Q4 2021 Darling Ingredients Inc Earnings Call

[music].

Good morning, and welcome to the Darling Ingredients, Inc Conference call to discuss the company's fourth quarter 2021, and fiscal year 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.

Today's call is being recorded and I would now like to turn the conference over to MS. Sue Ann Guthrie. Please go ahead.

Thank you Tom and welcome to the Darling ingredients, Inc, fourth quarter and fiscal year 'twenty 'twenty. One earnings call participants. This morning are Mr. Randall C Stuewe, Chairman and Chief Executive Officer, Mr. Brad Phillips, Chief Financial Officer, Mr. John Bullock, Chief Strategy Officer, and then Sandra and deadly.

<unk> executive Vice President of renewables and U S specialty operations.

There is a slide presentation available on the investors page under events and presentation on our corporate website.

During this call we will be making forward looking statements, which are predictions projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties actual results could materially differ because of factors discussed in yesterday's press release and the comments made during this conference call.

And in the risk factors section of our Form 10-K , 10-Q, and other reported filings with the Securities and Exchange Commission.

We do not undertake any duty to update any forward looking statement now I would like to hand, the call over to Randy.

Thanks, Joanne welcome to Darlings Joanne So good morning, everybody and thank you for joining us for our fourth quarter and fiscal two 'twenty. One earnings call 2021 was another record year for Darling ingredients and we carry solid momentum into 2022, we finished the year with combined adjusted EBITDA of one point to three five.

Billion, our global ingredients business had a record year with $851 4 million of adjusted EBITDA and Diamond Green diesel demand remains strong with 370 million gallon sold at an average EBITDA of $2 seven per gallon.

We have sustained strong growth in our core business over the last four years and we are poised for significant cash generation during 2023.

At the end of December we announced that we entered into a definitive agreement to acquire all the shares of valley proteins for $1 1 billion plus or minus various closing adjustments. We estimate this acquisition will drive about 200 million in savings over the next three years and will be nicely accretive. We are currently awaiting government approval for the ACA.

<unk> Valley operates 18 major rendering and used cooking oil facilities throughout the southern South East and mid Atlantic regions of the U S and as a primarily a poultry tonnage company, but it has significant used cooking oil business, which will expand our ability to provide additional low ci feedstocks to fuel the growing demand for renewable.

Diesel.

As we've discussed in the past our strategy is to continue to acquire low Ci feedstocks businesses that will de risk and protect our supply chain, making us the number one and most efficient producer of renewable diesel in the world now turning to D. G. G. In more detail. It is producing a phenomenal return for all of us.

EBITDA per gallon is lower than last year. It is not unexpected and I continue to be very optimistic our supply chain is unparalleled in the industry. We have tremendous tailwind demand should continue to grow as energy prices increase in more states look to impale implement L. CFS mandates, we ultimately believe L CFS prices.

And RIN prices will normalize and improved to reflect the growing demand and realization of higher input costs no matter. How you look at it D. G. D is well positioned in 2022 and beyond now moving to our fuel segment in Europe on February 25th we closed on the acquisition of Grupo off the back.

Leading organic waste and Green energy company in Belgium, much like our strategy to grow low Ci feedstocks supply we have a bias that believes green energy in Europe will also provide superior returns and flexibility for our European assets. The bio digestion facility in the in Belgium. Currently has the capacity to produce 67.

A watt hours per year of green electricity today, we're announcing a major capacity expansion, which will grow the renewable electricity production to 101 gigawatt hours annually, coupled with our existing assets in Belgium, and the Netherlands Darlings total annual Green energy production in Europe will be 163 gigawatt hours.

Our feed ingredients business had an incredible year due to growing demand global demand for fats and proteins and a focus on de carbonization through the use of lower carbon intensity feedstocks. We ended the year with $613 7 million of adjusted EBITDA versus 317.8 in 2020.

The capacity, we added over the last five years positioned us well to handle this tremendous growth flawlessly.

Food ingredients also had a strong year with $194 9 million of adjusted EBITDA versus 167.1, and 2020, driven by strong demand for collagen peptides in the health and nutrition markets. This segment has been growing at a three year compound annual growth rate of 14.5% our foods.

<unk> remains an attractive growth vehicle for us and provides an earnings stream that is resilient to commodity fluctuations. Our fuels segment also had a strong year with $483 1 million combined adjusted EBITDA versus $411 nine in 2020. This was primarily due to the D. G D. Two expansion.

Which came online in October of 2021.

As world drives towards de Carbonization Darling is at the forefront we have set a goal to be net zero greenhouse gas emissions by 2050, we plan to submit a commitment letter to the science based targets initiative by the end of 2020 to committing to set a science based 1.5 degree aligned greenhouse gas.

S emissions reduction target with support from our new S. E. S. G Committee at the board level I have no doubt we can achieve these targets. Additionally, we identified both short term and long term targets in our 'twenty 'twenty. One ESG report published last fall and are currently working on setting midterm targets.

As far as our short term targets are concerned we are investing in various capital improvements at our plants that will reduce our energy intensity.

As for water, we are investing in a new state of the art recovery system in our Ghent, Belgium, Rucell low factory that will reduce water consumption by nearly 46%. Additionally, we have begun an engineering study to evaluate water usage at some of our U S. Plants. We hope this work will provide us with a blueprint for best practices and water use.

