Q3 2024 Darling Ingredients Inc Earnings Call
Speaker Change: again demonstrate our ability to be the largest, most reliable.
Speaker Change: Most cost efficient renewable diesel and sustainable aviation producer in the world.
Speaker Change: with three quarters of the year behind us are core businesses fit more men nicely.
Speaker Change: But waste fat prices are still lagging and our demargens are modestly improving but waiting on regulatory clarity.
Speaker Change: This was suggest 2024 fiscal year combined to just to leave it off to be in the range of 1.15 billion up to 1.175 billion. Not where we wanted to be, but still our fourth best performance in our 142 year history.
Speaker Change: As we look forward to 2025, Darlin and Greenance has tremendous tailwinds building that had the potential to propel us back into record earnings levels for both our specialty ingredients and renewable businesses.
Speaker Change: Our Global College of Business is positioned nicely for returned growth as we launch new innovations and market conditions become more favorable.
Speaker Change: from a decarbonization standpoint, state and now federally newable, spuel and sentence, greatly favor the use of waste fats and oil, which darling is the largest producer in the world. In fact, renewable diesel and SAF producers that want to be profitable will need to switch to waste fats and oils, which will ultimately benefit our specialty ingredients business.
Speaker Change: Dinosaur Green Diesel is positioned nicely to continue to benefit from both federal and state program improvements. And it is, as it is, the premier producer of renewable diesel and SAF capable of utilizing the most economical waste facts and oils source globally.
Speaker Change: We have 11 plus years of successful production under our belt and now we can say we are the largest and most successful producer in the world.
Speaker Change: So now let's take a quick look in an early look at 20-25.
Speaker Change: Even kind of from a worst case perspective, assuming that prices are somewhat steady or unchanged, and diamond green diesel produces approximately 250 million gallons of SAA.
Speaker Change: and one billion gallons of renewable diesel and let's assume Rand's and LCS, LCS, LCS, Valu State, relatively unchanged or flat, I see the combined earning power of our platform to be an excess of 1.5 billion for next year.
Speaker Change: H. However, given what we see in the market, we believe LCFS and Rins will increase and wake the price is well-seembed higher.
Speaker Change: As we've said, one penny moved in the waist back.
Speaker Change: Price, means about 12 million EBA.ang and wait for darling during the year. It's impossible for me to precisely predict how the waste fats and oils complex and rents an LCFS markets will shape up over the next year. But clearly the transition from the Wenders Tax Credit to the Clean Fules, producer credit or 45 C.
Speaker Change: will be positive for darling in many ways, from favoring waste fasts to providing additional cash for delivering. I'm very bullish on darling. We have a number of tailwinds pushing us into 2025, and I believe this could all result in the highest EBITDA for our company in its history.
Speaker Change: i
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star then too.
Speaker Change: Please limit yourself to one question and one follow-up question.
Speaker Change: The
Speaker Change: Our first question comes from Tom Palmer of Citi. Go ahead, please.
Tom Palmer: Good morning, and thanks for the question. Thanks for the caller on 2025, just starting out, but maybe we could touch first on kind of the implied outlook.
Tom Palmer: as we think about the fourth quarter, it does imply a pretty meaningful improvement.
Tom Palmer: versus what we saw in the third quarter. So maybe could we touch on.
Speaker Change: Some of the items that you see driving that inflection as we look at the fourth quarter, because it would seem like we're getting close to that $1.5 billion annual run rate in the fourth quarter, just based on the implied guidance. Thank you.
Speaker Change: Yeah, Tom, this is Randall.
Randall: Essentially, there's several assumptions that go into the fourth quarter. As we said in the script, traditionally we have operational challenges in Q3. That's around the world with wastewater and quality. So you always see some natural pickup there.
Randall: and in North America at a higher level than we did in Q3.
Randall: The college and business had a pretty bumpy Q3. Some of it was timing of shipments out of Brazil. But ultimately, you know, we see a little improvement there. We're still seeing a bit of recession around the world, and it ranges from China to Europe to the U.S. in, you know, in
Randall: and the the the the the the
Randall: to get there for Diamond Green Diesel in Q4 here.
Randall: It doesn't have any assumption for anybody that wants to know of any SAF shipments in there at this time. So hopefully that'll, you know, if we are successful there, which I believe we will, that could once again support that number and the run rate into 2025.
