Q2 2022 Darling Ingredients Inc Earnings Call
[music].
Okay.
Good morning, and welcome to the Darling ingredients, Inc.
Carl will discuss the company's second quarter 2020 to resolve.
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.
I would now like to turn the call over to MS. Julie I'm Jeffrey Please go ahead.
Thank you for joining the Darling ingredients, Inc. Second quarter 2022 earnings call here with me today are Mr. Randall C Stuewe, Chairman and Chief Executive Officer, Mr. Brad Phillips, Chief Financial Officer, Mr. John Bullock, Chief strategy Officer, and MS. Sandra Dudley Executive Vice President of renewables and U S.
Specialty operations.
There was a slide presentation available on the Investor Relations 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 yesterday's press release and the comments made during this conference call and in the risk.
Factor 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 will hand, the call over to Randy Thanks, Joanne and good morning, everybody and thanks for joining us for our second quarter 2022 call our 2022 second quarter.
Financial results yielded another record quarter illustrating the tremendous growth and diversity of Darling ingredients. This quarters combined adjusted EBITDA of $402 6 million is nearly equivalent to our entire fiscal year combined adjusted EBITDA, just five short years ago in 2017.
As I reflect on where we've come as a company I am tremendously proud of the work our teams across the world have done Repurposing animal and food byproduct since the specialty food and feed ingredients to support the growing population and converting waste fats and oils into low carbon fuel to power a growing world.
Going into the quarter and brief here, our global ingredients business had a record quarter of $312 million in EBITDA. The feed ingredients segment had a record quarter at $242 1 million and our specialty food ingredients segment also had a record quarter, posting $65 4 million and EBITDA.
Our fuel segment ended the quarter with $110 8 million with $90 6 million and EBITDA attributed to our joint venture at Diamond Green diesel.
With our feed ingredients segment globally raw material volumes were up 23% quarter over quarter or 13% year to date fat prices continued to climb rapidly illustrating the high demand for low carbon waste feedstocks for renewable diesel protein prices were also strong throughout the quarter with some.
Challenges remaining in container tightness for protein exports, though.
Rapidly escalating global energy costs, and lower gross margins from the Bally acquisition contributed to a reduction in gross margins for the feed segment.
As we have discussed in the past our procurement format formulas will ultimately recover many of the cost increases in the following quarter.
Since we closed on the valley proteins acquisition on May 2nd the team has been working hard on the integration efforts with a laser focus on margin improvement I'm encouraged by our efforts to date and continue to believe valley proteins will contribute $150 million of EBITDA in 2023, as we continue to address operational challenges and synergies.
Turning to our specialty food ingredients segment, we continue to see uplift from gelatin to higher margin collagen peptides hydrolyzed collagen demand continues to rapidly grow as consumers turn to these specialty products for joint ligament hair and skin health.
More resistant to commodity fluctuations, we anticipate to grow this business line in the high single digits in the next three to five years, we have pioneered and led the way in this space and we're excited about its potential for the future.
Our fuel segment, our Green energy investments in Europe continued to deliver as predicted with higher sales prices and volumes now, let's turn to Diamond Green diesel D. J D. Two is running at full capacity, which resulted in record volumes of 209 million gallons in the second quarter and 375 million gallons produced year to date.
In Q3 Diamond Green diesel recorded 91 cents per gallon EBITDA lower than Q1, 2022 and our full year estimate however, higher feedstocks.
While benefiting benefiting our specialty feed ingredient business impacted D. G. DS margins this quarter, along with some lower L. CFS prices second quarter L. C. F. F prices averaged 100 per metric ton compared to about 130 in the first quarter of 2022 on August 5th Diamond Green diesel delivered a dividend of approximately.
181 million of which 95 million was distributed to Darling.
This should once again provide confidence in our strong cash potential for the joint venture as we startup D. G D three as.
As we head into Q3 D. G. D margins are improving feedstock prices have moderated. Additionally, D. G D in Port Arthur Texas should be operational in the fourth quarter of 2022, bringing our total renewable diesel production going forward to 1.2 billion gallons annually, our strategy to procure and process waste fats and oils as feed.
