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spk03: Good morning, and welcome to the Darling Ingredients, Inc. conference call to discuss the company's fourth quarter 2021 and fiscal year 2021 results. After the speaker's prepared remarks, there will be a question and answer period, and instructions to ask a question will be given at that time. Today's call is being recorded. And I would now like to turn the conference over to Ms. Sue Ann Guthrie. Please go ahead.
spk01: Thank you, Tom. Welcome to the Darling Ingredients Fourth Quarter and Fiscal Year 2021 Earnings Call. Participants this morning are Mr. Randall C. Stewie, 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 is a slide presentation available on the Investors page under 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 can materially differ because of factors discussed in yesterday's press release and the comments made during this conference call and in the risk factors section of our Form 10-K, 10-Q, and other reported filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. Now I would like to hand the call over to Randy.
spk09: Thanks, Sue Ann. Welcome to Darling, Sue Ann. So good morning, everybody, and thank you for joining us for our fourth quarter and fiscal 221 earnings call. 2021 was another record year for Darling Ingredients, and we carry solid momentum into 2022. We finished the year with combined adjusted EBITDA of $1.235 billion. Our global ingredients business had a record year with $851.4 million of adjusted EBITDA, and Diamond Green Diesel demand remains strong with 370 million gallons sold at an average EBITDA of $2.07 per gallon. We have sustained strong growth in our core business over the last four years, and we are poised for significant cash generation during 2023. At the end of December, we announced that we entered into a definitive agreement to acquire all the shares of Valley Proteins for $1.1 billion, plus or minus various closing adjustments. We estimate this acquisition will drive about $200 million in savings over the next three years and will be nicely accreted. We are currently awaiting government approval for the acquisition. Valley operates 18 major rendering and use cooking oil facilities throughout the southern, southeast, and mid-Atlantic regions of the U.S., and is primarily a poultry tonnage company, but has significant used cooking oil business, which will expand our ability to provide additional low CI feedstocks to fuel the growing demand for renewable diesel. As we've discussed in the past, our strategy is to continue to acquire low CI feedstock businesses that will de-risk and protect our supply chain, making us the number one and most efficient producer of renewable diesel in the world. Now, turning to DGG in more detail. it is producing a phenomenal return for all of us. While EBITDA per gallon is lower than last year, it is not unexpected, and I continue to be very optimistic. Our supply chain is unparalleled in the industry. We have tremendous tailwinds, demand should continue to grow as energy prices increase, and more states look to implement LCFS mandates. We ultimately believe LCFS prices and RIN prices will normalize and improve reflect the growing demand and realization of higher input costs no matter how you look at it dgd is well positioned in 2022 and beyond now moving to our fuel segment in europe on february 25th we closed on the acquisition of grupo optivec a leading organic waste and green energy company in belgium much like our strategy to grow low ci feedstock supply We have a bias that believes green energy in Europe will also provide superior returns and flexibility for our European assets. The biodigestion facility in Belgium currently has the capacity to produce 67 gigawatt hours per year of green electricity. Today, we're announcing a major capacity expansion, which will grow the renewable electricity production to 101 gigawatt hours annually. Coupled with our existing assets in Belgium and the Netherlands, Darling's total annual green energy production in Europe will be 163 gigawatt hours annually. Our feed ingredients business had an incredible year due to growing demand, global demand for fats and proteins, and a focus on decarbonization through the use of lower carbon intensity feedstocks. We ended the year with $613.7 million of adjusted EBITDA versus $317.8 in 2020. The capacity we added over the last five years positioned us well to handle this tremendous growth flawlessly. Food ingredients also had a strong year with 194.9 million of adjusted EBITDA versus 167.1 in 2020. Driven by strong demand for collagen peptides in the health and nutrition markets, this segment has been growing at a three-year compound annual growth rate of 14.5%. Our food segment remains an attractive growth vehicle for us and provides an earning stream that is resilient to commodity fluctuations. Our fuel segment also had a strong year with 483.1 million combined adjusted EBITDA versus 411.9 in 2020. This was primarily due to the DGD2 expansion, which came online in October of 2021. As the world drives towards decarbonization, Darling is at the forefront. We have set a goal to be net zero greenhouse gas emissions by 2050. We plan to submit a commitment letter to the science-based targets initiative by the end of 2022, committing to set a science-based 1.5 degree aligned greenhouse gas emissions reduction target. With support from our new ESG committee at the board level, I have no doubt we can achieve these targets. Additionally, we identified both short-term and long-term targets in our 2021 ESG report published last fall and are currently working on setting mid-term targets. As far as our short-term targets are concerned, we are investing in various capital improvements at our plants that will reduce our energy intensity. As for water, we are investing in a new state-of-the-art recovery system in our Ghent, Belgium, Rousselot factory that will reduce water consumption by nearly 46%. Additionally, we have begun an engineering study to evaluate water usage at some of our U.S. plants. We hope this work will provide us with a blueprint for best practices in water use and reuse and recycling in an effort to meet our short-term goals of reducing water withdrawal by 5% per unit versus our 2020 values. Now, you've heard me say that we are the original recycler. At our core, we help our customers have a positive impact on the climate. We have embarked on a journey to better tell our carbon handprint story, the solutions we provide to our customers that decrease their carbon footprint. For example, we produce meat and bone meal as an alternative soybean meal. This positively impacts land use change and carbon emissions. The carbon intensity of the renewable diesel produced at DGD is up to 85% less than fossil diesel. We play a critical role helping to protect the planet, creating better lives, and we can do so while providing our shareholders superior financial returns. With this, now I'd like to turn the call to Brad to take us through some financials. After that, I'll come back with a little outlook for 2022 and beyond.