Speaker Change: All right, thanks for the color there. I wanted to follow up quickly just on the food segment. It sounded like some of the issues that we saw in terms of 3Q were more transitory, and then some maybe is the competitive environment has changed a little bit. So maybe as we think through the coming year,
Speaker Change: You do have the new product rolling out, and I guess...
Speaker Change: To what extent does that offset the competitive environment? Do you think we've kind of seen the full magnitude of some of this capacity coming online? And so from here, at least stable to better would be the expectation?
Speaker Change: Yeah. Thanks, Tom. This is Bob.
Speaker Change: I think you're right. I mean, we're seeing today just a bit more capacity that's come out of the market, you know, gelatin margins kind of...
Speaker Change: a little more pressure than they had been. But like you said, we see that stabilizing as we go into 2025. And our expectation is that the next data GC product will get traction and that product is sold at much higher margins. So.
Speaker Change: So I think that's correct, that we expect to see stable results in that business in 2025.
Speaker Change: You know, a strong trend as we end the year.
Speaker Change: Yeah, I'll build on that a little bit from, you know, we...
Speaker Change: If you look at Darling, you know, one of the competitive advantages and disadvantages we have is we're public.
Speaker Change: and we do segment and share.
Speaker Change: is bovine hide.
Speaker Change: you know, grass-fed, bow-line-hide.
Speaker Change: The transparency of the earnings power that we have, you know, ultimately no different than diamond green diesel.
Speaker Change: in the sense of how successful we've been there, attracted competition. It's somewhat of a micro market around the world. The numbers range from 600 to 700,000 tons.
Speaker Change: Globally and and ultimately when you add it to 15 or 20 thousand ton plant it takes a year or so to place that volume and that's what's happened in Brazil with a couple of Factories, they're they're looking for customers today You know ultimately, how do you get a customer you buy a customer?
Speaker Change: And so that's the driver of the decline in sales value. But ultimately, it also, it's a spread management business for us on the commodity gelatin business. And then ultimately in the collagen business.
Speaker Change: It is a very specialty ingredient, so our margins have pretty much maintained what we've been able to hold.
Speaker Change: The outlook for 2025...
Speaker Change: is exciting for us. I mean, obviously next week we talked about
Speaker Change: being out to launch next Ida, it is available.
Speaker Change: There are a number of customers there and how quickly that ramps up and...
Speaker Change: And then we've got three or four other products behind it now that will be coming on over the course of the next year, two years, three years.
Speaker Change: So, we see ourselves differentiating ourselves, once again, from everybody else in that business, but ultimately, it's a great business and we're...
Speaker Change: Also keep in mind, Tom, when you look at that business, remember, 80% of that business is really kind of feed and fat.
Speaker Change: And so ultimately, if we get any fat price improvement, that ultimately translates back into that business, too, on top of the specialty ingredient being generated. So that looks pretty strong for 25 here.
Tom Palmer: All right, thank you.
Speaker Change: Our next question comes from Paul Chang of Scotiabank. Go ahead, please.
Paul Chang: Hey, good morning guys.
Paul Chang: Morning.
Paul Chang: in the fourth quarter and also into 2025? That's the first question.
Paul Chang: Okay.
Paul Chang: and also cause reduction.
Speaker Change: Okay, the CapEx outlook would be...
Speaker Change: Probably more closer to back what we projected this year, probably the 450 to 500 million range, I would say.
Speaker Change: I think for the current year, we're still on track to be in the ballpark of that 400 or maybe lower.
Speaker Change: Yeah, Paul, this is Randy for, you know, Q.
Speaker Change: through Q3, we spent $259,000. That's probably one of our lowest rent rates ever. You kind of look at the working capital improvement around $340,000, and you can see how we're managing the business through improved inventories. Cost reductions are something that we don't break out. It's just part of our culture.
Speaker Change: and how we run our business around the world. So, you know, we've been successful in closing some offices in North America, taking out some, you know, some.
Speaker Change: simplifying our organization in many areas. I always tend to be very quiet about that stuff because it impacts people's lives.
Speaker Change: Ultimately, I'd say for next year, you know, kind of use that 450 number as we go forward here and that would be really the maintenance, the environmental, and the fleet side here with no growth in there.
Speaker Change: On the food ingredient business, you mentioned that in Brazil you are seeing some supply increase and you are seeing customers around the world restocking.
Speaker Change: Yeah.
Speaker Change: Thanks, Paul. This is Bob. You know, I think that this is, we're going to continue to see it over the next quarter or so. I mean, broadly, the market has been, you know, aggressively pursuing the de-stocking of inventories, you know, but we're, you know, these things typically take longer than expected. The good thing for Rousselot is...
