Q1 2021 Darling Ingredients Inc Earnings Call
[music].
Good morning, and welcome to the Darling ingredients conference call to discuss the company's first quarter 2021 results.
After the Speakers' prepared remarks, there will be a question and answer session 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, Tom and welcome to the Darling ingredients Q1 earnings call participants on the call. This morning are Mr. Randall C Stuewe, Chairman and Chief Executive Officer, Mr. Brad Phillips, our Chief Financial Officer, and Mrs. Sandra Dudley Senior Vice President of renewables and strategy Ms.
John Bullock is attending college graduation today and family comes first.
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 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.
Range Commission.
We do not undertake any duty to update any forward looking statements now I'd like to turn the call over to Randy.
Thanks, Jim Good morning, everyone glad you could join us on the call. This morning, a year ago like many other management teams. We all had the deer in the headlights, there happening as a result of the pandemic today, we see a very clear future for Darling ingredients as our dedicated global team of 10000 plus employees.
Continue to execute our business strategy and of safe and efficient manner.
Our earnings for the first quarter of 2021, we're certainly energized by a rising commodity price environment, which undoubtedly had a positive impact and enabled Darling to report a record $284 8 million of combined EBITDA for the quarter. The feed segment EBITDA was $124 four which was <unk>.
34 million better than the fourth quarter of 2020, and 54 million of higher than the first quarter of 2020 protein and fat prices averaged in the range of 40% to 60% higher than the year ago period and have continued to move higher into the current period, our food segment turned in a solid performance to start 2021.
On with an EBITDA of $46 4 million, which was approximately 18% higher than a year ago. We continue to see solid growth in our collagen peptide sales and look forward to our biomedical products, having an impact of the future on this segment's earnings.
In the fuel segment, we continue to see solid results from our European Bioenergy business, which reported another solid quarter producing $25 million of EBITDA in Q1.
Diamond Green diesel generated another outstanding quarter with a $2 77 EBITDA per gallon on 78 million gallons sold darlings half was $108 2 million of EBITDA plus our bioenergy results produced a strong $128 7 million of combined EBITDA in Q1 for our fuel segment.
As we noted in the earnings release yesterday, both D. G. D expansion projects remain on time on budget and on target. We continue to experience of favorable commodity pricing environment as the U S economy recovers with more and more states lifting COVID-19 restrictions as travel increases we are seeing energy prices go higher.
As ultra low sulfur diesel is trading above $2 per gallon in the Nymex spot for the first time in a couple of years higher levels of economic activity here and abroad. We believe will support continued strength in the demand driven commodity cycle that I'll discuss a little later on the call now I'd like to hand, it over to Brad to take us through the financials and then.
I'm going to come back and discuss the outlook and our increased guidance for 2021, Brad. Thanks, Randy our net income for the first quarter of 2021 total of $151 8 million or 90 cents per diluted share compared to net income of 85 point.
5 million or <unk> 51 per diluted share for the 2021st quarter net sales increased 22, 7% to 1.15 billion for the first quarter of 2021 as compared to $852 8 million the first quarter of 2020.
Operating income increased 62% to $199 5 million for the first quarter of 2021 compared to $122 8 million for the first quarter of 2020.
The 62% increase in operating income was primarily due to the first quarter 2021 gross margin improving approximately $68 million over the prior year and increasing from 24, 1% to 26, 2%.
This was primarily the result of higher protein of fat prices on our feed segment during the first quarter as Randy mentioned earlier.
Depreciation and amortization declined $6 1 million on the first quarter of 2021, when compared to the first quarter of 2020. This reduction was due primarily to certain assets and our food segment, which became fully depreciated in amortized by the end of 2020.
SG&A increased slightly by $1 2 million in the quarter as compared to the prior year and there were 778000 of additional restructuring and impairment charges related to the biodiesel facilities shut down in the prior quarter Lastly regarding the improved operating income of 50% share of Diamond Green Diesels net income was.
$102 2 million as compared to $97 8 million for the first quarter of 2020 interest expense declined $2 7 million for the first quarter 2021, as compared to the 2021st quarter now turning to income taxes. The company recorded income tax expense of $28 7 million.
For the three months ended April 32021, the effective tax rate for the first quarter of 15, 8%, 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 excess tax benefits from stock based.
Compensation. The company also paid $15 6 million of income taxes in the first quarter.
For 2021, we are projecting on effect and effective tax rate of 20% and cash taxes of approximately $30 million for the remainder of the year.
Looking at the Q1 balance sheet, our total debt declined $63 5 million to $1 44 billion and the bank Covenant leverage ratio ended the first quarter at one six times adjusted EBITDA cash.
Capital expenditures were $60 8 million for Q1 2021 and is in line with Darling as planned capex spend of approximately $312 million on capital expenditures for fiscal 2021.
As you saw at the end of March Diamond Green diesel successfully entered into a new 400 million senior unsecured revolving credit facility.
The new revolving credit facility matures March 32024, and is non recourse to the joint venture partners.
Use of funds of this revolver of this revolver or for general jointly.
<unk> venture purposes, and as we have indicated in the past any potential distributions in 2021 wouldn't be considered until the expansion of norco, Louisiana is in production in the fourth quarter of later this year now with that I'll turn it back over to you Randy.
Brad.
I'd like to touch on our updated guidance, we provided in our press release yesterday and it can also be found on slide five of our investor presentation.
We feel comfortable with the increased range of one point of <unk> 75 billion to 1.15 billion of combined EBITDA as the increase is coming from two segments. Our feed segment in our fuel segment. The feed segment is certainly benefiting from the rising commodity price environment for both proteins and animal fats and waste oils and the question you are.
Thinking is how long does this higher price environment last Darling just like every other commodity producer is watching this like a hawk. Our view is that we got into the current situation because of a demand driven event, which started with China and unlike a supply shortage driving commodity prices higher higher prices from a demand.