Stocks and not food based oils will continue to position D. G D as advantaged over other renewable diesel producers in the market our global supply chain augmented by our two recent acquisitions positions our vertical integration second to none in the world. Additionally, we continue to see growing public policy that supports low carb.
<unk> energy solutions beyond California, we're excited about Canada's clean fuel regulations passed last month and encouraged by the rulemaking currently underway in Washington State and Oregon. The proposed inflation reduction Act if past will represent the most robust piece of climate legislation in U S history and bring sustainable aviation.
<unk> fuel closer to reality these programs give a boost not only to D. G D, but the darlings global specialty feed ingredients business as we prove we are the premier provider of low carbon feedstocks with access to inbound water truck and rail for feedstocks and outbound water and options for either pipeline and rail to both coach.
D. G D is well positioned logistically to serve markets well beyond California, now before I turn the call over to Brad for details on the financials I mentioned last week, we closed on the purchase of deposit group the largest independent rendering company in Brazil for approximately $2 9 billion reals or approximately 562.
Million U S dollars at the current exchange rates. This acquisition adds 14, rendering plants with an additional two plants under construction to our portfolio and it processes more than one 3 million metric tons of beef pork and chicken annually.
Currently the EBITDA run rate is around 500 million reais per year with that I'd like to turn the call over to Brad and then I'll come back and give you a little outlook for the balance of 2022 Brad.
Thanks, Randy Alright, net income for the second quarter, 2022 totaled $202 million or $1.23 per diluted share compared to net income of $196 6 million or $1 70, 17 cents per diluted share for the 2021 second.
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Net sales were $1 65 billion for the second quarter 2022, as compared to $1 2 billion for the second quarter of 2021.
37, 7% increase in net sales.
Operating income increased three 8% to $278 6 million for the second quarter of 2022 compared to $268 3 million for the second quarter of 2021, primarily due to a $98 1 million increase in the gross margin from our global ingredients.
Business, which more than offset a $52 1 million decline in our share of the earnings from Diamond Green diesel as well as an increase in SG&A and depreciation and amortization primarily due to the addition of Alec proteins. The second quarter of 2022 also included an $8 6 million of impairment charge. Additionally, we incurred $5 4 million.
Of acquisition and integration costs, primarily related to our acquisitions of <unk> Tabak Valley proteins and fossil interest expense increased $8 7 million in the second quarter of 2022 as compared to the second quarter of 2021 due to an increase in debt related to the closing of the valley proteins acquisition.
Now turning to income taxes. The company recorded income tax expense of $47 3 million for the three months ended July <unk> 2022.
The effective tax rate is 18, 8%, 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.
For the six months ended July <unk> 2020 to Darling reported income tax expense of 73 point.
$4 million and an effective tax rate of 15, 7%. The company also has paid $72 4 million of income taxes year to date as of the end of the second quarter.
For 2022, we are projecting an effective tax rate of 19% and cash taxes of approximately $30 million for the remainder of this year.
Total debt outstanding at the end of the second quarter 2022.
$2 9 billion as compared to one 5 billion at year end 2021, and the bank leverage ratio ended the quarter at 259 times.
The increase in debt was primarily a result of the acquisition of valley proteins, which included a 750 million issuance of unsecured.
Senior notes to Europe .
Your 2030, we continue to maintain strong liquidity with 1.45 billion available on our revolving credit facility as of quarter end July 2nd.
Capital expenditures totaled $79 9 million in the second quarter and $151 5 million year to date.
The company repurchased approximately 700000 shares of its common stock for $48 7 million during the second quarter, which brought the year to date total shares repurchased through 971000.
For $65 9 million.
Subsequent to the July 2nd quarter end date, the company also repurchased an additional $29 3 million in shares with that I'll turn the call back over to you Randy Okay.
Thanks, Brad I am very optimistic about the rest of the year as the market environment remains favorable to Darling.
We operate a diverse business platform across multiple sectors that allows us to take advantage of our scale integration and technical expertise to deliver shareholder value, we produce what the world needs food and energy, we maintain our strategy to deliver a positive impact on our planet and society, while also providing superior returns.
