Q2 2021 Darling Ingredients Inc Earnings Call
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Please note. This event is being recorded I would now like to turn the conference over to Mr. Jim Stark. Please go ahead.
Thanks Andrea.
Welcome to the Darling ingredients Q2 earnings call.
Participants on the call. This morning are Mr. Randall C Stuewe, our chairman and Chief Executive Officer.
Mr. Brad Phillips, our Chief Financial Officer Mr.
Mr. John Bullock, our Chief strategy Officer, and MS. Sandra Dudley, our senior EVP of renewables and strategy.
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 and 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 and 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 hand, the call over to Randy.
Hey, Thanks, Jim Good morning, everybody. Thanks for joining us on our call. This morning, and it's great to have everybody here over the trailing 12 months darlings ingredients business is generated in excess of $4 billion and sales and now more than $1 billion of combined adjusted EBITDA to US. This is a significant breakthrough for all of our stake.
Holders and puts us on an accelerated path to continued growth across all of our business segments in the coming months and years.
Barley, opportunistically repurchased approximately $76 million of common stock during the second quarter, because we believe that our diverse green global business will continue to appreciate and value in the near future.
We saw many records and Q2, and all segments and including our joint venture Diamond Green diesel and total our global ingredients business generated approximately $222 million of EBITDA and <unk> produced $132 million, which is our half making our combined adjusted EBITDA just shy of three <unk>.
<unk> 54 for the second quarter.
And we're very excited about the anticipated startup of the new 400 million gallon renewable diesel expansion and norco.
We are approximately 60 days from the largest project of its kind to begin producing one of the greenest hydrocarbons on the planet.
Also we are pleased that the startup of the 470 million gallon renewable diesel plant located in Port Arthur Texas has now moved through the first half of 2023 for startups once port Arthur is on line. The <unk> platform will have $1.2 billion gallons of renewable diesel production capacity and <unk>.
Million gallons of green gasoline capability with that now I'd like to hand, it over to Brad to take us through the financials, and then I'll come back and discuss our outlook and why we're raising our guidance for the balance of 2021, Brad. Okay. Thanks, Randy will take a look at the income statement first briefly net income for the second quarter of 2021.
Totaled $196.6 million or.
$1.17 per diluted share compared to net income of $65.4 million or 30 non cents per diluted share for the 2022nd quarter net.
Net sales increased 41, 2% to $1.2 billion for the second quarter of 2021 as compared to $848 seven.
$7 million for the second quarter of 2020.
Operating income increased 152, 4% to $268.3 million for the second quarter of 2021 compared to $106.3 million for the second quarter of 2020 the.
The increase in operating income was primarily due to the $104.3 million increase and gross margin, which was a 48, 2% increase and gross margin over the same quarter and 2020.
Adding to our operating income improvement was our 50% share of Diamond Green Diesels, net income, which was $125.8 million as compared to $63.5 million for the second quarter of 2020.
A quick comment on gross margin percentage as it continues to improve year over year and sequentially for the first six months of this year. Our gross margin percentage was 26, 5% compared to 24, 8% for the same period, a year ago, which comes out to a six 8% improvement year over year.
We continued to experience higher protein and fat prices and the second quarter compared to the same period a year ago, while at the same time, maintaining historically high volumes.
And it's better pricing environment and strong volumes are driving the improved results for the first half of 2021 and that trend. We believe will continue for the balance of this year.
Depreciation and amortization declined $4.1 million and the second quarter of 2021 compared to the second quarter of 2020.
This decline is primarily in our food segment, where certain assets became fully depreciated and or amortized by the end of 2020.
SG&A increased $8.9 million and the quarter as compared to the prior year. The main drivers for the higher cost and the quarter were related to FX travel and insurance increases.
Interest expense declined $2.7 million for the second quarter 2021, as compared to the 2022nd quarter now turning to income taxes. The company recorded income tax expense of $55 million for the three months ended July three 2021.
The effective tax rate is 21, 7%, which differs from the federal statutory rate of 21% due primarily to biofuel tax incentives the relative mix of earnings among jurisdictions with different tax rates and certain taxable income inclusion items and the U S based on.
Foreign tax foreign earnings for the six months ended July three 2021. The company recorded income tax expense of $83.7 million and and effective tax rate of 19, 2%.
The company has also paid $25.3 million of income taxes as of the end of the second quarter.
For 2021, we are projecting an effective tax rate of 22% and cash taxes of approximately $20 million for the remainder of this year.
Our balance sheet remained strong with our total debt outstanding as of July 3rd at approximately 144 billion.
And the bank Covenant leverage ratio ended the second quarter at 171 times.
Capital expenditures were $65.3 million.
For Q2, 2021 and totaled $126.1 million for the first six months of 2021.
Which is in line with our planned spend of approximately $312 million and capital expenditures.
For fiscal 2021 as a reminder, this capex spend does not include our share of the capital spend at Diamond Green diesel which continues to be funded by internal resources at DVD that Randy I'll turn it back over to you. Thanks, Brad as our global ingredients business and Diamond Green diesel continues to perform well we are once again.
Updating our combined adjusted EBITDA guidance for 2021, we are raising the guidance for the year to 1.2 dollars 75 billion as we indicated in the press release yesterday and also on slide five of our IR deck.
