Q3 2021 Darling Ingredients Inc Earnings Call
Good morning, and welcome to the Darling Ingredients, Inc Conference call to discuss the company's third quarter 2021 results.
After the Speakers' prepared remarks, there will be a question and answer period and instructions to ask a question will be given at that time.
<unk> call is being recorded.
I would now like to turn the conference over to Mr. Jim Stark. Please go ahead.
Thanks Grant.
Welcome to the Darling ingredients third quarter's earnings call that this morning, just Vince on the call are Mr. Randall C Stuewe, Chairman and Chief Executive Officer, Mr. Brad Phillips, Chief Financial Officer.
Mr. John Bullock, Chief strategy Officer, and MS. Sandra Dudley Executive Vice President of renewables and U S specialty operations.
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 then 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 statements now I'd like to hand, the call over to Randy Hey, Thanks, Jim Good morning, everybody and thanks for joining US. This morning, our core business continues to perform very well for the third quarter. We reported combined adjusted EBITDA of approximately 290 million of which.
$230 million was directly from our global ingredients business like many companies around the world. We continue to face the challenges others are facing when it comes to labor transportation and higher cost of operations. Our team continues to execute our business strategy and operate our facilities with great efficiency, while improving our gross margin.
Year over year and sequentially from the second quarter of this year I want to thank all of our employees, who continue to dedicate their efforts in navigating the challenges we face in our daily responsibilities.
As it has been well stated hurricane either took a big bite out of D. G. DS performance in Q3 for the first time in eight plus years of operating D. G. D was shut down and to protect the employees and the assets of the facility from this significant storm. The great News is there was little damage to the facility, which it took a direct.
Hit from Heidi Wood.
With the days of shut down and the restart process. We lost approximately 17 days of renewable diesel production also on the Great News front. The D. G. D. Norco expansion is running well and is closing in on reaching its production capacity putting D. G. D on track to sell 365 gallons were.
More in 2021, we also believe D. G D could sell over 700 million gallons of renewable diesel in 2022 as the engineering team continues to fine tune the performance of this expansion there.
The achievement of Diamond Green diesel was only possible because of the hard working employees contractors and service providers at the facility. While many of these fine people suffered damage to their personal property and disruption to their daily lives from the hurricane there resiliency to return to work and get the plant back into operation and finish the construction of D. G D too.
What is extremely important and exceptional we truly appreciate their tenacity for getting the job done also during the quarter Darling repurchased approximately $22 million of common stock.
And for year to date, we have purchased approximately $98 million worth of stock on a year to date basis. Our global ingredients business has earned approximately $628 million of EBITDA, putting us at an annualized run rate of approximately 850 million for 2021 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 a little bit of our outlook and how things are going to finish up for 2021, Brad. Okay. Thanks, Randy net income for the third quarter of 2021, total $146 8 million or 88 cents per diluted share compared to net income of $101 1 million or.
<unk> 61 cents per diluted share for the 2023rd quarter.
Net sales increased 39, 4% to $1 2 billion for the third quarter of 2021 as compared to $850 6 million for the third quarter of 2020.
Operating income increased 61, 4% to $205 7 million for the third quarter of 2021 compared to $127 5 million for the third quarter of 2020. The increase in operating income was primarily due to the $114 1 million increase in gross margin, which was a 53.
8% increase in gross margin over the same quarter in 2020.
Our operating income improvement was impacted by the lower contribution of our 50% share of Diamond Green Diesels net income, which was 54 million in the third quarter of 2021 as compared to $91 1 million for the same quarter of 2020.
As Randy mentioned earlier Hurricane impacted gallon sold in Q3, resulting in lower earnings for D. G. D. During the quarter, our gross margin percentage continues to improve year over year and sequentially Q.
Q3, 2021 gross margin was 27, 5%, which is the best result, we have had in the last 10 years for the first nine months of this year. Our gross margin percentage was 26, 8% compared to 24, 9% for the same period, a year ago or a seven 6% improvement year over year as you can see.
On pages, four and five of our IR deck gross margins have continued on a positive trend for the last four years as our management team across the business has worked to increase the profitability of their operations depreciation and amortization declined $7 9 million in the third quarter of 2021, when compared to the third quarter of <unk>.
'twenty SG&A increased $7 3 million in the quarter as compared to the prior year and declined $1 9 million from the previous quarter.
Main causes for the higher cost in the quarter compared to a year ago or related to labor travel and other.
Interest expense declined $3 4 million for the third quarter 2021, as compared to the 2023rd quarter now turning to income taxes. The company recorded income tax expense of $42 6 million for the three months ended October <unk> 2021.
Our effective tax rate is 22, 3%, 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 of items in the U S. Based on foreign earnings for the nine months ended October <unk>.
2021, the company recorded income tax expense of $126 3 million and an effective tax rate of 22%.
The company also has paid $36 9 million of income taxes taxes year to date as of the end of the third quarter for 2021, we are projecting an effective tax rate of 22% and cash taxes of approximately $10 million for the remainder of the year our balance sheet remains strong with our total debt outstanding.
As of October 2nd at 1.38 billion.
And the bank Covenant leverage ratio ended the third quarter at one six times capital expenditures were $65 6 million for Q3, 2021 and totaled 191.7 million for the first nine months of 2021 as a reminder, this capex spend does not include our share of the capital spend at Diamond.
Green diesel which continues to be substantially funded by an internal resources at D. G. D. Now I'll turn the call back over to you Randy Thanks, Brad as our global ingredients business and Diamond Green diesel continued to perform well and as we indicated in our press release yesterday, we are maintaining our guidance for 2021 of.