There is no singular solution to environmental challenges, we face nor is there one priority to focus on Darling ingredients is committed to helping the world avoid carbon emissions by turning discarded animal waste into valuable specialty feed ingredients specialty food ingredients and low carbon energy, you'll hear more about our efforts in this space.
And our upcoming ESG report, which will be published next month, our vertically integrated supply chain allows us to fully leverage the strength of Darlene squad platform with superior access to waste fats and oils, coupled with our technical expertise pre treatment technology and superior logistics D. G. D will continue to be a leader in the north.
Erika and renewable diesel market for years to come while I recognize D. G. D. 's EBITDA this quarter was less than our full year forecast. We expect the back half of 2022 to improve D. G. D should be able to deliver a $1 10 to $1 25, a gallon EBITDA and it's still a great return and will remain advantaged over other producers rely on.
Non waste fats and oils for feedstocks looking forward to the back half of the year, our global specialty ingredients business is currently running at a rate well over 1 billion in EBITDA, including the new Pfizer group, we believe margins will improve a D. G. D. Therefore, we are reaffirming our forecast of 1.55 to $1 6 billion and.
Find adjusted EBITDA for 2022, so with that let's go ahead and open it up to Q&A.
Yeah.
I'll begin today's question and answer session.
To ask a question you May press Star then one.
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So with Cowen Your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question will come from Adam Samuelson of Goldman Sachs. Please go ahead.
Yes, thanks, good morning, everyone.
Good morning, gentlemen, good.
Morning.
So I guess I guess the first question Randy is thinking about some of those forward comment you just made.
So wanted a clarification on D V D to the dollar tens of dollars 25 per gallon of EBITDA is that your expectation for margins in the second half are the margins for the full year average because I mean look at spot margins today, and even with lower L. CFS prices, they would seem to be well above that level.
And I guess, the corollary to that is thinking about the second quarter.
Was the impact it seems like the impact was much more around hedges on diesel and the backwardation and diesel cars.
Then the declines that you saw in the LCR fast and increases in feedstocks I'm, just trying to clarify kind of how you were framing the TGT performance.
Yeah, I'll take a stab and let sandy build on it clearly in Q2.
Clearly, we don't want to dive into derivative hedges in and impacts, but clearly the volatility in the in versus that were there with how you procure feedstocks you Ya.
Put on a hedge and then you lift the hedge clearly had a significant impact on Q2 that curve has clearly flattened in Q3 that will be beneficial feedstock prices have leveled off but remember we owned feedstock anywhere 60 to 90 days in advance and so as it flows through you should see improvement in margins.
I think $1 25 is still very doable for the full year as an average at this time, Sam do you want to add anything.
No you know I think Randy you hit it on the head Oh, we had a really high feedstock prices that outpaced diesel prices throughout the quarter L. CFS.
Prices did contribute to the decline versus.
Q1, we saw that rents continue to work really hard during the quarter, but oh CFS prices were just off.
Okay, and then if I if I take a step back to the whole company I mean, you talked about the ingredients business running at a well over $1 billion EBITDA rate.
The full year guidance for the whole company level was unchanged <unk> close.
Four or five months earlier than you thought wasn't than in the prior outlook and I think.
The 35 to 40 million or so based.
Based on the run rate you talked about of incremental EBITDA that wasn't in the prior outlook can you talk about some of the moving pieces and.
What youre thinking for feed and food and fuel and the parents.
For the full year and how that has changed relative to today.
Yeah, I mean, clearly you know.
Sue Ann read my name is Randall C. The C stands for conservative and we.
We look at this thing right now with a lot of moving parts. As you said I mean feedstock prices number one have come down a little bit, but oh by the way D. G. D. Three hasnt really started buying yet Oh, that's a secret out there right. So the market knows that that we've got a go to market and start buying you know another 4 billion.
<unk> pounds of waste fats and greases in the back quarter of the year here. So we've become pretty friendly on where you know the feedstock prices will either you know either stabilize or rebound a little bit of as we start to ramp up that facility protein demand remains pretty darn good around the world. So each segment should have a pretty.
Solid quarter in Q3 here valleys delivering as we expected I mean, there were some operational challenges there and we're still moving tonnage around for them and getting the synergies from moving used cooking oil accounts moving different raw material streams to different plants trying to make pet grade at one plant.
