Q1 2022 Darling Ingredients Inc Earnings Call
[music].
Eric.
Okay.
Second.
Good morning, and welcome to the Darling Ingredients, Inc Conference call to discuss the company's first quarter 2022 results.
After the Speakers' prepared remarks, there'll be a question and answer period and instructions to ask a question will be given at that time.
Today's call is being recorded I would now.
Now like to turn the call over to MS. Suzanne Guthrie. Please go ahead.
Welcome to the Darling ingredients, Inc. First quarter 2022 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 Sandy Dudley Executive Vice President of renewables and U S specialty opera.
There's a slide presentation available on the investors page under the events and presentations 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 today's press release and the comments made during this conference call and.
The risk factors section of our Form 10-K, 10-Q, and other reported filings with the Securities and Exchange Commission, we do not undertake any duty to update any forward looking statements now I would like to hand, the call over to Randy. Thanks, Joanne and good morning, everyone. Thanks for joining us for first quarter 2022 earnings call we kicked off.
The year was a very strong first quarter earnings of $330 7 million in combined adjusted EBITDA, Our global ingredients business had a record quarter at $244 1 million in EBITDA, our food business earned $57 7 million and EBITDA in our fuels segment ended the quarter with 110 million in EBITDA with 80 <unk>.
Six six coming out of Diamond Green diesel, we're carrying solid momentum into 2022 global supply chain challenges remain while increased labor and energy costs are being addressed by our formula and spread pricing and finished product pricing remains robust around the world starting with our feed segment.
Globally raw material volumes were up year over year, and we are not seeing any indication of livestock or heard reduction fat prices continue to escalate through the throughout the quarter protein prices improved during the quarter and grew sequentially. However, logistical disruptions due to container shortages have kept our prices lower year over year.
Additionally, we saw some margin compression relative to Q1 in 2021, which reflects procurement process lag due to rising prices. We are working diligently to maintain margin structure and a higher energy cost environment, especially in Europe .
Turning to our food segment performance grew year over year, driven by our Pepped in business and our product mix shift from commodity gelatin to hydrolyzed specialty college since the changes we made in late 2021 have helped improve margins I am confident we will see improvement in the food segment for the balance of the year. Despite despite some.
Why chain challenges.
You'll segment escalating energy prices in Europe supported stronger earnings in our Green energy electricity business. Our previously announced acquisition of <unk> Tabak is contributing nicely and is under expansion now turning to Diamond Green diesel we successfully completed a turnaround of D. G D. One during the first quarter.
Q1 earnings for D. G D $1 11 per gallon EBITDA. This is lower than our full year estimate of $1 25 per gallon and it's attributed to rapidly escalating feedstock prices, while heating oil rens and L. CFS did not have adequate time to react as we head into Q2 margins are on the rebound.
We're seeing higher rents and steady L. CFS prices D. J D. One and two are running wide open and optimization programs are in place to increase gallons.
Given these factors combined with the startup of D. G. D. Three in Q4, we maintain our forecast of at least 750 million gallons at $1 25 per gallon EBITDA for the full year 2022.
Last week, we announced two key strategic acquisitions to grow our base business.
Please go to the valley proteins acquisition, and our signing of a definitive agreement to purchase deposit group in Brazil with these announcements we will process more than 15 million metric tons of the world's available slaughtered animal byproducts or about 15% of the world's supply.
Valley proteins, which closed on may 2nd for $1 1 billion plus or minus various closing adjustments includes 18, new plants to process about $2 4 million metric tons of raw material for ear and enough batch of produce approximately 125 million gallons of renewable diesel.
This is a great acquisition and will be immediately accretive for 2022, we expect the contribution of 60 to 70 million of new EBITDA and under current market conditions I anticipate the business contribution that would be more than $150 million in EBITDA in 2023, as we address operational synergies.
On May 5th we announced the signing of a definitive agreement to purchase sponsor group for $2 8 billion Reals or approximately 560 million U S dollars at the current exchange rate.
As a group processes more than $1 3 million metric tons of beef pork and chicken annually through 14, rendering plants with an additional two plants under construction and it has approximately 2400 employees.
So we'll augment our supply of low carbon feedstocks to Diamond Green diesel and will also be immediately accretive upon closing we expect to close by the end of the year. The current operating EBITDA of this business is approximately 500 million reals per year now I'd like to hand, it over to Brad to take us through the financials and then I'll come back.
A little bit of an outlook for the balance of 2022, Brad Okay. Thanks, Randy net income for the first quarter 2022 totaled $188 1 million.
Our 1.14 per.
For diluted share compared to net income of 151 8 million or 90 cents per diluted share for the 2021 first quarter net sales were 1.3 dollars 7 billion for the first quarter 2022, as compared to 1 billion for the first quarter 2021 or 35.
5% increase in net sales.
Operating income was $232 9 million for the first quarter of 2022 compared to $199 5 million for the first quarter of 2021 the.
The 16, 7% increase in operating income was primarily due to the gross margin, increasing $71 9 million or a 26.2% improvement on higher volumes and record high fat prices and our global ingredients businesses, while our share of the earnings from the Diamond Green diesel joint venture.
I'm 30.4 million to $71 8 million from 102.2 million the previous year. Additionally, the first quarter of 2022 included $3 8 million of acquisition and integration costs, primarily related to our acquisitions of off the BEC valley proteins and fossil group as well as $4 six.