Speaker Change: We believe that by the time the destocking is over and when we do have to renegotiate contracts in the future, that will be done with that cycle. So, overall, we're not too concerned about that.
Speaker Change: But how about on the supply increase?
Paul Chang: Sorry, say that again. How about the supply in...
Speaker Change: Yeah, so new capacity coming on, you know, as Randy said
Speaker Change: The nice thing about that business is the collagen market continues to grow at a pretty fast pace. So, you know, over a relatively short period of time, we can absorb an additional supply, you know, increase into the market like that. And that's what we're expecting to see here over the next several months.
Speaker Change: We do. Thank you.
Speaker Change: The next question comes from Dushant Elani of Jefferies. Go ahead, please.
Speaker Change: Hi guys, can you hear me?
Speaker Change: Sure.
Speaker Change: Awesome. Yeah, good morning. Thanks for taking my question.
Dushant Elani: One on SAF, just real quick. Could you share some color on your sales book? I know that you guys have announced some orders. Maybe could you share how much has been contracted thus far besides what you have announced? And maybe, do you have a target split between contracted and spot, if any?
Dushant Elani: This is Matt. Good morning. I think I understood your question. And so, you know, as Randy mentioned, our SAF plant is mechanically complete.
Dushant Elani: and we're in the commissioning phase right now. We're very excited about where we are in that. I would say that that project has been now actually early and under budget.
Dushant Elani: So, and we've made a few announcements over the last few weeks with some of the contracts that we have made. I would just say that not all of the contracts get announced.
Dushant Elani: There are some for competitive reasons as an example, and so, you know, we have lots of different discussions going on We have already completed some contracts as you know
Dushant Elani: And I'm quite optimistic about our future there and our ability to contract.
Dushant Elani: product and make deliveries. A lot of these contracts are one to three years in tenure. And so, you know, it's really not necessarily our intention to go spot right now on material volume.
Dushant Elani: But we'll see how as time develops, but again, we're confident in our ability to make the sales on product.
Speaker Change: Awesome. Thank you, Matt. And then just to follow up on...
Speaker Change: on just your debt targets going forward with a constructive kind of feedback that you guys have, or a constructive picture that you guys have painted for 2025.
Speaker Change: How do you think about your debt targets, especially as you have some maturities coming in in 2026? Maybe it's too early to talk about it, but if you have any thoughts there.
Speaker Change: Nishant, this is Brad. So, you know.
Speaker Change: Where we are now, just a touch above Ford, anticipate you're in.
Speaker Change: here being right around in that ballpark, obviously always to a bit degrees on, depends on dividends at a DGD. Next year, we are definitely projecting to be the back half of the year, be below three times.
Speaker Change: So to really, you know, get beyond that in 26, the momentum will definitely be down. So, you know, at 26, I'll just generally say, all things being equal, we'd be much lower than 3.
Speaker Change: Yeah, and ultimately the the targets unchanged at two and a half I think the thing that people have to understand and while we're still waiting for a little bit of IRS
Speaker Change: Clarity here, which we believe is coming.
Speaker Change: to market that credit and generate cash rather than waiting for the waterfall or the distribution out of DGD.
Speaker Change: That, in itself, creates a very fundamental change in how much cash comes into the mothership here and then how the debt ratio...
Speaker Change: from now on gets calculated. So it's a very positive outlook.
Speaker Change: for 25 here, and it puts us in a position then to, once again, by the back half of the year, as Brad says, to really start evaluating what the long-term, both capital structure and the return to shareholders opportunities will provide to us.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Heather Jones of Heather Jones Research. Go ahead, please.
Heather Jones: Good morning, thanks for the question. Um, Brandi, you mentioned that you expect to have visibility on 45Z soon. And some of the conferences I've gone to lately and just people I've talked to
Heather Jones: There seems to be a very low expectation of having any visibility on that this year. So, I was just wondering if you could share with us what is underpinning your confidence that we'll get that soon.
Heather Jones: Hi, Heather. This is Matt. Look, we hear a lot of the same, let's say, input that you're talking about.
Heather Jones: and we've got a lot of discussions going on our side. We remain optimistic that we're going to get clarity on 45Z with the guidance, whether it's provisional guidance or, and then it will certainly spill over.
Heather Jones: into 25, but we do believe that this is something that is imminent.
Heather Jones: and we're anxiously waiting for it, obviously, but I would say that we hear some of the same chatter that you're talking about, and don't disregard that, but it's something that over the next coming weeks, we hope to have more insight.