Through the first half of 2021, we have produced $638.5 million of combined adjusted EBITDA and we believe based on what we see and our markets at the present time. The second half performance of 2021 will be as strong as the first.
<unk> has sold 162 million gallons of renewable diesel and the first half of 2021 and with DG due to starting up in Q4, we should see over 200 million gallons sold and the back half of 2021 I do want to point out that we would expect the EBITDA margin per gallon for D. G D to normalize back into.
The original guidance range that we gave you a $2.25 to $2.40 per gallon over the next six months and I would also add that is not a bad thing, earning 297 EBITDA per gallon and the first half was well above our expectations and with margins normalizing and this second half PGD can still put up EBITDA per gallon.
The $2.50 per gallon during all of 2021 remember that our focus and <unk> is to improve our efficiencies and lower our carbon index scores and innovate production of renewable diesel and other renewable products that we can make like renewable naphtha and soon sustainable aviation fuel with the largest plan.
Form and North America, DGB will continue to take full advantage of its first mover position for a long time to come now that we are less than five months away from 2022, we think it might be time to frame up our expectations for the next calendar year with our current global ingredients business is approaching $800 million of EBITDA.
For 2021, we believe that our base business could grow and the range of 5% to 10% for 2022, our assumption for this growth is continued higher demand for animal proteins, and fats and continued growth of <unk> and product sales around the globe. We anticipate the DGB will earn $2.25 per gallon.
In 2022, and a 700 million gallons sold rate that puts darlings have a DVD EBITDA at approximately $800 million. Our <unk> outlook for 2022 is based on <unk> ideal location are incredibly flexible logistical platform our processing capabilities and the fact that we have by far the <unk>.
Most experienced and capable team of people, which makes D. G D. The lowest cost producer of renewable diesel and the world, adding it all up Darling ingredients combined adjusted EBITDA for 2022 should be and the range of approximately one six to $1.7 billion.
For a quick comparison last year, we reported 841 and $5 million of combined adjusted EBITDA, where we stand today. The 2022 estimate is double what we earned in 2020, yes, our team needs to execute to deliver this performance next year and I am very confident that they will because for the last half year.
And a half our 10000 employees have delivered stellar results and what has been one of the most challenging environments, a business or a community or our people and people around the world that have ever faced with the ongoing pandemic I'm very thankful for the hard work and dedication and finding ways to make our global platform home on all cylinders and.
And the face of COVID-19, with that let's go ahead and open it up to Q&A Andrea.
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And the first question comes from Ben B and venue of Stephens. Please go ahead.
Hey, good morning, guys and congrats on a nice quarter and weren't even.
So I wanted to talk about.
And capital allocation you you bought back some stock in the quarter, while in absolute terms. It was not a significant amount I think it's important that you guys and the <unk>.
Obviously, you have the confidence and the business and your commentary on 2022.
Underlying that as well.
Can you help us think about given all of the cash flow coming and the door in.
In 2022.
How do you think about capital allocation priorities, how do you toggle between buybacks or potential special dividends or M&A and and just help us think about that paradigm and you're using.
Yes, Ben this is Randy and Brad and I can tag team and it's obviously over the last couple of years, we've used some buybacks opportunistically once again.
As the market tried to digest.
And some global commodity volatility during the quarter.
As we looked at our base earnings the DGB current earnings and outlook and just.
It just say our earnings are robust and the forward look is very strong at this time. So it just felt like the right thing to do.
Two to allocate capital to it I mean, our M&A slate has not developed to a point out there were anything eminent and obviously, we'll always look at things.
Been very very.
And kind of gentle and our approach and and and controlled over the last four to five years as some things have come to market to not overpay I mean, clearly allocating capital. The DGB has absolutely been the right thing to do to the returns that are available to us.
And at an inflection point and that's the reason, we decided to step out and talk about 2022 today.
While we put 800.800 out there or you can go $758.50, whatever you want to do you can you can do it plus or minus $50 million to $100 million that doesn't change the trajectory that the companies on now and what I mean trajectory of the amount of free cash flow, that's going to be available to it to either buy back.
<unk> stock put a meaningful dividend or acquire supply chain or growth assets that makes sense. As we go forward I mean, as we've tried to tell people as you look into October.
October here and God willing and.
Nice start up and <unk> and all of a sudden you've got a 700.750 million gallon asset at two and a quarter or $2.40, a gallon now generating significant cash that puts meaningful dividends and the 2022 portfolio absolutely significant dividends in 2023.
And 2024. So this is not just a snapshot of the world as we look forward, we're going to have incredible flexibility as we look to either pay down debt. We've got two bonds out there we've got a little bit of term be pre payable and then we'll go forward from there I know that.
We'll probably get questions on sustainable aviation fuel, we might as well hit them up right now.
John Bullock and Sandy are working hard on the technology, there as to whether it's a bolt on or whether it's an additional plant as we go forward, but I think the thing that we feel confident about is now that we understand what it takes to make that fuel will comment more later as questions come on what it takes to develop that market but.
<unk>, we don't see our business stopping and growing here in the next three to five years, we kind of see a platform now that is really agitated to the point that it can continue to grow and have a lot more fun.
That's great. Thank you for the color.
If I think in the near term quickly.