Increase in SG&A now turning to income taxes. The company recorded income tax expense of $26 1 million for the three months ended April <unk> 2020 to the effective tax rate for the first quarter is 12%, which differs from the federal statutory rate of 21% due primarily to biofuel.
Tax incentives and the relative mix of earnings among jurisdictions with different tax rates and excess tax benefits from stock based compensation. The company also paid 41.4 million of income taxes in the first quarter.
For 2022, we are projecting an effective tax rate of 18% and cash taxes of approximately $60 million for the remainder of the year.
Total debt outstanding at the end of the first quarter of 2022 was $1 7 billion as compared to $1 5 billion at year end 2021, and the bank Covenant leverage ratio ended the quarter at $1 six nine times. The increase in debt was primarily a result of the acquisition of opt them back and contributions to die.
Green diesel too to the due to the project's acceleration.
Capital expenditures totaled $71 6 million in the first quarter and the company repurchased $17 2 million of common stock.
Lastly, you will note we added a $500 million delay draw term loan a which was undrawn at the end of the first quarter with that I'll turn it back over to you Randy.
Thanks, Brad.
Looking ahead, the business environment remains very favorable for Darling ingredients rendering volumes are robust and growing with no sign of depopulated or heard reduction.
<unk> global supply chain concerns we are optimistic as we have seen some improvement and better raw material availability, while European energy prices were up 250% year over year, we're working hard to minimize the impact and protect our margin Darling ingredients continues to lead the way in creating renewable and bio <unk>.
<unk> solutions to come back rapidly rising energy prices and satisfy the world's demand for low carbon fuels and de carbonization.
We expect our green energy and bus business in Europe to continue to flourish as we expand capacity to meet this increased demand diversifying our feedstock supply to support D. G. D from a multi continent arbitrage has been our focus darlings access to low carbon intensity feedstock is unparalleled in the industry D. G DS.
D. A location with access to multiple transportation options are pre treatment expertise our experienced team make D. G D. The lowest cost producer of renewable diesel in the world and.
And our best is yet to come our global ingredients business run rate supports earnings of 1 billion to one O. Five 1 billion EBITDA for the year without valley proteins Valley proteins is expected to contribute about $60 million to $70 million of running EBITDA in 2022, adding in at least 750.
Million gallons of renewable diesel at $1 25 per gallon EBITDA, we believe our combined adjusted EBITDA of 1.55 to 1.6 O is very achievable. This does not include any additional gallons that may even be produced at Diamond Green diesel three in Q4 with that let's open it up to Q&A now.
Yeah.
We will now begin the question and answer session.
To ask a question Star then one your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question when you're supposed to talking to you.
At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question will come from the mob Gupta with credit Suisse. You May now go ahead.
So Randy somehow you guys are always ahead of the curve you figured out renewable diesel before everybody else did go facilities or <unk>.
Now coming on bvd trees coming on soon.
And we'll just like our competitors are still figuring out plummeting and stuff. So somehow you don't always ahead of the curve and my question here is when we see the next leg of growth for Darling here.
Appears between value Brodie in Plaza and the deals you are signing the Chick Fil a and stuff that the next leg of growth for Darling is going to be coming from the feed side of the business.
I mean, you have <unk> coming on but when we look at the next leg of blood for next five years is going to be the feed side. So if you could comment a little bit on that stuff.
Yeah, I think thanks Manav your I appreciate the comments and.
John to say hats off to the global Darling team on bringing these acquisitions home.
The Brazilian one we worked on for almost eight years and the valley protein one <unk> been working with the Smith family for a number of years to do to bring that one home as well I think we talk very openly about kind of a four legged approach to to grow and you know we in this room.
With the management team still view Darling is as well.
Is it really an excellent growth vehicle around the world, We don't see our growth anywhere near done in the near future and so I'm going to talk about for passive growth. Your number one that's our green electricity business in Europe , we continue to see the opportunities to add digestion.
Paucity Oops Baxter. An example, that's going to grow substantially in volume given energy prices in Europe . It. It's a it's a very lucrative investment, but most importantly, it allows us to arbitrage different raw material streams that they typically could go to landfill or can't go to landfill and make energy out of them. So it is.
Very very good investment so that's the Green energy side, you got to move to Diamond Green diesel we're not done there yet I mean jet fuel I mean, you saw the United announcement here. This week I mean, we are not by any means discounting. The fact that we won't be making S. A up here in the next couple of years, we're just going to let the policy evolve.
All before the Capex is spent here and we believe theres just adequate gallons. There eventually when the policy supports that so that's number two number three you will see the foods segment accelerate for the balance of the year and next year, we built a special product that a product line, there and it's expanding into our biomedical.
Area now that gives us a really need opportunity to add significant earnings without volatility and that's a very different business in the sense. It uses slaughtered animal byproducts as raw materials, but at the end of the day, it's more of a specialty ingredients business than anything else. We're in.
And we've got a great team there that's moving it forward. So you know as we look we've got the Green energy, We've got Diamond Green diesel expansion as they are we've got the <unk> business that we're working on growing and then the fourth leg is clearly the what we would call our global ingredients business or core rendering.
Valley proteins was the number two independent processor in the United States and it's a great team great locations, where we're not at Bay.
Basically 50% the size of Darling.
USA rendering operations in volume per week, and I think it's very easy to look back historically, what Darling post national Byproducts post Griffin and the 2011 12 can make and then we're almost you know we're about 60% bigger now in North America or the USA than we were at that time.
