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spk02: Good morning and welcome to the Darling Ingredients Incorporated conference call to discuss the company's third quarter 2022 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. I would now like to turn the call over to Ms. Sue Ann Guthrie. Please go ahead.
spk09: Good morning and thank you for joining the Darling Ingredients third quarter 2022 earnings call. Here with me today 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's a slide presentation available on the investors page under the events and presentations on our corporate website. During this call, we will be making forward-looking statements, which are predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results can materially differ because of factors discussed in yesterday's press release and the comments made during this conference call and the risk factor section of our Form 10-K, 10-Q, and other reported filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. Now I will turn the call over to Randy.
spk01: Thanks, Joanne. Good morning, everybody, and thanks for joining us for our third quarter 2022 earnings call. Darling Ingredients reported a strong third quarter financial result. This was created by more than 14,000 employees around the globe. I'm so proud of the Darling Ingredients family, particularly those who are new to us from Ooptabek, Valley Proteins, and the Faza Group. In August, I took our board of directors to visit several of our new facilities that came with the Valley Proteins acquisition. I cannot be more proud of the dedication, pride, and transparency I saw from our new Darling employees as they work hard to integrate into our business. A few weeks ago, I was at our new Ooptabek facility in Belgium, the green energy facility we acquired last spring. I was able to see firsthand the ingenuity, the entrepreneurship, and commitment from our new employees, and it's truly remarkable. While I have not yet had the chance to personally see our new employees at the Faza Group in Brazil, I know how hard they are working as we bring our businesses together. The success of our company begins with our people. As I made my way to many of our factories across the U.S. and Europe this summer, I saw a tremendous amount of energy from our employees who are constantly looking for ways to make our company safer, our plants more efficient, better for the environment, and ultimately more profitable. I can absolutely say our team now understands their role in an evolving ESG world. Now, turning to the third quarter. Extremely hot weather in North America, escalating energy prices in Europe, a one-time inventory step-up charge from the FAS acquisition, and foreign currency translations impacted our base earnings this quarter. Our global ingredients business came in at $274.4 million in EBITDA. The feed ingredients segment ended the quarter at $198.6 million. Our specialty food ingredients segment had another record quarter, posting $68.2 million in EBITDA. And our fuel segment earned $143.4 for the third quarter, with $120.3 coming from Diamond Green Diesel. Turning to the feed ingredients segment, globally, raw material volumes were up 39.6% quarter over quarter and 21.8% year to date. Summer heat and regional droughts made raw material quality a challenge and processing difficult. The results were lower grade fats with DGD not ready to accept, and these fats had to be discounted to be sold in North America. However, both domestic and export demand for North American and European proteins was exceptional in the third quarter. We continue to see strong export demand for our Brazilian and European fats as demand for low carbon intensity feedstock for renewable diesel continues to grow. Container availability improved in the third quarter and is expected to continue to improve in the fourth quarter. Energy costs in Europe continue to be challenging, more than doubling year over year. However, we have made raw material procurement adjustments and have recovered 85% to 90% of these costs now going into fourth quarter. Valley protein facilities struggled during the quarter. As we have openly discussed, we are making progress bringing these facilities up to our standards But converting from a run-to-fail mode will take a bit of time. Summer was brutal. Ultimately, as we bridged the margin variance in the feed segment, it was valley proteins, plants, animal fat price discounts, foreign exchange, and the FASA inventory step-up. All of this is behind us going into fourth quarter. On November 2nd, we announced that we entered into a definitive agreement to purchase the Polish rendering company Mirapaz Group for approximately 110 million euros. Mirapaz processes around 250,000 metric tons annually through three large poultry rendering plants in southeast Poland and has around 225 employees. The acquisition will provide a nice bolt-on to our existing three plants in central and western Poland and displays our commitment toward building out our global supply of low-carbon feedstocks as global demand for low-carbon intensity renewable diesel continues to grow. Our specialty food ingredients segment had another record quarter, earning $68.2 million in EBITDA. Our continued product mix shift from gelatin to collagen peptides helped drive margin and EBITDA improvements. We are very encouraged about the future growth in our food ingredients business. We expect the collagen peptides market to double in the next five years. We have additional collagen capacity coming online in early 2023. If you reference the chart in our earnings slide deck, you will see a performance in the food segment that tells the story of why we are growing with our global customers in the peptide space. On October 18th, we announced that we entered into a definitive agreement to acquire all the shares of Gelnex, a leading global producer of collagen products for approximately $1.2 billion in cash. Headquartered in Brazil, Gelnex has six facilities, four in Brazil, one in Paraguay, and one in Portage, Indiana in the USA. with a capacity of around 46,000 metric tons to produce gelatin and collagen peptide products. Gelnex is a very well-run business and will increase our production capacity for grass-fed bovine collagen in South America. When this acquisition is completed, most likely in the first quarter of 2023, Darling Ingredients will operate 17 state-of-the-art collagen facilities on our four continents around the world. Now, moving to our fuel segment. We saw strong volumes this summer from our European brand, Remdac, which collects fallen animal stock and converts it into green energy. In our food waste to energy business, expansion plans at our newest green energy facility, Ooptabek, are now underway. On October 31, we closed the acquisition of Jejong Recycling, a collector and trader of organic waste based in the Netherlands. This strategic acquisition provides Darling Ingredients with additional feedstock for its four biogas plants in the Netherlands and Belgium. Our green energy business in Europe is delivering as planned, and we continue to believe in green energy in Europe, and it will provide superior returns and help diversify our European assets. In the third quarter of 2022, Diamond Green Diesel sold 190 million gallons of renewable diesel and recorded $1.26 per gallon in EBITDA. Year-to-date, the joint venture has sold 545.5 million gallons of renewable diesel at $1.09 average EBITDA. Now, we have begun commissioning the unit at Diamond Green Diesel III in Port Arthur, Texas. The catalyst is loaded, and we expect to be online in mid-November with a ramp-up to capacity shortly thereafter. For the full year, we are forecasting approximately 800 million gallons of renewable diesel to be sold at Diamond Green Diesel I, II, and III, and are estimating $1.10 EBITDA for the final part of the full year. Now, with that, I'd like to turn it over to Brad to take us through the basics on financials, and I'll come back and talk about our outlook for 2022 and beyond. Brad?
spk04: Thanks, Randy. Net income for the third quarter 2022 totaled $191 million, or $1.17 per diluted share, compared to net income of $146.8 million, or $0.88 per diluted share, for the 2021 third quarter. net sales were 1.75 billion for the third quarter 2022 as compared to 1.19 billion for the third quarter 2021 or 47.4 percent increase in net sales operating income increased 30.4 percent to 268.3 million for the third quarter of 2022 compared to 205.7 million for the third quarter of 2021 primarily due to a 50 million increase in the gross margin from our global ingredients business and a $49.5 million increase in Darling's share of Diamond Green diesel earnings. SG&A increased $7.8 million quarter-over-quarter, and depreciation and amortization increased $27.2 million due to the FASA and Valley Proteins acquisitions. In the third quarter of 2022, we incurred $4.5 million in acquisition and integration costs, primarily related to our acquisitions of Wootenbeck, Valley Proteins, and FASA, as well as the previously announced pending Gelnex acquisition. During the third quarter of 2022, the euro weakened against the U.S. dollar as compared to the third quarter of 2021. The foreign currency exchange impact for Q3 was approximately negative 18.4 million, using an average rate assumption of 1.01 in Q3 2022 as compared to the average rates of Q3 2021. 2021 of 1.18. For the nine months ended October 1, 2022, the foreign currency exchange impact was approximately negative 41.6 million using an average rate 1.06 compared to an average rate of 1.20 for the nine months ended October 1, 2021. Interest expense increased 24.4 million in the third quarter of 2022 as compared to the third quarter of 2021. 