And obviously, we're awaiting some sort of verdict around RVO and the RFS.
You alluded to turbulence and the commodity markets last year as an opportunity to buyback stock could you talk about that dynamic, particularly if we juxtapose that with your.
And your outlook and the confidence there the opportunity around Saf.
And cash flow is that the sort of impact.
Potentially presents opportunity to be more aggressive with capital allocation from a buyback perspective.
And how do you think.
Depending on what the range of outcomes might be how do you think that dynamic ultimately really have an influence on your business.
Well I'm going to tag team this with John Bullock, a little bit here I mean, it's really fascinating is you wake up again this morning and you see.
The palm oil numbers and palm oil up sharply point bean oil up back again, another 150 points.
I don't know the volatility is going to be reduced here and the near future.
And so what we're looking at around the globe as strong protein demand for meat consumption I don't see that Wayne and I think you can see the meat exports out of the U S whether year over year or frozen stocks things are still pretty strong here I think the U S could produce more meat right now if we could find labor and.
It's clearly a challenge that that is out there.
Proteins to feed animals seem to have stabilized I think we would've felt that those might have backed off the back half of the year and the inverse that was out there, but those seem to stabilize and then fats.
To a degree and I get to Jim start told me I Couldnt take a victory lap and I always do I don't listen to Jim but.
At the end of the day, our goal has always been to get animal fats equivalent to be and oil and we're very close to that right now not refine bleached deodorize bean oil that some of the guys that are out there are having to buy today and the renewable diesel plants, but from our standpoint.
Getting the gum to be and oil and animal fats equal we've been successful and Thats really been one of our 20 year goals around here and Diamond Green diesel two is starting to accumulate the feedstock in order to begin to run at its new rate and.
And separately and October here, and so I think we're seeing that impact now and Thats. What gives US then the confidence that our core business is going to carryover strong both here, Canada and Europe and the supply chain side as we go into 2022, John anything land.
It's important to put this and context, we have been saying for years that both sorts of via an acquisition and Maple leaf acquisition and the subsequent growth, we did which was extremely aggressive for five years on building plants expanding plants. Our volume base has increased magnificently since the last time, we had a strong commodity cycle.
And we told everybody listen we know we're acquiring assets we're below the 10 year average price, but when the average price swings back to the 10 year or as it has now above the 10 year youre going to be surprised at what rolls out of our base business well surprise it's happened.
And anything about these commodity cycles that we're now and as we're talking about a demand driven cycle. Here. This is not supply disasters around the world. We've got a few cases of that going on like with canola and Canada, but largely this is demand driven as demand driven by the ASF issue, which has caused a repopulation of the pig herd in China, and we don't know where that.
And the process and it just still last for a while a lot of the big commodity companies and the grain companies are saying and I think that's going to sustain for a quite a period of time and as per our biofuel policy that is based on solid climate change issues that has to be addressed by the world. So from our view, while we see as an extremely.
Strong I wouldn't call it a commodity cycle, it's a demand cycle, that's being created by strong fundamentals and we would anticipate that would last for a period of time with the volume that we're processing through our machine at this point and time that gives us great confidence to think that our trajectory, which has been pretty spectacular has a long ways to go as we move forward and.
On top of that we've got cash to be aggressive if we can find the right places to allocate that cash too. So it's a nice position.
Okay, Randy John Thanks, So much congrats and good luck with the back half.
Thanks Ben.
The next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.
Yes, thanks, and good morning.
Good morning to you almost answered I'll have my questions and.
And those answers previously Randy, but I'll give it a shot.
Okay.
First on the on the base business as we think about and the feed business kind of where it is exiting the.
And the second quarter you talked about.
You talked about <unk>.
And while prices approaching kind of commodities oil and food grade pricing.
And as Victor can you characterize the implied deceleration and earnings and the feed segment and the back half of the year. If those spreads continue to narrow, especially with diamond green ramping up it does seem like you're Inc.
Implying at the second quarter might've been a little bit of a high watermark on feed EBITDA and just wondering what drives that.
Yes, I don't know that we would imply that the second quarter was high water I think.
And I think and the words of Zac Brown, the tide still ryzen here and what I mean by that is as Diamond Green diesels.
You know what they are paying for fat down and today is in the mid Sixty's and.
And so that was my comment about above prude Begum soybean oil now.
And if you think through and second quarter those numbers were in the fifties and so obviously sandy can address if we need to the.
The margin structure and D. G D. And then clearly there there is some margin compression to normalization off of the higher feedstock prices, but the higher feedstock prices are now, giving us the confidence Adam for third quarter and fourth quarter. So I don't see any week.
And this in the feed segment and the third or fourth quarter seasonally the third quarter.
As always seems like it's a little weaker and that.
And that's due to the discounts that we would take on selling and animal fats.
That we are of lesser quality or higher acid. During the summer. We now have a machine that can take those and so that should bring a different value into the north American system than we've had in the past.
The one risk that we see out there today is theyre taken six days now and a slaughterhouse to kill and what they were process, what they were and five days and a lot of cases and Thats just due to the absolute shortage of labor that's happened and everywhere in the country whether it's.
Rural and urban as we go forward and I don't know that I see a fixed and the near future on that.