So that's where we're trying to telegraph the valley proteins will be incredibly accretive to this company once we get it integrated and once we get the margin structure of the operations and get it to look like the business that we have moving south to Brazil, we've talked openly.
Brazil for a number of years, we are a very successful company in Brazil today, adding these factories to our Brazil management group and our team and our structure just made a lot of sense, Brazil will feed the world and we absolutely believe that animal agriculture, while it may come under challenges in Europe , and maybe two.
A degree at times in Canada, or the U S. Brazil is still the wild wild west relative to growth in animal agriculture, and we have 14 factories and two more under construction they are spread out throughout Brazil to allow for growth from the south to the north as Brazil expands and so you know I think the thing.
That's interesting and I'm sure Sandy will comment later today, but we're already importing fast from Brazil into Diamond Green diesel that goes with the logistics that we've always talked about location location location for norco. When it was St Charles and Port Arthur So the Pfizer group wasn't immediately just a <unk>.
Simple idea that we've been working on for a lot of years, it's been procured or bought from a private family that we know very well the management team is going to stay in place for three years to help us continue to grow. So those are the four past green electricity D. G D pattern and core ingredients growth, we continue to see.
See many many opportunities are still around the world and the core ingredients growth, including additional factories that will be put under construction here in the U S. Once the agreements are signed so we just still see Darling as a growth vehicle manav.
Thanks, and my quick follow up here as you know sometimes those analysts we focus too much on fat prices Vince prices L. P. F F N b sometimes.
Don't give enough credit.
Darling at the end of the day is a technology innovation company you spend so much time on collagen peptides and figured it all out and it's doing very well.
Can you talk a little bit about killer R&D efforts R&D pipeline, what's that looking like in and where could the next leg of R&D. Thank you and then I'll leave it there. Thank you so much.
Thanks Manav. This is John you know at the end of the day, we have tremendous expertise and taking the byproduct material from the meat industry around the world and turning it into a variety of different products.
Darling I believe has been really good at is we focus on the value of the finished products were always out there trying to figure out where our customers and the world is going to take us for demand for our products and then we work backwards from there trying to figure out how to create the most efficient and best supply change around those great products.
And what you see inside of Darling today is we've got Rockstar and I mean, Rockstar low carbon products across the spectrum of Bayou fields as well as into fixed energy.
In electric and gas in Europe , we have rock star products on the Pepco side.
And when you start with what's the value of the product Where's the marketplace going from the demand of the product and you listen to your customers.
Dan you are able to rebuild the innovation our innovation pipeline today is tremendous.
We're working on a variety of new products that our customers are coming to us and saying. This is the future. This is why we would like to see you bring us products and we're really good at going back and because there's just such a broad range of expertise along different product lines around the world different geographies, we understand various cultures around the world.
Very well, we have an ability to internalize those products and design that structure backwards and I will tell you today. The pipeline is more robust internally than it's ever been we have a very exciting.
Platform of products that we are working on now developing with our customers, but it's all about the finished products. It's all about creating a product that the market wants.
Thank you so much thank you for taking my questions.
Hum.
Our next question will come from Ben <unk> with Baird.
May now go ahead.
Hey, good morning, guys. Congrats on all the work maybe.
Maybe a boring question, but just on the leverage.
How do you view that.
Randy or Brad when we look for I think the tick up in the Q I saw two five times and you've been there before but maybe just remind us about the cash flow that D V D spits out and how are you.
Do you think about the leverage going forward.
Yes, Ben this is Brad good morning. So you you followed us for a while and what we've tended to do is certainly de lever down to you know, where we've recently been and as Randy just articulated and and John .
We have been we still our view ourselves as a growth company, having said that when we.
Lever up but you know after valley for a bit over two times, you know with <unk>, we will delever the business that we're in the process already de levering our cash flows are tremendous.
D G D coming online now.
In the fourth quarter. This year, so having said all of that we still have the big Big picture from a leverage perspective of staying.
After the dust settles from acquisitions each time, you see what we've done we've gotten below three times well below three times and that's that's really still our mantra and our strategy.
And Randy you you said you know we're not finished with the D D.
You talked about Uh huh.
But is there.
As you make acquisitions to underpin feed.
Feedstock is or what's the thought about what's next I hate to ask quick question Luke.
What's next.
In terms of the bandwidth.
Yeah, Hi, Beth this is sandy Dudley you know I think where we're right now working on feverishly trying to complete D. G D three and but that said well there's not an investment decision on the table you know, we purposefully less space at Port Arthur.
That would work well for I D. G D for our S. A F.
If the marketing conditions are right.
And I think if you look at both us and our partner you know it would be a huge underestimation to say that D. G. D. Three is the limit for US I mean, if you look at our partners you know they've done a whole lot beyond just control in and then you look at what we've done is darling anywhere great low carbon feedstock business, a tremendous food business.
And then we have an unparalleled renewables business and then if you look at what we did together you know we created D. G. D. So I think that there's a lot more for us I think we purposefully.
Purposefully positioned ourself.
Within the market and how we built the G D three to take advantage of whatever opportunities.
Makes sense for us going forward.
Okay.
Thank you.
Okay.
Our next question will come from Adam Samuelson with Goldman Sachs.
You May now go ahead.
Hi, Thanks, good morning, everyone.
Randy.
Randy I was hoping to maybe first if we could just thinking about I updated you on the base business for the year and I think in your prepared remarks, you said.
One to 1.15 billion for the base and then 60 70 or so of EBITDA for Valley.
Could you help us just.