Adjusted EBITDA of $1 $2 75 billion. There is strong momentum for our global platform as we finish out our best year in our history and look to build on that energy going into 2022, I want to spend a few minutes on capital allocation over the last couple of years, we have discussed our best use of cash at Darling through five.
Five points and those really have not changed.
Those five points are investing and D. G D growing our core business, reaching an investment grade debt rating meaningful share repurchases and potentially starting a dividend policy for our shareholders. It is our belief and most everyone who is on this call knows that our future cash generation will be large enough to address all.
These points in our capital allocation plan and we continue to work on the execution of this plan is our free cash flow generation continues to grow I do not need to point out that we did make the decision earlier to accelerate the construction of <unk> Port Arthur, Texas, which puts a bigger capital spend on <unk> in 2020 to that.
Does push out the potential size of the distributions from the venture in 2022, but increases the potential for 2023.
I do also want to add that our M&A funnel of opportunities to grow our low Ci feedstocks footprint around the world and grow our green bioenergy production capabilities is rising this may adjust priorities in our capital allocation plan, but not limit our ability to execute on all of the points I already mentioned so with that.
Let's go ahead and open it up to Q&A.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
We are using a speakerphone please pick up your handset before pressing the keys to.
To withdraw your question. Please press Star then two.
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At this time, we will pause momentarily to assemble our roster.
Our first question today comes from Adam Samuelson with Goldman Goldman Sachs. Please go ahead.
Hi, Thank you good morning.
Good morning.
Okay.
I guess my first question is around.
Policy.
And just thinking about some of the new incentives that were are working their way through Congress and the build back better Act specifically the sustainable aviation fuel tax credit and then that clean fuel production credit post for 2026 and beyond Randy I'd just be interested to hear how you see the opportunities for D. G around.
Both of those and what the longer term kind of potential contribution of those would be to the DVD.
Okay, Adam I'll, let sandy take a shot at this for US Hey, good morning, Adam.
First of all I think we think it's very supportive of the Biofuels industry. It shows really a long term commitment and one that says that biofuels are an important way to reduce emissions.
We've all known for a long time, but sometimes we don't seem like we get recognition for that.
In terms of the BTC extension there there are actually two things that I think that are positive with regard to Darling first there is the PTC extension as well as the Saf.
Credit so.
So first on the BTC expense and you know that's a four year extension at a dollar per gallon.
Its treated in the same manner as it is today, which is very positive then after and that would go from 2023 to 2026. After that then you have the clean fuel production credit that would go from 2027 to 2031 and the way we read it possibly to 2034.
What we're seeing is that then becomes a production credit that the dollar per gallon. That's adjusted annually for inflation and then subject to OCI adjuster as well before there was a step down.
And credit value in that step down in credit value.
It is based upon whether or not a certain emissions reduction has happened.
We've gotten through the year 2031.
Oh gosh.
Gosh, that's just enormous support them in terms of what we've been doing today and what we expect to do going forward.
In terms of the Fas you also have a credit there for four years. It's what we are reading of $1 25 per gallon up to another 50 cents per gallon, depending on the Ci them under that you'll have to have a lifecycle of reduction of at least 50%.
As determined by Ikea or a similar a similar methodology.
After 2026, then you have the clean fuel production credit that kicks in and that would go again from 2027 to 2031 and again, possibly to 2034.
Depending on whether or not there.
Yeah.
Again, it becomes a production credit and the credit goes from a $1 25 to $1 75, again that would be adjusted annually for inflation and then subject to OCI adjuster.
As well as the step down.
I think you know all of that is just so supportive of reducing.
<unk> and supportive.
Direction that Darling is going and D J D.
I think this is Randy I mean, I think Sandeep did a really detailed nice job there of explaining I mean overall the legislation that's out there in the <unk>.
Will they build back better or social spending plan that I think has a pretty high probability of moving forward is probably the single most bullish thing that we've seen.
In many years here that gives certainty.
Of our participation in the climate change discussion I think sandy was very subtle and hopefully you picked it up but I'll make sure you pick it up she said the word producers or production credit.
So that's so that's a very key principle in here that gives us extreme favorability to the U S assets.
Well, that's really helpful color, Sandy and Randy and I guess as a follow up.
Did you look at D. G D kind of with the normal expansion just about done port Arthur coming in 18 months or so.
How are you thinking about both scope for opportunities to reduce the Ci scores of your own production and then incrementally.
Just thinking about SaaS and what it would take to actually start making that that fuel.
Yeah. So I think we're constantly looking at trying to reduce our Ci scores. There are a number of ways that we're doing that.
And you know.
I think that we can start with our feedstocks too. So we're looking at ways with our feedstocks are helping reduce the Ci scores, but then internally we look at that all the time and try to make adjustments to our processes that allow us to do that.
And so it's just a constant thing on our mind in terms of SaaS, where we're headed and I think we've constantly said that we're really excited about SaaS, but we need the right economics.
And to that end we've reviewed the capital required we studied the yield profiles, we've talked it till the logical markets. We've done the preliminary engineering and we've evaluated the economics.
I will say just as you and I were talking about the build back better appears to be really serious about trying to grow the SaaS industry and we're really excited to see that but yet. Unfortunately, the legislation is not yet finalized. So we have to see it before we can make any decision assuming that the final economics are supportive we look.
Forward to expanding our role in terms of low carbon solutions and I think what you've seen from diamond in the past is that when we make an announcement, it's well contemplated and we're serious about it. It's not just an announcement that you know we want to get something out in the press or have an ESG story.
We plan to do it and so at the end of the day you know we've done our homework and once things are finalized we should be able to let you know relatively quickly where things stand I'm, hoping that in Q1 of next year that said I hope that we can become a part of the Saf movement soon.
