Q3 2023 Darling Ingredients Inc Earnings Call
[music].
Good morning, and welcome to the Darling Ingredients, Inc Conference call to discuss the company's third quarter 'twenty to 'twenty three result.
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 Ann Guthrie. Please go ahead.
Good morning, Thank you for joining the Darling ingredients third quarter 2023 earnings call here with me today are Mr. Randall C Stuewe, Chairman and Chief Executive Officer, Mr. Brad Phillips, Chief Financial Officer, Mr. Bob Day, Chief Strategy Officer, and Mr. Matt Janssen, Chief operating officer of North of.
Erica.
Our third quarter 2023 earnings news release, and slide presentation are available on the Investor Relations page under events and presentations tab on our corporate web site and will be joined by a transcript of this call. Once it is available during this call we will be making forward looking statements, which are predictions projections or other statements about future events.
These statements are based on current expectations and assumptions that are subject to risks and uncertainties actual results could materially differ because of factors discussed in yesterday's press release and the comments made during this conference call and in the risk factors section of our Form 10-K, 10-Q, and other reported filings with the securities and exchange.
Commission, we do not undertake any duty to update any forward looking statement now I will hand, the call over to Randy.
Thanks, Joanne and good morning, everyone and thanks for joining us for our third quarter earnings call Darwin Global ingredients platform delivered as predicted and D. G D face some headwinds and operational challenges during the quarter overall, we feel good about the momentum we're carrying into fourth quarter and 'twenty 'twenty four.
Turning to the feed ingredients segment raw material volumes were flat compared to third quarter 2020 to our gross margins have returned to pre acquisition levels, demonstrating our ability to successfully integrate bally and fine. So our work is not done and we expect further improvement in fat prices were lower year over year, but.
Sequentially improved late in Q3, turning to our specialty food ingredients segment raw material volumes increased 18% year over year due to gel next acquisition, our global collagen platform delivered solidly and we continue to shift our product mix into higher margin products hydrolyzed collagen remains.
An important part of our long term growth strategy within the food ingredients segment.
Earlier in the quarter, we commissioned a new spray dryer in epitaxial, Brazil added much needed capacity to continue our growth I'm also excited to share that our research and development efforts. In this segment have resulted in our ability to formulate a product that targets specific health concerns such as glucose moderation we are current.
And scientific trials and expect to bring this gradient through market during 2024.
On October 26, we announced the D. G D volumes for the third quarter were lower due to a regularly scheduled turnaround at number two in St. Charles Louisiana that took the unit offline for 27 days after that turnaround D. G. D. Two had a minor operational disruption. So in total D. G. D. Two was offline for $30.
Seven days in the quarter. This resulted in lower gallons produced higher cost and lower than expected operating profits year to date D. G. D is sold 910 million gallons of renewable diesel at approximately $1 two per gallon EBITDA and Darling has received $163 6 million in cash dividends year to date with that.
I'd now like to hand, the call off to Brad and then I'll come back and discuss the rest of my thoughts for 2023, and 'twenty 'twenty four Brad Okay. Thanks, Randy net income for the third quarter 'twenty twenty-three totaled $125 million or 77 cents per diluted share compared to net income of $191 1 million or a dollar.
17.
Per diluted share for the third quarter of 2022 net sales were 1.63 billion for the third quarter 2023, as compared to $1 75 billion for the third quarter 2022, or 7% decrease in net sales.
Oh Darlings third quarter 2023, gross margin increased $10 1 million and was 23, 8% as compared to 21.5% for the third quarter of 2022 operating income decreased $19 million or 33, 5% to $178 4 million.
For the third quarter of 2023 compared to $268 3 million for the third quarter of 2022, primarily due to Darling share of Diamond Green diesel earnings decreasing $49 million. Additionally, depreciation and amortization and SG&A increased about 21 million and $32 6 million.
<unk> as compared to the third quarter of fiscal 2022.
Primarily due to the gel next and falls or acquisitions.
Now moving to not nonoperating results.
Interest expense increased from 39.8 million in the third quarter 2022 to about $70 3 million in the third quarter 2023, primarily as a result of increased indebtedness due to the acquisitions.
For the three months ended September 32023, the company reported an income tax benefit of $15 4 million and an effective tax rate of negative 13, 6%, which differs from the federal statutory rate of 21% due primarily to the relative mix of earnings among jurisdictions with different tax rates and buyout.
Fuel tax incentives the company's effective tax rate, excluding the biofuel tax incentives and discrete items is 25, 9% for the three months ended September 32023, the company paid 40 million of income taxes in the third quarter.