<unk> driven event can take multiple growing seasons to rebuild feed inventories, yes commodity prices have steepened versus on the futures curve, but that futures price is still 30% to 50% higher than the historical price when you get to that future period for now we think the feed segment will perform well for the rest of 2021.
We remain disciplined in our evaluation of the volatility of this segment can experience and contingent on new to reduce our expenses and improve efficiencies to enhance the margin environment. We are experiencing today the.
The other increase in our guidance as the fuel segment D. G. D turned in a record EBITDA per gallon in Q1 and with that the Q2 margin is averaging in the current environment. We are putting a potential range of $2 25 to $2 40, EBITDA per gallon for <unk> for 2021, as our joint venture partner <unk>.
On several weeks ago, we believe the startup of norco expansion will be in the middle of Q4. The D. J D will ultimately sell 365 million gallons of renewable diesel in 2021 of those higher gallons in the range of EBITDA per gallon provided put starlings half of the EBITDA from D. G D between 410.
And $435 million for 2021 the.
The <unk> Port Arthur project continues to make excellent progress and we did include a picture of that side on slide 10 of the Investor presentation. We are targeting this facility to be operational in the back half of 2023, but the team continues to evaluate if we can improve the timeline and startup port Arthur earlier for Darling.
We continue to investigate multiple avenues to expand our feedstock footprint and we believe that we're on a solid pathway to achieve this objective in the very near future. We're encouraged to see more and more states in the U S and other countries, passing and preparing legislation for low carbon fuel standards and our view of the renewable diesel supply and demand.
We continue to believe the renewable diesel demand will outpace supply for the next three to four years, then we believe that sustainable aviation fuel market demand should begin to develop and have demand pull for <unk> somewhere in that timeframe. We think our <unk> joint venture is a highly innovative platform and employees.
One of the most advanced processes for turning waste animal fats and oils into the greenest hydrocarbon in the world.
And it goes without saying D. G. D is one of the best investments, we can allocate capital to for high returns for our stakeholders, but we have other areas of innovation as well since the beginning of 2020 Darling has had 100% ownership of <unk> and viral flight is the leader in sustainable <unk>.
The ingredients designed for animal and plant nutrition aiming.
To drive transformative change on the global food supply.
We have made several of recent announcements on expanding our operations of environment of flight earlier. This year and we believe this project will position us as the leading developer of proprietary Tech Nostology with the first commercial scale Black soldier fly larvae manufacturer in the U S. We're also pleased with the development of work going on in Europe.
With our biomedical technology team, our ex peer or <unk> is our latest addition to our biomedical range of ultra pure gelatin oncologists to the medical industry and we anticipate that the product offerings will grow as we move forward in the new products being bringing added value to our industry. Our exterior products are unique.
On the market as they come with ultra low levels of impurities and fully validated traceability of raw materials. Our innovative spirit grows as we continue to look for ways to improve our product offerings across the spectrum of the markets. We serve we view our efforts to add innovative products as well as the ongoing investments we have made to build new and expanded rendering.
Capacity over the past several years as key to improving long term shareholder value.
Sometimes the cycles may not lineup for us, but when they do Darling can generate solid returns and strong free cash flow I'd like to note that we are proud to be selected by Bloomberg on television media group is one of the 50 sustainable climate leaders in the world the <unk>.
<unk> is the original recycler in the us that makes Darling ingredients of the Greenest company on the planet. Thank you for all of the 10000 employees for making Darling. The company. It is today with that let's go ahead and open it up to Q&A Tom.
Thank you we will now begin the question and answer session.
Ask a question press Star then one on a touchtone phone.
If you are using a speakerphone please pick up of your handset before pressing the keys.
Anytime of your question has been addressed and you would like to withdraw your question Press Star then two.
At this time, we will pause momentarily to assemble our roster.
And the first question comes from Ben <unk> with Stephens incorporated. Please go ahead.
Hey, good morning, everybody.
Good morning, Ben.
I wanted to ask maybe starting on your guidance and in particular the margin per gallon guidance for <unk> could you help us think about.
What's the embedded into your outlook, there and where you think elements of variability are obviously, we had very strong margins in the first quarter. We've seen some components of the margin pressure things a little bit on <unk>.
But still as you said the supply demand looks favorable on some I just wanted to kind of better understand what's going into your output.
Ben This is Randy and I'll tag team with Sandy here, a little bit on this one the <unk>.
Margin environment in Q2.
Very similar if not better than Q1, right now and what's driving it is the is really the biodiesel industry, which obviously, we don't participate in is having the pay substantially more for feedstock then than we are as you know a majority of biodiesel made from soil.
The oil and you can see that in the.
At least on the board of trade as the 65 on the non deliverable option here in July.
And those that are run and refine bleached of refined bleach deodorizer paying somewhere between 75 and 85 cents a pound delivered their locations today.
That and you have the in order to produce those gallons you have to drive marginal profitability and the green premium that we referred to which is the combination of the rins in the blenders tax credit Forum are having to do the work the blenders tax credit fixed. So therefore, it comes down to the RIN and we've seen some pretty strong escalation in the room.
That has been provided with lower feedstock cost of the D. G D because of waste fats and oils on our free treatment technology, plus the RIN plus the CFS has come back a little bit here in the in the last 30 days. We've set up of Q2 now that I think will impress the balance of the year.
I think it would be easier to take guidance up there right now than where we're at but we're going to watch from here and see where we're at in.
That's fair enough Sandy that you want to add to that I think we're very pleased with the the margin environment that we're in I think that historically, you've seen that our margin spin very good regardless of the environment that it's been.
But there are some things that we're going to continue to watch, especially as we get further into the year. So theres. The Supreme Court ruling on small refinery exemptions theres. The RVO there of how feedstock prices are kind of progressed.
That said again, you've seen very solid performance out of D. G. D for an extended period of time, regardless of the environment.