Alright, I appreciate all that color I'll pass it on thank you.
Our next question comes from <unk> <unk> with Citigroup. Please go ahead.
Hi, good morning, Thanks for taking the question.
I wanted to pick up on.
Morning, I wanted to pick up on something you said there sandy.
And used generative and then also what sort of the legislative environment.
Pushes here broadly with this administration and globally Darling has a very compelling ESG and sustainability story and Randy you talked about that before that there is a 2022 might be the year that there could be some clarity around the messaging to the market gets that I was wondering if you could help us think about that just beyond <unk>.
Just the carbonization.
<unk>.
The land use water use you know other factors in.
To highlight in the Darling story.
Do you think sort of.
Might be the time to really emphasize those I was wondering if you could help us think about how youre thinking about messaging that in and sort of.
Leveraging the open solutions.
Yes. This is John it's an interesting point, we have a.
Long viewed ourselves as an ESG company, because quite frankly, almost everything that Darling does as a carbon capture story, which in a world that needs to reduce carbon emissions is a great thing I think what's more interesting than that though than just the fact that historically, we happen to be standing in the right place at the right time.
I don't think there's another company out there that has actually moved as aggressively.
To help the world reduced carbon emissions as Darling has not only with our diamond Green diesel, but also the actions that we're taking internally to help reduce water usage. The fact, the matter as we recapture much water and associated with our rendering operations. We have a really broad based ESG story, we have as this story has evolved and part of this.
ESG is a developing concept and theres been a lot of moving pieces on how people view in how people judge that we're working hard internally to try and clarify our messaging around this issue because at the end of the day once you pull all the curtains back but the reality is Theres no company out there that's doing more.
In relationship to the ESG story of the ESG movement, then Darling is and has been doing for several years now in preparation for it. So I think it's a matter of getting the messaging out there because the story is absolutely rock Star Randy No absolutely John in for Shaun.
As we did during your conference I mean, clearly 2022, we will be spending a lot more time talking about the initiatives that we have around the world from water intensity reductions, we're looking at different technologies in the in the gelatin business, which is a huge water consumer.
Water recapture for.
Production energy intensity clearly when energy is cheap no. One really spent a lot of time thinking about this stuff and all of a sudden in the last year. We've seen energy move up you know, 40% to 100% different parts of the world and so once again, it's going to get more and more attention and then clearly in the <unk>.
Labour World.
We've got to get smarter there.
As the world's at full employment. So I think it's a great time for us I. Appreciate you, bringing it out I would tell you to stay tuned and we'll.
We will bring you more here in 'twenty two.
I appreciate that John and Randy and just one quick follow up I just wanted to touch on.
Capital allocation for next year Randy.
Okay, great to hear the reconfirmation of how you think about these things I just wanted to check.
When you think about 'twenty, two specifically given the acceleration of Fort worth in the distribution up to the partners might be.
It has to wait until we see D. G D three up.
How much when you think about inorganic growth in 2022.
I just wanted to sense check you know where your appetite is and.
What room, there might be on the balance sheet should you need to go there on the debt side too.
Count too.
To source capital for potential inorganic growth bolt on or something like that and I'll leave it there.
Wow, that's a great question.
I'm getting lots of spares in the room here.
Now the fun part is we're clearly as we're trying to decode and telegraph, we're seeing more M&A opportunities a multi continent than we've seen in the last three to four years.
I can't really address them, yet can't tell you if they're going to be fair price and if we're going to get them home.
Clearly our you know as we think of our business today, we want to continue to build the moat around the machine and the machine is this giant ESG story, and how do we do that by procuring and securing additional low carbon feedstocks around the world. So.
We're looking hard.
You know obviously, the the acceleration of D. G. III, it's both kind of a blessing and to the degree not a curse because what it means is as it will be online in early 'twenty three we hope and once again, a source of it'll be completely funded and de Levered and it will give.
Darling unlimited cash generation capacity at that time, a high class problem between now and then we've got plenty of availability within our credit agreement within maybe some modifications to it if we need to hear.
Clearly as Brad said, we're down to a one six leverage time.
<unk> ratio, if not headed lower even yet this year and so we have plenty of room to do what we want to do in 'twenty, two and then pretty much.
A high class problem as we say in 'twenty three here.
Great. Thanks, Randy I appreciate the time guys I'll turn it over.
Okay.
Our next question comes from Tom Palmer with Jpmorgan. Please go ahead.
Good morning, and thanks for the question.
Good morning.
We've seen animal fat prices move a bit higher used cooking oil corn oil haven't really fall into the same extent.
Curious what your view is on that you expect the price gap for you go in and corn oil to converge with with Tallo over time or are there constraints to consider.
When it comes to the pricing of these other feedstocks.
Yes. This is John Yes, I think in general what Youre seeing is this trend that waste fats are valuable fat when we're trying to reduce carbon emissions in our field spot.
And so you're generally seeing those move higher I wouldn't take too much notice and any type of short term movements on the relative price of vehicle and corn oil and animal fats. They all carry a slightly different carbon intensity scores, but essentially they're all substantially better than vegetable oils are in relationship to their value in the low carbon intensity.
Fuel cycle so.
I think this market's a big markets and it's an evolving market I wouldn't get too.
Too excited about short term type of differences between the fat prices. The general concept that waste fats are valued in low carbon fuel markets is a fundamental truth now and it's going to be a fundamental truth for a very long period of time to come and that's essentially the oilfield. The Darling sits on top of it.
As a low carbon source of deal for the.
Our low carbon fuels and I would say Tom This is Randy I think John said, it very very well as Sandy pointed out Saf is going to give preferential treatment to a low carbon feedstocks. Once again, that's us when you when you look at the low carbon pool of feedstocks, both in North America and around the World where now.