Frame kind of how they keep moving pieces of how that's changed relative to where you were and are at the end of February .
And specifically is that just assuming forward curves on on fats and oils are from here.
And then I have a I have a follow up on Bali.
Yeah, No Adam you know what.
Essentially you know, it's a bit a bit dynamic and a bit of crystal ball ish or a little little bit, but you know we're looking at the Q1 run rate you know and then I'm looking at April now and you know basically doing rendering math divide by four times 13, and then extrapolate now so it's very simple as we look at.
The run rate and we have not seen the higher fat prices flow through the business. You remember we were 60 days sold out in front and most times now relative to the supply chain to Diamond Green diesel. So you get a bit of a lag so youre going to see Q2.
Much higher in the in the global ingredients business in Q1, because of the fat prices flowing through protein prices, well better sequentially lower year over year whole bunch of different reasons going into that but you know still at the end of the day is somewhat at or near in many many places too.
To the soybean meal and as long as soybean meal doesn't crash, which should be good there.
Bruce low in the food ingredients business is really just starting to ramp up as sales move forward here and so we feel pretty good there about it so it's pretty simple math of extrapolating. The first three the first quarter and then taken April divide by four times 13, and that'll put you at the one you know basically the.
One O five O run rate and then valley as we believe will run at about eight and a half million maybe up to 10 million a month here.
For the balance of the year and there are seven months left and so you know that's not added in there yet we're still you know we're.
We're really on a de number eight of valleys. So it'd be kind of hard to tell you remember you know while it was in.
And Hart Scott filing we you know what it's in today's World you didn't get to do a lot of deep dive into people places and pricing. If you will and so now we're just getting into it.
The benchmark for next year. There is just simply saying, we should be able to get the similar margins out of that business operationally and in marketing wise and product mix wise that we haven't heard in our base business. So that's how that's all extrapolated in Sandy's numbers are 750 times, a buck on a corner divided by two and that that's.
That's how old that that's the magic math I don't know that that works in Goldman Sachs quantum physics class, but that's rendering randy's Matt.
Well I'm I'm no quantum position so I all I appreciate it though but on the on the valley protein for next year, and just thinking about getting that business more in line with your legacy U S business.
Can you just talk about where the bigger opportunities where is the product mix on some of their time on moving some of the poultry back product into pet food markets.
Where was the gap in terms of their performance in their operations in their mix.
They are so excited about.
It's a little bit of everything and you know number one when a business goes for sale and management teams and operating teams find out there we're going to have a new owner you know it it becomes a bit of a challenge to keep them you know to keep momentum in I would say they lost a little bit of focus and momentum.
Around the business, there's a little bit of capital its not a giant numbers that have to go back into this to bring it up to our standards, but you start to look at species specific moving different products around we look at what we're selling product for versus what they have sold product for and saying if they would have only sold.
The product at the same price, we did or near that a significant number.
There's 19 500 people in 18 factories, I mean simple math again, one O five one and people.
There's a lot of people that we got to figure out what they're doing and then you then you look at it from a yield standpoint from an energy operating cost standpoint, and we see significant opportunity there too to teach the organization. How we do it I don't want to ever say, we're the best of the best well I think we're pretty darn good at what we do and.
And when we benchmark ourselves against them, if we can get them to where we're at there. It is very easily the achievable $1 50 number next year that were thrown out there.
And if I could just squeeze one more more follow up where where spot margins and did you do today and how is the backward dated kind of diesel diesel car kind of impacting kind of your market capture.
You would take out Sandy yeah. So you know diesel spot margins today are well above where they were for Q1 and you know they're getting closer to the dollar 50 to $2 level I'm, just kind of depends on the day, where the rins prices and feedstock prices et cetera.
So well above what we saw in the last quarter.
And so that's positive and and I think that that if you look at where we're estimating for the year to end up at $1.25 that probably looks like a pretty conservative estimate at this point in time. So we're we're really happy about that in terms of the backward dated curve and the backward dated curve for US you know what we do is we don't know.
This early.
Hedge our volumes out today.
They're going out to two further months.
And so we're not capturing that fall front month value that you're you're seeing.
Okay, Alright, thats that that's really helpful. I'll pass it on thank you.
Yeah.
Our next question will come from Ben doesn't know what Steven you May now go ahead.
Yeah. Thanks, so much good morning.
Good morning.
I wanted to ask about your acquisition strategy around <unk>.
Continuing to build out your feed ingredients business.
Strategically it makes all of a sense in the world.
And I think you guys are.
In a relatively unique position and that you're vertically integrated.
Renewable diesel production.
<unk> you to acquire these assets I would think without a lot of relative competition for these assets.
The multiples you're paying suggest that.
Can you talk about the potential though it seems for mode for the competition for these types of assets to grow and when you think about the value that you can add to these businesses. When you buy them given your long history of running and operating these types of businesses efficiently how that positions you competitively relative to potential there.
Suitors for these types of businesses.
Yeah. This is John I mean.
First of all thank you for asking that question. This is something we sit around all the time and wonder.
Actually quite frankly, when we see the multiples that others are valued in the marketplace.
Reality is this the feedstock supply position that we've established around the world and today's marketplace would cost an insurmountable amount of money for anybody else to come in and try to replace but more importantly than that the <unk>.
Apply system associated with low carbon fat is a complicated supply chain.
These are complicated supply chains to our plants, our plants are complicated to run.