For the nine months ended September 32023, the company reported income tax expense of $52.3 million and an effective tax rate of eight 4% the company's effective tax rate, excluding the biofuel tax incentives and discrete items is 28, 4% for the nine months ended September 32023.
The company also has paid 127.7 million of income taxes year to date as of the end of the third quarter.
For 2023, we are projecting an effective tax rate of 9% and cash taxes of approximately $30 million for the remainder of the year.
The company's total debt outstanding at third quarter, 2023 was $4 4 billion as compared to $3 4 billion at year end 2022 our bank leverage covenant leverage ratio at the end of the third quarter was 3.25 times, we continue to maintain strong liquidity with 1 billion available on our revolver.
<unk> credit facility as of quarter end.
Capital expenditures totaled $146 2 million for the third quarter, 2023, and $380 6 million for the first nine months with that I'll turn it back over to you Randy Hey, Thanks, Brad.
Previously announced a few weeks ago, we revised company guidance to 1.6 to $1 7 billion of combined adjusted EBITDA for the full fiscal year 2023 for Q4, we carried good momentum in the third quarter around the world raw material volumes have slightly softened, but our diversified geographic footprint.
It makes the implant negligible clearly the global fats and oils have softened as a direct reflection of an ample supply of global fats and oils and delayed startups and inconsistent operations of renewable diesel plants well.
While we've seen a lot of press and noise about significant gallons of new renewable diesel coming to the market. The numbers appear to tell a very different story, if more capacity outside of Diamond Green diesel was operating fat prices undoubtedly would be higher D. J D is performing well and we do not have any planned turnarounds in Q4.
Margin structures are adjusting and we're very encouraged with the conversations we're having with a variety of interested parties regarding sustainable aviation fuel and our ability to deliver the margins in line with what we have communicated looking forward to 2024, while the heavy lift of our integration work has been completed there are still a few.
Opportunities that can add some margin improvement in our feed segment and our food segment should continue to reflect our product mix shift from an earnings perspective, we see 2024 shaping up nicely and expect to deliver and Delever with an improved performance globally. The table is set with an improved outlook for the L. CFS gross.
Demand for S. A a strong demand for our low Ci feedstocks and favorable tax structures given the environment. We see for 2024 week at this time, we anticipate combined adjusted EBITDA to be in the range of 1.7 to $1 8 billion in 2024, we plan to lower capital expenditures folk.
<unk> on improving our working capital usage, and we anticipate regular dividends from Diamond Green diesel. This will all help us accomplish our leverage targets by year end, given the anticipated dividends from D. G D and the strength of our global ingredients business, we should be well on our way to achieving our target leverage ratio of about 2.5 by.
At year end 'twenty four with that let's go ahead and open it up to questions and I'll come back with some closing comments.
We will now begin the question and answer session.
You ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the key.
To withdraw your question. Please press Star then two.
In the interest of time, please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble the roster.
And our first question will come from Manav Gupta of UBS. Please go ahead.
Good morning. My question first is on the little bit on the macro side, how do you view the recent stock proposal by Gob, which increases compliance by 50% by 2030.
So has the aorta Mccann ism, which pulls forward the program in cancer or generation of CFS do you believe this will be supportive of RV economics once it kicks in in 2025.
Oh, Hey, good morning Manav. This is this is Matt. So first of all the answer is yes are we we do a we do believe that this is supportive to.
The already a business as you know the L. CFS as they are an important component to the margin build in AR and in the R&D space and given that the the Soria that was a that was put out a couple of months ago and the.
Expected legislation that is forthcoming there are several components that we think are supportive for the Rd and even the S. A F.
Business. So obviously volume is a is an important part.
And then there's the component for a potential of a.
S a F and in California of up to.
In the neighborhood of 150 million gallons, which will line up very nicely with the a R. R. S. A project.
And there's even the component of timing, there's the possibility of an earlier implementation right now it's set for 2025 Ah.
But there there is the chance in the us, but we all have to stay tuned on this but are there is the chance or even sometime in Q3 or Q4.
And implementation are coming on this so again all in all we are we are very optimistic and quite satisfied with the with El TFS.
Okay, I'm, assuming just basically that's leading to the fact that they are pulling forward. The program into 2024. So the program will actually start in third quarter 2024.
That's a potential yes.
Thank you one quick follow up is on slide 11, you indicate lower vaccines, while you were 32 million year over year headwind and north protein sales volume with a 13 million, Italy, a headwind given that integration is going well for both valeant fossa should be as you know this was just a temporary blip and the volumes will come back as we go.
[noise] ahead.
Yeah Manav. This is Randy I mean, what we're seeing in the in my script I commented on it that that's directly related to lower cattle slaughter numbers predominantly in North America.
And clearly the.