Okay, perfect and then when we think about the feed ingredients business kind of two part question here. It seems like the the outlook. There is I guess, just the reflection of what we see in the future strips.
On.
Is there a point of which you you foresee any sort of demand destruction or price resistance.
I know the demand backdrop for the feed environment is quite good all of the protein processors continue to consume it at high margins ethanol is coming back online on supporting corn. So it does seem like there's a great demand backdrop for the grain environment.
But I wanted to get a sense of how you think about that.
That unfolding through the year relative to your guidance and then kind of understanding what's on your guidance. If it is reflective of the current futures.
Yeah. Ben This is Randy again, I mean, clearly the Optionality that is built in the feed segment, we've talked about for the last three years or four years as we've said well if the if the pricing comes back finished product pricing to the 10 year average.
Everyone will be pleased with the investments we've made we've now driven past the 10 year average on these in the feed segment, the core rendering business and the derivatives from the the slaughtered animal byproducts, they're benefiting from the from the corn pricing the soybean meal pricing around the world and.
It's really pretty fascinating to me you know you could probably take our guidance up from the feed segment performance here, even because prices have continued to improve here in the near term, we're probably being conservative we benefit in.
And the these times when corn and soybean meal rise up because we're on alternative ingredients many of the rations around the world and so we become the.
On alternative out there and probably never received full nutritional value, whether we're at a discount of where our premium so.
Think we're pretty well set I think the our fats and oils will we're trading today.
<unk> delivered diamond Green diesel delivered feed customer in the mid fifties, while the bean oil boards at 65, and so that's a historical discount that we've seen so at the end of the day anybody that has fears for us having enough feedstock theres plenty of feedstock here for US and then the proteins of now move.
Up to where soybean meals in the mid force it slightly inverted it's not a giant inverse from to new crop. So we'll continue to see that strength. The interesting thing on on this is and we've had a lot of internal discussion of narratives about it.
Every time.
I'm approaching 39 years of almost 40 years in the business now and when we have ever seen price spikes in the past or cycles. If you will they've been driven because of some crop shortage usually of weather event somewhere in the world on multi hemispheres as it was in whatever 2011 two.
10 of 11. This is the demand driven event, where the combination of meat production the feed animals and fuel production to produce Green energy has now made the lines get very narrow to the point, where even what looked like massive stocks of corn and soybeans, 6%.
The nine months ago, now as the stocks or percentage of use ratio youre down in very low levels and so if you get any disruption in crop production and those lines will cross and.
You could have $9 corn very quickly here at that point youre going to ration something what's interesting to me is as you look at the price of chicken in the price of pork and the price of beef year over year, the the marketers and the producers of gotten ahead of the curve there and have retail prices in the at a point here where.
Theres still profitable even with the higher feeding economics. It doesn't mean that there's not going to be some compression in the margins of the livestock producer here with the higher input costs, but there is enough to keep it there theres enough profitability in the chain itself and to keep it.
Reducing vs contracting as maybe what we've seen in the past year. So overall it looks pretty darn good around the world for us raw material volumes.
The aren't up as sharply as they were a year ago, but they're still up again population growth of around the world. This year and I just don't see much much changing that here in the near term.
Okay very helpful. Thanks, and good luck.
Thanks.
Yes.
The next question comes from Manav Gupta with Credit Suisse. Please go ahead.
Hey, guys. Congrats on the beat on our excellent trees. My question here is what he has seen a number of small players out there who have never actually done this come out and signs of sustainable aviation fuel contracts. A few day are nobody even close to producing and have never actually produced and then.
We look at you guys. The best in the business, who has not announced anything major in sustaining of an aviation fuel as of yet. So my question is a lot of the two best guys on business holding back and I'll ask from some of the other players out there on announcing these contracts, which be the I'm not even sure on executable.
Yes.
This is Andy and so I think in terms of next steps.
First our immediate future is really completing the St Charles expansion and the Port Arthur Greenfield.
We know that these facilities will provide significant carbon reduction opportunities for our customers.
And both projects will be completed before we know it and of course, we've talked about what's next we've left space at the Port Arthur facility in anticipation that there would be something next.
And that's no coincidence as the market develops both in terms of transportation and aviation, we'll have more for you envy of shared when we do move we'll move swiftly and that's in line with our first mover reputation.
We're well aware that SaaS is of.
And on extreme interest to a lot of folks.
We believe that there is a real push by the current administration and their significant support in general for reduced aviation emissions.
It will happen, it's just the matter of time, but what we need is we need the mandates and we need the incentives to turn this nascent industry into a real one.
We're really in the in the stages of preliminary engineering on that of D. G. D. As we speak and we're running all of the financial models that you normally would.
The economics pencil out of course, we one of your of part of it.
Okay. Great. My follow up question. Here, then I think you mentioned this a little bit on the prepared comments.
All of a little bit of pull back on the carbon prices in California.
I think it's seasonal but I would like to the view and also do you think of Washington, Canada and other places open up do you think there's the sustainable support for of carbon prices, whether it's California, Washington on even in Canada or do you think the supply of that this building is a little high so the carbon price can trend down.
Yeah, So I.
The first thing with regard to California, I think here of what Youre seeing there is it just really a matter of that they got hit really hard by COVID-19.
They're starting to open up things will get better I think as we move further into the summer and we see the the transfer station the summer transportation pick up you'll also see that L. CFM pricing pick up on it.
In terms of demand.
Worldwide I think you had asked about that and what we're seeing out there.
Obviously, there are a number of programs that exist today those of your California, Oregon V C.
Now, we see and expect to see Washington join the list of jurisdictions with the CFS.
We also recently signed new Mexico make a run at the CFS.
And it came so close but just ran out of time and so we think that theres significant momentum going into 2022, as well and we know that New York continues to work to get of CFS and place them with hopes that.