And reuse and recycling in an effort to meet our short term goals of reducing water withdrawal by 5% per unit versus our 2020 values.

Now you've heard me say that we are the original recycler at our core we help our customers have a positive impact on the climate, we have embarked on a journey to better tell our carbon handprint story. The solutions, we provide to our customers that decreased their carbon footprint. For example, we produce meat and bone meal as an alternative soybean meal. This positive.

Lee impacts land use change in carbon emissions the carbon intensity of the renewable diesel produced a D. G. D is up to 85% less than fossil diesel we play a critical role helping to protect the planet, creating better lives and we can do so while providing our shareholders superior financial returns with this now I'd like.

To turn the call over to Brad to take us through some financials after that I'll come back with a little outlook for 2022 and beyond alrighty. Thanks, Randy for comparison purposes note that our fiscal 2020 results included an additional week of operations, which occurs every five to six years in fiscal 2020, the additional week occurred in the fourth quarter.

<unk> Creek and increased net sales and operating income by approximately $73 million and 8 million respectively.

Now net income for the fourth quarter 2021 totaled $155 8 million or 94 cents per diluted share compared to net income of $44 7 million or 27 cents per diluted share for the 2024th quarter.

Net sales were $1 3 billion for the fourth quarter 2021, as compared to 1 billion for the fourth quarter 2020.

Net income for fiscal year, 2021 was $650 9 million or $3.90 per diluted share compared to net income of $296 8 million or $1.78 per diluted share for fiscal 2020 now turning to operating income we recorded two.

211 million for the fourth quarter 2021, compared to $74 4 million for the fourth quarter 2020. The primary contributors to the improved operating income was a $72 5 million an increase in the gross margin a 7 million increase in our portion of the earnings from Diamond Green diesel as well as lower depreciation.

<unk> amortization and SG&A. In addition, the fourth quarter of 2020 included a $38 2 million in restructuring and asset impairment charge related to the closure of the of the biodiesel units.

Operating income for fiscal 'twenty fiscal year, 2021 was $884 5 million as compared to $430 9 million for fiscal year 2020. The increase in operating income was primarily due to the gross margin increasing $358 9 million.

A $36 5 million increase in our portion of the earnings from Diamond Green diesel and a $33 8 million reduction in depreciation and amortization, which more than offset a $13 million increase in SG&A.

As just mentioned fiscal year 2020 included biodiesel restructuring and asset impairment charges.

Interest expense declined $141 9 million for fourth quarter 2021, as compared to the 2024th quarter and declined $10 6 million when comparing fiscal 2021 to fiscal 2020 the year over year decline was mainly due to a reduction in our term loan balance during the year.

<unk> as well as lower amortization of deferred loan costs.

Now turning to income taxes. The company recorded income tax expense of $164 1 million for fiscal 2021, the effective tax rate was 20% and cash.

<unk> payments for 2021 were $46 four.

Million for 2022, we are expecting the effective tax rate to remain about the same at 20% and cash taxes to increase to approximately $120 million.

Our balance sheet remains strong with our total debt outstanding at the end of fiscal year 2021 at 1.46 billion and our bank Covenant leverage ratio ended the year at 1.57 times.

Capital expenditures totaled $82 4 million in Q4, and 274 million for full year 2021.

The company also repurchased 167 7 million shares of common stock in fiscal 2021.

Lastly, you will note, we increased and extended our revolving credit facility from 1 billion to $1 5 billion and added a 400 million delayed draw term loan a which was undrawn at year end 2021, now I'll turn it back over to you Randy Thanks, Brad I'd like to conclude with my thoughts on how I see 2022 shaping up at the start of the call.

Paul I said, we carry tremendous momentum into 2022, our base business is currently operating at around 950 to 1 billion adjusted EBITDA, depending on the timing of the close on valley proteins, we could well exceed the 1 billion adjusted EBITDA in our base business regarding D. G D diesel pricing is improving.

RIN should react to the higher feedstock prices and Lcs as should improve as we go through the year, while the boiler plate capacity at D. G. D is currently 700 million gallons, we're seeing tremendous efficiency gains and it wouldn't surprise me to see us exceed 750 million gallons for the year. Additionally, D. G. D is progressing well ahead of.

Schedule with commissioning set for Q1 2023 today D. G. D margins are around $1 25 per gallon, but I believe we're going to see improvements as we move through the year all of that said I'm forecasting combined adjusted EBITDA to be about 1.5 to $1 6 billion for the year as we move through the year I'll try.

To provide you with a narrower range so with that let's go ahead now and then open it up to Q&A.

Yeah.

We will now begin the question and answer session.

If you'd like to join the question queue Press Star then one.

If we are using a speakerphone. Please pick up your handset before you press any key E P.

You'd like to remove yourself from the question queue Press Star then two.

And the first question comes from Manav Gupta with Credit Suisse. Please go ahead.

Yeah.

Thanks, guys Hi, My question here is that over the last six months.

The new boost diesel bus has to look at the argument that NCS in spaces that are going to crash to $80 a ton and then it'll be massively oversupplied now Chevron is one of the best Dealmakers in the space, we saw that with the new Northern acquisition doesn't chevron willing to buy at angi cooler longer Tom the Newbuild diesel fundamentals.