spk04: Brad? Thanks, Randy. For comparison purposes, note that our fiscal 2020 results included an additional week of operations, which occurs every five to six years. In fiscal 2020, the additional week occurred in the fourth quarter and increased net sales and operating income by approximately $73 million and $8 million, respectively. Now, net income for the fourth quarter 2021 totaled $155.8 million, or $0.94 per diluted share, compared to net income of $44.7 million, or $0.27 per diluted share, for the 2020 fourth quarter. Net sales were $1.3 billion for the fourth quarter, 2021 as compared to $1 billion for the fourth quarter 2020. Net income for fiscal year 2021 was $650.9 million or $3.90 per diluted share compared to net income of $296.8 million or $1.78 per diluted share for fiscal 2020. Now, turning to operating income, we recorded $211 million for the fourth quarter 2021 compared to $74.4 million for the fourth quarter 2020. The primary contributors to the improved operating income was a $72.5 million increase in the gross margin, a $7 million increase in our portion of the earnings from Diamond Green Diesel, as well as lower depreciation, amortization, and SG&A. In addition, the fourth quarter of 2020 included a $38.2 million restructuring and asset impairment charge related to the closure of the biodiesel units. Operating income for fiscal year 2021 was $884.5 million as compared to $430.9 million for fiscal year 2020. The increase in operating income was primarily due to the gross margin increasing $358.9 million, a $36.5 million increase in our portion of the earnings from Diamond Green Diesel and a 33.8 million reduction in depreciation and amortization, which more than offset a 13 million increase in SG&A. As just mentioned, fiscal year 2020 included biodiesel restructuring and asset impairment charges. Interest expense declined 1.9 million for fourth quarter 2021 as compared to the 2020 fourth quarter and declined 10.6 million when comparing fiscal 2021 to fiscal 2020. The year-over-year decline was mainly due to a reduction in our term loan balance during the year, as well as lower amortization of deferred loan costs. Now turning to income taxes, the company recorded income tax expense of $164.1 million for fiscal 2021. The effective tax rate was 20%, and cash tax payments for 2021 were $46.4 million. For 2022, we are expecting the effective tax rate to remain about the same at 20% and cash taxes to increase to approximately 120 million. Our balance sheet remains strong with our total debt outstanding at the end of fiscal year 2021 at 1.46 billion and the bank covenant leverage ratio end of the year at 1.57 times. Capital expenditures totaled 82.4 million in Q4 and $274 million for full year 2021. The company also repurchased 167.7 million shares of common stock in fiscal 2021. Lastly, you will note we increased and extended our revolving credit facility from $1 billion to $1.5 billion and added a $400 million delayed draw term loan A, which was undrawn at year end 2021. Now I'll turn it back over to you, Randy.
spk09: Hey, thanks, Brad. I'd like to conclude with my thoughts on how I see 2022 shaping up. At the start of the call, I said we carry tremendous momentum into 2022. Our base business is currently operating at around 950 to 1 billion adjusted EBITDA. Depending on the timing of the close on Valley Proteins, we could well exceed the 1 billion adjusted EBITDA in our base business. Regarding DGD, diesel pricing is improving. RIN should react to the higher feedstock prices. and LCFS should improve as we go through the year. While the boilerplate capacity at DGD is currently 700 million gallons, we are seeing tremendous efficiency gains, and it wouldn't surprise me to see us exceed 750 million gallons for the year. Additionally, DGD is progressing well ahead of schedule with commissioning set for Q1 2023. Today, DGD margins are around $1.25 per gallon, but I believe we're going to see improvements as we move through the year. All that said, I'm forecasting combined adjusted EBITDA to be about $1.5 to $1.6 billion for the year. As we move through the year, I'll try to provide you with a narrower range. So with that, let's go ahead now and open it up to Q&A.
spk03: We'll now begin the question and answer session. If you'd like to join the question queue, press star, then 1. If you are using a speaker phone, please pick up your handset before you press any keys. If you'd like to remove yourself from the question queue, press star, then two. And the first question comes from Manav Gupta with Credit Suisse. Please go ahead.
spk11: Thanks, guys. My question here is that over the last six months, renewable diesel bears have floated the argument that LCFS prices are going to crash to $80 a ton and RINs will be massively oversupplied. Now, Chevron is one of the best dealmakers in the space. We saw that with the Nobel acquisition. Doesn't Chevron willing to buy Reggie tell us that over a longer term, renewable diesel fundamentals are going to be strong? And while margins may normalize, they'll still be healthy. So my question is, don't you think that betting against R&D producers, especially high-quality names like Darling, these bears are just being too myopic and ignoring that over longer term, carbon prices will actually move up and not down. World needs to decarbonize so the carbon price actually moves up and not down.