21, primarily due to increased debt. We also incurred a $2.5 million charge due to a fire at our Tacoma rendering facility. Now, turning to income taxes, the company recorded income tax expense of $35.2 million for the three months ended October 1, 2022. The effective tax rate is 15.5%, which differs from the federal statutory rate of 21%, due primarily to biofuel tax incentives and the relative mix of earnings among jurisdictions with different tax rates. For the nine months ended October 1, 2022, the company recorded income tax expense of $108.6 million and an effective tax rate of 15.6%. The company also paid $88.9 million of income taxes as of the end of the third quarter. For 2022 full year, we are projecting an effective tax rate of 18% and cash taxes of approximately $25 million to be paid the remainder of this year. On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which includes a new 15% alternative minimum tax based upon book income, a 1% excise tax on stock buybacks, and tax incentives for energy and climate initiatives, among other provisions. The provisions of the IRA are generally effective for periods after December 31, 2022, with no immediate impact to our income tax provision or net deferred tax assets. We do not currently expect the new book minimum tax and or excise tax on stock buybacks to have a material impact on our future financial results. The blender tax credits, which are refundable excise tax credits, have been extended two years through December 31, 2024. After 2024, the Clean Fuels Production Credit, a non-refundable income tax credit, becomes effective from 2025 through 2027. We are assessing these tax incentives, which can materially change our pre-tax or after-tax amounts and impact our tax rates in future years. We'll continue to evaluate the applicability and effect of the IRA as more guidance is issued. Now, turning to debt, the company's total debt outstanding at the end of the third quarter 2022 was $3.28 billion as compared to $2.91 billion at the end of the second quarter. Our bank covenant leverage ratio ended the quarter at 2.48 times. The increase in debt in the third quarter was primarily a result of the acquisition of the FASA Group. We continue to maintain strong liquidity with $1.35 billion available on our revolving credit facility as of quarter end October 1. Capital expenditures totaled $105.6 million in the third quarter and $257.1 million year-to-date. We received a $90.5 million cash dividend from the Diamond Green Diesel joint venture during the third quarter. The company also repurchased approximately 609,000 shares of its common stock for $37.2 million during the third quarter, which brought the year-to-date total shares repurchased to $1.58 million for $103.1 million. We completed two delay draw term loans during the third quarter, which are intended to be drawn to complete the Gelnex purchase upon regulatory approval. Additionally, we issued $250 million of additional 6% senior notes due 2030 with the same terms as the previously issued $750 million 6% senior notes. With that, I'll turn it over to you, Randy.
spk01: Thanks, Brad. Throughout the year, we continue to strengthen our diversified policy portfolio through accretive acquisitions that will enable long-term growth in our specialty ingredients and green energy businesses, all by turning animal byproducts and food waste into sustainable ingredients to feed and power the world. Today, one in every six and a half slaughtered animals is processed through one of our 270 factories around the world. The strategic investments we've made in all three of our business segments are delivering sustainable solutions to feed a growing population while also helping the world achieve its decarbonization goals. We were a first mover into the renewable diesel market and continue to be one of the only vertically integrated renewable diesel producers in the world. Darling Ingredients carries tremendous momentum into the final months of 22. Raw material volumes remain robust. Fat prices reflect their carbon value while DG3 begins to ramp up. Global specialty protein demand and pricing continues to be solid. Collagen peptide demand continues to grow. Higher energy prices around the globe are being absorbed and adjusted for. Darling Ingredients is set to deliver another record year. We'd like to reaffirm our forecast of $1.55 to $1.6 billion in a combined adjusted EBITDA for the full year of 2022. Now, we're not showing any signs of slowing down into 2023 in our global specialty ingredients and green energy platform. Demand for our ingredients and inputs remains rock solid. We are busy integrating our new acquisitions, and the results will become more visible in 2023. The DGD portfolio of facilities is ready to deliver over 1.2 billion gallons of renewable diesel next year. Our collagen peptide business is growing and expanding, and our team is poised to deliver another record year in 2023. So with that, let's go ahead and open it up to questions.
spk02: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. The first question comes from Adam Samuelson of Goldman Sachs. Please go ahead.
spk06: Yes, thanks. Good morning, everyone.
spk04: Good morning, Adam. Good morning.
spk06: Good morning. Randy, I was hoping to start in the feed segment in the quarter and just make sure we understood kind of the drivers of that decline. You gave some color around it, but segment profit was down. EBITDA was down a little over $50 million quarter on quarter. And I was hoping you could kind of break apart some of the key factors that you kind of alluded to in terms of value and FASA and currency. And as we think about the go forward on that, just how much of those should be kind of cleared out of the system as we get into the fourth quarter and you're maybe in a more constructive operating environment given commodity prices.