[noise] et cetera that should pick up momentum in the back half of the year here and then the Pfizer group. It's currently at the current re irate running you know 90 to 100 million EBITDA and so we'll have it here for for the quarter as we as we go forward or two months of it why valley for three and that for two so I mean overall you know if if D G.
Puts on 750 million gallons for the year and then that doesn't have any gallons in there for D. G. D. Three startup that's where the seat for conservative comes from so we feel pretty darn good even though theres a lot of moving parts here.
Adam we always as you've been around the business a long time, you know quality, it's hot all over the world and quality of animal fats gets challenged in the summer time, we always have to deal with that but now we've got the machine that can convert those and so it's a little different kind of set of circumstances than we've had in the past John Bullock anything you want to add that Youre thinking.
I think that's exactly right. If you look at it overall, what you see is diamond Green diesel as a result of the expansion of Diamond Green diesel has gone from a 300 to 800 million gallon and we're set to go to a $1 2 billion gallons.
Whether we're making a dollar $1 25, that's a lot of money on that number of gallons and at the end of the day the impact of low carbon fields in the world has increased that prices from 20 or 30 to.
To 60 to 75 says all of that is not that especially one we've increased massive scale to our low carbon vertically integrated supply with the valeant fast acquisitions.
Okay. That's all very helpful color I'll pass it on thank you.
Mhm.
Okay.
The next question comes from Manav Gupta of Credit Suisse. Please go ahead.
Oh, So you guys a little bit of a follow up kind of on Adam's question here I mean, we can sit here and debate why the EBITA was the dollar a gallon knock 1000 from Socgen.
Lots of them lots of is that you are the best in the renewable diesel business. We just saw somebody's stocked up.
200 million gallium facility to end up at the EBIT golf minus 25 million in the quarter. So you guys had a plus a bot and what I'm trying to get to is what is the best in business what will it take for the best in the business to announce an entry into the sustainable aviation fuel to market now that you could actually get like $1 75 BTC on your.
Daniel You mentioned <unk>. So I know you and your partner had been working very hard on commercializing sustainable aviation fuel and I'm just trying to understand this.
You know inflation reduction that how close are we or data and when they work together to think about the announcing something on sustainable aviation fuels.
Yes, I think Manav. This is Randy I'm gonna have sandy comment on I think we want to comment on a couple of different pieces that all have sandy cover off I mean, clearly the inflation reduction act is very positive to Darling globally, and then the Saf.
Wording in there is very positive also and it moves us a step closer but sandy why don't you fill in the blanks or yeah. So thanks Manav. This is Andy So you know I think that the the inflationary reduction act that's probably one of the most important pieces of U S. Environmental legislation that we've seen in a long long time, it's very supportive not only of our road.
The old business, but I think it makes a significant inroads into enabling us to be able to produce as a yeah. What we saw is when we were looking at it there are a number of positives in the first thing is we're excited about the opportunity to have the programs in place for five years and that showed a significant support for Biofuels Ali.
So as the U S. Biofuels producers you know we were really excited to see the change to a producers tax credit starting here in 2025.
And then as a renewable diesel prettiest said that focuses on waste feedstocks. You know, we're really excited to see the new focus on emissions reductions.
And I think that that's really important for Darling to and John and Randy had hit on this earlier you know from a Darling perspective that focus on emissions reduction is also very positive given that we're a low ci feedstock producer and then you throw on top of that the SASSA and the valley acquisition.
They've been more timely and supported that so all of that's great stuff.
And so what we think of when we think of the incentives and N S. A.
Is it gets us a whole lot closer to being able to justify S. AF production and we're hopeful that the airlines spills at the incentives greatly reduce their burden since I know that they so want to be able to use as a oh you know what we're still doing is we're still reviewing the legislation and the economics and obviously we.
To talk to our partner.
But what I can say is if the airlines cabinet minutes, there on closing any potential gaps that might exist.
For the supplying them with S. A F.
Perfect and my quick follow up here is Monday, we saw the volumes into Q little extremely high beating our expectations. So first can you talk a little bit about how badly content due to the overall volumes and then what I'm trying to get believes when <unk> had valley.