spk06: John, why don't you take that? Hey, thanks, Manav. Yeah, I think the place to start here is, And you said it. Chevron is obviously a large petroleum company in California. They know that market very well. So I think you certainly have to respect their views on how they see the carbon world going forward. There's absolutely no doubt about it that over the long term, the pattern and the direction has been set on this, and in the short and medium term as well. We are going to decarbonization policies. As we go to those decarbonization policies, the best short-term and medium-term alternative is to decarbonize. is renewable diesel and biofuels. That means we're in the right place at the right time. I think we obviously have all known that when we saw margins that were up in the $2 to $3 a gallon range, that that wasn't continued for a long period of time. Those margins are simply outsized. The reality is our strategy, and we had it out in front of everybody, was simply to substantially increase our volume at very low capital cost for the volume that we were increasing. So what have we done? We went from an operation that was selling 160 million gallons four years ago. Last year, we sold close to 270 million gallons the year before, 275. We're running at a 750 pace this year, and next year we're going to be at 1.2 billion gallons. It's interesting to me and to us, we see all of these announcements. And quite frankly, so many people in the industry have started to run a math exercise. Oh, this guy's announced. Oh, this capacity is going to be here. The reality is, who's the people that's actually building the substantial capacity today? And the name in the United States is one, Diamond Green Diesel. That's the one that's putting the real capacity online right now. Our project is real. And I think the more important point is this, and we've talked about this, but the message doesn't ever seem to get out there. The plants we're building are in the right place with the most flexibility to see different types of feedstock, with the ability to process different types of feedstock, and the ability to hit all of the different carbon markets because we tend to think of the carbon market as just California, but it's not. Oregon, Washington's coming online. New Mexico came within one vote of coming online. California, or New York is working on bringing an LCFS up. And currently, Canada is in the regulatory development phase on their LCFS. So we see massive developments of decarbonization occurring around the world. Diamond Green Diesel is positioned to hit every one of those markets, not just one market, but every one of those markets. So we've got the right machine, which means we're always going to be maximizing margins in this space. There's no doubt decarbonization is going to continue. That's going to create value. The other thing that I think that we are constantly amazed at is if you look at the renewable diesel producers in the world, there's only one that owns a substantial oil field, and that name is Darling. So as we've seen, as we've driven up fat prices in part as a response to the decarbonization policies that are developing around the world, we've benefited from that on the other side of our business. There's simply no other renewable diesel producer in the world that can say that. So we think the trend is clear. The short-term mathematical exercise of, oh, there's going to be too much capacity this month or that month, I think that misses the larger point. And the larger point is we're just massively well-positioned because we built ahead of this thing, and we've got the right assets in the right location with the right supply chain. Therefore, at the end of the day, we forecast and think that we'll be making more and more out of this, not less and less, as some seem to be implying over the last couple of months. Thank you.
spk11: I completely agree with your views.
spk13: Thanks, Manav. Thank you for taking the time.
spk03: The next question comes from Ben Bienvenu with Stevens. Please go ahead.
spk07: Hey, thanks. Good morning, everybody. Good morning, Ben. So I want to ask, starting on the expansion in DGD, and you know the potential to produce in excess of 750 million gallons, How should we be thinking about the build to that kind of new run rate? You know, 148 million gallons in the fourth quarter. I know, you know, you're ramping to capacity. Is that something we should expect to ramp through the year? And then just roughly taking a shot at it, kind of what do you think is a normal run rate capacity as you get to your full capacity level?
spk06: So in the first quarter here, we are doing a scheduled turnaround at Diamond Green Diesel 1. That's just being completed right now, and that unit should be coming back up here within a few days. Other than that, once Diamond Green Diesel 1 is back up and running, for the balance of the year, there is no ramp-up. We're running at that rate.
spk07: Okay, fair enough. On the core business... In the feed ingredients business, as we think about your ability to generate margin leverage, which clearly this business is running full speed, performing exceptionally well in what is a very tight global grain fats and oils environment. As you think about the ability to continue to realize operating leverage in this business, Are there inhibitors to price flow through to margin that we should be mindful of? And can you talk about kind of your view of S&D for fats, oils, proteins, and kind of the intermediate term as well? And then maybe kind of the two-, three-year view as well would be helpful. Thank you.
spk09: Wow. So, Ben, this is Randy. You know, we've lived through the lower times. We've lived through the higher times in these businesses, tailwinds and headwinds, as we refer to them. You know, we spent a lot of time repositioning this company, both from a capacity and a margin standpoint over the last three or four years, knowing that we were at the lower end, if not the bottom of the 10-year cycle. We talked about this being different than in the past, meaning that this was a demand-driven, you know, cycle, meaning the demand driven on price increases. Now you throw that with a little bit of hemispheric droughts. South America's bean crop getting smaller to a degree. It's dry here. Now you throw on a war on top of that, and you've kind of got the hyper super cycle here. So really kind of hard to clear the fog and the crystal ball today. But one thing's for sure, in 2022 and probably through 2023, we cannot bring on enough production around the world yet to fulfill the growing demand. Now, I think it's probably safe to say in some cases, the higher prices will ration some type of demand in different places. But food, for the most part around the world, is resilient to these type of inflationary pressures. So at the end of the day, I mean, we're seeing, you know, and John commented about it, not only at Diamond Green Diesel. Diamond Green Diesel is having really nice margins as far as a return on invested capital right now, while we're having really nice returns on invested capital with, you know, 70 to 75-cent fats, FOBR plants throughout the country and around Europe. And then proteins, if you say we have one weak sister in all of it, it's still kind of the mixed-species proteins, but they're starting to move up rapidly as soybean meal is becoming both tight and moving up in price around the world. I just don't see this thing backing off at all in 22 at this point, and I think 23 will carry forward with it. John, you got any other thoughts on?