The cattle economics have changed in the U S. The herd is low but being replenished and that's just directly related to year over year comparisons.
Do you think of it this way you know red meat has the most fat the most protein and then pork and chicken and so that's that's what that is that the volumes in South America are relatively flat right now Europe's in good shape, but that's all pretty much North America, Canada is in good shape.
The next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.
Yes. Thank you good morning, everyone.
Good morning, Good morning, So I guess first question Randy I mean, if you think about the updated kind of outlook for the balance of this year and you gave kind of.
Our framework for for 2020 are for 2024.
Can you first quantify in the quarter.
There was an illusion in the pre announcement to a hedge loss at at Diamond Green can you quantify can you quantify that.
And as we think about Diamond Green for the fourth quarter. If there is no scheduled turnarounds.
Should we be thinking about production.
A lot closer to where you were in in the second quarter.
Which if true and even at.
Third quarter margin levels, who would imply.
Pretty tough to get to the low end of the of the way you framed the full year. So can you just help reconcile that.
Why don't I don't know that I would frame it the way you just finished that sentence no.
Clearly, there's always a timing issue.
How the fat prices in our core business flow through.
And also remember a significant portion of the North American portfolio ends up with Diamond Green diesel was the purchaser.
So you you had a little bit of a double whammy here number one you know the prices started to accelerate in third quarter again.
We had already sold Diamond Green.
And so those sales now are coming to be fruition in Q4 for our core ingredient business on the other side, we saw heating oil spike up you do get some hedge losses you can go you know.
The act or you can go to straight to the financials and the derivatives sections on the Valero relief and you can see what that number is and.
It was a significant number at the same time, you had higher fat prices flowing through and then you had heating oil now coming off and so at the end of the day. That's my comment about margins are adjusting you know if you think about the efficiency of the D for rune.
When that thing came down when did you say it said fat prices had to come down to put.
Some type of margin back in the business, so clearly the margins.
In D. G D are coming back very nicely in Q4 here and you know they'll finish the year strong and then that's what gives US then the momentum into next year I mean, like we said we're trying to you know we've always said you know we're not going to guarantee you know volatility and D. G. Because theres a lot of moving.
Parts, there, but at the end of the day 910 million gallons at a dollar or two per year to date, you know, what we said coming into the year, we'd be somewhere between a dollar dollar 10, we're using $1 10 for next year.
We'll finish up somewhere you know within our guided range for the year.
Just depends on how everything flows through but knowing what you know from what we see right now we're right on target.
Okay. That's helpful. And then just in the in the feed in the feed segment can you maybe just.
Maybe that the quarter on quarter EBITDA decline help bridge some of that so EBITDA was down 20.
Six or $7 million versus the second quarter.
Can you help bridge how much of that was seasonality how much of that was the <unk>.
Commodity prices, maybe some of the weakness in pet ingredients.
And if you think about the fourth quarter kind of with where commodity prices.
Land can help us think about some of the key.
Items in EBITDA and in feed moving forward.
Yeah, and I think you've kind of answered most of your question. There I mean typically the seasonality hits in this business, especially in North America and Europe in third quarter in the feed segment, because you're being the quality of the raw materials in the summertime, it's much harder to process that's code for.
It's harder to get the fat out of the product and leave it in the protein. So you kind of have lower quality fat less less fat and that's that's how it flows through it has for a 142 years the.
The pet food business. It is something to put your finger on right now pricing remains good in that area demand was weak, but it's picking back up again, you got a little bit of a trade down going on it appears around the world right now in the pet food side, but overall when we're looking at <unk> 24 versus 23 that it.
It looks pretty pretty stable their protein prices you know on most products are in pretty good shape, I mean, theres, a little bit of trade disruption in the world right now.
And in different areas that are moving or moving proteins around Matt what else do you want to add here, Yeah. I mean, I would say you know what the Q3 as you all know was a typical a very hot summer and our businesses did.
As expected feel that and so but we are seeing especially now in Q4 a quick.
Quick return to the the pickup in recovery yes.
Yes keep in keep in mind, Adam a year ago today, not sequentially, but a year ago.
You know here was we still have words, South Carolina operating in North America. Your words, South Carolina is going to be key to 'twenty four for us as it comes back online here.
Plant those completely rebuilt we're still land filling a significant amount of product right now that we can't process in our system. So as we guide higher next year.
Say what.
You always have to assume fats and oils prices and protein prices in there in energy, but most importantly for us it's being able to bring back our system to full strength on the eastern seaboard.
The next question comes from Derrick Whitfield of Stifel. Please go ahead.
Good morning, all and thanks for the 'twenty 'twenty four commentary this morning.