Speaker Change: And when you say spill over into 25 like are you're expecting the visibility to come in stages? Potentially.
Speaker Change: Potentially it could, but we don't look at it, Heather, as is it going to happen or not happen. I mean, we don't look at it as a line in the sand. All the discussions we're having.
Speaker Change: with the proper people are that it's eminent.
Speaker Change: A little bit of timing here, but it doesn't mean that it won't be quote retro and be part of it. I mean, when we look at our cash generation for next year, you know, really at the end of the day, we look at that we'll be able to market three
Speaker Change: quarters of that credit next year. So that's, you know, we're taking a conservative approach to it, but we're not taking an approach that the can gets kicked down the field to mid 25. I just don't see that happening. Bob, do you have any different opinion here? No, I agree with that.
Speaker Change: Sure.
Speaker Change: Okay, and then my second question was on Diamond Green.
Speaker Change: Looking at margins, and I lied to feedstocks, etc. There has been a significant improvement in margins.
Speaker Change: But going from your Q3 to what it seems to be implied in your Q4, I'm not seeing that kind of step up. So I was just wondering, was Q3 affected by any high-priced feedstocks that you had locked in or something like that? Just...
Speaker Change: Given that you're not embedding FAFSA in those numbers, just wondering if you could help us understand why we're going to get such a big step up in diamond green.
Speaker Change: I guess, yeah, so, you know, what we've seen, what we saw through quarter three is a lot of a lot of movement with all of the inputs as there's, you know, we've we've had a relative amount of uncertainty in this market. As we go into the fourth quarter, we're really going to be shaping up for 2025.
Speaker Change: And as we sit here today, 2025, the outlook is really positive for renewable diesel companies that can utilize low CI score feedstocks.
Speaker Change: And so, you know, what we're expecting as we move through the quarter is that we're going to see margin improvement.
Speaker Change: As we go through the quarter, companies are positioning for 2025.
Speaker Change: There's a couple of realities that are important here. If you look at ending 2020, you know, 2024 supply, we're shaping up to.
Speaker Change: to have produced 3.2 billion gallons of renewable diesel, 2 billion gallons of biodiesel, and about a billion gallons of imports. So that's like 6.2 billion gallons of supply. And when you look at 2025,
Speaker Change: We need, just to satisfy the mandates and normal export demand, we're going to need about 5.7 billion gallons of supply.
Speaker Change: and Renewable Diesel, you know, depending on what happens with CARB, Renewable Diesel is going to be...
Speaker Change: We need biodiesel to be operating at a positive margin in order to satisfy mandates. And so as we get to the end of 2024, that should really provide a lot of support. We're obviously expecting positive outcomes from...
Speaker Change: from LCFS prior to the end of the year.
Speaker Change: Okay the next question comes from John I'm sorry from Manav Gupta of UBS go ahead please
Manav Gupta: Good morning, guys. So as we are looking at the RIN prices, they are rebounding. LCFS is also rebounding, which could be because of the November 8th meeting. But the way the RIN prices are rebounding,
Manav Gupta: It seems that some low-quality biodiesel or renewable diesel production has already started to shut down. So just wanted to understand if you are seeing that and do you think this trend accelerates?
Manav Gupta: Once we go from BTC to PTC, that some of the lower quality, non-profitable BDRD production might continue to shut down in 2025.
Speaker Change: So we'll kind of tag-team this question, Manav. I mean, number one, clearly you're seeing the world, you know, reevaluate future investments and whether they're and operating of renewable diesel plants or construction of new plants.
Speaker Change: I mean, you saw it in BP, Shell, any now around the world.
Speaker Change: Clearly, NEST-A is having their challenges.
Speaker Change: that's been well-reported here. When you start to think of what's starting to hit the market here is not only some.
Speaker Change: some shuttering of capacity, but Nestae's offline now.
Speaker Change: and then with the transition from the BTC to the PTC.
Speaker Change: Clearly, you know, trying to make a cutoff time to be blended and sold.
Speaker Change: is now the clock's ticking, and that's what Bob was trying to allude to to Heather's question there is, we're in the midst of watching this change right now. You know, we're seeing California
Speaker Change: You know, physical gallon demand is very, very tight right now.
Speaker Change: And so, ultimately, you can see what's happening is as these imports are starting to slow down coming in.
Speaker Change: You know, you're seeing that in the rims. The LCFS, you know, with the limited number of obligated parties there and liquidity there, they're waiting for some clarity there, but I think you're within a week or so of having that.