spk06: Absolutely. I mean, you have to remember the basis of what was the foundation of the higher commodity prices, and that is a combination. It's not just biofuel programs. It is also the fact that we've had Fantastic GDPs around the world. All the nations of the world have incented their economies with strong fiscal stimulus. We also have the Chinese reconstituting half of the herd in China, which is 25% of all pigs in the world. As a result of that, we've taken the ending carryout for corn, soybeans, meal, oil, every commodity, including meat inventories around the world, down to just nothing. So the reality is if we keep with this strong demand to rebuild... the cushion that we need to be able to restabilize the commodity prices at a lower level, that's going to take a while. That's not going to happen overnight. So we think we're here for a while. The good news for Darling is we're making fabulous money in our base business, and we're continuing to make outstanding money in Diamond Green Diesel during this period of time. And I can't go back to this often enough. We made 370 million gallons last year. We should make around 750 million gallons this year. and we're going to make 1.2 billion gallons next year. That's a tremendous increase in volume in a profitable business that has a great return, and our production capacity is not now, not an announcement for some future date, as almost all the capacity that we're seeing announced is.
spk13: Yep, that's great. Okay, thanks. Best of luck.
spk03: The next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.
spk16: Yes, thank you. Good morning, everyone. Good morning, Adam. So I guess, Randy, first I want to just clarify some of the pieces of the outlook and just make sure that we're all on the same page. The $952 billion for the base business, was that inclusive of Valley or not?
spk09: I just wasn't immediately clear on how you framed it. That has a little bit of oop-de-beck in it, and that has zero valley in it. Got it. Okay.
spk16: And so within that, just from a commodity price perspective, is that kind of thinking about the business from obviously for two months through the year and taking the forward curves as they sit and applying that to the commodity values? So it's still a pretty backward-edged curve from the spot. Is that the base assumption in there?
spk09: Yeah. What I'm looking at, Adam, is clearly we just finished period two here yesterday or Saturday in our business here. So I saw January. I'm seeing the prices that were sold both in North America and Europe. And then I'm looking at what I'm seeing on the books for Q2. And I'm seeing some pretty significant increases from Q1 to Q2 in protein prices. And then really, fat prices will have traded in the 60s in Q1, and they're going to be in the 70s in Q2. And so that's what's driving the forward curve here for us, is really it's the forward fat prices that we're being able to lock in Q2 forward.
spk16: Okay. And then in your prepared remarks, you talked about Valley potentially garnering up to $200 million of savings over several years. I know the transaction hasn't closed yet, but would love to just dig in there and just help maybe if you could help frame kind of where the opportunities come for, for that kind of magnitude of savings. It's pretty significant relative to the purchase price and relative to what I would think the earnings base of the Valley kind of is coming in.
spk09: Yeah. I mean, it's a fair question. And obviously while we're, awaiting government approval. I want to be fairly guarded in my comments here. They're very nice, significant plants and factories on the East Coast and two in Texas and a wet pet plant up in Pennsylvania. You know, we look at all kinds of different things from yields to operating costs, all the above, to how we trade species-specific products. And really, at the end of the day, we kind of look at our margins, their margins, and and say over the course of three years, that's what we believe we can deliver to the shareholders. And it won't be easy by any means. I think the most important point is geographically, there aren't what I'm going to call just, you know, route synergies. In many of the bolt-on acquisitions we've done in the past, you know, we essentially are picking up at the same account or the same town, and we can eliminate lots of freight and lots of trucking costs. This one is just about really doing it the darling way. And it's a well-run company. That's all we acquire. We just think that as we have looked at our business over the last 10 years and what we've been able to do with how we operate factories, recover products, make specialty products, move them to different markets, that we will be able to bring Valley a little more opportunity than they've had in the past. I don't want to take anything away from the management team there by any means. I just think the world is really, really opportunistic for us once the government gives us clearance.
spk16: Okay.
spk13: Well, that's a really helpful caller. I'll pass it on. Thank you.
spk03: The next question comes from Ken Zaslow with Bank of Montreal. Please go ahead.
spk14: Hey, good morning, guys.
spk03: Morning, Ken.
spk14: Randy, you alluded to the fact that you think that RINs and LCFS credits will start to move higher. What are you seeing that makes you believe that? Do you think that imports are going to slow down? Do you think that the policies are going to kick in? How do you think about that? We're in the same view, but I'm just kind of figuring out what you think the key drivers are to see the RINs and LCFS credits starting to move in the right direction again.