For my first question I wanted to wanted to lean in on DGB and focus on the sustainable margins of your business, which really should drive that value of that business beyond 2024, when we analyze your system the margins by assessing the value of your feedstock streams relative to a marginal unit of production there appears to be a very meaningful positive spreads.
What you own differentially versus industry.
As you optimize the economics of D. G. D is it reasonable to assume that that's sustainable margin you've talked about in the past at about 10 per gallon still stands even with depressed diesel RIN prices given your ability to increment tallow D. J D.
I mean fundamentally Derrick that's what we believe I mean, clearly the volatility in Q3, the turnaround offline 37 days.
We disrupted our logistics, both inbound and outbound there and move boats to Q4 that should have loaded you know et cetera et cetera, you know the.
D for room plays an important part in the value of that business down there clearly we were not a hedge or a D for rents and we got caught in the volatility there with higher fat prices lower a lower green premium as we say and then you saw that flow through but overall our thesis.
It still remains the same as Sue Ann pointed out to me. She said you know even under any situation. Our investment case and this was 70 910 years ago on a $3 23, a gallon built we still believe in that we believe it's even better now given our Ci.
Vantages, given our both inbound outbound logistics advantages I mean keep in mind wire fat prices are little lower than North America, because diamond Green's the largest importer now of fats in North America, because it has the logistical capability to convert and pre treat those fabs. So that's phase one phase two.
As the script diluted.
We're working hard with the interested parties and we won't say who the interested parties are so please don't ask but we're very close and Saf is real the demand is real and the margin opportunities as we've explained out there remain very real and doable. So if you if you.
You look at this business and 24, Matt said, Okay. I think there's a chance we could get the L. CFS implementation online a little sooner you know even if it doesn't come until the back half of the year. Just the fact, when carb publishes and everybody says Oh here is the script here is the playbook that's part.
Positive and we will see you will see an improvement there number two as we look around the world for next year, you know the Saf side. Our plant is progressing nicely we made it through hurricane season.
I know technically that's got another week or two but it looks like we've made it through hurricane season will be button it up.
Steels up equipments, there and you know hopefully as we progress through the wintertime and next summer will be mechanically complete.
And in doing our normal normal startup here and that's if you look at it two to three years from now.
You'll you'll have 250 million gallons of Saf in 'twenty, four or I mean 25 for sure.
And then Oh S. A F. Two is on the drawing board here clearly as we've communicated to people that decision wont be made until we have complete proof of concept of both the technology and the margin structure.
But you know at the end of the day. If you look at 'twenty four 'twenty five 'twenty six you can start to think out that that our portfolio will include you know substantial.
A substantial gallons of SA ER along with R&D.
Then we will have we will own that arbitrage again as we go forward. So it's a you know as we look forward, but we don't see any downside you know from our case you know there may be a little lull here that the market seems to want to price in Matt anything else you want to add I would just say that one thing to keep in mind is that.
As this S. A F comes online the feedstock is renewable diesel.
And so our plan is Oh boy, they're played for 250 million gallons and so when we turn when we turned on with that plant. That's 250 million gallons of R&D, that's coming out of the Rd marketing going into the S. U S. A F market. So that that's another let's say friendly component to the even the outlook for <unk>.
Rd.
That's great maybe stand on DVD wanted to see if you could offer some additional color on the apparent delay.
Seeing in R&D capacity expansions weather delays or simply just difficulty in running at nameplate, which is more challenging than I think we all appreciate we see the same but I'd like your views on that as well.
Yeah, and I'll tag team this with our with the team in here I mean, you know.
Clearly as we look around the horn, where both buyers and sellers of fats and oils around the world.
And when I say buyers I mean, that's the D. G D hat and sellers, that's the Darling hat and clearly we're not seeing the demand from the renewable guys and in North America. In fact, we're actually we're buying material back from them.
I think I guess, if if we say frustration that might be too strong our curiosity and a bit of frustration is that when people started whether it was bloomberg or others, putting out these smbs on D. Four rooms, they forget multiple components of it number one they assume it at Phillips 66 announces of Pla.
It's gonna be online Jan one and run at capacity.
At vertex at PBF, I mean, Holly frontier finally hit 52% capacity yay.
You know at the end of the day you know it you just keep reading this stuff well that doesn't generate the level of rins that they're seeing and then the world doesn't understand when you export.
Material, which are a significant portion of diamond green because of its location on the Gulf Coast goes around the world at the end of the day those rooms get retired in 60 days, there's a delay there. So you know it.
At the end of the day, you kind of have to go back and rebalancing thing with with reality. So we're buying back that we're not selling and selling means they don't have the pretreatment units that they claim they do or they would be buying the cheapest fats in the world Madden anything else you want to you know as it is I think of many of these are learned.