spk01: Yeah, no, fair enough, Adam. And, you know, I fully understand everybody trying to reconcile the feed segment after the, you know, the really rock star performance in Q2. You know, Q3 is always a bit of a challenge for us around the world because of the summer heat. This year was as bad as I've seen it in my 20 years. And I'll give you a little bit of input on it here. You know, Brad talked about the FX impact of 18.4 million with the euro at 101. You know, at the end of the day, with the feed segment being, I don't know, 80% of our volume and revenue, et cetera, you kind of would say then, you know, 80% of that number had to go through the feed segment in one way or shape. The, you know, the FASA is a standard purchase accounting. I think it was eight and a half, nine million that flowed through the P&L in period nine for us. And then when you look at Valley Proteins, and I want to give really hats off credit to Rick Elrod and the operations team and Royal Winter and the Valley team that are becoming part of the family here. You know, those plants, as we've told people, were not well taken care of. It was a business that was being set up to transition, and we're in the process of rebuilding about 15 different plants there in one way, shape, or form. And when we got hit with excessive amounts of raw material this summer, you know, as different markets opened and closed for the poultry producers, 100-degree weather made for, you know, incredibly challenging problems of operating those plants. And, you know, that... I do know that number. I won't put it out there, but let's say it was significant of what was unable to be processed, but you pay for the raw material and you don't get it through your plant in a very significant amount of money. It also happened in the Midwest to us, as we'd never seen a summer as hot as it was in the Midwest this summer in the fallen stock business. As we referenced in the script, Adam, we talked about when you... perishable products degrade in summer heat, it's very difficult to get the fat to separate from the protein. So you leave more fat in it, your yields aren't as good, and oh, by the way, the fat has a higher free fatty acid content. And really, DGD3 was not in position yet to take those fats, and so we didn't have a market to move them to other than to different feed markets. And you can do the corn equivalent that we've done 10 years ago, and they had to be discounted substantially. from what their renewable diesel value should and could have been. So, you know, I think I want to leave everybody with, and not glossing over it, but I want to leave everybody with, that's behind us. You know, I've seen the results coming in around for, you know, period 10 here. You know, the weather's cooled off, and, you know, the valley plants are back, you know, really online. The team's done a great job there, and we'll pick up, as we said, momentum for the balance of the year, and we don't see anything changing in 2023. We have an aggressive CAPEX program geared firsthand at making those valley plants more reliable. And that's really our focus right now is reliability and efficiency there. And then, you know, there'll be a strong contributor as we've thrown out there for next year. And, you know, at this time, we haven't really stepped forward and given guidance for 2023. We want to see DGD3 come online, make sure we've got everything ready. working well there, and then we'll step forward and look in our crystal ball and tell you. But in the core ingredients business, we see continued strength around the world, very little slowing of any type of raw material or demand for any of the products. Clearly, the fat market is really pretty solid out there as we see it. So, Adam, I hope that answered as much color as I can give you.
spk06: It's really helpful, and if I could ask a follow-up along those lines. So the EBITDA guidance for the full year was reiterated. I think if I heard your prepared remarks, 800 million gallons of DGD, $1.10, so it implies about $140 million of EBITDA contribution, your share, in the fourth quarter. It wouldn't seem like there's a big implied step-up in 4Q in the course. ingredients businesses from the third quarter level. And we talked about purchase accounting, which I think would go away. And clearly the Valley business and some of your core rendering businesses had summer heat pressures that wouldn't persist into the fourth quarter. So I just want to make sure I'm thinking about kind of the sequential kind of ramp in fourth quarter that doesn't seem all that big based on where your EBITDA guidance is.
spk01: You know, the team around her always smiles when you do the math because they know that my middle initial is C and it stands for conservative. So at the end of the day, yeah, I mean, you're backing into the correct numbers right there. But, you know, I think at this point in time, you know, as we said, we've got two more periods to go through here. But it feels solid. I think, you know, Q4 will be much improved, you know, over that period. Sandy, anything you want to add on DGD3 and the $1.10 for the year?