And the sale of the product in the marketplace and the supply chain is a complex mechanism to operate so yeah. If somebody wanted to today's market, which basically what we've seen in recent acquisitions with others. If you look at what you know you have heard in the marketplace and relationship to other acquisitions that have occurred out there that we haven't been engaged in.
You would see multiples in the 12 to 18 times range. If you went out to try to replace the size and scope of our system.
Those types of multiples today.
You would have to break our bank to come up with enough money to do that so the reality is we're hard to duplicate in fact were impossible to duplicate.
Now, it's pretty easy to set up a trading desk and put a guy at a desk, what's telephone and say that you've got procurement expertise on fats, you've got the ability to call us up to try to buy a fat and others like us, but you don't really have the ability to source fat from its origin source, which is what we do we go out to restaurants and pick.
The fat, we'd go to slaughter facilities and pick up the process and material and bring it in process well.
We go out and pick up the food platelet used to come in and turn that into bioenergy.
Reality is that system is very very difficult nobody else has that nobody else has the vertically integrated position in this marketplace and it seems to be the best kept secret in the entire industry.
I would add Ben I mean, it's a it's a very special business that we've put together over the last 20 years clearly the marketplace is still trying to understand what we have what the competitive advantages are I mean.
Scale geographic people expertise product line, you know when a meat processor around the world, whether it's in Brazil, or China, or Australia thinks about it. The first call is to US now because they know we can derive maximum value for them with the product line that we can convert there.
Byproducts into and thus essentially pay them more make them more competitive and help them grow at the same time meeting our shareholder requirements are growing like I said, we we still see the world is our oyster out there John was John was talking about you know I always liked it to give a little joke about it I mean RTI traded out there at <unk>.
<unk> 16 times.
200 million pounds of fat well, that's great well, we got that with valley and Oh by the way we got the 18 other rendering plants for free so it's really how do you look at this stuff in and if this is really a very special platform around the world that has you know it always has competition, but we have such.
<unk> position now I think it's very defensible and it will continue to grow.
That's great yeah definitely in an enviable position to be in.
My second question relates to cash flow and I'm less looking for a direct answer in more helping.
Hoping that you can help us think about.
Kind of calibrating strategically.
And the question is you know what.
I think we certainly been guilty of this focusing a lot on what might the distribution of cash flow from the joint venture be backup to Darling in 2020 three year and beyond.
And I'm kind of stepping back and saying, we're thinking now that you're making.
You're making acquisitions across the feed ingredients business, you're investing into organic growth of the business you're buying back stock you're talking about potentially down the road if the economics line up and.
And I guess it sounds more like you have got a lot of opportunities that you might pursue them and the.
The returns will dictate where you put the capital to work.
But as we get closer to what's.
Likely to be a very sizable amount of free cash flow coming back to the business.
Have you considered setting up a framework or a structure that's great some predictability and our expectation of where that cash might go or is it truly going to be variable depending on the environment.
No I think Ben I mean, you you articulated about our you know about six hours of the board meeting the last couple of days, there and to be honest with you. Yeah. I mean, we will be articulating that I mean number one we will maintain and our goal is to to become investment grade and maintain sub three.
<unk> leverage so you know if you say dollar one gets you to the trajectory of Delevering. After the growth that we've done here, that's very simple to do given the massive amount of cash that is generated number two John Bullock has projects that will compete for capital and number three we will can.
Our share buyback on an opportunistic basis I'm just like we've done we're committed to that and for if there are any shekels left in the cigar box. There then the board will have the opportunity to put a dividend under it and in 'twenty three to be meaningful so theres going to be a balancing act of all four items.
With the number one being maintained the leverage it at investment grade levels are below number to fund the growth as we see it out there that has reasonable returns number three buyback stock when it makes sense when that is the best investment and it make sure we don't dilute anybody at any time and for consider a dividend when it.
Makes sense here and so I think that's it that's exactly what youre going to see us do and we'll be we're gonna be committed to it.
Very good it sounds great. Thanks, so much best of luck.
Yeah.
Our next question will come from Thomas Palmer with Jpmorgan.
May now go ahead.
Good morning, and thank you for the question.
Maybe follow up on Adam's question on D. G DS economics and dig into some of the factors that maybe could cause D. G. D to vary from the spot rates you cited so I'm just going to list a couple of things. So first I saw you have an approved pathway in California for renewable naphtha have you started selling into LCR past markets with.
That.
Second the derivative losses were pretty sizable last quarter at this point should we expect additional losses in the second quarter or is it mainly going to be isolated to that first quarter and then third to what extent should we factor in startup cost at Port Arthur as we look at the fourth quarter.
Sandy.
Okay, and so I guess I'm going to start with R. R.
Feedstock are our hedge loss.
And because you brought that up so typically what we do at D. G D. As we buy our feedstock months in advance and.
And when we do that generally what we try to do is we try to hedge the spread between the feed stock price and the diesel price that means that we're putting on hedges in the months and which we plan to sell the diesel that's typically not the front months. So that's in part and answer to your first question on why we don't realize.
And the the the front months.
Margin and so basically then and because we're putting those hedges on and specifically within Q1. What we saw is we saw that that diesel price continued to climb all quarter long and what that meant then is it meant that we were buying are hedged back at a higher price than what we put it on and that's what created the hedge loss.
And in terms of you know, what we expect going forward.
You know, we don't know where diesel prices are going to go we're not going to expect the spread we have a normal hedging policy that were planned to maintain and so where that all of the house is where it falls out.