Trading well above the caloric value of corn, which is always been kind of the baseline of where it could go and so at the end of the day.
<unk> two we kept telling you keep in mind, it's buying 40% of north America's feedstock today.
And so it is clearly firmed prices for us, but it's also there's plenty of feedstock out there for us to accomplish what we want to it number two and number three.
Okay. Thanks for that.
Last quarter you laid out.
The outlook for 2020 216 to one seven and I think it was kind of $850 million from the ingredients business 800 from DVD.
It still the outlook you did increase your production I think at.
At least by a little bit of DVD does that affect the outlook at this point are kind of still.
The prior one.
No I think we're kind of still.
You know theres been a lot of fluctuations clearly and margins with the disruption of Aida rents moving up LCR fast moving around heating oil moving around.
We're still gonna we came into the year, telling you that we would operate around $2 25, a gallon maybe a little more in DTD clearly 17 days offline didn't help us there, but as we go forward to next year I think we're pretty much where we said we would be at this time so.
I feel good what I see right now if you think as we said the base business. This year should finish up around $8 50, plus or minus a few dollars there.
When you sit there and say okay, $7 50, then coming out or 700 coming out of <unk> next year, which would be $2 a gallon at 700 million gallons.
Simple math, we're doing today I don't see any real change in that forecast at that time.
Oh, great. Thank you.
Our next question comes from Manav Gupta with Credit Suisse. Please go ahead.
Hey, guys I'm going to ask on the Cvs question, you do talk to a lot of people that God. When you talk to the high level people in Cob and again there are some estimates out there and we're testing a number of projects that are coming on which we don't think all of them are coming on but there is a bit pieces floating around.
That.
CFS price could go up to 80, which would not be good for the entire.
Program also as CFS.
<unk> would be good data back in your opinion in discussions with God do you think they will be supportive of a decent carbon price on most of the high or low but would they try and at least you said the expectations with people who are investing in these low carbon projects would get some good returns and so will they.
Try and support the place of Quad, one that's what I'm trying to ask.
It's Andy Yeah.
So manav. This is sandy so I realize everyone's very focused on <unk> credit prices. These days and the direction they've taken lately I think in Q2, we saw L. CFS credits.
It definitely sets and over the last few months, we send it seen a general decline in <unk> prices.
Within the market, we've seen things going on we've seen weakness in California gasoline and diesel demand versus historical levels and we saw the same thing really over in Europe, as well and that may be even more pronounced that resulted in more renewable diesel volumes being shifted from the.
The European market to the California market, which we saw in terms of increased imports that further weighed on the market. I believe we also saw increased credit generation within a number of our categories.
Categories recently, and we've heard about a number of projects that are planned to take place.
But keep in mind, we also have seen credit credit exceed deficits off and on.
Her time and Theres been a general decline in the credit Bank. Since 2017 2018. We also recently saw Governor Newsome, calling carve in S. E. T C to achieve carbon neutrality by 2035, and that's the whole 10 years earlier than was originally planned that's a huge task and it's going to require.
Significant carbon reductions.
We've been hearing that carve is contemplating ramping up its carbon reduction targets.
The answer to your question and we've recently seen too that the 2020 average credit prove intensity exceeded the baseline and that's going to be added to the regulated partys obligations for 2022, unless something changes during the comment period.
And we've also seen you know don't forget that some projects have been delayed or scrapped we see in Washington State pass an L. P. F. S. Although granted there's still some work to do in terms of implementing the transportation package. We also noted that Canada will be implementing at CFS in the not too distant future and we know others.
We're looking at implementing L. CFS type programs like New York, and New Mexico, and then finally, we've seen euro proposed some significant mandates.
Within its fit for 55, a suite of programs and all of these carbon reduction programs will be competing for low carbon credits going forward. So sometimes I think when we look at events or trends or any short period of time, we are focused on those temporary trend and John kind of spoke to that earlier and so we don't.
Necessarily always see the broader picture so I'm not entirely sure that we're seeing an inflection point here with the L. CFS because theres a number of things coming down the road that I think should be bullish on credit prices, but we like everybody else are going to continue to monitor that.
If I could just add on top of that we're actually extremely pleased to see that the <unk> credit market has not challenge the maximum ceiling pricing I think what we've established now and this is really going to help the long term low.
Low carbon fuel programs in other jurisdictions move forward and help California increase its mandates is these things are successful the market brings new low carbon alternatives into the marketplace and we have a vast array of other government entities that are thinking about implementing low carbon fuels.
Standards quite frankly, the success in California, and the fact that the market has responded with low carbon alternatives not only renewable diesel but other is extremely positive for expansion in these programs and the expansion in these programs provides a much more stable base and long term viability base for what Diamond Green diesel.
Is and for what Darling is a supplier of low carbon feedstocks. So we very much like how this is working and we think this is good news I don't know everybody obsesses about the bad news and what's the impact going to be on per gallon this quarter and all that good stuff. The fact, the matter is it's indisputable the pattern that's being laid out here.
Extremely positive for what we have at Diamond and while we have a darling.
Perfect.
It could get into a little bit of policy again and I know.
<unk> came out with some numbers in there was a knee jerk reaction that you know by the by the New administration is probably going against Biofuels, but when we dig deeper it's very clear that they may not be fully supportive on the ethanol side, but when you look at the advanced Biofuels renewable diesel biodiesel is almost <unk> 2 billion.
Got it and increase that they're proposing so I understand it's leaked document but.
Wanted your views as to you know do you generally feel when you are in fact, then with Biden E D.
They may only talk electric and at the top.
But downunder do you think there is support for Biofuels within the Baidu <unk> administration.