spk10: I think just really solid results from DGD. We're excited to have DGD3 online here. It'll come online this month. We're getting so close to it. The great thing about DGD is we continue to sophisticate that organization, both in terms of our feedstock, which I think is amazing. You know, we've done just a tremendous job in terms of that, and I have to give our team kudos on that. And then, really, we expanded our finished product sales as well. So just a great shout-out to the DGD team on that.
spk06: That's all really helpful. I'll pass it on. Thanks.
spk02: The next question comes from Derek Whitfield of Stiefel. Please go ahead.
spk08: Thanks, and good morning to all. Being on the feed segment, could you comment on the potential earnings power of a Mirapause transaction with the understanding that earnings in the near term would be compromised by higher energy costs? Also, what potential synergies do you see with their operations as you integrate it into your home?
spk00: Hey, Derek, can you repeat your question?
spk08: Absolutely. So staying on the feed segment, could you comment on the potential earnings power of the Mirapaz transaction with the understanding that earnings in the near term would be compromised by higher energy costs? Also, what potential synergies do you see with their operations as you integrate Mirapaz into your own operations?
spk01: Yeah, I'll take a little stab, and I'll ask John Bullock, who worked on the transaction, to assist me here a little bit with it. that transaction will not close till the back half of 23. So I don't think that there's anything that we can really step out and predict at this time, Derek. It's a small transaction. It gives us, once again, we have the plant in the outside of Gdansk and Ust-Nis and down by Warsaw and Krakow and Ust-Nis and then Lublin. And it just spreads us out with more opportunity in Poland. And as we've said, as the The European Union comes under pressure on animal production and manure disposal, whether it's in the Benelux countries or Germany. Both Poland and, as we look forward, Spain will become more important into that portfolio. John, anything you want to add?
spk05: Yeah, I think the last half of your question involved whether or not we're able to adjust to higher energy prices. And I think this is beyond a Mirapaz answer. This is largely a Darling answer. The fact of the matter is, Our margin management tool that we use in this company really allows us to reflect higher energy costs and maintain our margins in the business. And that's kind of a hidden story about Darling, whereas higher energy costs have impacted many, many businesses around the world. The fact of the matter is how we manage our business allows us to really deal with those higher energy costs without substantially impacting the bottom line of the company. So we are positively the same as the rest of our organizations.
spk01: Yeah, and I think, Derek, I mean, clearly we've seen Poland energy prices escalate much faster and higher than the other parts of Europe. But at the end of the day, we are able to manage the raw material, as John says. And, you know, margins in the meat production business remain fairly good. And we're able, given our model and our relationship, to adjust for not only labor but energy and diesel prices.
spk08: Terrific. And then as my follow-up, kind of staying on the same topic, but shifting over to the fuel segment, I recall that you guys have spent quite a bit of time in Europe over the last quarter, and you guys noted that in your repair remarks as well. In light of the energy crisis we're facing there, could you speak to the near- to medium-term outlook for that business and where you see the greatest opportunity for growth?
spk05: Talk about green energy in Europe, John. Green energy in Europe, yeah. This is John. This is one of our key platforms that we've been really dynamically growing over the last two to three years and still have a lot of growth plans on the board, not necessarily acquisitions, but stuff we can do to kind of expand our core business. It is so well related to our activities. It allows us to help with our meat slaughter byproducts as well as opens us up to a whole new raw material stream with the organic food waste that we traditionally don't render. And the platform in Europe, both from a pricing of natural gas as well as the green programs that are embedded in Red 2 and coming in Red 3, are just perfectly tailored for that business. And this is another example, I think, where I'm proud of Darling because we've been on the leading edge of this. We've been expanding and growing this business well before everybody else thought that being in the digestion business was cool in Europe. And now we've built a tremendous platform in both Belgium and the Netherlands today. in relationship to this, and we're really, really excited about what it can do for our business model over there.
spk08: That's helpful. Thanks again for taking my questions.
spk02: The next question comes from Tom Palmer of JP Morgan. Please go ahead.
spk03: Good morning. Thanks for the questions. Just wanted to circle back on the feed segment outlook. So you previously indicated FASA had around 100 million EBITDA annually. Valley was expected to contribute 60 to 70 million in 2022, which works out to about 8 million per month. So I just want to confirm, when we think about the fourth quarter, do these businesses return to that run rate? And then is the $150 million EBITDA outlook for Valley next year still appropriate?