<unk> Valley and foster so help us understand how the volumes in the feed segment will trend in the back half of this year.
Well valley by volume relative to the U S. Rendering size is about half the size, we've given that optic out there so that that should grow and so I think overall valleys net net is about two and a half million times and Faas is 1.3 million times, so let's round up to <unk>.
For for a simple math for me and then Theres, a what about five months left here and in the year. So I mean, they they should add you know what there are $5 12 some of.
Of that 4 million tons going forward to the back half of the year Manav.
Okay.
Thank you so much. Thank you all suddenly say up on it.
Okay.
The next question comes from Ben <unk> of Stephens. Please go ahead.
Hey, Thanks, good morning.
Good morning, Ben.
Can I ask you you know you you've got phosphor you've got valley.
I'm sure you're going through an integration process, but those are in full swing here you started to buy back a little bit of stock, but theres going to be a pretty meaningful cash build on the balance sheet and the absence of either continued M&A or distributions or share repurchase and I know I know, we keep asking this each corner, but the anticipation keeps building around what are you going to do with all the cash.
Cash and.
It is what we saw in the quarter from a buyback perspective indicative of the sort of support that you'd like to allocate to that use of cash.
Yeah, I mean and.
And I'll have Brad help me out here I mean clearly.
The dividend that we pulled out a D. G D out of the venture here is symbolic of where we're at and even even at the the dollar or $10 25 margin and getting larger shows the cash generation ability. So you know it's kind of like Hello, It's pretty obvious now.
The second thing is the share repurchases that you saw in Q2 are indicative of the authority that Brad and I have to Opportunistically continue to buy back as it makes sense and and clearly we came under some pressure here post Q2, So we'll just leave it at that.
The third thing is you know prioritizing them is really delevering back to two and a half overtime here, which will happen very quickly.
We're always looking for opportunistic M&A that may happen out there and then then we'll decide with it from there Brad anything you want to add to that yeah, just reiterate <unk> been and you know this I think everyone on the calls heard this but you know we close falls and we were at 259. So immediately after faas are here a little harder.
That below three but with the dividends and with number three coming on paid for the JV debt free.
You know going into let's call it going into 'twenty two 'twenty three.
The distributions are expected to be material in 2003, so to randy's point of of Delevering not not to mention just the base business and where it's where it's running with free cash flow going into 'twenty three.
Yeah, Okay, Great and then my second question is a follow up on Randy your comments on the.
P D margins of $1 10 to $1 25, what consideration is there around that.
D. G D three and that is a potential kind of margin detriment as you initially ramp it and I know you guys get better each time you do these ramps.
Would you expect the impact of of that spool up to be less than we've seen over the last couple of generations.
Yeah, I'll take a front end a stab at it and then give it to sandy here I mean, clearly we've affirmed 750 million gallons. You know we ran 200 plus in the in Q2. So we're exceeding that already about 10 by 25. So that has no D. G D. Three on it.
Clearly, that's where we're trying to be conservative as always anytime you try to start one of these things up yet you don't know what you don't know yet, although we've got 10 years of experience and history, and saying do you want to comment on the on the ramp up of three year. Yeah. So you know I think we learn a lot every time, we do one of these end and it was.
Big step up for us for a D. G D. Two D. D D. Three will be another big step up and you know I think we will see some some flows.
Move around on that side I think we've also learned an awful lot since D. G. Two we've expanded them, who we source from both domestically and internationally and I think that would be advantageous to us.
Okay, great. Thanks, so much best of luck.
The next question will come from Tom Palmer of Jpmorgan. Please go ahead.
Okay.
Good morning, and thank you for the question.
Okay.
Wanted to ask on.
The.
Expectations on D. G D. You pay down debt this quarter paid down and paid distributions to the JV partners. So I guess it seems like a signal that you know capex winding down obviously quite Arthur just a few months from opening what are your expectations for distributions for the remainder of this year or should we start expecting.
Later, this quarter or fourth quarter further distributions or is it more a 2023 about.
Yes, Tom I'll start this is Brad so we do have a distribution policy, obviously with our partner so that's what.
Allowed or created the recent distribution, so I would say.