<unk> animals are coming in and of weight and and that seems to be working just fine but at the end of the day. If you think through our system then.
And we now have to run six days, where maybe we were running five or $5 five to keep up with them. So we're trying to manage the cost structure and things around that too to maintain margin. As these guys go forward that said animal production economics, and North America are still favorable and they are favorable around the.
The World is people have the wealth to buy the products. So if you think back and the mid two thousands as core and ran up to six or $8 animal feeding economics became challenged no. One can figure out could the producer could the retailer pass it along how much would be the lead lag time and that.
Process well.
People have money they are eaten at home, they're eating out and theyre paying the prices and so.
You may need and armed guard to get a steak at whole foods. These days, but at the end of the day I don't see really meat consumption slowing down as we said earlier protein of whether they are mixed species.
Species specific or poultry proteins.
Everything seems to be in sync around the world today. The other challenge if we highlighted which is no different than a lot of businesses clearly container freight around the world has been disrupted for various reasons, it's not only 50% higher but it's 50% less dependable.
Now as we try to move stuff around the world, causing some logistical backups at plants here and there, but nothing we're not used to managing to so long story feed segment solid we don't see really any any degradation, there probably stronger and Q4 as we look forward the fee the food segment.
And we've been challenged thereby the reduction of slaughter due to Covid and in South America and Thats.
Our gelatin are our pep and businesses down there, where we process basically bovine hide or beef hide and so we're continuing to deal with those challenges as we go forward, we've been able to get through it and we continue to grow our pep and sales around the world, but it has come with some real challenges.
On origination there, but I think those will start to improve as the vaccines rollout and different parts of the world John anything you want to and.
And you hit it.
Okay, and then just quickly if I can follow up.
And earlier about sustainable aviation fuel and that being a bit of a more of a plant and bolt on to some of the existing infrastructure.
At this point any way to Dimensionalize, maybe what the capital intensity of that could look like or what it would take from a policy perspective before you think about moving forward with any of that kind of investment.
Yeah.
And is the Eddie.
We have looked at the capital.
And.
It's going to obviously mean that we have to either add more equipment or for building. Another facility that there is a specific equipment that will need to be added there and we've.
Kind of steadied, the yield profile and what that would look like and then and then we've done other background work in terms of like the feedstocks and talking to the logical market and.
And then we've also looked at the preliminary engineering as well and we've evaluated those economics and kind of as we said on last quarter's call. Currently today those economics, just don't Pan out, but we think that things look very positive I mean, what we've seen between last quarter and this quarter as we saw on the EBITDA the fit for 55 program came out.
And under that they're proposing and mandate for SaaS and so that's very positive and if you look at that mandate, we don't know that it will.
I'll turn out the way that it's written today.
And it starts off at 2% and.
2025, and it grows to like 62% and by 2050 and so that's we think that that's the path that the he's going down and we think that Thats also a model and that we hit the U S gets to you today and what we do.
And hearing more and the U S. As we've been hearing more about and finance type program and.
And is there typically.
People have been talking about those in terms of $1.50 level.
These low carbon feedstocks it may progress up from there and so.
And I think both of those are very positive things that we're seeing right now and I think that if we can get the right and mandates and the right incentives in place.
We'll do what it's supposed to do and it will produce mcgowan that are needed and.
And as long as those things are in place <unk> will be a part of that.
Alright, great I really appreciate all the color I'll pass it on thanks.
Thanks, Adam.
The next question comes from Manav Gupta of Credit Suisse. Please go ahead.
Hey, guys congrats on the good quarter and the guidance range.
All day.
And I wish people, who are listening that renewable diesel is a learning curve and there's a lot of learning that has gone over the years between you and below which is allowing you to deliver b does not know one of these refiners, who initially talked all you need is a broken hydro treated globally and get on is now coming out and saying I actually may not even stock my plant.
So just sitting here and wondering theres a lot of capacity announced here.
Some of these new entrants try and copy our model and realize the margins.
And really I would absolutely elusive to them do you actually think this capacity comes on and doesn't really stock or do you think some of these capacity announcements that actually can send him.
Yeah, and I know this is John at the end of the day I think we never want to disparage anybody who's a competitor or a potential competitor what I would repeat is that building a machine that is well located that can handle the low carbon and feedstocks that allow you to maximize your prop.
<unk> ability that has flexibility to hit all of the best markets and the world is not easy and everybody. That's jumped into this business. Many of them have pretended that this is like and being in a little wave pool that you can walk through it and be fine.
Right and renewable diesel plants is difficult and it takes tremendous expertise and I will tell you. The sophistication that's occurring to manage margins and take advantages of margins and feedstocks, that's occurring and diamond Green diesel is absolutely startling when you look underneath the covers so the fact the matter is we see.
Sort of announcements out there some may happen and some may not we have built diamond for the long haul we will we believe always be and the physician to have the best margins and the industry and the other people will do what the other people do and we are prepared for the competition and we welcome the race. So if others want to come and that's up to.
And thats their choice, but we are prepared to have and excellently run facility and the right place with the right capabilities and it's not easy to do that and it takes a lot more money than a lot of people are pretending that it takes to get into this business. So.
And they will do what they're going to do and we're going to do over and to do.
No perfect. It looks like you and our product and the right. My quick follow up here. It is.