Speaker Change: And then, you know, I just see this thing really starting to improve next year. Bob alluded to a billion gallons of imports. It was 527 million gallons through June.
Speaker Change: Clearly, it'll slow down a little bit here, the back half.
Speaker Change: And so you get a couple things that are tailwinds to Darling. One is if you're going to be profitable in this business, you've got to learn to run waste fats.
Speaker Change: And so far, the industry has it. Imports have slowed.
Speaker Change: of imported feedstocks into the country.
Speaker Change: That's a result of European changes now.
Speaker Change: and then also China taking back their feedstocks and processing themselves. So there's a lot of movement in the world. We were bringing up a lot of feedstock out of our operations in Brazil.
Speaker Change: The domestic market for biofuels in Brazil now is a premium to the U.S.
Speaker Change: So there's lots of different pieces that are happening here around the world that are setting the stage for 25. Bob, you want to add something to make me look smarter here?
Speaker Change: Yeah, look, I mean, I think if you just kind of take a snapshot of today, spot margins for biodiesel are somewhere in the neighborhood of 10 cents a gallon. And so if you take a lender's tax credit out of that.
Speaker Change: that that's negative 90 cents. As I said earlier, biodiesel needs to be produced in order to satisfy the mandate in 2025. So we need to migrate towards a positive biodiesel margin and as...
Speaker Change: as, you know, current indications around PTC are that biodiesel...
Speaker Change: made from soy, wouldn't be eligible for the PTC. So we need to see a pretty significant...
Speaker Change: Improvement in Margins.
Speaker Change: Otherwise, we won't have enough supply, and so to answer your question, Manav, yeah, as we get towards the end of the year, I think we expect to see idling of plants until or unless margins improve.
Speaker Change: I would say just to pile on, one thing to keep in mind is as we go into our SAF production, SAF production, that's one-for-one gallons of RD that will not be available on the market.
Manav Gupta: Perfect, my quick follow-up here is, you know, historically the feed segment margins could go in that 23 to 25 percent range. You're trending around that 21 percent, so any margin enhancement opportunities in 2025 as they relate to the feed segment.
Speaker Change: Yeah, I mean, clearly we're still improving our operations on the eastern shore. Clearly we're improving our procurement strategies in South America. And we're also focused on, you know,
Speaker Change: improving our procurement strategies on raw material in North America. That should start to translate through.
Speaker Change: and to what I'd say non-price.
Speaker Change: That would ultimately put us back into that 23-25% range. Anything you want to add, Matt? Like you say, Randy, it's spread management, it's fat prices, and it's also reliability and operations of the plant.
Speaker Change: Our next question comes from John Royale of J.P. Morgan. Go ahead, please.
John Royale: Hi, good morning. Thanks for taking my question.
John Royale: So, I was hoping you could update us on your expectations around the per-gallon profitability uplift from running SAF versus RD at DGD.
John Royale: And then what's baked into your 1.5 billion soft guide for 25 in terms of the contribution from staff?
Speaker Change: Yeah, I would say from a pricing and margin standpoint
Speaker Change: within our staff. That's not something that we're openly discussing. I would just say that the margins do meet or exceed our project economics that we have put into the project, and I don't look for that to change.
Speaker Change: Okay, thank you. And then I was hoping you could dig in a little bit on the imports you discussed that are dragging a bit on fat pricing relative to your expectation. Just any more color there, and do you expect that to continue or is that more of a transitory impact?
Speaker Change: Imports of fat or fuel or both?
Speaker Change: I believe the comment was on fats in your opener, but correct me if I'm wrong.
Speaker Change: Okay, so imports of biofuel have actually had a bigger impact on fat prices in North America than imports of waste oils and fats.
Speaker Change: just due to the fat volume equivalent.
Speaker Change: imports of biofuel we expect to significantly decrease in 2025 because those imports won't be eligible for a producer tax credit and so they're going to be less competitive so that should have a positive impact.
Speaker Change: As far as imports of used cooking oil and animal fats, it's really going to be supply and demand and price related, but there's really nothing that we believe will prevent those products from continuing to come to the market.
Speaker Change: Yeah, and ultimately, as you look now, you know, palm oil is now at a high of what since 2022.
Speaker Change: those AIPAC countries.
Speaker Change: You know, same thing we're seeing in Brazil right now as they move their mandate up.
Speaker Change: It's been a long time for several of us in this room to know when U.S. soybean oil has been competitive in the world market for export, but we are today. So that's what we're saying. The world is moving right now.
