to operate it so Canada is going to have a better year.
Our U S. Rendering team really worked hard last year and in widening margins and really getting paid for the services. They provided I mean I understand it was a pandemic year essential services in that and I don't want to play that down and say that we leverage that.
Before we came into the year there was a plan given the amount of capital that we put in place that we needed to go out and do the little things to tack on an extra $10 to pick up to change make sure yields are right in and to make sure we're marketing the product into the right markets and so.
The U S rendering team did a masterful job there the specialty businesses. The John Bullock also runs are just that those are different ways of diverting what I would call streams that are in the feed segment to higher value markets of the pet food organic fertilizer area and really.
We've grown our footprint tremendously with two more organic fertilizer plants last year and major.
Expansion in the pet food business. So those are those are the big drivers there when you go to Europe.
You've got a couple of things driving their one tonnage was extremely strong for the year, because China blocked the Germany pork exports. So as we say the rendering barrel or the rendering tonnage was very strong poultry tonnage was good especially out of Poland.
And so in pricing improved or was steady it was much higher than the U S. For most of the year and then actually started to improve even more in fourth quarter. So we got some lift there so really the driver as we look at the feed segment into 2021 will be the optionality that more or less exist in north.
Erica than Europe, I look at Europe is steady for next year.
Depending on tonnage could be just a little weaker if the if the tonnage of the animal numbers contract a little bit and then ultimately the U S.
Other than the slight disruption we had in February here, you know the the poultry guys. We're gonna be killing on Saturday here for the next six weeks. So end of the day the tonnage should be strong we're seeing the strongest protein prices and strongest fat prices. We've seen in an inverse you stay sold up and so we're doing our best.
To manage the margins there, but I wouldn't you know it.
I wouldn't be surprised if we don't see additional margin expansion driven by the U S. Also like to point out and Brad Brad was pointed to me when you compare 'twenty against 19, why was 19, where it was at because it had the retroactive BTC for 19 and 18 for North America Anna.
And so that's at the total company level. So we kind of got it thats, where he was trying to in our script trying to normalize 18, 19 and 20. So you could see the continued improvement we have and now we've got a strong pricing environment that should carryover very nicely into the feed segment.
Yeah, Okay. Thanks for all the detail.
My second question is the decision to shut down the two biodiesel plants makes perfect sense I'm curious when you look across the rest of your asset portfolio do you have additional opportunities like that you mentioned the opportunity to bolt on additional feedstock sources that debt support your feed ingredients business, but also potentially.
Support your feedstock raw materials for D J D.
What exist internally and when you look out at the landscape externally how competitive is the market for acquiring assets like that.
Well 2021.
It was a pretty.
Slow year in the world of relationship, making you know you know.
The platform that we've assembled over the last 20 years has come at the at the from a relationship developed.
Acquisition bias.
We.
We look for companies that share our values that want to be part of our global family and really that's so key to us and that's the reason we've been so successful integrating acquisitions, we were able to do that with the Lippe acquisition in Belgium, that's three poultry plants last year. That's the one if you say it came.
Flying by our door and we paid a fair value for it Brad mentioned and the specialty group, we acquired the Marine go tank Company Marine goes it's been a long time supplier to us of our indoor used cooking oil tanks, but it now gives us the ability to if you will ratchet up that and put more indoor tanks.
And the large operators and franchisees, we're working on additional technology. There that are in the AI world that makes us smarter as to when to pick it up and help <unk>.
Operators with what they're using and producing in their restaurants. So we're excited about that and then you kind of got to step outside the outside of the U S. We're seeing major meat company potential expansion in Canada, Canada has a license to trade with the world in more cases than the U S.
We're seeing opportunities now.
Pop up in Europe, South America, and in Australia. So we will continue as we've always done nothing crazy here, but if we see something to bolt on that.
You know that makes our return standards that supports our supply chain needs.
Make no mistake, we will go after it we see ourselves as a truly a growth company, we see with Diamond Green diesel.
Two and three coming online that's a as we've said in our boardroom, we have a high class problem coming on and that is you know what to do with the with the cash that we're going to generate as Brad says, we have about $300 million of pre payable debt out there before we have to start calling bonds or or ultimately change our cap structure and put out a dividend, but that's where we're at.