Obviously, the feed segment was very strong and if you look at dig a little and look at the revenue line items of all the components you provide and the 10-Q quarter over quarter Fox was up the revenue line item was muted and the up and proteins was also about Fox was up a lot more and I'm just trying to understand you have repeatedly said look this is a <unk>.
Demand driven cycle can you help us quantify those markets between fats and proteins and I understand there is an up cycle on both but between those how are the growth trending.
Yes, let me take a shot at that so I think what you see with most production of fats and proteins and the world is both sources of those produce.
More protein and then they do fab. So when you see a large increase in production of vegetable.
Material around the world and as we're starting to see an increase and the up cycle and some of the low Ci feedstocks as we have higher prices here or two you'll see.
A combination of a little more fast and you do a meal coming into the marketplace.
And I think you know obviously, what the demand coming from China, which has been both a protein and energy are fat based demand and then the.
Biofuels market, focusing and the low Ci biofuels market focusing on the energy side, a little bit more you'll see and a little bit more of a drive up and the price of fast, but I would say quite frankly, and Randy alluded to it earlier protein pricing is very very good at this point in time as well it's not.
<unk> gone up as much but you know.
And you really get a combination of fats and proteins from the supply chain that come to us a little less fats normally than protein.
And so that means that's gone up a little bit more of a proteins and been very very strong for us as well.
Thank you so much for taking my questions.
Thanks, Ron.
The next question comes from Tom Palmer of Jpmorgan. Please go ahead.
Good morning, Thanks for the question.
Good morning.
You noted your assumption for the second half of <unk>.
$2.25 to $2.40 EBITDA per gallon.
This would imply some slowdown from current levels and your assumptions would drive the startup and pushing up low Ci prices, just some conservatism and to what extent have you already begun to build inventory for the expansion, meaning some of the demand coal is already reflected in market pricing.
So I think what you saw in Q2 as the stars really aligned for us.
We came into the quarter and we had purchased feedstocks and then for a lower price than what we what we saw.
And during that quarter.
And I also saw it.
And what you thought was we had the machine that allowed us to take advantage.
And really run those lower price feedstocks, and we didn't have to run the arvida soybean.
Which is what the marginal producer with using you also saw that soybean prices went up.
<unk> had to work really hard and then you solve it and because of that the margins fell to our bottom line.
And then I think what you had also asked is where we and preparation for for <unk> and coming online in terms of feedstocks and things like that and we're already and loading feedstock and to our tanks right now.
We're preparing as we speak.
Thank you.
And I just wanted to follow up.
This was brought up on an earlier question, but I'm not sure.
Yeah.
The address is just on the on the RVO side I mean.
We get a lot of questions.
Sure.
And do as well just on on how this might shake out for 2022.
Do you have any thoughts just on kind of the likely scenario for biomass based diesel do you think volume will take into account and capacity that's coming online I would assume you're kind of pushing that side of it at least.
Yeah, I don't think that we know for sure.
Administration has been very carbon intensity focus Barry DHT reduction okay.
So I think that there is probably a push to keep volumes where they are.
Not accelerated but I don't know that.
And I can't answer that.
But it would look strange I suppose if volumes reduced for any reason and didn't.
Didn't grow.
Yes, if I can just add on top of that we have with the buy and the administration. The most environmentally focused administration that we've ever had and the history of the United States of America. It is very apparent that bio feels substantially reduced carbon emissions it would be extremely odd foray admin.
Australia and that is base and gets marker on reducing carbon emissions to do something that would not promote the additional production of carbon emissions. So we feel very good about how this works. The other thing I would point out is this we are now late in the process of developing the RVO for 2021 and 2022.
Historically, when we've gotten into these type of positions, we have never seen them reduce the mandate as they move forward. They always go and hold it where it is which was COVID-19 has put the <unk> and our ethanol rins and to a very tight issue and being able to reach compliance. So we feel that this market is where it is for a while.
Now the administration is clearly taking their time on coming out because this is always a political hot button when they do this but this administration is focused for the interest of Diamond Green diesel on exactly the right issue, which is carbon emissions and we would anticipate they would stay true to their DNA and be supportive of low carbon.
Emission reductions as we move forward.
Alright, thank you.
Okay.
The next question comes from Craig Irwin of Roth Capital Partners. Please go ahead.
Hi, good morning, and congratulations on that really solid results.
Thanks, Craig.
So Randy this is and.
And exciting time right you've got line of sight on a doubled from 801.617 billion and EBITDA and we really haven't seen the biggest tailwind ever for the industry on the rendering side cutting yet right. The 15 give or take plants that are either announced or unannounced and renewable diesel.
Can you talk about how you see that potentially cutting and saying, it's narrowed or a half of those get built and.
Is this a multiyear process as far as it how it impacts feedstock prices and is there maybe an opportunity for you to get bigger.
On the rendering side to service that.
Yes, I think there is a bunch of questions hidden in there I think as John John talked about.
And we.
We are not and the board rooms, and the inside baseball of the thinking of some of the petroleum industry or even independents that are trying to enter the business I mean, they have various drivers from margin to environmental.
The difference cost to compliance avoidance, who who knows what their spreadsheet truly is driven off of I mean, what we know from a fact out here is the one plant of 180 or 85 million gallons and Dickinson North Dakota truly upset the supply and.