Speaker Change: You know, 30% of the globe's...
Speaker Change: Renewable fuels demand is supplied by veg oils globally.
Speaker Change: you will run waste fats. And so far, we're seeing some, we're seeing one of the West Coast guys try to operate on waste fats while the other one is not. So, you know, there's some changes happening right in front of us here.
Speaker Change: The next question comes from Andrew Strelzick of BMO. Go ahead, please.
Speaker Change: Hey, good morning. Thanks for taking the questions. The first one I just wanted to clarify...
Andrew Strelzick: Your comments are taking another stab at that around the framework for 2025. Does that, you know, one and a half billion that you articulated include a SAF uplift? I guess it doesn't really sound like it since it's the run rate that's implied for the fourth quarter. And is there an assumption on?
Andrew Strelzick: tax credits and how that's going to shake out.
Speaker Change: Yeah, you know Andrew that you know, the you know, the crystal ball, you know has a little bit of fog in it And in these that this early in the season right now, that's the reason we kind of threw the billion and a half out there
Speaker Change: Clearly, we think we're going to move out of November and December with some pretty good momentum here. How that translates through, whether it's feedstock pricing or whether it's margin and staff improvement in 2025, it's yet to see. We're just telling you that we see a much-improved...
Speaker Change: environment next year for cash generation and deleveraging and other opportunities that exist.
Speaker Change: Got it. Okay. That's very clear. And then...
Speaker Change: My other question, you know, you've talked about RD margins having improved a little bit.
Speaker Change: certainly you've got the SAFT tailwind for next year, but one of the things that we struggle with is kind of the capture rate relative to paper margins, you know, which by our math keep kind of moderating and so I guess
Speaker Change: Maybe my math is wrong, but you know, I guess what I'm what I'm asking is is there something in the recent or current market environment?
Speaker Change: that is limiting the ability to capture those paper margins, or maybe on the flip side as we go into kind of the, you know, a more favorable environment, is there the ability to increase that capture rate on kind of the base DGD margins going forward? Thanks.
Speaker Change: I mean, it's an academic question, and I understand it, and, you know, we track a paper margin every day, and when I look back, non-LCM,
Speaker Change: It averaged for Q3 around 45 cents a gallon, approximately, and without the LCM, we got about 80% of that.
Speaker Change: And so, you know, if you look at...
Speaker Change: The Daily Margin up and down. There's some pretty big valleys in there and and ultimately the way those Contracts work is when you know
Speaker Change: It's the bill of lading date of the vessel, the ship, the barge, the rail car, whatever you want to call it, the pipeline shipment. And some of them look back three days. Some of them look back seven days. And so, you know, it's always a timing issue. So trying to get it to match ratably is impossible.
Speaker Change: So, Bob, Matt, you guys.
Speaker Change: I would just say that it's fair to say that considering the plants and their size and scale, we have a constant book on the purchase side as well as the sales side, and those
Speaker Change: And on average, I would say one to two months long. And so the margins don't necessarily change by the tick in terms of what we actually achieve.
Speaker Change: Okay, our next question comes from Matthew Blair of Tudor Pickering Holt. Go ahead, please.
Matthew Blair: Thank you and good morning everyone. Could you talk a little bit about the market for RD exports?
Matthew Blair: You know, European RD margins are moving up in October here and the British Columbia LCFS pricing has really rebounded after some pretty weak numbers in July. Would you expect that RD exports would be a source of improvement in the fourth quarter versus the third quarter?
Speaker Change: Hey, good morning Matt Hewitt. So our approach is basically best economics.
Speaker Change: determines where we make our sales and so you're right we have seen an improvement in some of the export markets and that's one of the beautiful things about DTD and it's
Speaker Change: strategic locations on the Gulf Coast, so we can not only import very cost-effectively but also export very cost-effectively. So we're constantly in those markets, and if we have a better opportunity to export, then that's what we're going to do.
Speaker Change: Sounds good. And then...
Speaker Change: You know, I know your feedstock slate on the RD side is typically one-third fats, one-third
Speaker Change: corn oil, one-third used cooking oil. Was there any feedstock switching in the third quarter? There were certain points during the quarter where it looked like
Speaker Change: RD from soybean oil actually was pretty attractive due to cheap soybean oil prices. So, was there any unusual or atypical feedstock movements for DGD in the third quarter?
Speaker Change: Not out of the ordinary.
Speaker Change: Thank you.