Yeah.
I do think that there is support within the by you know within the Biofuels are for <unk>.
Biofuels within the Biden administration.
I think you see that and you know within the Saf credit that we saw.
Yesterday, there was a new report.
That was released the 2021 aviation climate action plan, that's very supportive of them going forward and it's a whole host of programs that support S. A S. In addition to that I think what you've recently seen too.
And as you've seen the potential long term extension of the BTC. So I do think that that that's very supportive for us as well.
So I do I think let.
Let me just add on and it really just as Jon in relationship to the RVO question.
The fact of the matter is you can't just look at what Biden administration is doing this rvs I think your point is right on it's quite clear that they are going to be ramping up the mandates for the biomass based diesel part of the program and for the advanced categories. That's extremely positive for us.
The other thing that I think that you've got to take into consideration here. It's just not the RV owes its what do they do with ESR as soon as we saw they just United and SRA.
The general noises, we hear is that theres not going to be the liberal granting of Srs, that's very important to the SMT Rens and then finally, there's this historical question. There are some folks that are obligated parties that are behind us on the rins compliance what is it what's the administration going to do on the court is going to do in relationship to those issues. So there are a number of balls bouncing.
We see nothing that tells us that the Biogen administration is anything less than totally positive and committed to reducing carbon emissions and fuel and the answer today for reducing carbon emissions and feel our biofuels.
Specifically biomass based diesel is the primary driver of that so we think the supports there absolutely.
Oh that theres going to be some confusion when these <unk> come out because when you think about it.
The EPA had to address the issue that gasoline consumption has reduced dramatically during COVID-19.
And at the standards had been established on a pre COVID-19 basis, they have to figure out how to adjust that snd as they come out with the new rules, that's going to create some controversy it's going to create some sparks, but we think where we are positioned in relationship to biomass based diesel is an extremely firm ground and we should see.
Excellent support for Rins moving forward.
Thank you for taking my question just to say that you took a bad hit from Ita, but you maintained your annual guidance and that is very commendable. Thank you for taking my questions.
Okay.
Okay.
Our next question comes from.
<unk> with Stephens. Please go ahead.
Hey, Thanks, good morning, everybody.
Good morning.
I wanted to follow up on Adam's questions around SaaS and I don't want to put the cart ahead of the horse because I know, we're still ramping DDD too we've got <unk>.
Sandy you talked about wanting to get a little bit more clarity around the policy to support the production economics of S. A F.
But noted the merit of the fuel and reducing greenhouse gas emissions, John I think you've talked about.
Having all of the feedstock availability you need to ramp <unk>, two and <unk>. Three in addition to production economics, how does the feedstock component of the equation figure into your decision around what to do with potential involvement in S. F.
Go ahead John.
Or are you asking I'm not sure quite what you're asking US are you asking is there going to be enough feedstock available to pursue both the build out of Saf and renewable diesel because it seems like renewable diesel alone is going to suck up most of the.
Fats oil increases available.
Low carbon fuel, yes, yes, so we have kind of two paths. We can go down here. One is as we can convert some of our current or in.
In process of being expanded our belt renewable diesel capacity for the road, we can make some of that SaaS. If we want so we have the alternative.
Essentially diverting some of that road feel to SaaS.
We wanted to do that that clearly as possible. We also have the possibility of building Diamond Green diesel for at some point in time in the future and making a part of that us products from that unit being Saf as well.
Both of those roads are open to us in the future.
I think it's more likely than not that if we were wanting to move rapidly into the saf marketplace and I'm, probably jumping a little bit ahead.
But we would probably want to take some of our existing capacity and create optionality around say I found out we can get there a little quicker than we can with a new unit.
But we will see what all of that leads to we don't have to prejudge any of those conclusions yet the fundamental thing is we have our homework done right. So once we see how these policies finalize and they're not finalized yet and there's a lot of very important details that go into these tax credit bills that you've got to take into consideration as to whether it's Hal.
But they are in terms of your production economics, we will see how they finalized we've got the rest of the little homework, largely diamond and we'll sit down with our partners that have a discussion about what we wanted to do but the most rapid method would be to divert some of our current renewable diesel production to Saf. If we wanted to get there pretty quickly the decision on Diamond Green diesel four we'll just have to evaluate that.
We go forward.
Okay, Thanks, John and understood I appreciate the thoughts.
Shifting gears, a little bit and thinking about the food ingredients business you guys continue to expand margins there.
That business has been food ingredients has been kind of the unsung hero I think over the last year given the focus on D. G D and understandably the.
The enthusiasm there is warranted on <unk>, where are we on the.
The curve of continuing to expand margins there.
Any thoughts you could offer on the food ingredients business would be helpful.
Yeah. Ben This is Randy I mean, clearly you know theres been a parallel strategy, while it seems like 80% of the calls or R. D. G D and rightly so quietly we've been transforming the rousselot business from a basically a gelatin supplier to a college and company and it's a.
It's a two or three pronged strategy there with the with the Pepped in being the collagen peptide that's out there now on the shelves around the world predominantly in North America being launched in Europe today in Asia.
With extreme growth potential double digit growth potential.
Driven by basically its solubility and solution here for different product applications and so.
We worked long and hard you know, we always talk a little bit and I have to give a little pitch Darling as an innovation company, we'd been working oncology peptides for almost nine years.
And we got it right and we're building we've got our four plants run and contemplating another one that's phase one phase two you heard us rollout our discussion on our biomedical that would be our ex pure and then.
We're also starting to work on different tissue regeneration in Oregon development off out of the biomedical area. So long story short we're in a in a three to five year window of margin expansion and growth in that business unit as we go forward, we've taken a little headwinds with COVID-19 against the collagen peptide business.