Randy add onto this.
Really it will depend on the remaining cadence of the spend as well as really the.
The ramp up in the feedstock.
Here for D. G D. Three three because that's all taken into account along with the anticipated cash flow. So at the end of the day could we received another distribution, yes, we could but really the focus what do we do or don't like I said earlier, we're going to want to be significant distributions beginning in 2023.
Yeah, I agree with Brad Brad you know, we've always said that we expect strong distributions starting in 2023, and we'll see what Q3 and Q4 holds for us.
Okay. Thank you.
And then just in terms of the spread at and T. J D between what's been produced and shipped it it's been a little wider than we've seen in the past I think you've actually under shipped by about 20 million gallons in the first half should we be factoring in some catch up here as we look towards the second half in terms of that shipment timing.
Yeah, you know I think what you can count on is that we'll get to 750 by the end of the year. That's that's what we're projecting them and you know often you know.
Between quarters and things like that we may have shipments they carry from one quarter into the next and that that can impact that too and I think that's kind of what you saw in some of those numbers.
Yeah.
Okay. Thank you.
Yeah.
Yeah.
The next question comes from Ben <unk> of Baird. Please go ahead.
Good morning, guys.
For Nevada.
Hey, Thanks for taking my question.
Yes.
Maybe just can we talk about the.
The.
Fuel business.
D G D and then the fee business.
The food business, so the fuel in the food business.
Okay, and I know last time, you called out for fuel.
Rising.
Energy prices in Europe . So maybe how are we thinking about that going forward and then.
On food.
I think collagen.
Still driving.
The boat there but.
But just how you'd think about.
Going forward in the.
Mix and how long is that sustainable or any incremental.
Additions you have there is a follow up.
Well, clearly been and I'm going to hand, it off to John Bullock here and a man who has been very intimate and driving the strategy of both.
The Rousselot business and our European Green energy business, the things, we like to point out to people.
Or.
D Commoditized businesses for the most part I mean, they're there they're just really just far more inelastic in the sense of exposure to the commodities in our feed segment and so we love growing them and we think over the last year.
We did a board meeting of course yesterday, and we look back at the.
At the growth of Russo low since 2014 15, it's just been a tremendous story in that food segment and we you know we all have been very open Rus low represents the biggest portion of that food segments. So no surprises there the green energy side comes from.
Not only putting the growth money into some of existing facilities for acquiring new facilities and being able to arbitrage different feedstock streams around Europe for for benefit and they're making more money. So John do you want to kind of talk where we're at and where we're going a little bit. Yes. So I think just stepping back for a second what you see with Darling is.
A company that has been based on value, adding a byproduct strange on the animal industry around the world and what's made us so successful over the last 10 years as we have created Rockstar products had been on the leading edge of that.
It uses low carbon feedstock to create renewable diesel obviously in the transportation low carbon fuel segment and we've also been the world leader in terms of the hydrolyzed collagen on the peptide Revolution, which has continued and it looks like its continuing going forward. So both the European strategy D car.
It is.
Low Ci energy products for fixed power generation as well as the improvement because of the investments we made in really shallow in relationship to the collagen peptide.
And to that basic theme, we have rock star products that we are the leading edge producers in the world and we are continuing to extend our advantage on those critical two critical trends that we see as moving positively forward.
Thank you my follow up and.
We get this question a quote quite a bit.
Whether it's from your rendering.
Or from the used cooking oil as well.
Your products become more valuable.
Does that change your.
The protein plants and how they look at it and they won't take value from your or how does that was that negotiation would go going forward just because of this.
New big huge end market.
Realize that there is value there. Thank you Yep band. We got this is Randy we get that question all the time and it's a fair question to ask the model that we built into this thing 20 years ago was a sharing model we needed to de commoditize or take some of the risk out so that we can put.
Fair credit lines underneath it to build and grow the company and so with our very large suppliers. These are very transparent agreements that that share the upside and protect us on the downside with a basically a fixed margin processing fees. So we're hearing no pushback you know in a in a joking sense. If you if you want.
Then we get that question, while we'd like to have a little more about some of that benefit out of Diamond Green diesel that's one John Bullock asking for $1 billion. You know so they can be part but end of the day. The formula is both protect us they share with these guys you know and you know from a just a pure philanthropic standpoint.