spk06: Ken, this is John. So, I mean, part of the issue around the RENs is, of course, they have moved dramatically higher over the last several weeks. So it's not a thinking that they will. They have. We obviously see that, you know, the green premium, and that is in part the RENs, in part the LCFS, and in part the tax credit, that green premium has to be there to incent the production of renewable fuels. As we see the price of fat go up, quite frankly... You know, it's harder and harder for a lot, especially the more inefficient biofuel facilities to actually make any money. So that green premium needs to suffice to be able to create the demand or create the supply to meet the demand. We were also extremely encouraged. Others were not, but we were by what the EPA did with her proposed RBOs. They obviously had to correct the fact that they had established some RBOs prior to the pandemic and gasoline and diesel consumption was down. But if you look at what they did, they said, listen, we're not going to do the SREs, which had been the real killer to RINs pricing going forward. And they said, you know, we're going to stabilize the RINs for what actually occurred in the U.S. economy in 20 and 21. But in 22, then they leapfrogged forward the demand and sent a clear signal that the Biden administration is going to push ways that decarbonize the economy. That's good for the U.S. farm community as well. And I think we're going to see that pattern continue. The LCFS market, again, has been heavily influenced by the fact that anytime anybody comes out and says, God, I'm building a brand new renewable diesel facility, then all of a sudden everybody puts out a recast S&D on how much volume there's going to be going to California under the LCFS. I hate to say this, but some of these announcements are laughable in what they are. There's going to be some real competition coming on. Don't get me wrong. But the reality is the only major capacity that's being currently built in the United States and it's going to be online in the next 12 to 18 months, the name is Diamond Green Diesel. The others are all well out in the future. And we know that CARB is looking to move forward or is discussing moving forward with higher standards as we move 25 and beyond. Canada is going to be coming online soon. Obviously, Washington's in the process of setting their regulatory framework up around it. New Mexico came very close to an LCFS program. And New York is going through the mapping stages on a regulatory implementation of an LCFS. So we just think the overall demand situation looks really, really, really good. That doesn't mean in the short term that the LCFS credit is not going to go from 150 to 130 or 150 to 170. We're obsessing too much on simply mathematical exercises here. and missing the larger picture of what's actually happening in the marketplace. And it's pretty obvious what's happening. And I think Chevron just put a giant stamp on what's happening in this segment on Monday of this week.
spk14: So what do you think the CARB options are to do in terms of what they might do? There seems to be some news and thoughts that they might change or enhance the California policy. Have you guys put together some thoughts of what direction it's going to go in? I know they increased it January 1st just from a procedural point of view, but it sounds like there's more to come. Do you guys have some thoughts on how that's going to develop and how positive that's going to be for you guys?
spk06: Yeah. You know what's really interesting about this? We don't view the LCFS going from $200 to $150 as a bad thing. What has CARB just learned out of this exercise? They've learned that they could dramatically reduce carbon emissions in the state of California without it being a massive expense to the California consumer. The reality is what that does is it positions them to increase those targets 2025 and forward to much higher levels. We are ecstatic that the market has developed this way because, quite frankly, this is going to drive much larger demand for low-carbon fuels going forward in the marketplace. So, yeah, absolutely. You know, what's the state of California wanting to do? They want to decarbonize their transportation system. The fact of the matter, LCFS has been a massive success for them. They've managed to create tremendous amount of additional credits. and the consumer in California is not having to pay nearly as high a price as we once feared. Remember, three years ago, we were all afraid that we were going to be at the cap and above under the LCFS. We worried about that because we thought that would be terrible long-term for the program. This thing is developing exactly as we would want it to have developed for the long-term development of the growth in California and elsewhere because what's every other state and every other region that's seen the LCFS? They're saying that they can implement low-carbon standards and do it in an economical fashion for their consumers. That's a great message.
spk14: And my last question is, when I think about the Chevron deal for renewable energy, can you give us – and I know this is probably a simple question, but I'd like to hear it a little bit more from you guys. How do you compare your business model to Reggie's? in terms of your profitability, the way you operate, how you think about it, because it seems like this would create a floor for value, not a comp. How do you think about that? And I'll leave it there, and I appreciate your time as always.
spk09: Yeah, way to lob one in there, Ken. I just use one word. You're a smart guy. We're significantly undervalued and underappreciated. So I'll turn this over to John now.
spk06: So if you want to compare us, Reggie's a great company. I'm not going to say anything negative about them. They do a phenomenal job. They make somewhere around 90, I think their information says about 90 million gallons of renewable diesel today. For this year, we'll produce around 750 million gallons of renewable diesel. Next year, we'll produce 1.2 billion gallons of renewable diesel. Reggie will produce 90 million gallons of renewable diesel, and their total biofuels, including biodiesel, will be somewhere around 700 million gallons. and will be 1.2 billion gallons of renewable diesel, which we think is a good technology moving forward in the biofuel space. In addition to that, and we've seen that in the results in our base business, as the low-carbon policies have driven a preference for fats that produce low-carbon fuels, we've seen an increase in the price of those low-carbon fats. We're positioned as an oil field to supply those low-carbon fats to the biofuel world. Again, I go back, we're the only renewable diesel company in the world that has both excellently located and rapidly expanding renewable diesel capacity and the oil field of low carbon fats. Nobody else has that. So when you compare like door A, B, and C in this place, it looks to us like we've got an excellent position in the marketplace.
spk13: Thank you guys very much. The next question comes from Tom Palmer with JP Morgan. Please go ahead.
spk02: Good morning, and thank you for the questions. Morning, Tom. Last year, you gave some helpful detail on expected EBITDA contribution on a segment basis. If we look at the $950 to $1 billion guidance in the base business, how should we be thinking about contribution from the food segment and fuel segments?