One will be included in the climate action Council of draft recommendations later this year, obviously, the the Canadian CFS final regulation will be out of at the end of this year and implemented in December of 2022, and now we're seeing provinces like Quebec, which are enacting their own provincial mandates and then of course Theres Red two which is the.
Totally becoming red three we're early stages of that but.
But we expect those targets will become more aggressive so as we look to the outlook in terms of demand.
We see great things and as we look at really at our sales cycle, which is kind of an indication of that.
We're very pleased you know obviously, we have two facilities that are going to be coming on line in the not too distant future and I think that there was probably a point, where we looked at ourselves around the I always say low or we would be biting off of a pretty big.
A piece of the Apple and filling up these facilities.
But the fact is that as we look at going forward, we're probably not going to have the gallons for everyone that wants them.
And so you know I know that it's not demand.
The demand related but at the same time, we're also seeing things on the supply side. So we're seeing projects getting pushed back and I think you had alluded to something like that and we're hearing less and less about other projects that we won that were once widely mentioned.
And so I think what we're seeing setting up is there maybe you know less supply than some would estimate.
In order to build the increasing demand that we're seeing so all in all I think we think that there's a lot of demand out there and we're really excited about that.
Thank you for taking my questions.
Thanks, Bob.
The next question comes from Tom Palmer with Jpmorgan. Please go ahead.
Good morning, and thanks for the question guys.
So you've seen a big step up in food segment EBITDA over the past couple of quarters. I know this has been covered various times over the years I just had a couple of questions to clarify your pricing model.
Given us some helpful detail on the past on how a penny of higher fat prices translates to $8 million to $10 million EBITDA in the feed segment has there been thought about providing similar figures for the other product from the segment like protein used cooking oil and then I just wanted to clarify the timing of revenue recognition in that segment, if we see spot prices at a certain.
Level today.
We'd be thinking about that as the price of recognizing immediately or do you pre sell in the higher prices today flow through on a slight lag.
Yeah.
Good questions, Tom I mean, obviously the feed segment has a whole bunch of businesses built on that somehow.
Rice exposure on Optionality of other others others don't.
When we want and we've said before a penny a pound.
There's $10 million of annual EBITDA of that's all fats and oils globally, you're seeing Europe be at a higher price on fast, although they've moved up above a $1000 of our 1000 euros of ton now so we're starting to get some more momentum back out of Europe reacting to this but but overall that model's intact.
As we look around our proteins have been lagging a little bit of what's going on in the World. You know Theres limited uses of times for some of the animal based proteins out there.
Then the final question is that you were asking is the lead lag the biggest impact of that is the.
I want to say is the pipeline the in transit to Diamond Green diesel we came into the first quarter with the very very short book on meaning we didn't have much sold out in frontier, we had beliefs of where the market was going at that time and convictions and and so we have now moved on and.
We keep in our strong universe trying to be sold up so what's that translate to in common language means that theres, probably a 40 or 45 to 60 day lag in recognition of these higher prices flowing into our P&L now, so that's where second quarter as the fat prices.
Moved up late in first quarter. They came back down they've gone back up we'll start to flow through again in second quarter and then the question will ultimately be how far how long does this inverse roll forward I think we're very comfortable it's going to roll through.
All of the third quarter and then the question is how how much does it really back off if any in Q4 and really we're already as I said earlier, we're such a substantial discount the palm oil and bean oil today on the fast, but I don't see much downside, there and the proteins or we're fairly priced and youre seeing actual protein price.
Now come back up while the oil shares backing off a little bit so end of the day.
I think youll see.
As we were saying that our improved guidance, obviously that comes through a belief that the the feed segment, which carries the new capacity, which carries the optionality.
We will continue to improve for the next several quarters.
Thanks for all of that color and I just had a follow up on on the back side.
Talked the last quarter once port Arthur is up and running about the possibility of sourcing from other parts of the world.
In your view is the animal rendering industry in areas like South America built out to the extent to ensure the supply you would like or is that of strategic opportunity for darling to explore istar.
Establishing rendering operations.
Well I think the first thing I'll have Sandy helped me a little bit on this here is I would say none of our strategy or investment is built on global origination we believe that theres adequate feedstock today in North America to support our investments. We've said secondarily that we believe that feedstock will be displayed.
From generation one technology.
And the biodiesel industry as we bring the capacity on line. That's number one number two we sit on a half million tons of fat in Europe today that can move in here if the euro of the freight rate on rate position and yes, South America, Australia, and New Zealand Latin America.
China two of the lesser degree have developed industries that the can arbitrage fan in here as necessary.
Yeah. This is sandy so you know I think we feel very comfortable about our ability to secure feedstock both for our St. Charles expansion and for our Port Arthur facility Feedstocks always been a significant part of any investment thesis that we've done for any of the facilities.
And keep in mind that you know the build out of our facilities is really centered around feedstocks, which I think makes us unique compared to many other projects yeah. Our locations of where there are a lot of agri of agricultural products that naturally funnel into it and that's no coincidence.
We like the U S. In terms of the supply of feedstocks and Needless to say Darling produces a significant amount of low carbon feedstocks in the U S. And finally, we you know we do see growth in feedstocks down the road in General and then specifically within Darling as they continue to enhance our collections and expand our control.
Various low carbon fuel.
Feedstocks, So I guess in the end of the feed stock supply chain has always been a differentiator between D. G D on at the other projects.
Thank you.
The next question comes from Sam Margolin with Wolfe Research. Please go ahead.
Hey, good morning, everybody, thanks for calling the amount of good morning.
Just a follow up on on <unk> margins and the strength. So look as you know a lot of people focus on that unit cost spread between the.
The byproducts and sort of fresh vegetable oils is there anything else going on on the operational or technical level.
That's worth calling out maybe of yield outcome that was that's generally better than modeled or something beyond just what people see on the screen on the price per pound basis.