We are obligated to and my sense and my responsibility to give.
Give back to the raw material guy as much money as we can to help them grow because if they grow we grow and so you know those things are very dynamic thing.
We're under no pressure in the world to deliver anything we continue to be very opportunistic and very.
Aggressive in the used cooking oil business around the world and I think we're in good shape, John anything you want to add that I'm missing there no I think you hit it exactly right.
Thanks, guys congrats.
The next question comes from Ken Zaslow of Bank of Montreal. Please go ahead.
Hey, good morning, guys.
Good morning Catherine.
Did you say that you have yet to buy for the Port Arthur facility, yet and does that mean that the.
Seed business is still not fully enjoying all the profitability that can come with the higher.
Rendering values just didn't understand that exactly I'm, just trying to make sure yeah, no what I'm what I'm trying to say is you know we're nearing mechanical completion down there we're not there yet logistics will start we got a fourth quarter start up so with a fourth quarter start up youll start buying towards the end of third quarter. While you may not own. Some on paper you you know until then.
Logistics start to flow then the market doesn't see it I mean, you know this is where we're trying to remind people.
On or about the start of Q4, we will be procuring, 70% of north America's waste fats and greases.
We're not there yet we're just starting so you know.
You know I think it'll end up it'll move some that who's going to non traditional markets and other markets clearly D. G. D. Two as an importer from around the world clearly part of our Faas acquisition was already a supplier into D. G. D. Too. So you know I I.
At the end of the day, it's while we've seen palm oil prices come down around the world, we've seen soy and a bit of sympathy to that you know our prices are really holding firm, we're working through summertime issues right now but I'm.
You know I'm fairly friendly and at least supportive to that going back into the feed segment. John Bullock anything you want to add to that no I think that's right I mean, obviously and this question was asked earlier, we bring each of these diamonds on these aren't huge businesses that we're starting up and we go to zero to 100 really quickly as we're operating those businesses that's going to have an impact in <unk>.
<unk> shifted the feedstock markets and as the supply chain has to adjust to be able to feed us the product, but it will happen. We've seen this happen time and time again, we started at a 126 million gallon run rate.
And we always wonder if there was a fad going to come from we won't do that when we went to a $160 million. We wanted to one went to $275 million. We wanted to wonder why it went to 400 million gallons. We wanted one went to 800 million gallons and now we're going to go to 1.2 of $1 3 billion gallons. The SaaS is going to come because we have the best machine in the world by the fab.
Okay Mike.
My second question is.
Is there any reason that you don't generate the.
Industry renewable diesel margin and that Theres not a parallel between what we see in the market and what you generate and thing.
Hedging it just seems like I understand that you said, there's some hedging issues, but it seemed a little bit more dramatic the differential and I'm not sure if maybe were miscalculating.
Trying to figure out if there's any other disconnect that we don't know about.
And just trying to figure that out.
It'd be very helpful.
So Ken this is sandy I'm, if I think that you know other folks in the industry. They often talk about capture rates and capture rates in my mind are really looking at the spot market and that's really not what we do at D. G D and so if you think about our supply chain, whereby our feedstocks months in advance and what we can choose.
Today as you can choose to let that ride.
And and and and not hedge it hedged and when we hedge what we do is we lock in the feedstock price and we would sell our heating oil contract to kind of lock in the margin between the two so we can either let it ride or we can hedge it we choose the hedge at and what that hedge does is it protects us from downside adjustments in.
A diesel prices.
And so what I think you see is that you know.
Our margins don't necessarily looked like the capture rates because we we can never looked like the capture rates because we're not operating in the spot market by virtue of our.
Our supply chain and the feedstocks, having to be purchased ahead of time and and so I think really that's what you're saying and I think what you saw during Q2 as you saw that you know prices throughout the quarter diesel prices generally increased and so what that means is when you unwind your hedge euro.
Always buying back generally at a higher price that's okay, because you're on the other side of things. When you are selling out your renewable diesel you're also getting a higher price in terms of your revenue those two things tend to offset each other and so you end up with your hedge price.