spk09: Yeah, I don't have those numbers in front of me. More than happy to think through that and try. We typically want to put those ranges out as we see the year go on here is what I'd say. Where I'm just doing it is benchmarking the $8.50 last year and the higher fat prices that we see running at this time. Remember, I'm only 30 days into the year here. Clearly, the feed segment is going to move up because of the higher fat prices. I'm watching Q1 and Q2. Protein prices move up 70 to $100 a ton through our system. Fat prices up 10 to 14 cents a pound as we move through the year. But remember, that's versus 50 cents last year. It's not hard to sit there and look at this and say a billion could be really light if these fat prices hold where they're at right now, which we tend to believe they will. Little color on the food segment. You know, we are just continuing to ramp up our collagen peptide business. You know, our demand from our customer base is still accelerating in the high single digits. Margins on that versus some of the commodity products that we made in the Russolo brand division, you know, are being replaced with higher margins. So, you know, we put up 198. I think, you know, I look back at Brad, and that was always we were kind of 130 to 140 margins. in the food segment, and then we started bringing on the peptide business. And, you know, now we're looking at that business should be, you know, well into the mid-200s here within a year or two as we bring on additional peptide capacity. The fuel segment, obviously, you know, Oopdebeck is going to help us grow there. That was just a very timely acquisition for us. It gives us lots of opportunity to arbitrage plate waste and different waste streams in Europe into biodigestion. And we're going to expand it out pretty nicely. And where green electricity prices are in Europe today, driven by the challenges in the Ukraine, I mean, that is a very, very positive accretive acquisition for us. You know, DGD, you know, simple said, $7.50 times a buck and a quarter, half of that flows, $4.61 or whatever the number is, flows right back into the fuel segment. So a full year at $7.51. know versus what we made 370 last year so the fuel segment will be up and that's where you get into that billion five billion six range and we'll we'll try to put some ranges out there as we uh move to the uh the q1 call in may for you to help you oh great thank you um and then just to follow up on dgd i know um in past quarters there there's been some discussion of of kind of when we might see distributions
spk02: flow through just given the elevated level of CapEx that we're seeing to get Port Arthur built. I mean, is this mainly a 2023 event at this point? Is there still the possibility of some distribution starting to flow through come later in 2022? Thanks.
spk04: Yeah, Tom, this is Brad. I guess I would never say never on this year, but you kind of prefaced it pretty well. I mean, with the acceleration, which is looking, you know, continues to look very, very positive. The spend being pushed back here in 2022, I guess the way I'd put it is never say never on some dividends. If we did, it'd be very late in the year and not really extremely sizable or material. You get into 2023, really almost no matter where the margins are, if there is a margin, we're looking at from there and beyond hundreds of millions of dollars in dividends. from there on out with the JV debt-free coming out of the construction.
spk09: Yeah, and I think, Brad, in 2023, that it just really absolutely, even at $1.25 a gallon, gets extremely sizable. And the JV will be debt-free coming out of 22 here.
spk06: And if I can just add, I want to make sure we're clear. We are at or below our cost estimate for Diamond Green Diesel 3 at this point in time. The only thing that's happened is we've been able to accelerate the project so that a little more dollars have had to been spent in 22. That obviously is one of the reasons why we don't really see at this point in time large significant dividends in 22. But all that means is we're done with our capital in 22. So when we get to 23, you know, we're largely dividending what we make, right, except for maintenance capital that we need in the business.
spk02: Great. Thanks for the call, guys.
spk03: The next question comes from Matthew Blair with Tudor Pickering Holt. Please go ahead.
spk12: Hey, good morning, everyone. I wanted to ask about the seeds segment. Your FAS and UCO revenue were extremely strong. I think FAS revenue was up 20% quarter-over-quarter, UCO revenue up 60% quarter-over-quarter. I was hoping you could just provide a few more details here. How much of this was pricing? How much was volume? How much was seasonality? And, you know, can you hold on to these levels into 2022? Thanks.
spk04: The only thing, what I would give color on there, Matt, would be really as we've talked about sensitivity on fat prices. I mean, that's kind of bigger picture this last year. I'd say what we put out last year, Years ago, several years ago, with John Muse and the sensitivity that we did on the business, it still pretty much holds water today when you look back at 22 and where a lot of the pickup that Randy's been talking about this morning is. And that bears out, and those prices are up here as we've entered into 22. I'm sorry, those bared out in 21. And that momentum's here in 22 and 21.
spk09: Yeah, and I think, Matt, part of its volume, we've seen a strong, you know, the rendering volumes around the world remain extremely strong. The UCO volumes kind of, you know, up and down, pretty strong fourth quarter with a lot of reopenings going on. So, you know, but, you know, remember, people love to talk UCO. It's a material contributor in the sense of earnings, but volume doesn't move around. None of our volumes move around much. So, It really is a price-driven event here of how we've got the procurement formulas written on this material.
spk12: Do you think, are the UCO volumes back to normal with restaurants reopening, or do you still see some upside there?
spk06: Yeah, this is John. Not quite back to where we were pre-COVID, but getting pretty close. as we continue to see the reopening of the economies of the United States and Canada.
spk09: I mean, clearly New York, the Northeast, is really dragging its feet to come back to where it was.