Oh, Yeah, you know I think we're always trying to improve our D. G. D facilities really what I think you know the the most important thing and it is with regard to our pre treatment facilities that gives us a huge advantage at D. G. D. It allows us to source you know the.
The lowest cost of feedstocks and you're seeing that show up on our margins today.
Yeah, and I think Sam this is Randy that you know I think thats, well said I think the secret sauce of is the the flexibility of our origination that comes into the free treatment.
Clearly theres never Indian operational efficiency targets that are happening on <unk>.
<unk>.
They're just they're just awesome people in the world of optimizing the the the unit down there between yield.
Collectively we work on Ci scores and then ultimately customer mix and then we've talked in the past about Arctic grade and what were the product mix that we're making so you put all of those together and it's quietly a very definable and unique in a sense to us the advantage that youre starting to see out.
There.
Okay. Thanks for that and then just switching gears to the base business and maybe I'd ask you to expand a little bit on your thoughts on on demand and how this is a unique cycle I mean, just how would you characterize what you're seeing in demand is this a special in the year for growth on <unk>.
The rate of change basis, or as what we're seeing sort of also like the cumulative effect of two decades of China in the WTO and on people on the world moving out of poverty and therefore is in that sort of adds to the structural duration of of what you're seeing thanks.
No. It's of Great question, and hopefully my Crystal ball of doesn't have a fog in it but.
For us as we looked around the world you know our thesis has always been very simple population growth wealth creation and two things happen. Once there is wealth created you use a lot of energy and you like to eat better and all of those confluence of those are coming together now around the world.
Of the pandemic, probably interrupted that for better part of the year, but we're seeing appetite for protein around the world like never before I mean, when you look at China and I have been.
Absolutely paradoxical on on my belief the China has the derisk their food supply. They don't have water. They don't have land there at full production on what they can produce and then you take the animal disease risk that they've experienced and it's really put into the four light and foresight here of what.
What they have to do on the world market. So.
The six months ago, we thought they were replenishing the hog herd and I think they were I mean, we would tell you what how do we know that we had picked blood coming into our five blood processing plants in China, and then we had pigskin coming into our central China Gelatin factory for the first time in almost two years.
So thats pretty good indicator that has slowed down again tremendously almost 50% of what it was in November if not less so China loss of a portion of their hog herd again and the question will ultimately be how do they.
Is this a cycle that the really industrialized institutionalized commercialize the bigger farms I think the answer is yes, and China has a magical way of making things have happened faster than most people on the world understand but we've never seen.
This type of demand in the world all around.
Every one of our plants in the world is full today to produce meat and I don't see anything slowing down that part of the picture in the in the near term here in the near term.
I can't even put years on that and I just think once that appetite is there. It doesn't go away. So you know that.
Where we've said and tried to characterize this as demand driven versus you know a crop shortage in North America, or South America or the wheat crop got interrupted in the in the Balkans of the Ukraine and so this is this is very different all set.
Talk both sides here I mean, China has a magical way of being one of the best traders in the world and they can change on a dime with policy and put a halt on some of this but I just don't see them doing that this time, they've got such a severe shortage of meat and the way to look at that as you look at cold storage of of products here.
In the U S and they're really of historical low so quietly the meat is moving out of the country. Its feed in the demand and I don't see anything slowing down.
Alright, thanks, everybody.
Right.
The next question comes from Ryan Todd with Simmons Energy. Please go ahead.
Great. Thanks.
Maybe just a follow up on one of your comments during the prepared remarks on on distributions and capital management I know you had talked in the past about external financing for the needs of the expansion do you have of revolver that you got there did you the I think in in March.
But I think you you commented that you wouldn't be likely to see distributions until.
Hum.
So Q4, when the expansion starts up of that.
Is that how we should think about it or will you look the tap the revolver over the course of this year or will you look to the hold out until the expansion of starts before we would see kind of distributions to the parent accelerating.
Yeah, Ryan this is Randy and brand now and Sandy will try team. This a little bit of from from a macro perspective. We are now what is this may June July August September we're four months away from starting up the second machine.
You know at that time, then you're going to be out of 700 700 plus run rate.
Maybe $2 50 of gallon.
Dividends become really possible as we start that new machine up here and start to pull back I don't think Poland from the revolver does much for any any any of our capital structure. Today is we're not in any risk of of that or have anything to really push on the the timing of <unk> three and <unk>.
The referenced and as we referenced in our comments clearly we're looking at ways to bring that online as quickly as possible.
Slated for second half 'twenty, three but as we complete number two clearly we will turn our focus to that we're blessed right now at the with the.
Kind of the troubles, if you will in the in the petroleum industry of the reduced capital program, Sir It's made great labor and really the mechanical and pipe fitting shops available rather than sharing them with somebody else for a percentage of their capacity. We've got access to them. So ultimately you know the timing and the size of.
Of the dividends when you if you say <unk>.
Moving to on a quarter to $2 50 for next year 700 million gallons of that's.
The 1 billion of $7 50, that's $875 million plus we don't see much change in the core business next year, given the demand driven cycle.
Hang with US here six months from a pretty significant cash coming over the transom.
Oh, Thanks, I really appreciate that maybe since you're talking of the expansion.
Yeah.
A follow up there I guess first on on D. G D to any any color on how you think about.
Like how much time that takes the ramp up volume metrically, how much youll see kind of in the fourth quarter of of this year and into the early part of the next year and then as you were talking about the the capacity on the pipe fitting and on on some of the construction side. We've obviously seen a lot of significant inflation in the mark.
But right now on raw materials, including steel of pricing is there any risk to the D C. The threes.
Capital budget or did you price these contracts before a lot of the stuff kicked in.
So this is sandy and what we've told you. We've given you guidance in terms of of total volume for this year.
Those include volume from D. G D two coming on line as well and we expect to be fully up.
And 'twenty, two and obviously, we're saying that it's prior to that.