Man.
<unk> soybean oil and the United States and that's a pretty you don't have to go to Harvard to see what that happened two and.
And the sense of the lack of capacity of the <unk> or a different way the lack of pre treatment and pre treatment is an easy word that a lot of people use out there I'm not sure. They know what it means and what it requires and what it gets you and what it doesn't get you I mean, what I know that it's gotten us.
His eight years of a head start here of learn and what are good fast what are not so good fats and what's you can't process and what kills catalyst and then you get into the processing technologies. Those are still evolving I mean, clearly we partnered with <unk> to develop a technology, but remember we spent eight years.
And.
The expertise and the system here of refining that process to get not only a yield but catalytic life and really product quality that were looking for around the world. So.
I ultimately believe that someone's going to try and obviously you've now you've seen other people try and one is now deferred there their startup.
And at the end of the day, if they all startup you bet. There is going to be a feedstock war like never before what John highlighted before was ultimately whether you were and the high fructose business the soybean crushing business the ethanol business at the end of the day, you got to be and the right.
Origination and right logistical location and have the right cost structure and I truly believe that the location economics that the team has put together between norco, where St Charles and Port Arthur or beyond superior and it's hard to put a cents per gallon.
And on and I won't try but at the end of the day. We can look at different locations that are and a railroad single railroad. We have double railroads you can bring it in and by barge you can bring in and by ship you can ship. It out by ship Jones Act non Jones Act out by pipeline and the flexibility is truly incredible that's been designed and these.
Facilities and as Sandy highlighted well now do we bolt on a jet units and we build another jet unit. We're looking at the product mix. We're looking at the next five to 10 years as we go out the learnings that we've had the expertise that's been developed and then you marry it with with the supply chain that we have here.
And South America I mean, the answer is you back Craig if we can find bolt on acquisitions that once again give us access to feedstock arbitrage is that make economic returns for the shareholders. We've got the cash to do it we've got the aptitude, we got the appetite and the expert.
<unk> because it's in our fair way to deliver that so nothing is off the table.
We're just trying to keep as we say we're focused on our execution and our execution only what the rest of these guys do.
We'll watch and learn we'll have a chuckle here and there and someone will be successful at and I'm pretty sure.
Excellent well I can't wait for that feedstock ore to be and full effect congratulations on the progress.
The next question comes from Matthew Blair of Tudor, Pickering, Holt and Paul. Please go ahead.
Hey, good morning, and thanks for taking my question Randy I was hoping you could size the R&D opportunity in Canada, with the CFO coming up and and about a year right December 2022 on a big picture basis. The Canadian diesel market is roughly twice with five other California depot market.
Of course, some other provinces already have blending requirement and then D. C has an existing program too so I guess how.
How do you think about the Canadian opportunities coming up and about a year and renewable diesel.
Yeah, I think we're very positive about Canada.
That's a market that we're serving today and a market that will grow for us, especially as they.
And as more and more demand out of Canada, It's a market that I think that we're well set to serve.
We now are able to produce our fifth diesel, which I think is going to be very positive for Canada.
And we're able to supply them volume all year long, which is going to be something new for them.
And Thats, great and so I think that Canada is probably one of the highlighted markets for us.
Sounds good and then.
In terms of the feedstock slate for DVD to what they are.
Understanding that.
Pick a pretty flexible approach.
And run whatever is the most economic.
Do you think about this as being most likely Paolo and and White Cree will there be any newco and that DVD too.
And any sort of general modeling help would be appreciated.
Yeah, I think what you'll you'll continue to see and Youll continue continue to see and our typical mix and that mix may change in terms of percentages.
But youll continue to see us using <unk> and Youll continue to see us using desio and of course, then the animal fat the animal fats and are likely to become a little bit more important as we go forward.
But I don't expect anything else to change beyond that.
Okay sounds good.
Thanks.
Yes.
The next question comes from Ken Zaslow of Bank of Montreal. Please go ahead.
Hey, good morning, guys.
Good morning, Ken.
Could you tell us the cost structure difference between you and the rest of the industry.
And have you I guess my first question is have you mapped it and.
And then can you tell us the spread because I think there's probably a.
Pretty high return difference on the assets that are coming on line versus what you guys are way to.
Quantify it or at least give some parameters to it.
Yes, Ken this is John I think.
As this industry has gone and Theres a lot of folks out there that are now publishing weekly data on what the margin structure is of various types of biomass based diesel biodiesel and renewable diesel facilities from various sources. So that's fairly well known and the marketplace at this point and time and and the answer to that is it.
And that thinking when you start to look at a renewable diesel plant that works with <unk>.
Versus any other type of facility that produces biomass based diesel whether that be.
And any type of biodiesel facility or whether it be any other type of renewable diesel facilities. So those numbers are pretty well and the marketplace out there I don't have them off the top of my tough right now, but they are out there and it's <unk>.
And is breathtaking and beyond that though and we just get down to competition between us and other renewable diesel producers.
When you look at those folks you've got to look at do they have a false and full chain capability do they have the right logistics and infrastructure can they take and rail from multiple railroads can they take and truck and they taken back by water on the river Blyth barges or oceangoing vessels.