spk12: Got it. And then finally, the guidance of $1.25 EBITDA margins for DGD this year, I guess I'm just trying to think through that. We have had a pretty significant increase in diesel prices. You have expectations of higher RINs, higher LCFS moving forward. You just put up, I think, $1.14 in Q4. So I guess is the way that we should think about that, that just you're expecting higher feed costs to sap out most of the gains from higher diesel and LCFS as we progress through the year?
spk09: You know, I'll take a stab, and John and Sandy can also. I mean, we're throwing, you know, if you think of the first five years that Diamond Green Diesel operated, it operated $1.26 a gallon. The next four or five here, $2.26 a gallon, and then last year down to $2.07. We're being conservative as we step out front here. We're seeing feedstock prices run up, you know, rapidly. I think the bid delivered Diamond Green Diesel today is nearly $0.80 a pound today. You know, we've never seen that. So we're trying to be a little bit conservative out there. We have our fundamental beliefs. We don't share your view, Matthew, on carbon pricing. We're bullish carbon pricing. I think the Chevron investment once again supports that. And at the end of the day, we think that things, remember, we brought on, you know, 400 million gallons of new capacity, you know, 90 days ago, and it's at capacity sold out. We didn't really move the markets. You know, we didn't trash RIMS. We didn't trash the LCFS. It just quietly got absorbed. And so now the markets are normalizing to the new higher, you know, levels of demand in California. We've seen some sluggishness, which you would expect in Europe on demand due to, you know, lots of different things from the pandemic now to war. but the world's picking up. Sandy, anything you want to add there?
spk10: Yeah, I think what you said, you know, things are going to ebb and flow based upon what's going on in the world, you know, whether that's due to weather events or supply chain events or political events or supply and demand events. You know, I think what John had mentioned earlier is the key point with regard to DGD is that, you know, whether the margin is $2.25 or $1.25, At the end of the day, we're producing more gallons here. So at $7.50 and $1.25, that's $938 million that we would be producing for DGD, and we're earning more money in our base business. And then starting next year, we'll have 1.2 billion gallons. And if it stays at $1.25, if it doesn't go up beyond there, that's $1.5 billion. So we're making a ton more EBITDA. And so, and throw on top of that, too, that even at a lower margin per gallon, and if that goes up, it's even higher, but DGD is one of the highest returns in the ag and the energy world business. And so I think it's just a great business.
spk13: Thanks for all the helpful comments.
spk03: The next question comes from Craig Irwin with Roth Capital Partners.
spk15: Please go ahead. Good morning, and thanks for taking my questions. I should start by saying, you know, really congratulations on this impeccable execution over at Diamond Green. Thanks, Craig. Can you talk a little bit more about the new capabilities that came online at DGD2? You had some new technologies you adopted there that allows you to produce some green gasoline. get you that much closer to sustainable aviation fuel. Lots of other companies out there are talking about SAF. Very few are actually doing it yet. How's the market development coming for these new products? What are you learning as you offer this out there? You know, how real do you see these markets for Diamond Green over the next couple years?
spk10: Yeah, so this is Sandy. I think, you know, what we see is we see the SAF market still, it's in its infancy stage. It's still trying to develop. You know, we've talked about this a number of times, is that really to incent it, what we need is we need more mandates. We need more incentives. Build Back Better did provide for one of those, an SAF tax credit. And while that seems to be stalled, at least temporarily, what we're hearing, is that that may get broken up into smaller bills. One might have a climate focus, and we would expect that SAF would be a part of that. I think that that, along with the mandates that are being proposed in Europe, are going to be huge triggers in terms of that. Obviously, SAF is something that we want to be a part of if the economics make sense. And we do think that it is going to develop, and it will happen eventually over time. It's just you know, when it's going to happen.
spk15: I understand.
spk06: But I should add, I should add, we're ready. We have the technology ready to go. When the economics are right, we know how we build it. We know approximately how much it will cost. And so when we get the economics right, we are ready to actually start to produce real SAF gallons. Again, there are a lot of pretend SAF announcements out there, a lot of folks that will never produce. selling to a lot of folks that will never buy because it was never produced. But the reality is when the economics are right, we're going to be in a position to move and move quickly because we're prepared to do so.
spk15: Thank you. So my second question is really your view on sort of the market self-regulation. You did discuss before in response to some of the other questions the way you see RINs and carbon prices normalizing. Historically, when the market goes through a period of volatility, the smaller biodiesels get squeezed out first. The guys with little five and 10 million gallon plants running on soy oil or canola oil. And that really tends to set a bottom in the market. Since we have had the Blander's credit and a fairly nice rent environment, those guys have taken a little bit longer to come out. But did you maybe see or can you share anecdotally with us whether or not you saw substantial capacity come offline over the last number of months with the pressures on these little plants that face tricky economics in periods of volatility.
spk09: John, Sandy, you want to take a shot at this?