Good day and stay tuned nothing eminent I don't want to signal anything that we've got anything near swimming into the net today, we don't but we're.
We're open for business and hoping that with Covid that we can get back out and continue to to look at the market around the world for what makes sense.
Okay very good thank you Randy and good luck with 2021.
The next question is from Manav Gupta.
Please go ahead.
Guys. So one thing which is encouraging as yesterday, we had Valero energy conference and Jill Golder Liens and Martin said exactly like you have just said that the feedstock will not be a constraint as it appears far D. J D. Do all day GDP. So its very good to see that blip.
The humans out exactly in sync I just wanted to get your take on one of the comments day meeting they said.
You guys do have the ability to add to BJ before export data if you wish to choose to do so.
Early but they did indicate it can be done and what they said was that Pete stuff would not even be a constraint. If you guys do eventually decide to go with D. J D full or so if you could give.
To give you a bump from that.
Yeah, and I'll comment and then I'll give John Bullock, a chance to comment.
Obviously, the good thing is clearly Valero and Darling and Mr. Gorder in myself and Martin Parrish. We're all on the same page. We spent a lot of time, making sure that we're in sync and you know what we've always said about who you do business with US we share values with the Valero team and Theyre, just an excellent team to <unk>.
Work with and so the feedstock side, obviously, that's been Jos in my we Gotta get comfortable and you know obviously, if everybody builds every announcement out there that statement wouldn't be true. So the counter to the statement that Joe and I are making as we don't believe all of those plants will be built and then we also believe strongly.
And our partnership in the supply chain advantages that we have not only in North America, but by location of St. Charles in Port Arthur or our ability to originate fats out of our European or South American or Chinese and Australian operations. So we feel very good there relative to D. J D.
For absolutely when when number three site was picked a land was if you will put aside for a parallel plant there lots of dreams on number four.
I think probably into two.
2020 to that discussion will get more and more traction I suspect that we will do some pre engineering on for as we've always told people. You know you can't go get a permit until you design. It and you have to know what equipment Youre going to order before you can design. It and then before you can permit it.
The reason any of these announcements out here you know are probably a little more hot Air then they're real at this moment and then ultimately the thing that truly gets US excited is as we've said in the past the sustainable aviation fuel narrative is gaining traction admittedly the airlines are.
A little challenge still right now the freight haulers aren't but they're under under this continued climate pressure and especially now with the Biden administration that we're actually having real discussions and looking at you know real engineering on an Mcf unit that can either be bolted on to number two number three or number four.
<unk> facility in itself, John anything you want and yeah, I mean, when we designed the number three at Port Arthur.
We actually laid out all the logistics and supply necessary as well as the specific plot and the specific design for Diamond Green diesel far so quite frankly for us is approaching ready to go in the tank whenever we make an ultimate decision on it and we had pre plan that as we put three in place.
Perfect guys I've been coming but it off on a long time and I can see why you guys get along so value share from any other common values. They do I have a quick follow up here one of the reasons you're seeing some pressure on he got stuck in the sector is because we have seen so many announcements come out of non renewable diesel side now.
Sometimes you might experience people like you are trying to build extra capacity, we can make sense, but then other times you have a refined that are coming out and saying, okay. I have a shut hydro cracker, some bad and it somehow I can restarted that uniquely positions me to create renewable diesel and Florida those of US who left from more on the energy background can you help us understand why is it more important.
Dan just to have like one shot hydro cracker there.
And that's not enough to make you a renewable diesel produced at overnight. If you can restart the hydro cracker.
Yeah. This is John.
The fact of matter is a renewable diesel plant is very different than our traditional petroleum plant.
Lastly in renewable diesel plant, that's capable of handling that.
Low carbon feedstocks that has the type of supply chain, that's necessary I think what most people don't realize is that the cost to build.
Green day cells.
Only 30% to 35 per cent of that cost is the actual cost to convert the fact to feel that's not the key success dynamic involved in this business you have to have the massive logistics infrastructure in place you have to have the pre treatment in place you'll have to add the logistics on the outbound side you have to be able to minimize your carbon into.
Density levels, you have to be able to be able to have flexibility to hit all of the different low carbon markets around the world, which have extremely different diner.