Can they get their product out are they located well to service multiple I'll CFS markets, what type of pre treatment capacity that you have and what's the flexibility and that pre treatment capacity is because as Randy alluded to earlier all day, all pre treatment units are not.
Built equally we've seen a lot of stuff as we've looked around the world a very awkward various opportunities and some pre treatment classic quite frankly, when we get back into our car and we look at each other and say Oh My God. So at the end of the day.
It's all about the capabilities, we believe we're advantaged versus other renewable diesel guys, we'll see as we move forward and I.
I think John and I mean.
Try to give Ken a little more granularity there I mean, RV D is what trade and.
Probably 25% to 30 cents above cryptogams, yeah, so 25% to 30 <unk> ago crude to gum simple math and <unk>.
Your $2 to $2.40, <unk> negative to <unk> today.
And then you take the Ci differential and whether Thats, if you run and soybean oil or used cooking oil that can be anywhere from 20 to 50.
And so.
And the non animal fat you CEO choice White grease, whatever you want to call. It low Ci is anywhere from a $2 two a $2.75.
Disadvantage to the logistical.
Mecca that John has built and sandy have built with the Valero team down and Diamond Green diesel and Norco and Port Port Arthur and then that's where we get and we try and not to exude arrogance on it and Thats, where we have the confidence that.
And a last man standing competition. There is no competition from that standpoint, because of where you are located.
Great. My next question is when.
And you're going to have a whole lot of cash.
You guys did buybacks and stock.
And a new direction for you is that something how do you think about cash deployment.
Going forward again.
And have a lot of it so how do you plan on using it.
Yeah no cash.
Ken.
Obviously.
And during the quarter as whether it was the <unk> that were confused and people.
Weather.
And I really don't know what drove the equity or the stock price behavior during the quarter, but as Jim and Brad and I looked at each other we said Oh My gosh were on a $1.2.75 billion, if not higher run rate. This.
This supports.
$75 to $80 a share today and and your 45 days out from a one six to $1.7 billion run rate and so opportunistically the board and authorize and I think up to a couple of hundred Bucks.
And we just stepped in over over the course of time, there and I don't know that there was anything magical about 75% or $76 million.
Brad and I looked and said, okay, that's enough and.
And clearly we will continue as and.
It makes sense as we go forward there.
Clearly the long term cap structure will be determined on how quick we start to repatriate cash out of Diamond Green diesel and and clearly as we've said be patient with us clear.
Clearly, we're bringing and diamond green diesel to online here and in early October that will be our new run rate and.
And then clearly as Valero and we've said and our call here, we've accelerated number three to the degree we can with labor materials and all of the items into the first half of 2023 that means there is a little stronger spend and 22 to get you there and early 2023, but after that they.
Giant numbers and clearly in 2023, you start to look at dividends that are extremely significant to the meaning of the company and will require action by the board and while I can't speak for where the board's appetite is today for for buybacks dividends.
And then ultimately.
We're hoping that there's all options to continue to grow whether it's sustainable aviation fuel as sandy alluded to but we need some mandates and legislation there or whether it's supply chain opportunities around the world.
That makes sense to bolt on and we will do that smart and not overpay, if we have to but we'll also believe that.
Feedstock management and origination also gives that competitive advantage and diamond Green diesel that we referred to so pretty pretty easy analysis, right now hang with us and.
For the balance of the year wants <unk> to startup watch the cash come onboard watch the new run rate and then it'll be a fun discussion.
And I'm going to sneak one more and I know, where and only allowed two questions, but I'm going to ask another one collagen.
You didn't talk much about that I know you moved up the food to the 200.
It may not be as sexy as all the other businesses, but can you just given us and update it.
And to just be a cash generator with a little bit of growth.
Yeah actually actually internally, we're extremely excited about collagen and collagen peptides.
The growth trajectory on them is maybe got a double digit attached to them now at least the high single digit and both food pharmaceutical nutraceutical.
And cosmetic application.
Our challenge and that business has been able to get the capacity online.
And get the product to people around the markets that are wanting to buy it and we're finally getting that that acceleration, we've been challenged and South America with the highest availability due to the reduced slaughter due to COVID-19.
Challenges within the slaughterhouses.
By all means we are on target, where we thought we would be we're expanding again and that business. We see a great business there that from a margin perspective, it really will attract capital. It really is a great business youll see it.
Clearly.
I watched that food segment for four to five years and that 130 to $1.40 range and to see it go up 40% to 50% is really exciting and I think we've only touched the tip of the iceberg on the applications of collagen peptides.
And then you look to our and our pipeline here our biomedical applications. We're only beginning to talk about those today and what we can do and that area and our ex pure product and so as as pest and matures. If you will and three to five years here comes the next round of biomass.
<unk> applications, we're really excited about that business and where it fits with Darling. So hang on there the food segment will play catch up here and and stay tuned.
Thank you very much.
The next question comes from Sam Margolin of Wolfe Research. Please go ahead.
And thanks a lot.
And I'm, saying.
I have a theory I want to run by you and I'll couch, it by saying I stole it from someone and so if you don't like it you can.
My fault, but it's about the effect of the renewable diesel startups. So if we assume for a minute that everybody is going to be able to start up without any friction.