This is the world shut down in the supply chain has got screwed up and then you know now we're and then we're struggling a little bit to be honest and in South America. Today are the different raw materials that the products are produced from our very tight in the March and the raw material prices have escalated.
300% from where they were a couple of years ago.
A number of cattle being processed in South America has declined both due to availability and labor and Covid and all of the above so long story short it's got a great trajectory you know stay tuned over the next three years, we keep throwing the bread crumbs out there it should accelerate nicely again next year I think thats why.
Jim starts been very comfortable to talk about earnings growth next year.
As that business expands.
Okay. Thanks, everybody and good luck with the rest of the year.
Thank you.
Our next question comes from Sam Margolin with Wolfe Research. Please go ahead.
Hey, good morning.
Good morning.
Wanted to just follow up on this ingredients M&A question and I recognize that there is some competitive elements at play and might not be able to reveal too many details but in the past you've talked about how valuations in the private.
Universe of that of the industry, we're just sort of prohibitive relative to where Darling was trading and it was undervalued and so youre waiting for that to bridge and I just wanted to ask about how that was playing out as the ask.
Private acquisition targets coming down because they're not capitalizing today's prices or are there new sort of synergies and value creation tools that darling has to pull that unlock more value.
Anything on what is kind of opening this window on M&A, that's new relative to the past call. It three to five years.
Yes. This is John I'm not sure there's a lot that's new out there.
I think what we've said in the past is when valuations get too high we always have the opportunity of building and we've done a lot of that with diamond as well as in our core business. I mean, you know the fact is the lag.
Last four or five years typically every year, we've had anywhere from 4% to six plants under a major expansion of our greenfields going in on our non Diamond Green diesel business around the world. So we've always had that alternative having said that I think we're an aggressive player in terms of acquisitions out there and you're going to see us be aggressive in this round.
<unk> of companies that come up for sale and I think we will we always maintained price discipline, we see sometimes prices go in on businesses that are just simply ridiculous and not sustainable going forward.
Don't do that but at the same point in time I would anticipate you would see us being a being a and then aggressive participant in this round of acquisitions I don't think you can count us out and these deals no and I think that's I think that's well said John I think the thing is we get a chance at looking at lots of different businesses around the world.
Remember the other then since last December you know theres been some pretty strong headwinds in these businesses around the world.
And so you know, they're having a little better year. This year, we're having a great year.
Families make decisions at certain times, and especially when when the business turns it might be time to sell were seeing a little bit of that around the world also you've seen the platform that John referred to as we have the ability to take many of the products.
Streams that come out of the slaughterhouses in the slaughtered animal byproducts business to their highest and best use and I know that's kind of an over cliched term, but whether we're making organic fertilizers, whether we're making pet foods, whether we're making a heparin.
There's all kinds of things now that as we have the platform built we can bolt on these companies and turn them into something a little different than they were so we do have a little different proposition than we had but as John said prices price and we stayed on the sidelines when things got up into the big double digits here for <unk>.
Five years ago, and we will maintain that discipline as we go forward.
Okay. Thanks for that color I appreciate it and then just one more follow up on ingredients and margins.
I'll revert questions that investors have asked me which is that.
As rendered fats, maybe take another leg higher because to your point Ci becomes.
Input factor in the in their value to a greater extent and that manifests.
It's been some questions that youre suppliers, the slaughterhouses will notice that and margin expansion.
You might see some friction as a result.
I just wanted to know what your thoughts on that or if that's something that you see as a as a risk that in other words your margins won't participate with with.
With pricing in the next leg.
No I think we've been clear for about 18 years that have a significant amount of our our raw material procurement is on a shared commodity basis and so they're getting the benefit of those higher <unk> and those values. So end of the day, that's being passed on already where we're getting our margin expansion is really.
And a lot of the different specialty products that we make out there and are able to transform that as the capital we put in play over the last five plus years. So you know I don't really see any any pressure there from time to time.
If you said what is the pressure you have around the world World. It's energy prices. It's labor prices you know the sales price of our products today have basically nothing to do with what the inflationary ish.
Issues that are happening around the world. Those are the challenges we're facing on margin here is can we expand out our processing fees are our collection fees or service models to to recover those higher operating costs, so, but the ci side or the feedstock or protein in price.
Remember the meat companies for the most part are all making a lot of money to and part of it is coming from US as we were able to glean and give them more money.
Got it. Thank you so much have a great day.
Our next question comes from Craig Irwin with Roth Capital Partners. Please go ahead.
Good morning, and thanks for taking my questions.
Randy $995 million higher.
<unk> segment margins, the beautiful thing right. It looks like roughly two thirds of that came up at some used cooking oil.
You're driving part of that with PGE to right, taking 40% of that feedstock off the market.
Can you maybe talk us through.
Okay.
What do you see as the primary drivers of that margin and margin expansion.
Has this this commissioning of <unk> need to have the full impact on the market yet.
For fats and oils.
I know there was the biodiesel Guy has benefited last quarter from from a backup with heightened right in the supply chain, but how does it play out our operations in the fourth quarter.
Yeah, and I'll tag team this with John a little bit into the day on a macro basis, both North America and globally strong fat prices I mean, theyre just theyre just solid demand for low Ci feedstocks clearly we learned how fragile that business is again.
With Hurricane Ida when it becomes basically a mono customer business, meaning diamond Green diesel and all of a sudden diamond Green diesel goes offline for 17 days and.
You know when we were offline what needs to be understood offline means we could run we just didn't have electricity. If you don't have electricity you can't unload railcars and so then you get this screwed up logistical pipeline and so we had to defer stuff the fourth quarter here, we had to pay people you know it's a notch.