And in terms of Port Arthur and margins and where we think things are going to go and we think that there's a lot of support within the market. You know what we've seen recently that was different than what we saw really in Q4 as we saw that rents really responded as well and we continue to think that rents will respond.
And in order to Incent, the marginal producer and we are not the marginal producer. So we do think that we'll have good values when port Arthur comes online.
And you know we have very low carbon feed stocks that we utilize and were fortunate for that and so I don't necessarily anticipate anything different with regard to port Arthur but we'll see we'll see how the market reacts to that we do see you know we're also seeing some movement in sort of LCR.
That's the prices, which is a good sign we've recently seen those kind of pop back up and I know that carb recently came out with their report on the scoping plan or there is some initial discussion with regard to the scoping plan, where they were talking about considering increasing the targets both before and after 2000.
<unk> 30, so that's very positive and you know I don't know if that's what's driving the increase in the L. C. F S prices.
But I think that that is well continue to strengthen there and so I think that that the market looks very positive going our way and that's again why we're seeing that.
Margins going into the future than we did in Q in Q1. Thank.
Thank you Juan.
Thank you for all that detail maybe.
Maybe just a.
Follow up on the Fox acquisition.
What's the structure of the rendering market in South America is it formula contract similar to the U S are structured differently.
Okay.
This is John there is a combination of formula contracts and then also some just contracts, where we're pricing versus the marketplace. I think the critical issues that we see in Brazil with foster that we see in all of our rendering operations.
Is that we have the right locations in relationship to where the slaughter byproducts are being created and so we've got a really good economics, we can give a really great deal back to our raw material suppliers.
Because of how we're positioned in those marketplaces and kind of the form and substance of whether you're doing it on a long term contract or whether or not you're just buying them at the current market isn't passing along that value back to your raw material suppliers I think it's sometime overestimated you know we operate very different models in every continent that we operate in but the fundamentals.
Thing is this are you in the right location with the right processing capability to support the people that are providing you with the raw material products and if you are then you then you've got a great business model.
Yeah.
Thank you.
Yeah.
Our next question will come from Ken Zaslow with Bank of Montreal, You May now go ahead.
Hey, good morning, guys.
Good morning, Paul.
I'm really trying to do some bank of Montreal now are maybe not that complicated, but let me just try this out.
If you're guiding this year to $1 $1 billion for the rendering and you have another $150 million of incremental profits coming from valley.
That seems to add up about 1.25 for next year without any changes and then if I think about the diamond Green diesel go into about 1.3 billion gallons next year holding margin at $1 25.
That's kind of close to about $800 million.
Is there anything wrong with bank of Montreal now.
I would I would say, okay. We're guiding 1 billion $1 50 in the in the base business add 50 to 64.
Accretion from or Valley. This year. So you could say up to one one there the incremental so I call. It $150, that's an incremental hundred over the 50. This year. So if prices hold volumes hold then yeah. You could go one one to one two next year and then you know I'm I'm looking at Sandy.
Two is is what we're saying you're rounding up to a $1 three now I'm not allowed to do that although I kind of believe it'll do that.
And you're right I mean.
You know that is bank of Montreal, math, and I love it.
So and that also excludes a bathroom.
Is that also true.
What does that include yes, yeah, and like I said, it's instead of 500 million or up you know the Bai Bai five on the REO plus or minus a couple bps. There. So it's at a 100 million run rate right now USD.
Okay, and then also just to make sure I fully understand that what new capacity for you guys is coming online this year on the food side and does that add incremental profitability.
We have one unit coming on to expand our peptide capability later this year.
And so that.
That's also.
So that would also be marginally incremental as well is that fair.
In 'twenty three is as it comes on it's supporting the growth in the hydrolyzed collagen business for next year.
Okay.
That does just trying to just do female now and then the second question I have just to double check on this.
Next year when you.
From the Diamond Green diesel business.
Pay a dividend back to yourself that could be used to deleverage the balance sheet to leverage it really not an issue that they should know about.
Brad when you discussed the leverage you're talking about generating tons of cash flow. But you also have is diamond green diesel dividend that might be coming back next year. So that also provides a little.
Likelihood of deleveraging or am I misunderstanding that as well.
No I mean, you know using the math that you generated there yeah I mean.
If we snap shot the world as of May 2nd or whatever Brad were what two way you de levered with something like that plus alley with Valeant. There now so I mean, you know, we're where we want to be right now and then if we start Poland dividends of $400 million to $600 million out of out of Diamond Green next year.
On top of a core run rate that has 1 billion number in it that.
There is somewhere between $701 billion of free cash to you know like I said to one of the four things that we're going to do.
Okay.
And then.
My last question.
When I think about <unk> S. A F.
What is the pathway to that and what will be the key milestone for you to be aware of that and then I'll leave it there.
I think the big milestone for us really is to get a tax credit put in place that's really the the main hold up so we need to see what that looks like and see if it makes it makes economic sense before I want to make an investment decision on that.
That's great I appreciate it guys.
So your next weekend.
Yes, my pleasure.
Oh.
Our next question will come from Matthew Blair with Tudor Pickering Holt you May now go ahead.
Hey, Randy you mentioned the D. G D as points in feedstocks from Brazil today, what percent of D. G. DS feed it is imported now.
And looking forward do you expect the U S too.
To pull an increasing amount of of you know.
Global feedstocks to support all this R&D growth in and if so it seems like your Gulf coast location could be could be pretty ideal. So hoping you could comment on that.