Yeah, No I think you can draw your conclusions there in terms of construction cost you know obviously, we're nearing the end of the St. Charles and the expansion and everything appears online and on budget, there and with regard to Port Arthur you know, we've driven pilings, we pour foundations, we've ordered all of our major equipment and we did that early on.
I know, Randy Randy and John Bullock, often talk about our first mover advantage and I think when it comes to the this is clearly an example of that you know we moved quickly and we hit the the market right in the right window in terms of when we made our purchases.
We've also done this before and we are of Great model, that's been fully engineered and working it's always easier when you have the blueprint than when you're having to make changes on the fly and we've seen other projects report in our 20% to 25% increases in cost on <unk>.
The things like that like you've mentioned we're not.
And I, you know and so I think everything looks very positive we are not projecting any increases at this point in time. So we're very proud of both of our projects and the progress and I know that Jim had mentioned earlier that we have of some fixtures in the the deck for you on that.
Thank you.
Okay.
Yeah.
The.
The next question comes from Craig Irwin with Roth Capital Partners. Please go ahead.
Good morning, congratulations on the really strong results.
Thanks, Craig.
Randy I wanted to ask if you can connect the $1 1 billion and EBITDA give or take on the guidance. If you connect that back to free cash flow. This year I know there is uncertainty around exactly how much share cash youre going to get from Diamond Green.
But what do you expect the core operations to throw off.
And the is.
Is it fair for us to expect cash cash flow to strengthen in the second half.
Hey, Craig this is just the breadth of.
On free cash flow. This year, you know, we've got the 300 plus million which more.
More or less of the last several years had on Capex.
Although our interest expense is coming down we will still see that probably it.
In the 60 to 65 range 40 $45 million of cash taxes, we.
We will see kind of how working capital ends up for the year right now with the higher prices, there's obviously a little bit of pressure on on.
Changes in working capital but.
We're pretty good shape, there in Q1, which is typically our toughest the working capital quarter, but.
Really when you put that all together with the guidance of where we expect the base business to be and you.
Disregard dividends for the moment in that discussion, which we just discussed the would be the tail end of the year and meaningful ones. Certainly next year from Diamond Green, We do expect to have noticeable reductions in our AR and our.
That level this year.
We're one of six seven on our on our leverage ratio.
Really for the year.
Even without dividends, we expect that.
To remain at or below two times.
Great. Thank you. So this is a very similar environment today to when you did the acquisitions of both the Griffin and buy on.
I've heard you explained in the past how.
Environments like this tend to increase the appetite.
The family is the control of some of these very large rendering the.
Competitors of yours, obviously, much smaller the music, but large for the market.
<unk>.
The question is are you guys elephant hunting again, North America attractive for you or would you be looking more for elephants, maybe grazing in South America or Asia.
For zebra as we own all of the elephants.
No.
I love it.
No.
Craig It's of Great question, and you know for the first time, we completed the board meeting here this week and for the first time the opportunities around the world are starting to surface again post.
Some pandemic recovery dependent on which continent, you're on so yeah, I mean, I think number one the balance sheets in order number two of the free cash generation between now and 'twenty $3 24 of its pretty well predictable and yes, we would like to grow in but we will do it smartly.
And it'll be driven around building the moats around the kind of the four platforms I talked about being that our renewable energy platform, which is the sustainable aviation fuel and our green energy businesses in Europe around and viral fly around our collagen peptide business and then we love any book.
OLT on.
Core rendering businesses that give us number one of our presence in the geography number two gives us the arbitrage of feedstocks. So.
We're actively looking around the world and for the first time, we're starting to see some stuff move that are that may come to market here of this year or later this year.
Excellent well you guys are definitely execute on the long term vision. So congratulations I'll hop back in the queue.
Yes.
The next question comes from Ben <unk> with Robert W. Baird. Please go ahead.
Hey, good morning, guys.
The good job good job on the call.
Randy I can look up the transom.
I didn't know that word.
The three three questions.
Two big picture of maybe one by yourself.
Big picture.
The in place.
The environment.
You talked about of lasting for four.
For the foreseeable future of I think of what I heard.
But you've been in a lot of.
Regardless of those 39 years.
I guess like how do we get called the day.
Around that.
The all your predictability the.
The second thing.
I get the question of quite a bit the result.
The facility coming on with the soy crush the.
Also the yesterday you guys knew about the more before but the the.
The question is like does the returns go to the ethanol businesses.
It comes into the business what separates.
And then the third the new sort of question.
The question is.
How do we think about.
S T a day.
I see it ticks up a little bit you're obviously theres some leverage.
The Big Bell, you could controlling costs, even though you're on.
High on the Hog period, let's say thank you.
Lots of lots of embedded questions. There then.
And clearly the business has some tail winds right now that it has faced headwinds for the last five years I'll break these down for you.
Clearly the crushing industry, both here and in the U S and in Canada for North America on canola of responding to the increase in demand or the anticipated demand.
For feedstock the feed renewable diesel investments in the near future and I think that's all well and good the crushing industry will take three years probably to build out.
And you've seen the scale of some of these announcements whether it's us.
The North Dakota crushing plant for ADM or it's the Sydney, Ohio expansion for Cargill, or canola for Richardson, and Canada, Bioterror, and Cargill, and et cetera, et cetera, and at the end of the day those are per 1 million ton crush plant that's of $3 5400.
Dollar of investment today U S. Dollar the other thing that you've got to look at is of any of the renewable diesel stuff that's been announced out there.
It requires refined bleach deodorize.
<unk> oil and that capacity is also needs to be expanded the day I.
Think van it's pretty simple and then I'll turn it over to Sandy is marathon has proven the great experiment true they used up all of the refining bleach and the euro rising capacity in the United States by starting up of plant and so.
Today I'm hearing that <unk> is trading somewhere between 15 and 20 over the 1500 in 2000 over and so clearly that capacity is going to have to be expanded to as we go forward and Sam do you want to talk about renewable diesel capacity on your views.