This is not necessarily an easy business to operate and whether it's a they call. It the ci component or are the quality of the raw material in the pre treatment component requires more capex and.
Someone tried to cut corners and.
And save on Capex, then they find out that Gee.
Now I know this product we can process it or it's a at the capacity that we want it so you.
This is a it is a complex and not easy business to to operate in and I think some of these people are finding that out.
Yeah.
The next question comes from the Cheyenne Eliana of Jefferies. Please go ahead.
Good morning, guys. Thanks for taking my question. The first one I had was on the guidance that you've given for 2024, the one seven to one eight.
Could you talk a little bit more about what margins do you expect for the food and feed segment.
Not really ready to go there yet Shawn I mean, you know as I look at it you know when we take a shot at reducing guidance here.
What you can back into here is you can say what are you thinking on diamond Green diesel while we're thinking that we're going to run it at above nameplate capacity and we're going to make a dollar dollars 10, a gallon next year and it doesn't include any Saf gallons coming on early at this time, it's just too early to make that prediction and so it's not hard to back into that.
Number and so at the end of the day, where it lands, whether it's in food or feed.
We're still we're thinking that that the numbers are going to roll up between a billion billion one maybe a little more in the core business, depending on where fat prices recover and as we've said if the if renewable diesel capacity is there and has pretreat ability or even if it doesn't have free trade ability fats and oil prices.
Stay where they're at.
If you look at the whether its the soybean oil SMB, we're at a at a multi multi year low and <unk> margins, which most of these guys are running are now 1100 over so that's 11 cents higher than were operating at so that's so.
That's how we kind of cast that looking forward, Matt Bob anything you want to add to.
I think that's right.
I mean, we're just it's a generally tight F&D scenario and where.
A lot needs to happen as far as crop production in South America, and that's that's really going to determine you know what we see with respect to certainly protein levels and ultimately oil levels as well.
Thank you that's helpful. And then one question I had was just kind of your thoughts on buybacks given where the.
The stock price is today or maybe just in general I know that the goal is to kind of get to that two five leverage but any thoughts on entertaining higher buybacks, given where the stock is trading today.
It is a discussion point with the board, we have adequate capacity to do that.
Clearly our focus today is as we said is to repatriate cash and get the total debt down and get to it.
At least the discussion point of investment grade as we have some maturities coming in in in 'twenty six 'twenty seven so it's not off the table.
Clearly every year, we will buyback any any executive compensation or dilution for sure and after that then it's opportunistic.
As the year goes along and as Brad says I have a little extra cash we've been given the authority to make those decisions. So nothing's off the table here.
Yeah.
The next question comes from Paul Cheng of Scotiabank. Please go ahead.
Thank you good morning, guys.
To your question piece.
Good morning.
Randy that are trying to understand.
Sequentially from the second to third quarter.
Feed ingredient and weapons, yes time that sounds small nims actually flat and all the market indicator with I guess.
You see all the time, though all of that is actually up.
Can we try and to understand that what's causing the sequential weapon new job.
From second to third quarter, you end up fit business that's.
That's the first question.
Yes, Paul this is Brett.
When youre looking sequentially, we have for lack of a better word.
Leading lags in and a lot of our contracts.
And so theres timing differences there.
It will often and when you get quick.
Quick movements for Randy talked about earlier between second and third quarter price movements.
And then with the way the contracts work in the lead and the lag that.
Can cause a little bit of a kind of just color there I would say.
And so Brad should we base on that means in the fourth quarter, we should see come painted.
One market indicator you're rapidly we've seen more of an upside.
Or that the lag effect is going to take longer than that.
Yes, typically what youre going to see that is if you think of it this way.
Today around the world, we have a significant amount of our internal produced fats and oils, whether they're in Europe, or Brazil, or North America headed to Diamond Green diesel and so as those.
You want to think about it what we produced in August.
So that it doesn't arrive and be processed until October and September is kind of November and October now as it's December January and so as.
As we said in the earlier in the script. So you had a move up of fat prices.
In Q3 that then we're soul and purchase and so those will those will flow through.
No it should deliver a pretty good fourth quarter in that in the in the feed ingredients segment.
The next question comes from Andrew <unk> of BMO. Please go ahead.
Hey, good morning, Thanks for taking the questions.
My first one is on Diamond Green diesel.
And I think Randy kind of over time, you've talked about 90 sensor a dollar being the cost advantage of the minimum.
Kind of margin to think about for D. G D versus the marginal producer and you kind of talked around this I think a little bit earlier, but I was hoping if you could be a little bit more specific but do you think that that number has changed at all with.