I'm going to be strong and margins.

Margins normalized they'll still be healthy. So my question is don't you think these betting against odd producers, especially high quality names like Darling.

They're just being too myopic and ignoring that London dumb carbon prices will actually move up and not down well it needs to be kind of a nice so the carbon price actually moves up and not down.

John why don't you take that hey, thanks, Yeah, I think the place to start here is and you said, it's Chevron is obviously, a large petroleum company in California, They know that market very well. So I think you certainly have to respect their views on how they see the carbon world going forward, there's absolutely no doubt about it that over the long.

Long term the pattern in the direction has been set on this and then the short medium term as well we are going towards carbonization policies. As we go though the carbonization policies. The best short term and medium term alternative carbonized is renewable diesel and biodiesel and Biofuels that means we're in the right place at the right time.

<unk> are I think we obviously have all knowing that when we saw margins that were up in the two to $3 a gallon range, but that wasn't continue for a long period of time.

Margins are simply outsize. The reality is our strategy and we had it out in front of everybody.

Simply to substantially increase our volume at very low capital cost for the volume that we were increasing so what have we done we went from an operation that was selling a 160 million gallons for years ago last year, we sold close to 200 and 370 million gallons a year before 275.

We're running at a 750 pace this year and next year, we're gonna be at $1 2 billion gallons.

Interesting to me and to US we see all of these announcements.

And quite frankly, so many people in the industry has started to run a math exercise Oh. This guy's announced all of this capacity is going to be here.

Reality is.

Who's the people that's actually building the substantial capacity today and the name in the United States is one diamond Green diesel.

That's the one that's putting a real capacity online right now are project, Israel and I think the more important point is this and we've talked about this but the message doesn't ever seem to get out there.

The plant we're building are in the right place.

With the most flexibility to see different types of feedstock with the ability to process different types of feedstock and the ability to hit all of the different carbon markets. Because we tend to think of the carbon market is just California, but it's not.

Oregon, Washington is coming online new Mexico came within one vote of coming online, California, or New York is working on bringing in LCR pass up and currently Canada is in the regulatory development phase on there al CFS. So we see massive developments of decarbonization occurring around the world Diamond Green.

<unk> is positioned to hit every one of those markets not just one market, but every one of those markets. So we've got the right machine, which means we're always going to be maximizing margins in this space.

There is no doubt the carbonization is going to continue that's going to create value. The other thing that I think that we are constantly amazed at is if you look at the renewable diesel producers in the world.

There's only one that owns a substantial oilfields.

And that's the name as Darling.

So as we've seen as we've driven up that prices in part as a response to the decarbonization policies that are developing around the world.

We benefited from that on the other side of our business. There is simply no other renewable diesel producer in the world that can say that.

So we think the trend is clear the short term mathematical exercise Oh, there's going to be too much capacity. This month of that month, I think that misses the larger point.

The larger point is we're just massively well positioned because we built ahead of this thing and we've got the right assets in the right location with the right supply chain. Therefore at the end of the day, we forecast and think that we'll be making more and more out of this not less and less of some of them seem to be implying over the last couple of months.

Thank you I completely agree with.

<unk>.

Thanks Manav.

Thank you for taking.

Yeah.

The next question comes from Ben <unk> with Stephens. Please go ahead.

Hey, Thanks, good morning, everybody.

Good morning, Ben.

So I wanted to ask starting on the the expansion and D. G D and you know the.

To produce in excess of 750 million gallons, how should we be thinking about the build to that kind of new run rate of 148 million gallons in the fourth quarter I know youre ramping the capacity is that something we should expect.

To ramp through the year and then just roughly taking a shot out at it kind of what do you think is a normal.

Run rate capacity as you get to your full capacity level.

So in the first quarter here, we are doing a scheduled turnaround at Diamond Green diesel one that's just being completed right now and that should be coming back up here, but then a few days.

Other than that once diamond Green diesel one is back up and running.

But the balance of the year there is no ramp up we're running at that rate.

Okay fair enough.

On the core business in the feed ingredients business.

As we think about your ability to.

Generate margin leverage, which clearly this business has.

It is running full speed performing exceptionally well and one of the very tight global grain fats and oils environment.

Think about the ability to continue to realize operating leverage in this business are there inhibitors to price flow through to margin that we should be mindful of.

And can you talk about kind of your view of S. N D. Four.

Fats oils proteins and kind of the intermediate term as well and then maybe kind of a two three year view as well would be helpful. Thank you.

Wow.

So Ben this is Randy I mean, clearly you know we we have we've lived through the lower times, we've lived through the higher times in these businesses tailwind and headwinds as we referred to them. We spent a lot of time repositioning. This company both from a capacity and a margin standpoint over the last three or four years.

Knowing that we were at the lower end if not the bottom of the 10 year cycle, we talked about this being different than in the past, meaning that this was a demand driven you know cycle, meaning the demand driven on price or price increases now you throw that with a little bit of.

Spiric droughts, South America's Bean crop getting smaller to a degree it's dry here now you throw on a war on top of that and you've kind of got the hyper super cycle here, So really kind of hard to clear the fog in the crystal ball today, but one thing's for sure in 2022 and probably.