Dynamics in terms of margin management, you have to have the ability to be able to capture your naphtha and being able to get your low ci value off of that as well as the ability to use the other feedstocks to lower your renewable make your.
Hydrogen that youre using in your visibility, we know where the lower the carbon intensity. So there is a simplistic view of this business that all I have to do is convert a unit and I can somehow make as much money as diamond Green diesel does deadlock.
Good luck with that.
Thank you for taking my questions like was there any detail just one thank you.
The next question is from Craig Irwin with Roth Capital Partners. Please go ahead.
Great. Thanks for taking my questions.
Randy so you're going to have more than 1 billion gallons here.
In the U S right that the trajectory is pretty well set at this point.
But when we look to other global markets Europe is a particularly attractive opportunity side no.
I guess some banker.
Let it slip out there that you were working with one of the potential partners over there in Europe.
But I assume you have multiple potential shots on goal.
Can you maybe frame out for us the scope of possible projects you might be looking at in Europe.
And you know when they take a similar timeline to what's going on here in the U S and what do you feel about the regulatory environment in Europe. You know next day seems to be doing pretty well with that is.
Is it something that the Darlington leverage as well.
Yeah. This is John so we agree the regulatory environment in Europe is excellent read too and I think there's even some conversation of a quote read three.
Coming down the line, we've evaluated whether or not we wanted to be in the renewable diesel business in Europe quite extensively that looked at several opportunities and depth at the end of the day, we may or may not play is from renewable diesel player in Europe, while we do sit on top of in Europe is a very very unique position.
In relationship to how we can sell our fats into the renewable diesel business in Europe and you have to remember Europe is very very different than the United States in terms of geography, it's very hard to have a standalone pretreatment system in the United States, just because of the size and distance that we have here, whereas in Europe, we have the opportunity.
To put ourselves in a position to be able to maximize.
Low Ci feedstocks to the renewable diesel business and quite frankly, our team there has done a phenomenal job in positioning us, allowing us to maximize value. So we will continue to evaluate whether or not we want to be in the renewable diesel business in Europe. At this point in time, we've obviously made the decision that we like our investments in renewable diesel.
All being in North America, particularly in the Gulf Coast, and North America, but that doesn't mean that we don't think that we can participate in the value chain associated with the renewable diesel in Europe in point of fact, we're excellently positioned for that and we've been working on establishing the right type of machines and the right type of marketing capabilities in Europe and.
We really like how we're positioned and the advantage that renewable diesel is going to bring to us in Europe as well.
Excellent excellent. So then the only major regulatory change.
Since your last earnings call is the release of the low carbon standard up in Canada.
They do consume a little bit of a renewable diesel biodiesel now obviously.
Randy your biodiesel.
Challenged and I understand that.
But what do you guys think about the potential of the Canadian market I know their diesel consumption is something sort of similar.
Similar in magnitude to the state of California, so potentially a multibillion gallon renewable diesel market.
Are you guys looking at this is this something where.
There's additional business development activity going on or would you look to maybe serves the Canadian demand out of U S based facilities.
Yeah. This is John we would right now look at servicing out of our U S. Based facilities, we are but nominally well positioned to service the Canadian marketplace.
You can get to Canada on either coast, that's not Jones Act right. So it's cheap freight out of narco or out of part of Arthur Once we put port Arthur in place, we're gonna have C and load out capability out of our facility in norco. So we can get directly to the interior in Canada. So we see ourselves as just extremely.
Well positioned to be able to hit the Canadian market and the other thing that's very very exciting is we have the capability to make an Arctic grade renewable diesel product, which obviously is extremely important for our rapidly expanding Canadian market because it actually does get cold in Canada, a fair bit of time at least 10 months of the year or so.
The fact of matter is we have a great capability to hit that marketplace. It's a wonderful wonderful market for us we have wonderful relationships with the folks in Canada, and we just love how we're positioned in relationship to servicing the Canadian market.
Thanks, John and thanks for taking my questions.
Your next question comes from Ben <unk> with Baird. Please go ahead.
Hey al.
Thanks for taking my questions.
Thanks for all the detail here.
Can you talk just maybe just briefly.
Briefly on Port Arthur.
On the debt.