The new capacity, that's come on et cetera, or is that still the right way to think over time about the baseline D. G D. Martin.
Yeah, I don't really see anything changing that competitive advantage out there right now I mean I'm looking around the table.
I don't know I agree that that's a that's something that we consider as a competitive advantage. We can we're going to continue to leverage that advantage going forward trying to stay let's say ahead of the game and that's again with the even with the Saf project is going to separate us even further from from our competition.
If I could just add I think one thing to keep in mind as part of that advantages us D. J D 's ability to blend all different kinds of feedstocks and.
The price relationship amongst those feedstocks changes a lot from time to time, so the relative advantage is not something that.
You can pinpoint and static.
But generally speaking I think that the advantage that we had before continues to be the case today, Yeah, and I think you know the the D J D.
Mixology has become even more complicated given whether you've got a cat III <unk> comment from Rotterdam from our factories or you got paulos in yellow Grease is coming from Brazil, and you goes from from the Asian countries. You know you got a timing of when those are.
Right and then you've got a usage you can't we don't really run feedstocks knee in a sense. So we make we make a mix that meets our customers needs that allows us to get the highest yield that we can and the longest catalyst life and so you know it becomes a far more complicated thing, but the <unk>.
<unk> advantage like I said versus running <unk> soybean oil right now is 88 cents a gallon. So that's not even a ci differential there. So I think as you've seen through the year remember port Arthur is still waiting on.
On its pathway, where we anticipate it any time support Arthur has not had the economics that it will have next year again, and then that's port Arthur pre SaaS. So I.
I think the advantage is very sustainable and widens out over time like I said I don't want to be somebody that doesn't say theres going to be less volatility due to timing here, but I think the margins are very achievable.
And on top of that advantage there is the value of our integration with our feed business and we're producing even the.
The local fat supplies in the U S and Canada that a large percentage of that ends up in.
Ends up in N D G D and and then again one of the other things back back to D. G. D is the are the producers tax credit going forward.
We think that the.
D. G. D is again, one more time.
More advantaged than the than the others in.
When that calculation comes into place so again, we like our position.
Okay that was really helpful color I appreciate that and just my second question.
On the following up on some of your commentary around some integration benefits. There that that remain are opportunities that remain we know I think that there is some valley contracts that that that go into effect. Jan one is that really what youre talking about is there any way to quantify that or more broadly are you seeing you know given kind of the bigger asset footprint with.
All the acquisitions et cetera that there's even more opportunity brought broadly beyond value to continue to optimize.
Yeah and.
And I think those comments were in the in the script I mean clearly.
The U S operations and procurement teams have made great strides at Valley and then our international team down in Brazil.
Can a private company to a public is no small task on either either continent here and then if you will making them Darling.
And you know we tend to be conservative we tend to risk manage and we have a margin expectation in our core ingredient business.
Very well known on our return standards are our etch didn't and metal there for us and so at the end of the day. We've made the successor of the Valley integration as we've said has been the ability to improve the raw material procurement contracts and all the little terms and conditions in there.
And then ultimately you know as I said earlier, we're still short <unk>.
Massive capacity on the eastern Seaboard, that's ready to come online, but as you know and.
As we've shared with others were waiting on motor control gear.
That's due to be delivered here. This winter otherwise, we'd have that plant back up but the supply chain you know, we're still moving stuff.
Inefficiently to plants just to support our supply base out there that wants more comes up next the next.
Next winter or next spring I mean Q1, we should be we should be back in good shape. There and then we've got capacity expansions going on down in Brazil right. Now that are just just in the commissioning stages that there should be accretive to us next year. So I mean, the world looks pretty darn. Good next year. It doesn't look like we will have 3% to 5%.
Rent growth of raw material tonnage as we've seen over the last several years, there was a little bit of contraction of animal numbers out there, whether it's disease or whether it was just margin and feeding people, but at the end of the day.
You're setting up pretty nice for next year.
The next question comes from Sam Margolin Wolfe Research. Please go ahead.
Hi, good morning, Thanks for taking the question.
My first question is on just the <unk>.
Environment.
Talked a little bit about you know the relationship to the vegetable oil complex.
But is there a scenario where fats prices next year decouple from from veg oils, just because.
If the whole if the pressure in the system is originating from Rens oversupply you.
You solve that with lower.
Biodiesel production, which would disproportionately.
Impact.
Soybean oil supply demand versus facts and then if there's a if there's a corresponding L. CFS rally that.
That might further.
Tallow and yellow grease prices relative to veg oils is that a scenario that you.
Do you think is possible.
I really don't think so.
Number one I think as we've said all along clearly.
The Gen. One technology of classic biodiesel would be the one that would become challenge, but the reason it would become challenged would be because there would be R&D capacity that then we would take that supply.