Through 2023, we cannot bring on enough production around the world yet to fulfill the growing demand now I think it's probably safe to say in some cases, the higher prices will rash in some type of demand in different places, but food for the most part around the world is resilient to these type of.

Inflationary pressures so at the end of the day I mean, we're seeing you know and and John commented about it not only at Diamond Green diesel Diamond Green diesels haven't really nice margins as far as a return on invested capital right now while we're haven't really nice returns on invested capital with you know 70 to <unk>.

75 cent fats F O b our plants in the throughout the country and around Europe and then the proteins we are.

If you say, we have one weak sister in all of it it's still kind of the mixed specie proteins, but they're starting to move up rapidly as soybean meal is becoming both pi and moving up in price around the world I just don't see this thing backing off at all in 'twenty. Two at this point and I think 23, Oh carry forward with a John you got.

And any other thoughts on absolutely I mean, you have to remember the basis of what was the foundation of the higher commodity prices.

And that is a combination its not just biofuel programs. It is also the fact that we've had fantastic GDP around the world all the nations of the world of incentive their economies with strong fiscal stimulus. We also had the Chinese reconstituting half of the herd in China, which is 25% of all patients in the world as a REIT.

Of that we've taken the ending carryout for corn soybeans meal oil every commodity including meat inventories around the world down to just nothing so the reality is if we keep with this strong demand to rebuild the cushion that we need to be able to re stabilize the commodity prices at a lower level, that's going to take them.

While that's not going to happen overnight. So we think we're here for a while the good news for Darling as we're making fabulous money in our base business and we're continuing to make outstanding money in Diamond Green diesel during that period of time and I can't go back to this often enough. We made 370 million gallons last year, we should make around 750.

Gallons this year and we're going to make $1 2 billion gallons next year.

That's a tremendous increase in volume and a profitable business that has a great return and our production capacity is not now not an announcement for some future date as almost all of the capacity that we're seeing announced is.

Yeah, that's great. Okay. Thanks best of luck.

The next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.

Yes. Thank you good morning, everyone.

Good morning, Adam.

So I guess, Randy first I wanted to just clarify some of the pieces of the outlook and just make sure that we're all on the same page the $9 $52 billion for the base business was that inclusive of valley or or not.

Immediately clear how you framed it.

That has a little bit of Uber back in it and that has zero valley in it.

Got it okay.

And so we.

Within that.

Just from a commodity price perspective has that kind of thinking about the business from obviously, we're two months through the year and taking.

Taking the forward curves as they sit and applying that to the commodity values.

There's still a pretty backward dated curve from the spot.

Is that the base assumption in there.

Yeah, what what I'm looking at Adam as you know clearly we're you know we're we just finished period two here yesterday or Saturday and in our business. Here. So you know I saw January I'm seeing the prices that were sold both in North America, and Europe , and then I'm looking at what I'm seeing on the books for Q2.

And and I'm seeing some pretty significant increases from Q1 to Q2 and protein prices and then really fat prices.

We'll have traded in the sixties in Q1, and Theyre going to be in the Seventy's in Q2, and so that's what's driving the forward curve here for US is really it's the forward fat prices that were being able to lock in Q2 forward.

Okay.

And then in your prepared remarks, you talked about valley potentially garnering a up to 200 million of savings over over several years.

I know the transaction Hasnt closed yet, but would love to just dig in there and just maybe if you could help frame kind of where the opportunities come for that kind of magnitude of savings. It's.

Pretty significant relative to the purchase price and relative to what I would think the earnings base of a valley kind of it's coming in.

Yeah, I mean, it's a fair question and obviously, while we're awaiting government approval I'm I Wanna be fairly guarded in my my comments here there, they're very nice significant plants and factories on the east coast and two in Texas, and a wet pet plant up in Pennsylvania.

We look at all kinds of different things from yields to operating cost all of the above to how we trade species specific products and really at the end of the day, we kind of look at our margins their margins and say over the course of three years. That's what we believe we can deliver.

To the to the shareholders and it won't be easy by any means I think the most important point is as geographically there are when I'm on a call. Just you know route synergies and in many of the bolt on acquisitions. We've done in the past you know we essentially are picking up at the same account or the same town and we can eliminate lots.

Free and lots of trucking cost. This one is just about really doing it the darling weigh in and its a well run company. That's all we acquire we just think that over as we have looked at our business over the last 10 years and what we've been able to do with how we operate factories recover products make specialty products move them to defer.

Markets that we will be able to to bring valley, a little more opportunity than they've had in the past I don't want to take anything away from the management team. There by any means I just think the world is really really opportunistic for us once we have the government gives us clearance.

Okay, Oh, that's a really helpful color I'll pass it on thank you.

The next question comes from Ken Zaslow with Bank of Montreal. Please go ahead.

Hey, good morning, guys.

Good morning, Ken.

But when you alluded to the fact that you think that wins in Els Els that's credits will start to move higher.

What are you seeing that makes you believe that you do you think that imports are going to slow down do you think is the policies are going to kick in how do you think about that you were in the same view, but I just kind of thinking about what you think the key drivers are either Brendan <unk> credit starting to move in the right direction again.