I'll comment a little bit and let's let sandy put our thoughts together I mean, clearly we have the arbitrage flexibility, we're bringing stuff from all over the world today into Diamond Green diesel wanting to and obviously, we will go through I mean, that's the beauty of those locations received by water can ship my water.
And you know as long as the U S is is really the leader in low carbon markets and as long as the capacities here not in Europe . Then yeah. We will continue to originate Sandy do you want to comment a little bit yeah. I think as we you know have expanded our capacity than we.
We've drawn more international feedstocks into the mix I would expect that we would do the same once D. G. D. Three comes online and I think we wanted to do that because we have the unit that can run the cheapest fast you know and so we want to do that so we can create the highest margins and so you know we're fortunate that we sit in the Gulf of Mexico, and where are we.
We do and then we have the capabilities that we do them with our unit that we have the free trade or that we have just tremendous logistics and that we can bring in whatever the cheapest that is from wherever that is in the world.
Great and then thinking about the dollar twenty-five EBITDA guidance for 2022 I was curious it if you view that as somewhat of a floor, they're just considering that some of your competitors seem to be struggling.
Given the state of a cash.
Break even in this environment.
Is that dollar twenty-five a floor in your mind and then also does that dollar 25 is that enough for you to support additional R&D investment.
Yeah, I'll try to answer that a little bit and maybe John will want to pipe in that number.
One as Sandy said, we we look at you know the ability of the feedstocks. We can run an originated from around the world that gives us an incredible competitive advantage.
You heard about the pathway on naphtha now that's out there you know the Ci scores that we have and you know the.
The supply chain between US you know no one ever talks about Valero supply of corn oil I mean, that's important into this facility. So dollar twenty-five I always hate to use as a floor, but right now with what we see.
You know, obviously with the inverse or the backwardation I had to learn with that word man and in the market clearly as we go forward here you know it looks like its conservative with what we see.
Going forward nearby spot margins are quite a bit above that but you know as we worked through the volatility and then the world dealing with.
Renewable demand rebate with the higher oil prices will see keep in mind, the dollar and a quarter against the $3 and whatever 30 sooner gallon investment is still an incredible return for us as we go forward with Sandy John anything you want to add.
Yeah, I think the only thing that I would add to it and we've talked about this a lot in the past we have built a machine that is the right machine in the right location with the right expectation the right capabilities.
And essentially what we have is a Swiss.
Watch.
We are fully capable to maximize margins in the environments that will develop in the future. We have a lot of folks out there that are not building Swiss watches, they're trying to come out with the cheapest knockoffs, they possibly can to try to participate in what looks like a mass sort of massively lucrative.
Business. This is a very good business if you're in the right location with the right machine with the right logistics with the right people if you're not it's not so much fun and we're starting to see that from some of these other guys. So margins are go up and down over time, a diamond we're fully confident that we bought the right machine with the right partners and we're prepared to compete for the long haul.
And we think that margin structure is going to be solid for us and as Randy said at a dollar and a quarter. It remains the best investment.
You could possibly have an egg or energy in the world.
Thank you very much.
Our next question will come from Sam Margolin with Wolfe Research you May now go ahead.
Good morning, everybody, how you doing.
Good morning.
Quick one on this.
Green energy.
Initiatives, maybe you could elaborate.
I guess youre talking about R&D digester gas and I was just wondering you know given.
It makes sense right, given where energy costs are in Europe is this a business that you imagine as kind of an internal almost like a co gen business or are you planning to distribute.
You know when you produce to third parties.
No. This is John we've been engaged in digestion in Europe now for a very long period of time, we ran one of the largest digesters for since we bought Dion at our San facility in the Netherlands. We recognize this you know it's interesting low carbon everybody has been focused on just low carbon biofuels and that's a.
Very important marketplace. However, in Europe , you have a fundamentally different pricing structure the price for fixed power is so much more expensive. This is before Latam air pollutant invade Ukraine, it's much more so today, but even before fundamentally they had high natural gas prices and that led to an extremely lucrative market. They are also developing.
All of our policies that support a fixed power generation similar to what we've talked about as a renewable electric credit in the United States has never been fully baked into the regulatory scheme in the U S. It is in Europe , and so we have the expertise again running digesters is a tricky proposition we have great anti.
The expertise we expanded San over the years, we put a unit into our Duluth facility in Belgium, a few years ago expanded that just recently bought back and we continue to look to expand that business. Because we just think fundamentally it's a great price is it's a great place in Europe to take advantage.
The low carbon fixed power market because the marketplace is structured such that it makes a lot of sense to be engaged there in the regulatory scheme is extremely friendly to being able to be in that industry. So again, we were in the right place at the right time, but we've not sat on our laurels, we've rapidly expanded that with us absolutely Fabulous Europeans.
We have a working on US yes, Sam the the supply chain. There is obviously, we can divert different streams from plate waste.
That has to be recycled to manure were in partnership with the with the Dutch farming community to.
Different animal byproduct streams that are not allowed to go back into feed and clearly you know then from there you obviously makes the gas.
We convert the gas electricity through the turbines and we make bio phosphate fertilizers.
<unk> fertilizers and then they go back into the marketplace and so it's just a natural force as John said, we operate the largest facility in the Netherlands, and Sun, we built and have doubled and tripled the size of our <unk>, Belgium facility now we undertook the back and we still see three or four different opportunities throughout Europe .
From Poland onto Germany that allow the same thing because of the if you think of it. It's the logistical supply chain you got to have the trucks to collect the material. It's no different in a sense from the used cooking oil business in North America, we're just picking up different streams and instead of settling or for purifying used.