You know it.
You just kind of have to do the numbers. If martinez is really going to run 730 million gallons.
3 million tons of raw material.
If P 66 can do half of what they think they can that's another million and a half $2 million.
And then you still got the Pbf's and you got the bird taxes, you've got <unk> Geismar. All these guys. It seemed to be new demand out there I mean, you can see the scenario quickly changed now the question is where what is D. For Rens do Bob do you want to take a shot at that.
I think you're right on Randy.
I think the only way that we would decouple is if our D production were to plummet because of challenges and not running and operating but if that were to happen RIN values should go higher than that would significantly benefit our broader network.
But we don't really see that happening what we see is.
Overall, R&D production, having some challenges, but continuing to have a significant demand pull in and keeping prices relative prices in line between fats and oils.
Got it Okay and then this is a follow up but you know it's also on the on the fats outlook.
With the El CFS proposal I mean, obviously a lot of people are looking at that through the lens of our D margins, but it seems like it would impact the.
So that's market to over time, because ci would become more important to our values to intrinsic value.
Of different feedstocks, and so but of course, it's very regional specific it's only California. So I was wondering what your thoughts on that or if if you think maybe the El CFS proposal is actually a bigger deal for <unk> than it is for underlying our D margins.
I think we would believe that we would think it clearly favors low Ci as does <unk>.
Yeah.
I mean, clearly you know.
I think if we do.
The whole conversation today down to one thing it's about timing R&D is a good business. It's got growing demand globally saf's gonna be a great business. It's got incredible growing demand, we got maritime fuels and Oh by the way they all favor low Ci feedstocks and we're stuck in this route of same old water margin is gonna be worse D for <unk>.
Orders L CFS and at the long term as we've always said.
The competitive advantage of the Gulf Coast real estate, whether you're shipping Saf by pipeline boat to Europe.
Or the order, California.
It's just going to really work out pretty nice man I don't know what the only other thing to keep in mind is that obviously the El CFS is specific to California, but as we're doing business in other markets. The L. CFS as a reference and our valuation when we were using to determine whether a where their product is sold to another market or two.
Due to California, So one way or another that that that L. CFS valuation is built into all of the Rd sales.
Sales, regardless of whether it goes to California or not so that's a that's an important component not too not to overload.
The next question comes from Ben <unk> of Stephens. Please go ahead.
Hey, Thanks, good morning.
I Wonder if we could talk about 2020 for Randy you talked about one seven to $1 8 billion of EBITDA.
What do you think that translates to for free cash flow and then what are your priorities for free cash flow as we start to see capex budgets.
Potentially come off of peak at D. G D. Notwithstanding the Saf expansion that you want to engage in.
Yeah, and I think we had this discussion with our board I mean as you guys look to valuing the company here ultimately we can talk about combined adjusted EBITDA, but it's actually what is the dividend plus the core ingredient business and then how much capex are we going to spend and you know what's in the M&A pipeline.
And so when we look to D. G D and we say above nameplate.
No $1 10, a gallon you can come up with an easy 500 million of dividends. There and then you look at our core ingredient business and if we're at a you know if we're at 1 billion billion won.
There's your number right there 500 million Capex. If we that's got you probably $100 million of growth projects of the new plants, we've talked about building.
And then you look at it and you say you got to.
On interest Bill of around 230, and cash taxes on 61, 60, and then some limited buybacks in there that could be higher if we're doing a little better or whatever but you know that you.
You quickly quickly pull down that down to around that 4 billion three 9 billion level.
We do have one.
Pending transaction that's out there.
And on a.
Mirror pause in Poland, which is 110 million euros that is.
Expected to close likely in Q1.
But outside of that I would say 24 is an M&A light.
Year on new acquisitions.
Call It an M&A followed.
[laughter] her in a very.
Very good very helpful and makes sense on the third quarter.
In the feed business I wanted to ask about in the.
The UK segment.
The pricing seems to be much weaker year over year then.
Broader yuko quotes would suggest is there something discrete or specific thats happening in the third quarter that we should be mindful of as we think about the relationship between pricing in that segment and the pricing of.
Used cooking oil out in the marketplace.
This is Randy year over year, I think prices for 65 down to 55, so up about 20% ish.
Remember Q3, a year ago.
Raymond Green diesel three was not operational yet and so we were still trading a bunch of material around the world. So as Brad said earlier, you got some leads and lags you've got some quality premiums you've got some training that was going on there, but I don't know anything else you want to add Brad.
That that's oftentimes when we're exporting it in the past there can be some premiums built in there.
With the X 40, so that'll that'll all flush out with now that we have all three units on in her right going forward.