Ken This is John so why I mean part of the issue around and this is of course, they have moved dramatically higher over the last several weeks. So it's not a thinking that they will they have we obviously see that you know the green premium and that is in part the rens and part D. L CFS and in parts of the tax credit that green premium.

It has to be there to incent the production of renewable fuels as we see the price in fact go up quite frankly.

It's harder and harder for a lot of especially the more inefficient biofuel facilities to actually make any money so that green premium needs to suffice to be able to create the demand or create the supply.

To meet the demand we were also extremely encouraged others, we're not but we worry about what the EPA did with their proposed RV OS.

So you had to correct. The fact that they had established some RV owners prior to the pandemic and gasoline and diesel consumption was down but if you look at what they did they said listen we're not going to do the sras, which had been the real killer parens pricing.

Going forward and they said you know we're going to stabilize the rins for what actually occurred in the U S economy in 2020 . One 'twenty. Two then they leapfrog forward the demand and send a clear signal that the by the administration is going to push ways that did carbonize the economy.

That's good for the U S farm community as well and I think we're going to see that pattern continue the <unk> market again has been heavily influenced by the fact that.

Anytime anybody you know comes out and says God I'm building a brand new renewable diesel facility then all of a sudden everybody puts out a recast S. N D on how much volume, there's going to be go into California under the L. CFS.

I hate to say this but some of these announcements are laughable and.

There's going to be some real competition coming on don't get me wrong.

But the reality is the only major capacity that's being.

Currently built in the United States, and it's going to be online in the next 12 to 18 months. The name is diamond Green diesel the others are all well out into the future and we know that carbs looking to move forward or discussing moving forward with higher standards. As we moved 25 and beyond Canada is going to be coming online, obviously, Washington Center.

The process of setting the regulatory framework up around at New Mexico came very close to Enel CFS program and New York is going through the mapping stages on a regulatory implementation of Enel CFS. So we just think the overall demand situation looks really really really good that doesn't mean in the short term that the L. CFS credit is not going to go from $1 50 to one.

30, or $1 50 to $1 70.

We're obsessing too much on simply mathematical exercise here and missing the larger picture of what's actually happening in the marketplace and it's pretty obvious what's happening and I think chevron just put a giant stamp on what's happening in this segment.

Obviously.

So what do you think the carb options are to do in terms of what they might do it there seems to be some news and thought that they might change.

Change or enhance the California policy have you guys put together some thoughts of what direction, that's going to go and I know they increased it January 1st as you know.

From a procedural point of view, but it sounds like there's more to come and you guys have some.

Thoughts on how that's going to develop and how positive that's going to be.

Yeah, you know, what's really interesting about this we don't view the L. CFS going from 200 to $150 is a bad thing.

What has carb just learned out of this exercise they've learned that they could magically reduce carbon emissions in the state of California without it being a massive expense to the California consumer. The reality is what that does is it positions them to increase those targets 2025.

Forward to much higher levels, we are ecstatic that the market has developed this way because quite frankly this is going to drive much larger demand for low carbon feels going forward in the marketplace. So yeah absolutely.

What's the state of California, I wanted them to do they want to Decarbonize, our transportation system.

The matter of L. CFS has been a massive success for them they've managed to create tremendous amount of additional credits and the consumer in californias not having to pay nearly as high a price as we once feared remember three years ago. We were all afraid that we're going to be at the cap and above under the LCR pass we worried about that because we thought that would be <unk>.

Terrible long term for the program. This thing is developing exactly as we would want it to have developed but the long term development of the growth in California and elsewhere because once every other state in every other region. That's seen the L. CFS, they're saying that they can implement low carbon standards and do it in an economical.

Fashion for their consumers, that's a great message.

And my last question is when I think about the Chevron deal.

Renewable energy.

Can you give us.

This is probably a simple question, but I would like to hear.

Here in a little bit more from you guys. How do you compare your business model too.

Reggie in terms of your profitability the way you operate.

Do you think about it because it seems like this would create a floor value not E.

Comp how do you think about that and I'll leave it there and I appreciate your time as always.

Yeah wait wait a lob one in there Ken I just use one word you're a smart guy we're significantly undervalued and underappreciated. So I'll turn this over to John now.

So if you want to compare US revenue is a great company I'm not going to say anything negative about them. They do a phenomenal job they make somewhere around 90, I think their information says about 90 million gallons renewable diesel today. This year for this year will produce around 750 million gallons of renewable diesel next year will produce one 2 billion gallons of renewable diesel.

Reggio produce 90 million gallons of renewable diesel in their total biofuels, including biodiesel will be somewhere around 700 million gallons.

And it will be $1 2 billion gallons of renewable diesel, which we think is a good technology moving forward in the biofuel space.

In addition to that and we've seen that in the results in our base business.

As the low carbon policies have driven a preference for fast that produce low carbon feels we've seen an increase in the price of those low carbon fats, we're positioned as an oilfield to supply those low carbon feel fast to the biofuel world.

Again, I go back where the only renewable diesel company in the World that has both excellently located in rapidly expanding renewable diesel capacity.

And the oilfield of low carbon fats nobody else has that so when you compare like door, a b and C and this place it looks to us like we've got an excellent position in the marketplace.

Thank you guys very much.

The next question comes from Tom Palmer with Jpmorgan. Please go ahead.