spk01: Yeah, Tom, this is Randy. Yeah, I was trying to say that in so many words, so I'll say yes to your answers. I mean, there were several one-offs going on with the valley plants during really period eight and period nine with the summer. Those will come back. They're going to pick up momentum. We're making adjustments in that business, and yeah, those are both numbers that we put out there before 150 for valley, and And the FAS acquisition rate was at 100 million EBITDA. So, yeah, those are real numbers for next year. And we're at that run rate now in period in Q4. Great to hear. Thank you for that.
spk03: And then I just wanted to ask on next year. I mean, maybe it wasn't formal guidance, but I think earlier this year you discussed the potential for 1.8 to 2 billion EBITDA growth. for the business in 2023. I guess as we think about the current operating environment, are there changes in the industry pricing environment needed to hit that range or just given current operations and internal improvements that you are instituting at these acquisitions, is that still a reasonable consideration?
spk01: Yeah, I mean, You know, we're, what are we, what, 45 days, 50 days now from 2023? We're carrying pretty solid momentum. I mean, not even pretty solid. We're carrying momentum in. And if you look at the base business and you take the Valley and FASA and where we're going to finish this year, yeah, it's not hard to get a $1.2 billion number out of the core ingredient business where pricing is today. If you, you know, depends on what you want to put on the dartboard here on DGD. We know we've got capacity to run 1.2 billion gallons and we averaged $1.9 or we'll average $1.9, $1.10 this year. You know, so then you're sitting there going, okay, you know, that's, you know, 1.32 billion. You know, we've got a couple turnarounds that are going to have to happen next year early and work through that. And then, you know, the bigger, better machine with working capital. And so Yeah, I mean, at the end of the day, you can sit there and look at it and say you add $1.2 and $6.50, you get $1.850. And, you know, I guess if we were snapshotting it today, that's where we would put it out there.
spk00: Okay. Thank you.
spk02: The next question comes from Ken Zaslow of Bank of Montreal. Please go ahead.
spk07: Hey, good morning, guys. Morning. Let me ask the question a different way. If you didn't have the acquisitions, would the feed business be sequentially flat?
spk00: You mean sequentially?
spk07: Okay. There might be some slightly down just because of the seasonality, but my sense is it probably would have been more aligned. The acquisitions seem, in my mind, to have changed dramatically. just this quarter. I mean, would you not have said that the profitability for feed would have been largely flat, maybe slightly down?
spk01: Let me answer it a different way and just say FASA and Valley really didn't contribute in Q3 to us.
spk07: But would I say that they were negative? I get the sense that they might have been negative to the quarter.
spk04: Together they were minimal.
spk01: Minimal. Minimal. So I wouldn't say negative, and then you've got the currency piece there, and then you've got really the fat price degradation that happened from the downgrades of the yellow grease.
spk00: I see.
spk01: And that's why, Ken, we're trying to say that Q4 is going to be much better. Okay.
spk07: And the base cases for both those are – or the business case for both those are still intact for 2023. There's nothing that happened this quarter that would – alter the business case for either one of those. Is that a fair statement?
spk01: Absolutely. And then we want to reaffirm it. We still think that the Valley and I mean, FASA was a one-off with the inventory mark to market and unwinding some hedges and stuff down there. And at the end of the day, the Valley is just an operational challenge. It's been overcome. Lots of changes have been made. And you know, summertime rendering is, is difficult when you know what you're doing, let alone when you have plants that aren't ready to run in the summer and wastewater units. So that's behind us, cooler temperatures make it easier. So, you know, between now and next summer, we've got a, we've got a capital program in position to fix many of those plants and those challenges that we had. And, and so, yeah, it's behind us. We're at the run rates. We're at the business case where we thought we would be. And, um, Thank God, you know, September's over.
spk07: And then a lot of CEOs in our space have had a wide variance of discussion discussing the Inflation Reduction Act. There's one CEO who says this is life changing and there's other CEOs who like it's more kind of, you know, an evolution. Can you give us your view on how inflation reduction would change Darling's model over the next two to three years? Is this A game changer? Is this something that's slightly positive or is this neutral? Just kind of trying to figure that out. There's been a, again, a pretty wide variance of commentary by CEOs in our business.