Jet fuel opportunity.
One thing that we have heard a lot yet.
And then how we should think about that in terms of overall margin going forward I know, there's a lot of puts and takes up there and that all book.
Two follow ups.
Yes. This is John so the naphtha has been something that we are going to be doing both at port Arthur as well as Marco when we startup Diamond Green diesel two we're going to have the ability to strip it out now.
And that means that we can market the NAFTA as a low ci feedstocks low ci feel into the various L CFS markets.
When you do that for the amount of the naphtha.
And after that Youre stripping out, which I believe we've indicated it's about 40 or 50 million gallons.
Out of the narco facility and then there'll be a similar amount that'll come out of total lesson that that'll come out of our port Arthur that means that we will get the upgrade on the <unk> value for that amount of naphtha. In addition to that we also taking off.
Light in strange propane butane and we're gonna be able to feed those into a hydrogen reformer be able to have renewable hydrogen to feed our unit, which means we'll be able to lower our ci value for every gallon.
Both naphtha and renewable diesel that we produce at both facilities.
Our significant economic upgrades.
They come at a capital cost, but those are significant economic upgrades.
And again this is the overall competitive positioning of Diamond Green diesel versus what other folks are doing out. There. This is not just a flip a switch and make a lot of money you have to have the right type of capabilities and the right type of locations.
The ability to separate out the naphtha and to make renewable hydrogen and those are all key capabilities.
Hey, Pete.
Ben also mentioned the jet fuel into margins, Yeah, and jet fuel is an interesting market, we see it as a developing market is probably a few years off.
There was a lot of conversation about sustainable jet at this point in time, we believe that will be a product in our portfolio as we move forward.
But quite frankly, it's probably a couple three years out there.
Because at this point in time, we have more than enough demand on the roadside.
For any product that we can make but we do believe the sustainable jet is going to be a key product in the diamond Green diesel portfolio.
At some point in time.
As we move through the next few years, John do you want to comment a little bit on you mentioned Arctic grip to them and why that's important in the product mix Yeah. Arctic rate is in the short term much more important is sustainable jet is to us.
Because so many of the markets that we go to.
Have periods of the year, where it's cold and quite frankly by being able to make an Arctic great product, we're able to substantially improve the blending economics for our customers that would be places like Canada.
Nor way.
Sweden, Switzerland, all places that have a significant part of the year, where the temperature is relatively cold that puts us at a tremendous economic advantage on being able to service our customers and dramatically increase the amount of value gallons that we sell on an annualized basis. So we're really excited to be able to have artie grade.
As part of our portfolio.
Got it.
Maybe Randy from.
The strategy perspective, how much.
This goes to your feedstock commentary how much is it.
A land grab the quicker you build capacity like port Arthur from the harder it is for people to get capacity or is it because it's just because it's transactional doesn't work like that or was that part of your thinking and then the second thing I wanted to go back to <unk>.
Total of acquisitions since you started.
Bad debt.
Balance sheet as it is.
<unk> doesn't have a long average on it I know you said you don't want to do anything crazy, but where would you do something crazy.
Okay.
Everybody is looking at me like I'm not sure.
Ready crazy, but that's true.
[laughter] no. Its interesting you know Vincent as we looked at the world here and I'll Digress, a little bit first mover advantage to us was key because of the supply chain and clearly that's the reason you know number number two or the expansion of the number one with the new 400 plus million gallon line.
We're seven months out from starting up now and Thats really exciting what happens then well then all of a sudden 40%, 35% to 40% of North America's waste fats and greases defined as used cooking oil animal fats distillers corn oil are destined to norco, Louisiana.
Hannah.
Now, let's let's fast forward about another 15 months.
Then port Arthur comes online and now you're up to 65% of North Americas waste fats and oils consumed by Diamond Green diesel Darling and Valero. So you know clearly what the plants under construction today, you know Inc.
I mean port Arthur I mean, if anybody wants to do a flyover.
The foundations are poor guys equipment is starting to arrive and steel will be going up here. Shortly so that's a little different than in an announcement on paper and I would suggest if you know the other announcements probably need to have.
I have another look at their financial model and then the second thing is is if you look at the world today of these non pretreatment retrofits I mean, they're running <unk> soybean oil and last time I checked that's somewhere between I don't know 55, and 60 cents a pound delivered the plan.