Speaker Change: And those, that combination of one-third, one-third, one-third, I, we, it's not exactly, yeah, yeah, that's not exactly the true breakout. There's other products, but I would say that, but there was nothing out of the ordinary in the in the product mix. Yeah, we are way heavier animal and yuko based.
Speaker Change: both on availability, most importantly, on quality. And that's what drives it.
Speaker Change: Okay, our next question comes from Ryan Todd of Simmons Energy. Go ahead, please.
Ryan Todd: Thanks. Maybe a follow-up on the on the base business side and in particular the feed business. In the third quarter of the base business right now
Ryan Todd: running at a run rate of around 850 million dollars in annual EBITDA. I know you've typically talked about that as kind of a billion dollar a year business.
Ryan Todd: and the 4Q and 2025 guide certainly seem to suggest...
Ryan Todd: that kind of improvement so maybe how much improvement do you are you assuming to get to I mean are baked in that 4q number and to get back to the billion-dollar level I mean based on your sensitivities that's probably another
Ryan Todd: 12 to 13 set improvement in fat pricing. So, what have you seen quarterly today to give you confidence on?
Ryan Todd: You know, kind of getting to those levels because it seems a little more than what we can see on the screen right now.
Speaker Change: Yeah, volumes remain strong around the world. Operational improvements that are happening in North America and South America for us.
Speaker Change: As we said, palm oil is $1,000 a ton or nearly $0.50 a pound here.
Speaker Change: We're moving towards those prices now at many of our factories around the world. And that's a major improvement versus averaging 38 to 40 cents.
Speaker Change: in the first half of the year.
Speaker Change: So, that's the main driver is the slow but improving, as I call it, lagging feedstock prices out there as we move forward, Ryan. And then some improvement in the food business.
Speaker Change: and we'll just see how it flows through here at the end. Keep in mind that in Q1, that there was a $25 million prior year adjustment.
Ryan Todd: So, you know, that's really in our thinking, too. You know, the Q1, while it reported at 280, was really operationally at 305. So, you know, as we go forward, getting back to those mid-three-level numbers for us doesn't seem out of reach.
Speaker Change: Thanks. And then maybe a follow-up on the staff side. Any thoughts at a high level in terms of how you expect
Speaker Change: Do you look at the European market as a potentially higher-margined destination for your project, as you think about...
Speaker Change: you know, kind of export versus domestic demand.
Speaker Change: Looking into 2025 and thoughts on, you know, maybe like relative supply-demand into that market.
Speaker Change: Well, and I think we'll team this one. I mean, first off, you know, when we wake up in the morning, we're thinking of what's the best destination for our feedstock.
Speaker Change: and during 2024 was the first time in my career and probably in, I don't know I'd have history, that we saw European fat, cat 3 fat, move to the U.S.
Speaker Change: That doesn't happen. What's that a result of? That's a result of underperformance of the renewables sector.
Speaker Change: in Europe, whether that's RD or whether that's biodiesel.
Speaker Change: That is changing right now, although Nestea continues to have their operating problems, but it feels like that's changing now, and those fats are going to stay within the boundaries of the European continent.
Speaker Change: When you look then at South America, a lot of South America was headed up here, our plants. It's a great deal because it improves the margins of our rendering business down there. But now with the mandates that are happening down there, it's slowly being absorbed.
Speaker Change: as a premium to the U.S.
Speaker Change: And then the U.S., we're still waiting on the two big guys on the West Coast to...
Speaker Change: you know, consistently and even run, you know, waste fats, whether that's yuko or whether that's animal fats. And that should change things. I mean, clearly Geismar…
Speaker Change: should have the ability. They've been around nearly as long as we have, and so they've kind of mastered that. So really, at the end of the day, the feedstock situation should change here if you have the capability.
Speaker Change: On the outbound product side, as Matt said, it's a find the highest price market and sell it. Clearly, Neste is creating a lot of spot opportunities here.
Speaker Change: Whether it's in the continent or Canada or California for us right now So that that's given us the courage in the q4 here guys anything you want to add to that? I would just say that you know we're seeing demand increase all around the world the you know the natural
Speaker Change: supplier of that demand is product that's been imported into the United States.
Speaker Change: What we see in 2025 is a significant increase in demand in the United States for renewable diesel on a relative basis because of what's happening with overall supply and demand.
Speaker Change: If there are global opportunities, as Matt said, Diamond Green Diesel is well positioned to take advantage of those opportunities, but we're seeing a really attractive market in the United States in the next year.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Our next question comes from Ben Callow of Baird. Go ahead, please.