spk05: So, Ken, this is John. I will say from Darling's perspective, the Inflation Act is the most supportive piece of legislation we've ever seen in the history of this company. Hands down, bar holes, nothing. It's perfect for us. Because we are positioned as guys that have the integrated feed stream of waste fats feeding into renewable fields. And what's now happened is that the federal program now recognizes the value of low carbon fuels as opposed to not really rewarding if you were producing a lower carbon field. Now it does. And so the result from a Darling perspective, it was a wonderful piece of legislation. We were fully supported. Getting five years was great. We are very appreciative that the federal government went in that direction. And I will tell you, from Darling's perspective, we love that program. We think it's absolutely phenomenal and great.
spk01: Brad, why don't you comment to Ken on the tax side of how that all could work?
spk04: Yeah, good morning, Ken. So as you probably know, I mean, we said it earlier, it goes from an excise tax credit to an income tax credit after 24. So, you know, The next two years, nothing changed in terms of the P&L. After that, John touched on the benefits from a producer's standpoint, but it also goes to an excise tax credit. So it's going against your tax liabilities or your tax bill, if you want to put it that way. So from a cash perspective, There's a bit of a delay there, offsetting of your, say, quarterly estimated tax payments. But really, one of the bigger things from an investor standpoint is really, as we talk about it internally or begin to think about it, really, we've become more of a, I dare say, a bit more of an EPS-oriented company with it going down below the line. And the other thing is it's going to be more geared toward the CI score, and I think that's also what John was referencing, which is definitely beneficial to us because, you know, it's just going to give more benefit. And I guess, John, you already addressed that.
spk05: But, yeah. Let me just add back on top of this. This is a producer's tax credit. Obviously, we're the guys that have built the unit that can convert waste baths. to low carbon fields in the United States, which means we're producing in the right area to be able to maximize the benefit associated with this. As I said, hands down, the best piece of legislation I've ever seen for Darling in the history of Darling.
spk07: OK, life changing it is. My last question is, on Diamond Green Diesel, it sounds like that you guys have shifted to using soybean oil. How much can you use? How does that work? And, you know, does that have an impact on the business? How do you think about that? Maybe I'm wrong, but it seems like that's been the shift. And what is the business decision based on?
spk10: Yeah, so I think we don't typically give out, you know, an exact percentage of any of our feedstocks. You know, and traditionally and really going forward, we are always a waste feedstock user. That's our primary focus. feedstock. That's really the premise of what we built with Diamond Green is to take and use the waste feedstocks because they typically give us the highest value in terms of CI scores, etc. They're typically the most preferred, so different customers want that. That's what we focus on. That doesn't mean to say that on occasion we don't use soybean oil because there are sometimes in the market You know, where soybean oil, after you adjust for CI scores and things like that, and there are markets that do like soybean oil, that we run that. And so we do. We are constantly a profit maximizer. And on occasion, when that happens, you know, when the stars align, we will use soybean oil. And then there are operational reasons that we use soybean oil too. So on startup, that's an important thing for us to use. in a certain stage of our process. So again, you know, just for clarity, we are by far just a waste oil, you know, we focus on the waste feedstocks. But on occasion, we will run some soybean oil.
spk01: Yeah, and I think that's fair, Sandy. I mean, you know, I know Neste throws 96% or whatever waste oils. We're probably way above that. But time to time, if the food service business goes to go slow out there, then the soybean guys are trying to move volume. And, you know, from time to time, either operationally or if animal fats go sky high and you get a, you know, five, six cent discount on bean oil, then you've got customers that you can arbitrage it in and maximize the facility.
spk00: Great. I appreciate it as always, guys.
spk02: This concludes our question and answer session. I would like to turn the conference back over to Randall Stewie for closing remarks.
spk01: Hey, thanks, guys. We appreciate everyone's time today and hope you stay safe. I look forward to seeing you at the upcoming events that are listed in our presentation on the earnings slide deck, and we'll talk to you soon. Thank you.
spk02: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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