And so the hedge is not a bad thing it doesn't look as grade during that time, when you have high rising prices, but now as we're moving into Q3, what youre seeing is youre seeing prices the diesel prices decrease and so you should see the opposite effect when that happens.
So I think that theres, a little bit of a disconnect between capture rates and how we actually look at our business.
So right now you would actually be.
And third and maybe fourth quarter youll be actually higher than.
The 170 ish that we're seeing is that kind of what you are saying it depends on how the hedges are going but is that that.
It will all go to end on where do you feel prices end up.
Yeah, clearly can the the you know the heating oil curve has flattened from where it was and the inverse is that we saw it in all commodities, whereas steep as anything ever seen in history. So trying to hedge in that environment was it was incredibly difficult and it looks like from what I see now on paper that is <unk>.
Leveled off and spot margins will be tend to be closer long term, if it stays that way than they've been in the past.
Great I appreciate it guys. Thank you.
Yes.
Yeah.
The next question comes from Matthew Blair of T. P. H. Please go ahead.
Hey, good morning.
You talked about the expected feedstock mix for D. G D three and how much of that can be sourced internally from Darling and how much will you have to pick up from external.
Third party suppliers.
Sorry, I think you would tend to see that our feedstock mix would be about the same you know, we're probably going to be a little bit heavier in terms of your yellow Grace's your talent and just by virtue that there there's more of those available and so I think I I think you'd expect that in <unk>.
They have internally sourcing you know as D. G. D. We we don't necessarily rely on Darling or Valera to provide for awhile.
And so I don't think that there's a set percentage it's going to be whatever price is the best price in the market to D. G. D is going to buy from.
So I don't know what that percentage will be no I mean, clearly Matt. This is Randy and you know at the end of the day you know as John was reflecting back a small portion or a third of Darling went through.
Basically wanted to it moved up to a little over half now and with Valeant Faiza, it's probably going to move up more clearly the numbers. The law of Big here says it has to go there.
Will be the best market now keep in mind, it's a it's an arm's length relationship in the procurement teams are.
Obligated to maximize profits and profits are defined as you know both output price and quality and so we ended the day you know there is always going to be arbitrage opportunities. That's what we love about the business for some of our products in many of the valley production was being exported that's now being redirected into there.
They weren't set up to load railcars. So when I made my comments about operational challenges and inefficiencies when I'm talking about and it's easy to send a truck to a to a tank terminal in Norfolk and now you've got a load of railcar that'll all happen over time and that will put more and more of Darwin's product in here I mean, we're not fearful at all.
All of originating to support number three here are the teams been traveling the world you know and as John has always said the moat around the business is that we can procure domestically and internationally with with the ease and so at the end of the day, you will see probably a lot more coming in on the water to us.
Then in the past and that that'll help regulate the right product mix for both quality and price into the unit that no. One else will have I mean, you're not going to originate Chinese yuko when move with Artesia, New Mexico that doesn't make sense. So it's an amazing advantage that the facility is going to have.
Sounds good and then.
On the current feedstock mix for D. D D. It looks like at least on paper or D from soybean oil actually looks pretty good here and I know you have your advantages on the on the low Ci seats, but I'm. Just curious have you been switching to any soybean oil feedstocks.
Feedstocks.
Currently a D D.
Yeah. So I don't think that we're really going to talk about our current feedstock mix you know what we do is we you know focused on weight stocks and if opportunistically. It makes sense to turn occasionally these soybean oil we would consider doing soybean oil yeah, I think that's fair, Matt I mean at the end of the day.
The focus is a super high percentage of waste fats and oils people always have to remember that 40% of the soybean oil production in the U S ends up in an energy anyway. So from time to time, we may arbitrage a few trucks are a few railcars in but at the end of the day, our focus is waste fats and greases driven because of Ci content.
Great. Thank you very much.
This concludes our question and answer session I would like to turn the conference back over to Randy Stuewe for any closing remarks.
Hey, Thanks again, everybody appreciate your time and hope everybody stays safe and has a great summer and gets the kids back to school I look forward to seeing you at some of our upcoming events listed in the earnings presentation and look forward to talking to all of you soon thanks again.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yes.
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