Good morning, and thank you for the questions.

Good morning, Tom.

Yeah.

Last year, you gave some helpful detail unexpected EBITDA contribution on a segment basis, if we look at the $950 billion to $1 billion guidance in the base business.

Should we be thinking about contribution from like the food segment and fuel segment.

Yeah, I don't have those numbers in front of me more than happy to to think through that and try we typically want to put those ranges out as we see the year go on here is what I'd say, where I'm just doing as benchmarking the $8 50 last year and the higher fat prices that we see running at this time.

Remember I'm only 30 days into the year here clearly the feed segment is going to move up because of the higher fat prices I'm watching Q1 and Q2.

Protein prices move up 70 to $100 a ton.

Through our system fat prices up 10 to 14 cents a pound as we move through the year, but remember that's versus 50 cents last year, it's not hard to sit there and look at this and say one.

Billion could be really light if these fat prices hold where they're at right now, which we tend to believe they will little color on the food segment.

We are just continuing to ramp up our collagen peptide business.

Our demand from our customer base is still accelerating in the high single digits.

Margins are on that versus some of the commodity products that we made and the Russo brand Division.

Being replaced with higher margin. So you know we put up 198, I think you know I look back at Brad and that was always we were kind of 130 to 140 <unk> in the food segment and then we started bringing on the peptide business and you know now we're looking at that business should be you know well into the mid two hundreds here within a year or two as we bring on additional.

<unk> peptide capacity the fuel segment, obviously oops. It back is going to help us grow there that was just a very timely.

Acquisition for us it gives us lots of opportunity to arbitrage plate waste and different waste streams in Europe into a bio digestion.

And we're going to expand it out pretty nicely and we're green electricity prices are in Europe today.

Driven by the challenges in the Ukraine, I mean that that is a very very positive accretive acquisition for us D. J D.

Simple said 750 times, a buck and a quarter half of that flows $4 61 or whatever the number is flows right back into the fuel segment. So a full year at $7 50.

Versus what we made $3 70 last year. So the fuel segment will be up and that's where you get into that 1 billion 5 billion six range and we'll try to put some ranges out there as we move to the Q1 call in May for you to help you.

Great. Thank you.

And then just to follow up on <unk> I know.

In past quarters Theres been some discussion of kind of when we might see distributions flow through just given the elevated level of capex that we're seeing to get port Arthur belt. I mean is this mainly a 2023 event at this point is there still the possibility of some distributions starting to flow through come later in 2002.

'twenty two.

Okay.

Yeah, Tom this spread I guess I would never say never on on this year, but you kind of prefaced it pretty well I mean with the acceleration, which is looking you know continues to look very very positive.

The spend being pushed back here in 2022, I guess the way I'd put it as a never say never on some dividends. If we did it would be very late in the year end and not.

Not really extremely sizable or material.

You get into 2023 really almost no matter, where the margins are if there is a margin where we're looking at from there and beyond hundreds of millions of dollars in dividends from there on out with the with the JV debt free coming out of the consumer and I think Brad and then 2023 that it just really absolutely.

Even at a $1 25, a gallon gets extremely sizable and the JV will be debt free coming out of 22 here.

And if I can just add I want to make sure. We're clear we are at or below our cost estimate for Diamond Green diesel three at this point in time. The only thing. That's happened is we've been able to accelerate the project. So there's a little more dollars of added then spend in 'twenty. Two that obviously is one of the reasons why we don't really see at this point in time.

She never had dividends in 'twenty, two but all of that means is we're done with our capital in 'twenty two so when we get to 'twenty three.

We're largely dividend, what we make right except for maintenance capital that we need in the business.

Yeah.

Great. Thanks for the color guys.

Yeah.

The next question comes from Matthew Blair with Tudor Pickering Holt. Please go ahead.

Hey, good morning, everyone I wanted to ask about the Steve segment, you're fast in UK revenue. We're extremely strong I think staff revenue was up 20% quarter over quarter U K revenue up 60% quarter over quarter.

I was hoping you could just provide a few more details here how.

How much of this was pricing how much was volume how much of a seasonality in and can you hold on to these levels into 2022.

The only thing.

What I would give color around there and that would be really as we've talked about sensitivity on fat prices I mean, that's kind.

Kind of bigger picture this last year I'd say, the what we put out.

Years ago, several years ago, with John Muse and the sensitivity that we did on the business. It's still pretty much holds water today. When you look back at 22 and <unk>.

And where a lot of the pick up that Randy has been talking about this morning is in that that that bears out and those prices were up here as we've.

Entered into a into 'twenty two I'm, sorry, those bare it out in 'twenty, one and that momentum is here in 'twenty, two and yeah, I think I think Matthew.

Part of it's volume we've seen a strong you know the the rendering volumes around the world remain extremely strong the UK volumes kind of up and down pretty strong fourth quarter with a lot of reopening is going on so you know, but you know remember people love to talk Yuko.

It's a material contributor in the sense of earnings, but volume doesn't move around none of our volumes move around much. So it really is a price driven event here of how we've got the procurement formulas written on this material.

Do you think are the UK volumes back to normal with restaurants reopening or do you still see some upside there.

Yeah. Yeah. This is John not quite back to where we were pretty solid but getting pretty close.

