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spk08: Good morning and welcome to the Darling Ingredients Incorporated conference call to discuss the company's first quarter 2024 financial 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 like to turn the call over to Ms. Sue Ann Guthrie. Please go ahead.
spk09: Thank you. Thank you for joining the Darling Ingredients first quarter 2024 earnings call. Here with me today are Mr. Randall C. Stewie, Chairman and Chief Executive Officer, Mr. Brad Phillips, Chief Financial Officer, Mr. Bob Day, Chief Strategy Officer, and Mr. Matt Jansen, Chief Operating Officer of North America. Our first quarter 2024 earnings news release and slide presentation are available on the Investor page under Events and Presentations tab on our corporate website, and will be joined by a transcript of this call once it is available. During this call, we will be making forward-looking statements, which are predictions, projections, and 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 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 statements. Now I will hand the call over to Randy.
spk17: Thanks, Sue Ann. Good morning, everyone. Thanks for joining us for our first quarter 2024 earnings call. As I mentioned to you during our last earnings call in February, The global ingredients markets are facing challenges due to replenished global oil seed and grain stocks, slower global consumer demand for premium ingredients, and most importantly, delayed or canceled renewable diesel startups. For the quarter, our combined adjusted EBITDA was $280.1 million, but it included a $25 million out-of-period inventory adjustment within the food segment. As you can see on the slides, this is the third quarter in a row we have dealt with deflationary pricing, but we now feel strongly we are seeing the winds begin to change in a positive direction. Now, turning to the feed ingredient segment. Global raw material volumes remain strong, and we are seeing fat prices slowly improve. Palm and soy oil continues to hold a strong premium over waste fats, and imported fats are now a premium to North America. This shows me that we are still waiting for renewable diesel capacity and pretreatment to ramp up. Global fat prices illustrate that these announced renewable diesel producers are not yet taking advantage of the economics and lower carbon intensity of waste fats and feedstocks. Also during the quarter, we completed the Mirapaz acquisition on January 30th, adding three poultry rendering plants to our portfolio. The plants are performing quite well, and I expect them to be accreted this year. And after 481 days offline, our Ward, South Carolina rendering plant is operational, providing us much-needed capacity in the eastern United States. Now turning to our food segment. Our Russolo sales volumes remain robust. Segment revenue is lower quarter over last year, Q1 over last year. due to a decline in selling price in collagen, gelatin, and our edible fats business. Adjusting for the 25 million out-of-period adjustment related to the Gelnex inventory, gross margins in the food segment actually widened to around 30%. This is a testament to our laser focus on spread management in a declining price environment. Now, we announced earlier this month that we have identified a portfolio of collagen peptide profiles that are believed to provide targeted health and wellness benefits. During scientific trials, these active collagen peptide profiles have demonstrated that collagen can be beneficial in reducing the post-meal blood sugar spike in a very natural way. This is a game-changing discovery that opens the door for many new product launches worldwide. Our first active peptide will be available this fall in 2024. Turning to our fuel segment, Feedstock prices tended to trend lower and improve DGD earnings compared to Q4 2023. However, weak RINs and LCFS prices and a lower of cost to market adjustment impacted DGD earnings. The margin outlook remains favorable due to lower fat prices and our competitive advantage plus an optimistic view we have on the LCFS. Our sustainable aviation unit construction is running ahead of schedule and on budget and is planned to start up in the fourth quarter of 2024. We continue to work with a number of interested parties on SAF purchases and remain confident in our outlook for SAF. Now I'd like to hand the caller to Brad to go through the financials, then I'll come back and give you my views on 2024. Okay, thanks, Randy.
spk18: Net income for the first quarter of 2024 totaled $81.2 million, or 50 cents per diluted share. compared to net income of $185.8 billion or $1.14 per diluted share for the first quarter of 2023. Net sales were $1.42 billion for the first quarter of 2024 as compared to $1.79 billion for the first quarter of 2023. Operating income decreased $118.7 million to $137.2 million for the first quarter of 2024 compared to 255.8 million for the first quarter of 2023, primarily due to 120.6 million increase in the gross margin, decrease in the gross margin, I'm sorry, which as Randy previously referenced, included a $25 million out of period adjustment of overstated Gelnex inventories. Also, our share of the equity in Diamond Green Diesel's earnings were 15.9 million lower than the first quarter of 2023. Depreciation and amortization was $11.5 million higher, primarily due to the addition of gel nets. We did recognize $25.2 million of income from the change in fair value of contingent consideration related to lowering an earn-out liability. Non-operating expenses increased $14.9 million, primarily due to interest expense increasing $12.6 million attributable primarily to additional debt related to acquiring Gelnex April 1, 2023. The company recorded income tax expense of $3.9 million for the three months ended March 30, 2024, yielding an effective tax rate of 4.6%, 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. The effective tax rate excluding the impact of the biofuel tax incentives is 25.4% for the three months ended March 30, 2024. The company also paid $33 million of income taxes in the first quarter. For 2024, we expect the effective tax rate to remain about the same at 5% and cash taxes of approximately $70 million for the remainder of the year. Companies total debt outstanding as of March 30, 2024 was $4.465 billion compared to $4.427 billion at year-end 2023, primarily due to the acquisition of Mirapaz on January 31st. Our bank covenant projected leverage ratio at Q124 was 3.71 times, and we had $811.1 million available to borrow under our revolving credit facility. Working capital noticeably improved in the first quarter of 2024. Capital expenditures totaled $93.8 million in the first quarter as compared to $111.3 million in first quarter 23. No cash dividends were received from Diamond Green Diesel in the first quarter, and there were no share repurchases in the first quarter. With that, I'll turn it back over to you, Randy.