And all of the above and so but they were still having to move product to the market. So that thus you know youre biodiesel Guy. So I guess my short answer on the fat side, you start you've seen prices rebound as the supply chain gets back into Diamond Green and we start to to truly operate at these new levels.
Protein side is really one specialty proteins remained very strong pet food demand is robust the challenges is really logistics around the world nothing that you haven't seen on the news channels every day of container freight.
It didn't even really about pricing its availability and so what we've seen on proteins. Both here and in Europe is the challenge has been to get it out of their primary market to the consumer has been really impacted thus you got to sell it to somebody and how do you do it that's the word commodity you've got a price it back into somebody else's you.
So as we go into 'twenty, two we see fat prices, where they're at today firm and protein prices should be pretty steady, maybe maybe improve a little bit it will depend on the soy crush around the world, but we as we've all seen we've got robust crops all around the world and so but remember meet demand in meat.
<unk> is really solid out there today, so from our business model raw material volumes should be solid next year fat prices good protein prices steady.
Excellent. Thank you and my follow up question.
Roughly dozen renewable diesel plants out there that want to come online maybe we can have those that actually work and do produce right.
But many of those companies are approaching feedstock suppliers, either soy crunchers or others.
For long term commitments for feedstock.
Theres, even conversations about processing agreements because they don't want to put out the capex chip.
Process for their own for their own facility.
Can you talk about whether or not you're in conversation with any of these.
Let's just call them spec plants.
Is there a possibility we see a long term offtake.
With any of these these third parties.
Yeah.
I don't know John do you want to.
Are you asking us Darling would contract.
With somebody who is building a renewable diesel plant that will compete against those diamond producer if thats. The question I can answer that in one word no.
We would not do that of course.
The answer is yes, there is a lot of conversation and Theres a lot of folks running around trying to figure out quite.
Quite frankly had to recreate what we've got the Diamond Green diesel. The fact that matter is we've positioned diamond Green diesel and we said this time to time again in the right location with the right capabilities with the right logistics to be able to hit the right markets that means that diamond is always going to be the best place for fab to go.
And the North American marketplace now people can talk all they want.
Cutting deals to do something else, but basic economics are basic economics, and I think the other thing that's important to consider here and this question was kind of alluded to earlier in this.
At the end of the day, our fat suppliers going to get a part of the margin of the renewable diesel business. The fact that matter is they do because the renewable diesel business is creating a higher price for that.
However, I have no no no business in the world that invested capital and then turned around and gives away its margin to somebody who hasn't put any capital in it and there seems to be a lot of conversation around that particular concept that hasnt worked and American capitalism for 200 years I doubt, it's going to work in the next 10 years that way. So at the end of the day. This is.
Great for fat suppliers, we're well positioned we're going to buy the fat because we're in the right location with the right capabilities and that's how the economics are going to work going forward people can have all sorts of conversations about all sorts of stuff, but at the end of the day economics of economics and keep in mind, Craig I mean, the thing that we feel so strong.
About as you know, it's the ultimate real estate play location location location and the ability for Diamond Green diesel too.
Originate raw material from around the world.
Is just unheard of no one else has that ability to unload ships directly at their Doc whether it's port Arthur whether its norco.
With fat from Brazil, Fat from China Fab from Australia, Fad from Europe wherever it work. So as we look at this deal as some of the petroleum guys are out there making deals with soybean crushers.
Good luck I mean, you know at the end of the day. The C is terrible and B. The economics rule here and will give us a very strong margin going forward.
That's unfortunately answer I like it thank you guys.
Okay.
Okay.
Our next question comes from Matthew Blair with Tudor Pickering Holt. Please go ahead.
Hey, good morning, Congrats on the strong result, Randy you had some comments on accelerating spending in 2022 and I was just hoping to clarify what the spend at <unk> will be next year at one point, we were thinking $350 million, but it sounds like it might be more and then also could you play out.
Any numbers or what the Darling Standalone capex would be in 2022.
Okay. So I think that that was for me I'm going to let you near term.
I struggled we struggled with all of US here with I'm hearing that one so I apologize can you help me go through that a little bit further capital spend for <unk> for 2023 capital spend for <unk> for 23 should be around 800.002 million 22 or 2022.
So that's what I meant.
Around $800 million around $800 million than our base business, what we're at $275 75 to 300.
Okay. So 800 for DVD and 275 to 300 for Darling Standalone.
It sounds good and then.
Randy you reiterated the overall EBIT guidance for 2021 do you have any updates for the segment level guidance.
If we take the previous numbers it would imply that.
That would be coming off quite a bit quarter over quarter in Q4, whereas food would be moving up does that is that the right conclusion.
Yes.
Matthew This is Jim I think.
The best way to think about is the the upside is going to be in the feed segment for us that the food, but still be on track to be what we'd add out there at around $200 million for the year. The fuel segment winding up about where we are so really it's the the higher results are going to be in the feed segment.
Great. Thank you.
Our next question comes from Ken Zaslow with Bank of Montreal. Please go ahead.
Hey, good morning, guys.
Good morning.
Just a couple of follow up what.
What was the decision in terms of share repurchases and where do you stand with that going forward.
As your stock has kind of been a.
Taking a little bit of a backseat now.
Yeah.
Board has authorized it and I think the number its $200 million right John Yes.
So $200 million of which we've used 98.
Clearly we have a strategy around here to Opportunistically purchase from time to time as we see fit and I think youll see that behavior continue.
As we go forward here clearly we're under some pressure again this morning.
We reflected on this in the board meeting in the last couple of days, we've got a lot of great shareholders and owners in this company and some of them have basis is as low as $14 and so.