As we continue to see the kind of the reopening of the economies.

The other states and Canada.

I mean, clearly New York the northeast is really dragging its feet to come back to where it was.

Got it and then finally the guidance of one.

$1 25.

EBITDA margins for <unk> this year.

I guess I'm.

Just trying to think through that we have had a pretty significant increase in diesel prices do you have expectations of higher RIN higher L. CFS moving forward you just get up I think about 14 in Q4. So I guess is the way we should think about that that you're expecting higher feed costs.

Yeah.

SAP out most of the most of the gains from higher diesel.

CFS as we progressed through the year.

You know I'll I'll take a stab and John and Sandy can can also I mean, we're throwing you know if you think of the first five years at Diamond Green diesel operated and operated a $1 26, a gallon. The next four or five year $2 26, a gallon and then last year down to two O seven we're being conservative as we step out front.

Here, we're seeing feedstock prices run up rapidly I think the bid delivered diamond Green diesel today is nearly 80 cents a pound.

We've never seen that so we're trying to be a little bit conservative out there we have our fundamental beliefs.

We don't share your view Matthew on carbon pricing, we're bullish carbon pricing I think the chevron investment once again supports that and at the end of the day, we think that things remember we brought on you know 400 million gallons of new capacity, you know 90 days ago and it's a.

At capacity sold out we didn't really move the markets, we didnt trash rooms, we didnt trash L. CFS. It just quietly got absorb and so now the markets are normalizing to the new higher levels of demand in California, We've seen some sluggishness, which you would expect in Europe on demand due to.

You know lots of different things in from the pandemic now to war, but the world's picking up Sandy anything you want to add there yeah. I think what you said you know things are going to ebb and flow based upon what's going on in the world you know, whether that's due to weather events or supply chain events or political events or supply and demand event.

You know I think like John had mentioned earlier the key point with regard to D. G. D is that you know whether the whether the margin is $2 25, or a $1 25, what at the end of the day, we're producing more gallons here. So.

So at 750 and $1 25, that's $938 million that we would be producing for D. G D and we're earning more money in our base business.

And then starting next year, we will have $1 2 billion gallons and if it stays at $1 25. It if it doesn't go up beyond there that's $1 $5 billion. So we're making a ton more EBITDA.

And so I and.

And throw on top of that to that even at a lower margin per gallon.

If that goes up it's even higher but D. G. D is one of the highest returns in the AG in the energy World business.

And so I think it's just.

Great business.

Thanks for all the helpful comments.

The next question comes from Craig Irwin with Roth Capital Partners. Please go ahead.

Good morning, and thanks for taking my questions I should start by saying you know really congratulations on this impeccable execution over at Diamond Green.

Thanks, Craig.

Can you talk a little bit more about the new capabilities that came online at D. G to you you had some new technologies you adopted there allows you to produce some green gasoline gets you that much closer to sustainable aviation fuel lots of other companies out there talking about SaaS I'm very few are actually doing it yet.

How's the market development coming pretty these new products.

What are you learning.

As you offer this out there you know how real do you see these markets for Diamond Green over the next couple of years.

Yeah. So this is sandy I think you know what we see is we see that the SaaS market is still in its infancy stage. It's still trying to develop them. You know we've talked about this a number of times is that really didn't send it what we need is we need more mandates we need more incentives there.

Back better did provide for one of those in SaaS tax credit.

And while that seems to be stalled at least temporarily what we're hearing is that that may get broken up into smaller bells, one might have a climate focus and we would expect that SAP would be a part of that I think that that along with the mandates that are being proposed in Europe are going to be huge triggers in terms of.

That obviously south is something that you know we want to be a part of it's the economics makes sense and we do think that is going to develop and it will happen. Eventually over time. It's just you know when it's going to happen.

I understand but I should add I shouldn't I should add work, we're ready we have the technology ready to go when the economics are right. We know how we build it we know approximately how much it'll cost and so when we get the economics right. We are ready to actually start to produce real Saf gallons again.

There are a lot of pretend saf announcements out there a lot of folks that will never produce selling to a lot of folks that will never buy because it will never produced but the reality is when the economics are right, we're going to be in a position to move and move quickly because we're prepared to do so.

Thank you to my second question is really.

Your view on sort of the market self regulation you did discuss before.

In response to some of the other questions the way you see.

<unk> and carbon prices normalizing for historically when when the market goes through a period of volatility the smaller biodiesel.

First the guys with little five and 10 million gallon plants running on split oil or canola oil.

And that really tends to set a bottom in the market. Since we have had the blenders credit and in a fairly nice rent environment. You know those guys have taken a little bit longer to come out.

But did you did you maybe see or Ken can you share anecdotally with us whether or not you saw substantial capacity come offline over the last number of months with the pressures on these little clients that are there.

It's tricky economics are in periods of volatility.

Yeah.

John Sandy do you want to take a shot at that.

You know I would say that we probably don't pay a ton of attention to whether or not an individual biodiesel facility is online or offline I think what we're more focused on is we're focused on you know what's important to us and we've always said that we've created you know I really unique machine in terms of.

Diamond Green diesel that's going to be able to out compete any facility, whether that's biodiesel or renewable diesel.

John had mentioned before you know, we just said we really have superior logistics so.