spk17: Thanks, Brad. For several years, we've enjoyed tailwinds from a demand-driven global economy that and strong global commodity and specialty ingredient prices. We are now adapting to the new reality of abundant global supplies. In my 21 years plus at this company, I've seen this cycle many times, and I am confident in the team's ability to make any necessary adjustments in our procurement processes and lowering our operating costs to regain margin leverage. In April, we saw nice progress in our core ingredients business, and DGD has finally worked through its higher price feedstocks. With SAF starting up in Q4, several contracts are underway, and we remain optimistic on LCFS, and DGD margin outlook remains favorable. Our goal to reduce debt and working our way toward investment grade has not wavered. Through aggressive CapEx management and a focus on improving working capital, along with improved performance at DGD, I still believe we can attain by the year end of 2024. Additionally, as we discussed in February, we're doing a comprehensive review of our global portfolio and continue to put a strong emphasis on cost and spread management. For the full year, given what we see today around the globe with solid raw material volumes, improving premium protein and collagen demand, along with slowly improving fat prices and DGD performance, we feel optimistic that momentum will be built during the year and we will be able to deliver $1.3 to $1.4 billion combined adjusted EBITDA, all while setting the table for a much improved 2025. So with that, let's go ahead and open it up to Q&A.
spk08: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble the roster. The first question comes from Bishan Ilani from Jefferies. Please go ahead.
spk13: Hi. Thank you for taking my questions. The question on the guide that you have for the 1.3 to 1.4, does that include any reversal of the LCM adjustments, or could there be additional upside to that?
spk17: No, this is Randy. You know, the 1.3 to 1.4 is really what we see today with a small improvement of fat prices, but really back half loaded here. It doesn't include any SAF early start-up. It's just a snapshot, as we've always done, of what we see right now. As I said in February, our hope is to beat last year, but we're going to need some help from fat prices. Ultimately, if you do, and I'm probably going to answer a few questions here and have Brad help me, but you can go straight to the feed segment and do the year-over-year, quarter-over-quarter type of analysis, and you see 100% of that is related to Fat prices being down from Q4 to Q1 by 20% and year over year by 35% to 40%. And so, you know, ultimately fat prices will drive whether that number is 1, 3, 1, 4, 1, 5, 1, 6, 1, 7, 1, 8 as we come back here. We also remain and, you know, as we'll talk through the Q&A, you know, optimistic that we'll get some LCFFs bump towards the end of the year. And clearly DGD has worked through the higher price feedstock with the longer supply chain, and it continues to outperform anybody on the street out there in the business today. So the 1314, as Sue Ann taught me, be conservative, and hopefully we'll give you some upside here.
spk13: Awesome. Thank you, Randy. And then just a quick question on, I guess, on your leverage ratio, 3.7, any kind of updates on targets or what your goal is for the year end?
spk17: Yeah, and I'll have Brad help here. Remember, the leverage ratio is a point in time of total debt divided by the core ingredients plus dividends. And so clearly as we've been building out SAF, and we had the Q3 and Q4 lower earnings of last year in DGD, you know, dividends didn't arrive here. So that's just a function of that. You know, as Brad and I and Matt would tell you, cash is building rapidly in DGD, and we remain optimistic on dividends, which will then pull that ratio down. It's a rolling 12-month calculation. By no means has anything changed other than the delay of the dividend out of DGD.
spk18: That's right, just the timing and when these dividends get started, which we anticipate, as Randy just mentioned, cash has been building at DGD now and the SAF projects winding down.
spk06: This is Matt, and I would just add that the dividend out of DGD is not a subjective decision. It's formulaic. It's calculated every month. And so, you know, there's not a discretionary push and pull in that.
spk08: The next question comes from Tom Palmer from Citi. Please go ahead.
spk15: Good morning, and thanks for the question. In the past, you've given a bit of a breakdown in terms of EBITDA between the base business and DGD. I know, at least from your comments to the prior question, that maybe there's a bit more variability on the feed side, but was hoping maybe you could give us, you know, kind of a rough split of how you're thinking about the year.
spk02: Tom, you're referencing really the guidance and splitting that out.
spk18: That's kind of where you're going?
spk15: Yes, that's right. Kind of base business versus DGD for 24. Yeah.