So renewable diesel capacity you know I think we touched on this maybe in an earlier call and obviously there are projects that are moving along and moving along well probably like ours and you know, but then there are projects that we're seeing you know.
Kind of fall behind in terms of timelines there are ones that we used to talk about but the we don't hear much about any more today and so while we probably saw this what some people think of the these aggressive amount of of gallons coming out on the market I don't think that we see it as aggressively as some other people do.
And then SG&A on brands that want to take that.
Yes.
Then I guess my guess is growing quite quickly my question too low.
On the ethanol right.
We had the boom bust cycle.
And then maybe you answered this.
But.
The.
Spell it out for me because I'm flow.
Why is the difference.
The net.
So Jim why is <unk> different in ethanol singer of X ethanol I saved you from that business.
Okay, Thanks, Randy Hey, Ben.
It's different because of the boom that you had with ethanol buildout was to meet a certain level of the mandate driven by the renewable fuel standard is different from renewable diesel because the low carbon fuel credit our low carbon fuel standards around the world about reducing carbon so you've got more.
<unk> and demand for lower Ci, scoring products like what D. G D makes versus ethanol and its reduction. So you you did the.
The element of the backdrop is to it comes from the fuel side itself a renewable diesel is 100% fungible with petroleum diesel today, you don't have limitations on what you can can blend in and the amounts are.
Doesn't have to be handled separately can get moved in the pipeline when it's back up and running.
So you've got a variety of just differences from that standpoint, and in all sorts of costs. If you remember back on the day when.
When they could get the 20 per cent ghd reduction they were spending dollars $65 75, a gallon to build we're looking at plants that are at least the way D. D. D is built you know three around $3 of higher so as of the capital of limitation.
The limitations and the advent of the just the overall market is a different from the standpoint of on RFS versus Earl CFS around the world.
Ben This is Brad just just to circle back on the SG&A, Yes, we were up a little tick there of about $1 2 million versus a year ago. We did have them all time ploy or one 3 million additional crew.
Cruel that we made on on withdrawal liability on the on the pension side, but when you strip that away. We're flat really the there you had some increases of several million due to FX. When you got the Euro USD 1.2 versus one one insurance as we've talked about before the last of couple of quarters of.
Is up year over year, and then we're actually this year and as Randy and we've talked about the guidance up on the performance. We are accruing more on the compensation incentive side instead of playing catch up maybe on a Goodyear later in the year, we've upped that so that'll be smoother during the year end.
And then on the on the flip side, we've obviously had a travel offsetting that with travel down and the and the stock awards expenses down versus last year, just sort of the difference in the plan on the cadence of that so I expect SG&A to run right in the in this range absent something extraordinary which many.
Things run through SG&A being around around this level or a little lower the.
Following quarters.
Thank you guys.
I know that was the lot of questions.
Okay.
Okay.
The next question comes from Matthew Blair with Tudor Pickering Holt. Please go ahead.
Hey, good morning, Thanks for taking my question and congrats on the the guidance raise.
The question is with the volatile pricing the recall on the quarter were there any significant shifts in your R&D feed stocks.
And I guess on the similar note are you seeing any improvements in newco or GTO availability.
Sorry, it's taken some of this is sandy.
And in terms of our feedstock plays and I think you were asking you know have we changed our mix based upon what we're seeing going on in the market and and really no I mean the.
Everybody knows the three products that we typically use and that's the Yugo D C O and animal fats and you know at any one time, one of those could be higher or lower price than the others and we're going to take advantage of that because we of the machine that can do that on and so I don't you know that really wasn't a major thing for us we just.
Took advantage of what we could in the market.
In terms of Yuko and I'm, sorry D. C. O were you asking if we were seeing more suppliers come on line.
And I you know I think that we never really experienced an issue with either one of those supplies and general I think that you're seeing more and more.
The restaurants coming back on line and so within the the market in general Theres, probably more more pounds out there, but I don't think that we've seen any substantial yeah, hi, Matt This is Randy.
I always on.
On a smile, a little bit what given the number of conversations that I have on on <unk> in this country.
It's not a material amount of the entire feedstock as we've always said you know the there's 2 billion pounds of at Darling has you know.
The 40% to 50% market share in the United States, we're still down about 8% to 10%.
Versus let's call it 2019 and Thats predominantly in the in the in the East Coast West Coast, Northeast and California to be exact where theres still not open. So it's really not a material discussion for even in the R&D business you would never build on R&D plant and say your lead feedstocks going on.
C O because there really isn't any of <unk> and.
And 50% of its already.
Go on to our location I can't use the word control like Sandy does but I'm not allowed to but.
That's where we see it but at the end of the day I think youre going to see more and more restaurants opening up with food service comes bigger and better demand for protein, which should make additional rendering and animal fats available as we go forward here.
Yes.
Sounds good thanks for all the details.
And then my follow up is for the 30 million gallons of renewable naphtha.
With the coming with the Norco expansion.
What markets does that go into those that go on to the Kim's markets does that go into the gasoline and can you talk about how the economics on renewable naphtha stack up versus the Rd.
Yeah. So you know I think renewable naphtha as the new product for US, which you know were just going to be able to to produce a once a day.
The expansions online.
But like renewable diesel you know, we view naphtha as the worldwide market and we're seeing potential opportunities out there around the globe and it may be in different forms whether that's in terms of green gasoline or possibly used as the feedstock and other process I think that there are a number of options, but we're just not quite.
Fair, yet where yeah.
We saw the actually produced it in strip that so.
Got it thank you.
Yeah.
The next question comes from Ken Zaslow with Bank of Montreal. Please go ahead.
Hey, good morning, everyone.
Good morning, Ken.
Can you dimensionalize, how each new policy would create demand relative to the California Bill.
Because there seems to be some real runway here in terms of the policies that are coming down the pike.