We built our facilities in the Gulf of Mexico, where agricultural products generally funnel into yeah. There's also are great in terms of outbound logistics because they can they can basically transport all over the world. We can transport from our facilities, we have multiple capabilities, we can tell.

He inspired by.

By rail you know, we can transport by water, we can transport by pipeline and so we have just.

Significant logistical capabilities.

We also have pretreatment capabilities, which differentiate us and and that allows us to run the cheapest most economical feedstocks and then we also have access to feedstocks to our partners and John's been mentioning that throughout the conversation today and I think one of the things that we don't talk about it and we haven't yet talked about on this call.

<unk> is that we've seen a lot of other renewable diesel type projects want to emulate that supply chain and so they've gone out and they've tried to contract for a long term supply agreements and D. G. D is really different in this respect because well it's partners had feedstocks and it has access to feedstocks.

We don't have any minimum cake requirements and we're not tied into any one feedstock we have the complete capability to optimize and arbitrage our feedstocks on a day to day basis and that makes us totally unique so not only do we have it but we can arbitrage around it.

And so well, yes, you know there are many more projects that are going to be felt like D. G. D. There may be other biodiesel facilities out there you know what we've been focused on and what we feel confident on you know Israeli our capability to compete.

Thank you for that congrats again on the strong execution.

Okay.

The next question comes from Ben <unk> with Baird. Please go ahead.

Hey, guys congrats on the quarter.

Just going back to Valero.

Talk to a nurse or conference call they talked about maybe having switching.

Switching feedstocks due to maybe more sort of oil.

Maybe I got that wrong, but could you just tell us about the flexibility there.

The Diamond Green and what that means for the core business.

Yeah. So I think we have the capabilities not only process Craig.

And soybean oil, but also army D soybean oil and on any day and what we're gonna be doing is we're going to be looking at the economics of what is the cheapest given the benefit of that and we have complete flexibility to process any of those and we would process soybean oil if it is the most economic.

Absolutely Yeah. Ben This is Randy I think are all the code for you what Sandy just said.

Typically in the Jan Fab window, you will see the foodservice business really kind of fall off the new year. So we saw animal fats and you go run up into the seventies and Jam fab and we saw our <unk> soybean oil trade sub carbon intensity equivalency, so as San.

He said, we can arbitrage around and we did and there were no secrets out there.

To maximize margins so that it's real it's flexible it's quick and we're very agile down there.

Dusty has a couple of turnarounds, so I think Q3 Q4.

Does that impact the market and then how about you guys just for your turnarounds.

Got it.

I mean, obviously you know.

Turnarounds are a regular part of being in this business.

As that happens those tend to reduce the supply that comes from individual facilities over a period of time and if you look around the world.

The reality is you know there are only a limited number of significant production facilities around the world having any one of those down at one point in time is going to have is going to have an impact on the supply of this available during that period of time, but this is a regular thing that's going to happen every year in the business. One of US are two of us are going to be involved in some type of turnarounds at one or two of them.

It's just normal course of the run business, Yeah, I mean 18 to 20 days offline doesn't change the global SMB because once you are catalysts for US you can run a little faster again.

And how should we think about just.

The debt level or the JV going forward. Thank you guys.

Yes.

Brad again, so the debt level, we have had some contributions here in Q4.

They are towards the end of the year and a little bit right. After the the but after the first of the year and that was again due to the.

Due to the downtime from the hurricane starting up.

In the process of starting up number two with working capital.

And so as we come out of that and with the acceleration that we talked about earlier, so coming out of that.

And where it's running now we'll see as we go through the year that love that level come down as I've said before we expect our win D. G. D. Three has completed the JV to be debt free.

Thank you.

Okay.

The next question comes from Bill Baldwin with Baldwin Anthony Securities. Please go ahead.

Yeah good morning.

I just wanted to say a quota.

Insightful job you all have done in your core business. The last several years execution has been unbelievable here.

So good job.

Just wanted to ask on the.

Diamond Green diesel.

But what would be kind of the expected level of maintenance capex.

On the on that facility.

As we look at it.

This year than going out with the port Arthur coming on.

How should we look at that for maintenance Capex.

Right. So I think if you're talking maintenance capex it will depend on what type of turnaround we're doing.

And that's probably $30 million to $50 million now we have two units online. We will have one that is going through a catalyst change out right now.

And future years, the second facility is a little bit more but it is not scheduled to have a catalyst change out. This year. So I think you're probably in terms of maintenance of close to 30.

Thank you I think what one of the things just to add to that one of the things that when design driving between diesel to a diamond Green diesel three yes. These are facilities that will add significant like greater catalyst loading capability. Our hope is that we will significantly lengthen the period of time between turnarounds.

Which if we're able to accomplish that woman and she doesn't have greater production over a two to three year period of time, and obviously less capital associated with turnaround times of a turn.

Hmm.

Thank you John .

Thanks Bill.

Yeah.

This concludes our question and answer session I'll turn the conference back over to Randy Steely for any closing comments.

Thanks again, everybody appreciate everyone's time today hope you stay safe and healthy we got a busy March coming up doing lots of conferences. There is a list of upcoming events in the in our presentation that the Suez provided what the column, we look forward to hearing and seeing you guys. All very soon thanks again.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Okay.

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