Ben Callow: Hey, good morning guys. Just on next year, like possibility of shuttering capacity, could you just talk about any kind of dynamics you think that people would run even at a loss in the marketplace and then I have a follow-up question.
Speaker Change: I mean those dynamics could exist certainly in biodiesel if there if it's an extension of a crush an O.C. crush business and crush margins are wide they could theoretically run at a slightly negative margin but
Speaker Change: slightly negative. We don't anticipate to see significant percentages of capacity running at large negative margins.
Speaker Change: at 5% biodiesel.
Speaker Change: But but you got to keep in mind that the RVO grows by 350-400 million gallons next year again That's a big number in itself
Speaker Change: So it's hard to see much shuddering. Really, if we kind of rewind the movie to the end of 23, every bet on the table was, well,
Speaker Change: and this is by all the sell-side guys, was that P66 and Martinez were going to run wide open and flood the market with RINs and product. Not happened.
Speaker Change: and we're starting to see that change. You know, while we don't share our book with us that we sell other folks, you know, we are only now starting to sell some waste fats out there to other people.
Speaker Change: You know, on the other side, there's still one of them out there that's only buying refined bleached soybean oil, and a lot of it's imported. And you've got to question the economics on it, because it involves paying a 19.1% duty.
Speaker Change: And so unless you're going to export that product, you don't get the duty drawback. So there are some people out here doing some what I'd say less than economic things.
Speaker Change: We hope that rational minds prevail, but ultimately I think you're going to see enough growth in the market and then enough...
Speaker Change: arbitrage from us meaning getting out of 250 gallons from you know RD to SAF and some other things you know Vertex is gone now that you know I we're setting up for a pretty good marketplace I see next year
Speaker Change: Thank you. Just on the SAF front, you know, we saw like the there's some loan guarantees, I think, announced and, you know, different pathways for SAF. How do you how do you envision the market evolving? Are we, you know, do you think we're going to be a period where we get to oversupply or what keeps us out of that? Thank you guys.
Speaker Change: The market for SAF demand could be up to 4 billion gallons, maybe more. So, it's quite a bit larger than any available production that's online today. Yeah, you know, Ben, this is Randy again, I mean, and, you know...
Speaker Change: The SAF market
Speaker Change: is developing, and our book is building out there, as we say. And the margins are what we earlier talked about.
Speaker Change: If you look at Europe today, it has a mandate in 2025, the obligated party.
Speaker Change: is the in-wing supplier or the oil company.
Speaker Change: but they don't have to be compliant until the end of 2025. So, a little bit of dragging of the feet there, but it's developing and ultimately, you know, you're seeing China now talk about an SAF mandate.
Speaker Change: You know, this thing, I think is, once again, what we believe is we've got an early mover advantage here.
Speaker Change: if it so warrants. But it's just gonna take a little bit of time here. Like we said, the plant is mechanically complete, it's commissioning, and we're optimistic we'll be fully operational in quality and spec here before the end of the year.
Speaker Change: Okay, our next question is from Jason Gabelman of TD Cohen. Go ahead, please.
Speaker Change: from the company and the implied cash generation. Can you just talk about that dynamic and if there's a change of distribution policy there? Thanks.
Speaker Change: Yeah, Jason, this is Brad. If you'll recall back, you may not, but back earlier in the year, we saw coming out of the holidays of 23,
Speaker Change: A slowdown, a backup in D.C. on payouts on the BTC, you know, back to parties, at least to Donna Green.
Speaker Change: and they were really two to three months behind.
Speaker Change: That
Speaker Change: That, once revenues came in, in the middle of May, I believe it was, into the IRS, as we internally anticipated, they started doing a real catch up.
Speaker Change: There was a really we got to the point during q3 where we really got more on on a normal course by the You know during the quarter on the BTC receipt so that that that had a big impact on
Speaker Change: I'll put it this way, we received multiple distributions during the third quarter. And we're still looking here at the end of the year, possibilities of additional distributions. We'll see how it turns out.
Speaker Change: That BTC catch-up is now complete though.
Speaker Change: Well, it's ongoing every month. They're pretty much caught up. I'll leave it at that.
Speaker Change: Okay. All right. Thanks.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Randall Stuewe for any closing remarks.
Randall Stuewe: Once again, thank you for all your questions. As always, if you have additional questions, reach out to Suann. Stay safe, have a great holiday season, and we look forward to talking to you again in the future.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.