Okay, well, we're converting it back into green electricity, so it's a very natural fit.
Got it thanks for that and then just a quick one on food I mean, if I kind of look at the margin progression and I overlay that with you know the way you're talking about the segment in terms of mix benefits and new products.
You know it looks like we are almost at the finish line of of the new product contribution kind of overwhelming and making up for the energy cost headwind that was that was hitting margins earlier do you think that's is that a fair assessment and then on you know on the margin side is that just going to keep going where now you know that business is essentially fully.
Absorbs the energy cost impact and now you're just sort of banking the mixed benefit.
On the college inside and in some of these new products.
Yeah, Yeah, I'm I'm not totally understood. So sure that I understand the question. Let me comment generally about the segment, we have seen tremendous margin improvement in our food segment. Because we were an early adopter under the patent space and have been able to divert a lot of products towards that much.
Higher margin product marketplace, because and the demand in that marketplace I have to tell you is.
Absolutely stellar and we don't think that that stops.
So we still think theres plenty of opportunity for us to grow in that space and we work hard on that every day to take advantage of opportunities to grow.
I'm not quite sure I understand the energy cost component of what you were asking us well.
Well. The question. So you had you know you had margin benefits accruing from product mix on the pep inside but it wasn't.
It wasn't accumulating too.
Full segment margin.
Gains right year over year, you have a little bit of a decremental margin in food.
I'm attributing that to energy costs, and so I'm just wondering.
Now that energy costs of Combi plateaued.
We're sort of through that process and you'll start to see food margins expand because theres nothing here.
Yeah, I think Sam.
Sam you know I think there were multiple things obviously from from Covid.
Disruptions container free disruptions energy price escalation raw material price escalation.
All impacted that food segment really instead of going into the end of hyper speed. It stayed back on cruise control last year, we're starting to see that now accelerate in first quarter and we think it'll it'll continue through 2022, and then we bring on some more capacity in 23, So I think you'll you'll see ya.
An improvement there I think that fair enough drawn no. That's exactly right. It was energy was part of it obviously, but there are a variety of set a variety of factors or just kind of flush together.
<unk> kind of delayed what we thought it was going to be the impact coming out of this but now we're starting to see it and then it looks like it has an excellent growth curve to it.
Got it thank you.
Yeah.
Yeah.
Yes.
Yeah.
Our next question will come from Bill Baldwin with Baldwin Anthony Securities.
You May now go ahead.
Okay. Thank you very much.
I wanted to see what are.
Insights you can offer regarding your rendering volumes in Europe . You know you indicated you had roughly around 15 a.
A million metric tons globally are with the acquisitions that you've made a.
Or where do we stand in Europe in terms of those volumes are and what are the trends. There are they are they static or are they growing or are they declining kind of but can you give us some feel for that.
Well I think you know bill we had about 11 and a half million tons added two and a half a little under one with valeant another little under a million and a half with them with Pfizer. So that's where the 14 something rounding to 15 million comes from never really broke out Europe , but what I can tell you in Europe today, the volumes are actually up year over.
A year right now pretty steady animal agriculture is under attack a little bit in Europe . Today are you know really what's what climate change and what has to do with the manure and we've seen some animal disease issues in Europe , I yourself up in Poland, a little bit into Germany, and then we've seen some bird flu issue.
Now remember that while the bird flu side the population in Europe . The anything that does with animal disease gets brought into one of our seven rendering plants to be disposed of so we benefit on both sides, there, but really no material changes I mean, yet today.
Animal production or demand in Europe , John Brown anything on that.
No.
One of the interesting things that we've seen and it was interesting when Covid started we sit around and worried about what was going to happen to our volume and it didn't go down and it went up and then as we've seen supply chain disruptions around the world, we sit around and worry that our volumes are going to go down and it goes up the reality is the demand consumption.
By the World now, while everybody complains about prices people are still buying.
So we see tremendous volumes continuing to flow through our facilities and thats part because we keep bringing on additional production capability all the time to be able to handle that so it's great right now yeah, and I think more importantly than in North America, we're still.
Running the.
The plants around the run six days to make five days of production in the in the meat business because of labor shortages I mean, its just universal So I mean, clearly the demand is there and they could run more if they had more people. So.
We're optimistic for the year that the volumes will remain robust and are up $3 six year over year right now during Q1.
Yeah, that's been that's been what we expected volumes to be pretty good here in the early part of the year.
I kind of felt like they might trail off a little bit in the beef as you got out towards the latter part of the year, but it sounds like you're not really expecting that Randy.
I've seen it yet.
Right.
Last question, Ken as far as the European rendering can you offer a little bit of a species break down as the percentage of.
Beef pork and poultry that.
That you process through your rendering plants, there how's that kind of stack up.
Well this is John Theres less cows in Europe , Theres, a whole lot of chickens and there's a whole lot of pain. So we're both we're engaged heavily in both of those I mean, Germany is clearly a beef country.
Hollywood is a lot of pigs in Poland, a lot of chicken so its pretty much its pretty its pretty similar mix to what we have in North America here. So just it's just differential which country because you've got more pastureland, obviously in Germany.
Okay.
Thank you very much.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Randy Sui for any closing remarks.
Alright once again. Thank you everybody appreciate everyone's time today I hope you stay safe and I look forward to seeing you at some time with any upcoming events next week, we'll be at BMO, presenting there and I look forward to everybody catching up and staying healthy and being safe talk to you soon.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.