The next question comes from Matthew Blair of P. P. H. Please go ahead.
Hey, good morning, Thanks for taking my questions.
The first one is I think in your recent guidance you talked about that you anticipate D. G D margins higher in Q4 versus Q3 and I wanted to see if that's still held them.
On our modeling it seems like you would receive a pretty nice tailwind.
The hedging side of things, but we were worried that there would still be.
Some of that price lag impact from your feedstocks versus the low do four rooms in Q4 that.
Weigh on margin so I wanted to check on that first.
Yeah, I would say that's a that's the reality of the way. Our book works. We do have we have Oh, we have to manage the pipeline through D. G. D. There's the anticipated purchases and so we're chewing through that but I would say that the you know.
If you think about the progression through the quarter.
December will be better than October.
Yeah, we see that too and so just to be clear that the guidance is still that that Q4 D. G D margins higher than Q3.
We clearly were going to make more gallons.
That's an absolute and right now if we had to look at it as Matt said.
As each month goes on that margins widen out spot margins as you can see are much better we should have a hedge gain coming back provided there is no major rally again, then in the heating oil market and Thats, assuming <unk> and <unk> really kind of flat.
The next question comes from Jason <unk> of Cowen. Please go ahead.
Yeah, Hey, Thanks for taking my questions. My first one is on the 2023 outlook.
And it's a it's a two parter.
The first part of it is.
You had initially our previously guided to 175, you reduce that and.
In hindsight, where where do you think you were you were off from the prior to current guidance and then as you think about the 100 million dollar EBITDA range for for Q. How do you think about what's driving the high to low end of that range and I have a follow up thanks.
Yeah, I think the Theres three letters that drove most of it D G D and.
In Q3, clearly was a didn't.
It didn't deliver what we thought it was going to be.
And clearly we're being we're being somewhat conservative on D. G. D Q4, right now it looks like <unk> got to deliver for us to get to the high end of the range in Q4, and then the fat prices.
It didn't get recognized in Q3, because they were sold to D. G. D. In Q4 have to flow through so.
We just said Theres theres timing issues here.
That puts you that kind of range.
I continue to look at myself in the mirror and say why am I, even trying to do.
This thing after five.
Here's so yeah.
Yes.
You know this but we have a pretty good feel for it I mean, as we came in and I would just remind the listeners as we came in sequentially out of out of Q2, we said seasonally we would be lower in Q3, and we were and you know so plus or minus 5% is not a not bad what we didn't see coming at us.
Was that the D J D.
All of the volatility that hit there due to you know whatever you want to call. It the war in the Middle East and D for Rens collapsing and everything there that could have happened to happen you know the <unk>.
<unk> took us offline that was another 10 days for our minor disruption as we call. It and you know the team did a magical job, but it just you know you've got a power down in power back up and that's that's six days with a three or four days of repairs. So those.
Look another I don't know 20 million gallons or offline or whatever it was so that's why we're a little more bullish Q4 than we were in Q3 here.
Alright, great and my follow up is on the 2020 for outlook and it seems like there's a decent amount of crushing capacity.
For.
Soybeans coming online in the U S and as we sit here soybean oil pricing is still decently above where it was tightened relative I guess to where it was prior to COVID-19. So it does seem like there is potential for some downside next year and I know you touched on it earlier, but I was just wondering if.
Your outlook factors in all of that new crusher capacity coming online in North America, and how that can impact vegetable oil prices.
Yeah. This is Matt I would say, yes that is factored into our expectations.
So oil or and and including protein so.
These new.
The new plants are known projects Wouldnt surprise me as similar to what we're seeing in the <unk>.
In the RV space, if some of them get delayed for a myriad of reasons.
We really haven't talked about lately is the you know with the.
This increase in interest rates that we've seen you know capex and the money. It takes to you know to build and operate as has gone up so that I mean, that's just the reality of the business, but at the end of the day, yes. They are where we incorporate that into our expectations, Bob you're getting from yeah, I think I would just add that.
Near term imports have had a bigger impact than added crush capacity in the United States for Oilseed crush.
Crush and the other thing is that we are overall as an industry increasing renewable diesel capacity at a much faster pace than we're adding oil production capacity short term.
We've got a lot of oil in the system and we've seen pressure on prices, but a few even getting out 12 to 18 months.
It's going to be pretty tough for the soybean oil industry to keep up with demand as we see it.
This concludes our question and answer session I would like to turn the conference back over to Randall Stuewe for any closing remarks.
Alright, Thanks, everybody for your question its days as always if you have additional questions reach out to Suzanne Please stay safe and have a great holiday season, and we'll look forward to talking to you in the future.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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Okay.
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