And the outcome of that is that the whole soybean oil waste oil rendered that complex is going to start to trade off a ci score.
So that rendered fats might actually traded a premium to soybean oil and obviously that has huge implications across all your segments and I was just curious what you think about that if that's feasible.
And if that's an outcome that you might consider within the planning range.
And so this is John I think the way to look at that as obviously.
And when you were talking about renewable fuels carbon intensity has a value proposition associated with it that it doesn't happen and the traditional feed cycles. We have expected for years that as we increased our renewable fuel space, we would see some type of and impact on the relationship.
Low fat <unk> versus traditional vegetable oils, and indeed, we have seen some of them that impact although I would caution you that just because you see that impact for a couple of months doesn't necessarily mean that that's going to sustain and there is volatility around that and Fred relationship. We'll see as we move forward I mean, we're comfortable that the field that we're producing out of Diamond Green.
Diesel has an excellent margin structure because of our competitive positioning and the marketplace. The capability location all the stuff, we've talked about time and time again.
At the end of the day.
The question is does the price of the low Ci feedstocks ultimately diminish the value of our margin proposition and Diamond. We don't think so could it have a positive value and relationship to Darling business, absolutely and I think and Sam I'd add onto Jon rich.
And remember.
The location of <unk>.
St Charles and Norco and.
And port Arthur and they were located there because we see the global Ci business or the carbon intensity origination business of feedstocks as a global opportunity.
If you rewind the movie pre Diamond Green diesel.
And we're competing with other other calories and animal feed you either had a small edible business for Friday, and the Bloom and onion and some other applications you had some very limited oleo chemical applications per animal fats and then you competed with the value of other cash.
<unk> to feed animals.
That is still true and for other continents. Today, So why what John didn't allude to is is right. Now we are kind of a high priced island and from a standpoint of carbon intensity poll for the different markets, we're serving and.
And I think over time, yes, as we both redirect supply to Diamond Green diesel and it's going to come from somebody no secret it'll come out of the biodiesel industry is gen. One technology moves to Gen. Two it'll also come from around the world as it makes sense between currency and freight.
To move the product in and so all of that stuff will then re normalize the value of Ci.
Feedstocks around the world and that's positive for US we have a confidence positive for all of our businesses on the five continents. We operate on so ultimately it's a global origination business, but you got to be and the right place to take advantage of that opportunity and add one more thing to that revenue I think oftentimes.
People tend to think of the <unk>.
Darlings core business and Diamond Green diesel as being counter to each other one and was doing while the other is not doing well, they're not they're complementary to each other and I think thats, what youre seeing with the results. So far this year.
How that will work its way quarter by quarter and through the process over the next several years, that's going to change, but the fact of matter is what we have built as a complementary vertically integrated business structure, where we can create value and add value from both pieces and that is extremely unique and back to see only animal like that and the biofuel business and the world.
Thanks.
Thanks, a lot that's it from me I appreciate it.
And.
The last question will come from Ben Kilo of Robert W. Baird. Please go ahead.
Hey, guys.
So just wanted feedstock.
Where does palm oil rate and terms of.
And again bar mill.
Right.
Because you have <unk> out there trading at a big multiple and they use a la Palma Inc.
But I always thought that was good.
And then my second question is about.
Cargill.
Consolidation.
Thank you.
So I'll answer the first part of other question about Palm oil.
Tom oil is not considered a.
And as good a feel is certainly other vegetable fats are or and particular low Ci feedstocks are around the world.
I don't believe you will see any usage of palm oil and the United States or Canada and relationship to their carbon programs Europe will allow some of it particularly around the <unk> side. So we're very comfortable with our feedstock.
You'll have to talk to others about what feedstock they use and I'm not going to comment on that but clearly we like the fact that we are using.
What has.
Systematically and universally been described as the greatest carbon reduction feedstocks and the world.
That is good for the environment and good for all sorts of environmental and sustainability purposes. John can you comment on the PFA D. Though specifically, yes, PFA is considered a waste that under some programs and won't be in the United States and won't be in Canada at least we don't believe it will be.
And in Europe, it's allowed.
Under the waste essentially under our waste fat classification, so, it's it's utilized and Europe.
I'll leave it to others to argue whether that's correct or not is a designation and partner PFA day, yes, and Thats. The real that's kind of the answer is is remember nest day.
Purchases are procured as a lot of PFA.
And are there mix, which is considered a waste oil and into at least the markets are serving today. So the second question.
<unk> is related to Sanderson farms.
I first have to give a shout out to <unk>.
Joe Sanderson, and Lampkin Butts, and Mike Cockrell, they've been great partners for us for a lot of years and.
And we play a significant role and rendering their product and we've had a very close relationship with them.
We don't anticipate if the transaction is approved and goes on through any changes or any risk to our business. We're in the right place for their factories and and.
And we've been doing it for a lot of years and I, just don't see anything change and there and the relationship going forward.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Randall Stuewe for any closing remarks.
Thanks, Andrea we appreciate everyone's time today and hope you stay safe and healthy there is a list of upcoming IR events that Jim has us presenting at and the IR deck and we look forward to getting back out on the road here seeing everybody and talking to you and making you more confident and our model as we go forward into 2022.
With that thank you again for joining us today, and we'll talk to you again in November.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.