And so at the end of the day you got that and then you got a ci score in the high Fifty's versus a 19% to 20 for Norco and Port Arthur and so those economics really don't look all that good relative to where they were and then they look okay.
You will as long as that blenders tax credits there forum beyond 'twenty three if it's not thereafter 23, so that those are horrible investments.
And so you know obviously, we when we built diamond Green diesel one we looked at it on a 10 year look back and obviously made the decision to go forward and we've been spot on with what we told you guys last year, we would be and we're pretty confident where we're at this year now going forward to your questions, we're going to generate a ton of <unk>.
Cash.
John Bullock famous line as this is when when management teams do stupid things.
We've got we're looking for the next big thing, but and also you know with that John is the strategy Officer also heads up our specialty group, which includes our enviro flight business, Brad talked to you about $312 million of capital going out the door, there's a chunk of capital in there that we are doubling the <unk>.
<unk> and investment in our in our bug business. We think we've got something there we're not sure what we got right now to be 100% transparent and honest, but we think we've got something.
And we are in production, it's legitimate we know how to do it we're scale in it and we're confident enough that we're scaling it and going to build number too and so we're well capital go it could be there as we build a platform out there and the idea is ultimately we see the world short protein and.
And this is just a wonderful product that has various attribute that are right now being in government regulation and getting permitted and an authorized to be used in different applications. We can't comment about those yet, but it's a pretty exciting time.
Relative from that you know, we'll see what the World offers this up this year I think if you look at the family held rendering companies around the world.
They went through the same five years of challenges that we did and when they get a good year I don't know does that say I don't want to go back to the prior five years and do they do they come for a succession and then you know event here, we will see we hope they do because we're we're in a position now to grow and obviously, we've got demand for the product.
And our know how to run those businesses.
That's all good. Thank you guys very much all of you guys. Thanks.
Next question is from Tom Palmer with Jpmorgan. Please go ahead.
Good morning, and thanks for the question.
Wanted to ask on.
Just the guidance around DGB, we've seen a bit stronger EBITDA. This year on a per gallon basis and in 2019 than the $2 25 Youre guiding for is this just conservatism or is there anything maybe to call out either.
Given moves in feedstock cost that might cause you to start off a bit lower or if theyre startup costs late in the year that we should be factoring in debt that are driving that number. Thanks.
Yes, Tom This is John no at the end of the day.
We feel very confident in the 225 call for the year quite frankly, we're starting off extremely strong both in production and margins as we move through Q1. So is there a possibility that we could end up higher than $2 25 for the year share.
What I'll say is this though functionally the difference on a 300 million gallon or if we can get diamond Green diesel two in production in Q4, maybe better than 300 million gallons at whether we're making $2 25 or $2 35, a gallon is largely irrelevant both are fabulous and that's particularly when you consider the fact.
We've seen fat prices move materially higher and I think what really needs to be emphasized here.
Is the fact that Diamond Green diesel has made $22 25 ish, a gallon plus and we've made that when we had diesel fuel prices at 86, when we've had them at $2 20.
When we've had that price is at 22, when we had them at 45.
The fact of the matter is the fundamental thesis that we've said time and time again.
Is that the green premium adjusted and as long as we have the strong driver for low carbon fuels around the world and the demand is there for the product as long as you have the right type of facility in the right location with the right type of capabilities margins can remain strong in this business and we feel good about while we are in the business as we move through.
1021 and on into 2022.
Okay. Thanks, Sean.
And then.
Randy I do have a question on feedstock.
<unk> predicted some of us would have on the prepared remarks.
As we look towards sourcing animal fats from outside the U S.
How does procurement.
In terms of pricing compare both in terms of underlying fat prices and then just shipping cost as you look at shipping.
Via freight versus shipping domestically.
Yes. This is John obviously.
Fat market is a worldwide market at this point in time and the prices are gonna be established by where the demand is and where the highest and best uses.
So we see this as a fungible market, we think product from move around the world as it needs to to supply the highest and best use our focus has been to develop the best machine at converting fat to feel and having it in the right location and having the right type of capabilities and in line with that as we open up Diamond Green diesel to we are going to be opening up.