There's still the challenge within the stock here as a major position to unload.
To put some pretty significant pressure on it as people exit so end of the day. The forward look is quite bullish, but if you're if you're wanting to move a big block it can be a bit challenging and thus we are there.
Yes, I'd use the word defend it if someone wants to pressure too hard opportunistically going forward.
Great.
And then you alluded to the point.
You talked a lot about the feed on a couple of other questions.
Are you fully capturing.
The full amount of the Ray.
In the prices.
Or is there more to capture this contract to keep on.
He reviewed how does that work I just didn't fully understand that or is it just a <unk>.
Margin shift based on your increased.
Product offerings I, just didn't understand the opportunity there.
The question is in the past, we've talked about working on increasing our fees and services and we are we still in that world of updating us absolutely can and I think as we look you know there is two or three different in the in the if you will.
The supply chain feedstock business around the world, whether it's Europe those are time to time contracts.
Every couple two three months you renegotiate we've had some really nice margin expansion there as capacity is relatively full Canada, we've seen a nice return to.
Historical levels, there and then in the U S. We have focused on if you will the non fully integrated large slaughterhouses to widening the margins and it's been a two or three year.
Process and program for US I mean, the challenge there for US is now to recapture.
Exponential rise in labor costs and energy.
As we move forward so is it fully baked in.
For the most part yeah, I think but from time to time, we'll be able to do a little better.
Great I appreciate it thank you guys.
Yeah.
Our last question today will come from Ben <unk> with Robert W. Baird. Please go ahead.
Hey, good morning.
Good morning.
How are you.
Our guidance on.
Sure.
<unk>.
My first question.
The carbon intensity.
How does that make a difference.
And pricing.
And costs could you explain that to us and then.
You mentioned South America, a couple of times I think too weak.
We get the question I'll talk about feedstock.
Feedstock feedstock. Thank you.
We're ahead of the curve on this.
Try to catch up now.
Do you maintain that lead.
I guess, just the third one part of that is.
You do a lot of you've done a lot of acquisitions would do a family owned businesses.
Hum.
Okay.
The past Yoko.
Youll Cobra gets in the way.
Because you can't go.
Pete.
And do that but where are we with that right now.
Has that picked up activity.
Andy you want to take the Ci yeah.
So in terms of the Ci and I think if you look at the market. What you see is that the lower Ci feedstocks generally priced higher but there's lower Ci feedstocks also gives you the greatest margin.
And so that's what we're seeing there I mean it is they may cost more on the front end right now, but they're returning it and much greater value.
But specifically sandy into the pricing of the finished product somewhat by a.
The gallon of renewable diesel made out of soybean oil or a gallon out of Youku, how does that work.
Yeah.
Again, if I look at our corn oil or animal fat, there's typically have traded higher.
Times in soybean oil not arvida soybean oil.
But because we have the pretreatment capabilities, we're able to convert that and turn that into a higher margin.
<unk> product price in terms of renewable diesel because we're able to capture more value in terms of Lcs S credits and things like that so just to add onto that essentially the way. This works is the lower the carbon intensity of the field that you sell the more valuable it is because the green premium associated with it is better.
The fact of matter is waste fats, which is what we produce in our company.
As fats have a lower carbon intensity of fuels made from those fats have a lower carbon intensity score and therefore, when they price into the marketplace. When we include the compliance element of the price, which is the green premium part of that being the CFS. It gets treated as a higher value and therefore.
Better margin for the company.
So just so I have it clear.
It might be two two gallons.
If I use.
Sorry.
As a feedstock versus one gallon.
Just very rough.
So let me answer it this way.
If I buy if I'm, a consumer of renewable fuels and I buy a gallon of renewable diesel based off of vegetable oils versus a gallon of renewable diesel is made from waste fats Yuko animal fat.
Distillers corn oil or whatever it may be the fact, the matter is the credit that I have is worth more on the gallon that I bought from the waist fast because it has a lower carbon intensity store and there are a half for it has more value to the to the purchaser of the fuel or the buyer of the credit than the alternative.
The higher Cif out so John a different way of saying that is we're selling a gallon of compliance that's right and it has more value to the obligated party Iraq. When it's made out of waste Fats then vegetable oil if you will and so therefore, they're able to meet their obligations and theyre willing to pay us more for.
Yes, that's well said.
Thank you.
Uh huh.
Feedstock acquisition front.
Any help there thanks guys.
There is no help there been not going to answer that but no.
We're working we're working hard on it around the world.
I think the thing is and you know.
It won't the secrets out there don't last very long until the government data is published but clearly DGB is and will be an importer from around the world. So I mean, clearly we've got a supply chain system setup, because we operate on five continents. Today, that's always been the secret sauce of why we didn't have fear on feedstock.
And so that'll come clear the rest of the stuff just takes time.
Seeing a lot of businesses for sale potentially for sale. If you will in Europe Asia, South America U S and we'll just see if we can get any of them home. Some are being driven by potential changes in tax policy, some or succession planning summer.
It's time to sell just one out but what I can always say to everybody is we buy good businesses with great management teams.
Can or do share our values and so we're just we've got the ability like we've never had before to grow and we will when the time prior to the fair value continue to expand the moat around the machine.
Sounds good thank you guys.
Yes.
Ladies and gentlemen, this will conclude our question and answer session I would like to turn the conference back over to Randy Stuewe for any closing remarks.
Thanks Grant I appreciate everyone's time today and hope everyone continues to stay safe and have a wonderful holiday season, there's a list of upcoming events of Jim Stark Scott in the IR deck.
But we'll be putting on out there and we look forward to talking to you again soon.
The conference has now concluded.
Thank you for attending today's presentation you may now disconnect.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.