spk10: You know, I would say that we probably don't pay a ton of attention to whether or not an individual biodiesel facility is online. are offline. I think what we're more focused on is we're focused on, you know, what's important to us. And we've always said that we've created, you know, a really unique machine in terms of Diamond Green Diesel that's going to be able to, you know, out-compete any facility, whether that's biodiesel or renewable diesel. John had mentioned before, you know, we really have superior logistics. So we built our facilities, you know, in the Gulf of Mexico where agricultural products generally funnel into. Those also are great in terms of outbound logistics because they can basically transport all over the world. We can transport from our facilities. We have multiple capabilities. We can transport by rail. We can transport by water. We can transport by pipeline. And so we have just significant logistical capabilities We also have pretreatment capabilities, which differentiate us. And that allows us to run the cheapest, most economical feedstocks. And then we also have access to feedstocks through our partners. And John's been mentioning that throughout the conversation today. And I think one of the things that we don't talk about, and we haven't yet talked about on this call, is that we've seen a lot of other renewable diesel type projects want to emulate that supply chain. And so they've gone out and they've tried to contract for long-term supply agreements. And DGD is really different in this respect because while its partners have feedstocks and it has access to feedstocks, we don't have any minimum take requirements and we are not tied into any one feedstock. We have the complete capability of to optimize and arbitrage our feedstocks on a day-to-day basis. And that makes us totally unique. So not only do we have it, but we can arbitrage around it. And so while, yes, there are many more projects that are going to be built, like DGD, there may be other biodiesel facilities out there, what we've been focused on and what we feel confident on is really our capability to compete.
spk15: Thank you for that. Congrats again on strong execution.
spk03: The next question comes from Ben Calo with Baird. Please go ahead.
spk00: Hey, guys. Congrats on the quarter. Just going back to when Valero talked in their conference call, they talked about maybe having, I think, switching feedstock to maybe more soy oil. Maybe I got that wrong, but could you just tell us about the flexibility there at Diamond Green and what that means for the core business?
spk10: Yeah, so I think we have the capability to not only process crude to dumps soybean oil, but also RBD soybean oil. And on any day, what we're going to be doing is we're going to be looking at the economics of what is the cheapest given the CI benefit of that. And we have complete flexibility to process any of those. And we would process soybean oil if it is the most economic. Absolutely.
spk09: Yeah, Ben, this is Randy. I think I'll decode for you what Sandy just said. You know, typically in the Jan-Feb window, you will see the food service business really kind of fall off of the new year. So we saw animal fats in Yuko run up into the 70s in Jan Feb, and we saw RBD soybean oil trade sub-carbon intensity equivalency. So as Sandy said, we can arbitrage around, and we did, and there were no secrets out there to maximize margins. So it's real, it's flexible, it's quick, and we're very agile down there.
spk00: And Neste has a couple turnarounds, I think one Q3, one Q4. Does that impact the market? And then how about you guys just for your turnarounds?
spk06: Well, I mean, obviously, you know, turnarounds are a regular part of being in this business. As that happens, that's going to reduce the supply that comes from individual facilities over a period of time. And if you look around the world, the reality is, There are only a limited number of significant production facilities around the world. Having any one of those down at one point in time is going to have an impact on the supply that's available during that period of time. But this is a regular thing that's going to happen every year in the business. One of us or two of us are going to be involved in some type of turnarounds at one or two of our units. It's just normal course of the run business.
spk09: Yeah, I mean 18 to 20 days offline doesn't change the global S&D because once your catalyst is fresh, you can run a little faster again.
spk00: And how should we think about just the debt level there at the JV and going forward? Thank you, guys.
spk04: Yeah, this is Brad again. So the debt level, we have had some contributions here in Q4. They're toward the end of the year and a little bit right after the first of the year. And that was, again, due to the downtime from the hurricane and Starting up in the process of starting up number two with working capital. And so as we come out of that and with the acceleration that we talked about earlier. So coming out of that and where it's running now, we'll see as we go through the year that debt level come down. As I said before, we expect when DGD3 is completed, the JV to be debt free. Thank you.
spk03: The next question comes from Bill Baldwin with Baldwin Anthony Securities. Please go ahead.
spk05: Yeah, good morning. I just want to say what an insightful job you all have done in your core business the last several years. Execution has been unbelievable here. So good job. Just wanted to ask on the Diamond Green Diesel project, What would be kind of the expected level of maintenance capex on that facility? As we look at it this year and then going out with the Port Arthur coming on, how should we look at that for maintenance capex?
spk10: Right. So I think if you're talking maintenance capex, it will depend on what type of turnaround we're doing. And that's probably $30 to $50 million. Now, we have two units online. We will have one that is going through a catalyst change out right now. In future years, you know, the second facility is a little bit more, but it is not scheduled to have a catalyst change out this year. So I think you're probably, in terms of maintenance, close to 30.
spk05: Thank you.
spk06: I think one of the things, just to add to that, one of the things is we've designed Diamond Green Diesel 2 and Diamond Green Diesel 3 is these are facilities that will have significantly greater catalyst loading capability. Our hope is that we will significantly lengthen the period of time between turnarounds, which if we're able to accomplish that, will mean significantly greater production over a two- to three-year period of time and obviously less capital associated with turnaround times or with turnarounds.
spk05: Thank you, John.
spk13: Thanks, Bill.
spk03: This concludes our question and answer session. I'll turn the conference back over to Randy Stewie for any closing comments.
spk09: Thanks again, everybody. Appreciate everyone's time today. Hope you stay safe and healthy. We've got a busy March coming up, doing lots of conferences. There's a list of upcoming events in our presentation that Sue Ann provided with the column. We look forward to hearing and seeing you guys all very soon. Thanks again.
spk03: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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