And it would be helpful. If we could get some idea of that is going to be the lead to continue the momentum.
Thanks.
So so there's two parts of their is am I right that that continues the momentum can you dimensionalize how much incremental.
Demand there would be with each new policy of that coming down the pike.
Yep.
So yeah, I think Youre right. You know we had mentioned earlier that there is an awful lot of momentum and we're seeing a lot of lot of and new programs out there and potential new programs out there.
Obviously.
We now have Washington State, which is in play and we're so excited about that and that's about it.
8 billion gallon market per year, New York is also on that horizon that we're looking at and that's probably the $1 4 billion per year, New Mexico, which we think has a decent amount of them than them going into next year is about you know a 0.5 to <unk> 6 billion gallon market per year.
And then obviously, Canada is going to be coming on line and there are about an $8 5 billion.
Billion gallon market per year, and then I think I had also mentioned, Quebec early on them as well and that's probably close to a $1 2 billion on market itself and so there there are of significant volumes out there. There's a lot of demand being created and and these are just what we're seeing today.
And so I think that there there you know the the.
Feature of looks really bright.
Great and then.
And in terms of the cash deployment you did obviously mentioned of the acquisitions.
The amount of cash that youre going to have.
It can be very hard to spend would you think about.
Allocating that to either onetime dividends share repurchases anything like that.
Again, I think it's going to be hard to spend all of the cash you're going to bring in any thoughts on that.
Yeah, I was as I said clearly in the in the boardroom the last couple of days.
That was put on the screen as the you know as we always call. It the cigar box starts to build cash here pretty strong.
Strong in 'twenty, two and then just.
Massive in 'twenty three.
At the end of the day, Brad has around $250 million of term be to pay down than we're sitting with the.
The summertime callable or fall callable.
Three and five eights eurobond, that's out there and then we've got of five and three.
Three of $5 five of the quarter U S bond in the 'twenty two.
Long term I suspect the we'd like to keep that.
That some of that debt out there if not the most of it and extend it out on the times right before inflation moves these rates back up and then at the end of the day.
The opportunities that were looking around the world. The hopefully we'll find something that makes sense that a fair price zone that we follow our model on and then can you send it out right. The board eventually going to have to evaluate you know a one time dividend a regular.
<unk> dividend or buybacks of of some magnitude going forward and as we've called it in the boardroom with the high class problem don't want to say, we're kicking the can down the road, but at the end of the day, we still got a little bit of time on our hands before we have to make that call.
Great I appreciate it.
And our final question today comes from Adam Adam Samuelson with Goldman Sachs. Please go ahead.
Yeah. Thanks, Good morning, everyone and thanks for squeezing me in.
Good morning, good morning.
Okay.
A lot of ground has been covered maybe didn't hear much about.
On the food business.
Okay.
Both on the quarter and the forward outlook, which was unchanged.
I know you've been very competent Randy on the growth on oncology and peptides and some of the new capacity. There just help us think about some of the dynamics in play.
In that business this year and how we should think of exiting the year into 'twenty two.
Yeah, No great question, Adam and I on a fun ones of kind of a kind of conclude what the feed segment clearly because of all of the optionality on there it looks like the shining star, but the reality is the growth in the annuity side and then the strong cash flows of I've been always in that food segment that had been very predictable.
The two years ago, we laid out of plan to add the three.
Three of four new spray dryers out there and then an enzyme conversion units to.
To capture of the growing college and peptide world, which essentially for those that are listening as a water soluble or.
Use versus in the mall, so fire type of application and are in regular gelatin and really we.
Not only the D. G D of or do we hit a home run there we are hitting a home run in the collagen peptide world right now from a demand perspective that capacity is all coming online right now when I say coming online it's running the sales ledgers of building.
Nestle's investment or not necessarily the health and nutrition and invested into vital proteins is clearly given kind.
Kind of a great turbocharged through the vital proteins brand and allowed us to grow with that of the number one brand in the world as the as we call. It the blue jar of that's out there now and that's a that's Bruce low Darling product that's in there and so we see that continuing to grow very nicely.
Been led by Jennifer Aniston on she has quite the following out there.
She was introduced recently and some some Dutch commercials and the sales are now five to 10 times higher than what the anticipated. So we're excited about it.
In that area all set in the segment, Brad the and I watch that segment in the 125 $1 40 range for years and years and then we said $1 60 last year and then we said we would probably be in the 100 Eighty's. This year and then we would be on the 200. So I think we're still on that trajectory as we change the product mix.
Here and get the capacity sold out and then we're working on that the biomedical device in the area right now and Thats, probably two or three years out but that in our world as we talk in the boardroom about the next big thing is is in that those applications for collagen peptides as as we look around the <unk>.
World going forward, so the Rus low model as we took it back in the 2014 was was 100%.
Gelatin driven model on and then we've rationalized that and refocused the to now where it's a both a gelatin collagen peptide business in sooner the will have a third leg to it and the biomedical health and nutrition area. So hope that helps.
It does and kind of I can just.
The squeeze one quick one in.
I think I heard this earlier what is the capex expectation both at the parent but also what the Diamond Green Capex this year.
On the on the base business.
We're looking at about 310 $312 million.
And we've just 60 here in Q1.
And so how do you want to comment about the GB of little bit. Yeah. So you know this year of Nextera really are two big Capex here. So we're finishing out on D. D. D. Two this year and starting our.
Working on D. G D. Three as well so you know you're talking probably close to $800 million.
In both years and book here, Yes.
Alright, great that's really helpful. Thanks, so much.
Okay.
This concludes the question and answer session I would now like to turn the conference over to Randall Stuewe for any closing remarks.
Thanks, Tom I appreciate everybody's time today and hope you all stay safe.
In our IR deck, there's a list of upcoming <unk>.
<unk> will be speaking at and look forward to talking to everybody in August and stay safe. Thanks for all the questions today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Yes.
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