Both vessel and barge receiving capability as part of Diamond Green diesel one and two so we're going to have the ability to collect that from anywhere in the world if the strike price.
And is the right path for us to be processing. So its capability the walk from the marketplace will determine what the price is the most important thing here is this though you've got to have the best machine economically at converting fat to appeal and if you do then you get to by the Fat and you got to make the most money than anybody does and our renewable diesel business.
And that's what we hope and think we've designed at both norco and at our new facility coming on in Texas and Tom. This is Randy I think I'd add to that because John is exactly right. It is a real estate play location location location, but I think the thing to market misses today is that we closed Montreal in our Butler, Kentucky.
<unk> biodiesel plant because the economics don't work.
While I can't make that as a general statement for the biodiesel industry I would tell you that superior technology in Gen. Two renewable diesel with the right locations and there really isn't going to be a feedstock issue in the U S. Because it'll come straight from the biodiesel producer.
In the U S and North America going forward. That's the reason, we're so comfortable if you look at two in a quarter versus minus 50 today and classic biodiesel I mean, there is no. There's no comparison and then you saw that in the December production numbers of the U S biodiesel industry, where 60 plus.
Were sent or it's now being made up by the integrated soybean oil guy that's either going to make volatile oil.
He is going to sell it as crude to come to the golf for export or you can run it through as biodiesel. So that's a different arbitrage within the crushing industry than it is for a standalone biodiesel guy going forward here, so youre going to see the marketplace rationalize itself and as Diamond Green diesel II comes on the battle.
That'll just really start to really crystallized for the market.
Great. Thank you for the insight.
The next question is from David Fernandez with Sydney.
Please go ahead.
Hi, guys. Thanks for taking the question I'm subbing in for for Ryan Todd here.
I think most most of what I had who has been covered but just wanted to ask on the.
The free cash flow side, so obviously post the start up of phase two.
Dar will be in a very advantageous situation from.
Free cash flow.
In terms of kind of how you think about returning that cash back to shareholders in light of you know.
Expectations to finalize.
The noncore revolver soon which lease time acknowledges the importance.
That is placed on shareholder distributions by the market.
David It's great question and I'll Tag team. This with Brad obviously, we feel very confident that with our partner Valero, we realize the importance of returning cash to shareholders Valero has been a master of it.
Their industry and for their shareholders, they're working with us on them on getting the revolver in there. So we can clearly make that happen for our shareholders. The thing is as Brad pointed out he has got $300 million of pre payable before we start to build cash that becomes then the discussion of what.
What we do with it we've never been in this position before.
And in a sense.
Brad and I share two dreams.
Get up in the years here and in Gray hair and that is we want to be investment grade and then we'd like to put it put a dividend underneath the the business that will attract a long term meaningful shareholder into it maybe I don't mean to offend any of the hedge funds on the on the call. They provide nice liquidity, but I'd rather have long term growth.
But they believe in the model going forward and I think that's one way of doing it. So clearly it's a discussion within the within the boardroom today, obviously opportunistic buybacks of the stock while maybe not in Vogue with Elizabeth Warren on CNBC right now, but ultimately it is a way of.
Returning cash to shareholders if necessary so as we say we call it operation high class problem within the boardroom today stay tuned.
Awesome. Thank you very much that's very helpful and one quick one we've got some questions around kind of be African.
Extreme virus.
The.
The African swine fever screens.
Reported net it's impacting the hog herd.
Is there any inc.
In fact that you guys have around kind of what's going on with that.
Yeah, I mean, it's one that I'm surprised it took this long in the conversation to the day to be brought up but.
I would have told you and I will tell you that starting November December we saw a much improved hog herd in China, and our visibility to that is in the form of being able to procure.
Hog skin to make gelatin at our <unk> plant and blood pig blood at our five processing facilities across north and South China, and so we saw a pretty nice increase what we've seen in China. Just recently is that we've seen the plasma if you think of your spend the pig blood red and white cells Red.
The Aqua culture White go to White go to baby pig starter feeds we saw an increase in plasma demand in China, which is symbolic of a replenishing baby hurt now plasma prices in China are about 40% of what they are in the rest of the world today. So.
Not back to where I would tell you that I thought it was or where it's going and now we're starting to see different strains of of.
The African swine fever in China today, I think they've got an uphill battle I would tell you that they've done a lot of the right things in the large scale bio secure.
Farms and processing plants now, but remember that's a that's a third of the population has access to kind of commercial protein a day.
Two thirds of the population still tries to grow it in the backyard and that and trying to control the disease, there and vaccinate I'm sure China can get that done if they need to but it really it hasn't really transpired to date, then you move to the continent and between Poland, and Germany, and we are continuing to still see.
Cases of ASF.
In the World. So I would tell you for 2021, we're still not out of the animal disease issue in the world and that's what's going to keep demand for replenishment of China's herd and strong feed grade and soy demand in the world as we go forward here.
Perfect. Thank you for taking my questions appreciate it.
Yeah.
Our last question today comes from Matthew Blair with Tudor Pickering Holt. Please go ahead.
Randy you touched on the backwardation in the past price does make me conservative on these prospects in the back half of the year does that same dynamic makes you bullish and fuel for its too.
<unk> 21 or is there more of a dynamic market, where maybe rents come down if from the steep cost drops.
Yeah. This is John I think what we've seen.
Consistently hear is the green premium as adjusted.
We've seen various steel prices and we've seen various fat prices and we seem to be in this 225, maybe a little bit better type of a range as far as the backward integration the in versus that we're facing in the commodity markets.
At this point in time, they are what they are but as long as the Chinese demand remains strong we would anticipate that we will continue to see relatively good pricing per our products as we move forward. We have to remember that we are getting down to very low inventories on both soybeans and corn.
As we move through and into our new crop year here. So we know we can't really forecast at current prices for the rest of the year because that's not what we see in the marketplace today, but I would tell you that we feel good about where the demand side looks on this China continues to drive this is day reconstitute their pig herd, obviously theyre going to hit some sharp.
<unk> struggles with ASF, but that doesn't mean that they still don't have the demand for the paper, they do and they're going to raise the page for their people and salary don't forget it figured out and Matt I would also add this is Randy again, I think John did a great job of laying it out there I mean, obviously.
If feedstocks do back off in the back quarter of the year, a third of the year.
We'll see what the situation is on the RIN side, but I would tell you given the negative earnings and biodiesel today that they probably have a better chance of staying staying firm and ultimately then we would we would widen margins back out and D. G D in excess of that two and a quarter and so.
Ultimately, we built and participated with Valero and D J D.
A cyclical or a hedge to the up and downs of the global grain markets, because we have no control over them in a fast arent going into renewable diesel there being fed to an animal as a calorie and so ultimately if corn goes down the price of the caloric value of fat goes down so.
I think we're in a perfect situation, we've been waiting for the tailwind I.
I think we've been trying to tell people.
Hey, we've got a model between all the different things that we do with Diamond Green diesel that allow us to capture enhanced margins and manage even if the feedstock who would have thought the feedstock one year ago to day was 22% to 25, a day, it's 45 to 50 and we're still telling you. The same margin. So I mean, I think we got something here.
And it's pretty exciting.
Sounds good and then.
I just wanted to clarify on the D. G D volume guidance.
300 to 310 million.
Gallons, which I think is above what <unk> guided to.
And I just want to clarify does that number exclude any any contribution from a.
The Q4.
Expansion startup.
Yeah. This is John Yeah with Diamond today is running.
Net of 300 million gallon pace.
Just as Diamond Green diesel one if we're able to get diamond Green diesel to onboard.
Then we should be able to produce better than 300 million gallons and we'll just have to see how quickly were big diamond two on <unk>.
How many gallons that could end up being in 2020 months from 2020.
Great. Thank you very much.
Alright.
Yes.
Go ahead Elisa.
I'll turn it back over to you Ryan for any closing remarks.
Okay. Thank you Hey, we appreciate everybody's time today hope that you stay safe stay healthy.
<unk> got a list of upcoming IR events in our deck for I think kind of hearing about another week and a half we kick off again, we know there's a ton of demand for non deal Roadshows and we'll be we'll be participating in those and.
And we look forward to talking to you in May and bringing me up to speed on our progress have a good one thanks everybody. Thank you.
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