spk17: Yeah, Tom, if we had to throw that out there today, 900 out of the base business is what we see today, and basically a billion out of DTD, and that's 75 cents times a little over 1.3 billion gallons. Remember, just a point in time.
spk02: Right, thanks for that detail.
spk15: And then... Just wanted to follow up on kind of some of the moving pieces within feed. I mean, you noted the expectation for fat and potentially protein prices to strengthen a bit here. I guess, could we walk through what the major catalysts are? I mean, obviously, there is this disconnect right now between some of the products you sell and what we're seeing with, say, soybean or palm oil. What kind of bridges that gap and how quickly might that take hold?
spk02: This is Matt. I'll take the first cut at that.
spk06: First of all, for the last little over a year, we've been hindered by the ward plant that we've been rebuilding. We're actually very proud of the fact that we've got that plant now up and running. We did a total rebuild of that plant in 481 days. Frankly, we could have even done it a little bit quicker if we could have gotten the equipment there even earlier. So now what that does going forward, that allows us to leverage our footprint in the space, especially in the eastern half of the U.S., where we've been over the last year, like I mentioned, incurring some costs, and it's frankly been inefficient just because of that plant being down. So that's back up and running now, and that's something that will give us now the ability to leverage our footprint in the space.
spk17: in the space yeah and that's a good point and globally i'd step back tom and give you give you three analysis one but there's an absolute fact here that anybody that says they're pre-treating waste fats in north america for rd isn't doing a very good job of it or we wouldn't be a discount to where we were 10 years ago to to vegetable oil whether it's palm or soy or canola That's number one. That impact we're seeing globally. I mean, you had European fats moving here for the first time in my career, even with a plus euro, 106.110. Brazil was moving up here. Now Brazil's over U.S. But at the end of the day, you know, the fat pricing drives this thing. And when you look at what's going on, In the segments, you've got three pieces. You've got animal fats. You've got premium proteins. You know, we saw a massive destocking of the premium pet foods. People were trading down. It seems to have come back a little bit now. We've got great orders in that business again, so that feels much better. China was kind of disappeared for a little while, Chinese New Year, but once again buying the premium chicken products for the aquaculture business. And then the other piece that, you know, obviously exists in the feed segment because of shared assets is the Yuko business. And that business has come down sharply, and that's a very profitable business for us. And so at the end of the day, the outlook for the feed segment is improved protein demand. and then a rebound in fat prices at some point in time here as we go forward. Bob, anything I'm forgetting here?
spk16: I think you highlighted it really well, and it's the spread between vegetable oil and animal fats, and as time goes on, we should see that spread tighten versus where we are.
spk02: Otherwise, yeah, nothing else. Hope that helps, Tom.
spk08: The next question comes from Ben Bienvenu from Stevens. Please go ahead.
spk02: Hey, thanks so much.
spk05: You mentioned the pull forward of the SAS production commissioning making good progress there. Can you talk a little bit about the development of, you know, getting that volume contracted and, you know, the potential contribution that you think that could bring to 2025 or even 2024? Randy, as you mentioned, maybe there's some stub contribution.
spk06: This is Matt. I'll again take the first cut at this. As we mentioned, the plant now we will commission in Q4 of this year, which is a solid quarter ahead of the original plan. That plan is also on budget at $315 million at the entity level, so we're tracking there. That's something that we're very optimistic about. I would say from a contracting standpoint, we continue to see a lot of interest in our product. We are taking what I think is the best approach towards this, and I'm confident that we'll be able to, let's say, contract the volume that we will be producing out of that plant. It's going to be boiler-plated at 250 million gallons on an annual basis. We don't have anything in our 24 numbers. related to the project in terms of EBITDA. But I'm confident, given the state of the discussions of where we are right now, that we'll be able to, A, meet the volume, and certainly, B, meet the return expectations from that project. Yeah, I think that's fair enough.
spk17: And I don't think there's, you know, there's been a lot of chatter out there, Ben. It's building. You know, 17,000 barrels a day is not going to be hard to disappear. We have plenty of interest there. It's down to the final negotiations on spread and pricing here in both the voluntary and the mandated markets. And clearly, that's going to drive it here. But we have no fear of any challenges there other than hurry up and get it online.
spk05: Okay, that's great. Thank you both. As we think about kind of Nearing the end of that CapEx project, you've built out DGD. You've kind of moved through DM&A activity you've had over the last couple of years. As you think about cash spend priorities from here, I recognize you want to get leverage down, and then distributions will be in the wake of that. How should we think about your appetite for continued opportunistic M&A and or incremental growth CapEx projects?
spk17: Yeah, I mean, it's one that I'll comment on. Number one, you know, we are on an aggressive CapEx reduction program this year. I told Brad we're going to scale it back. We were 93.7 million in Q1. I think that's a pretty close run rate. Q1 is always a little lower because of winter weather and construction. But that also had, you know, the final bills of building out, rebuilding Ward, as Matt mentioned. And so, you know, target there is 400 for the year, plus or minus a little bit there. You know, ultimately, we've got some pretty substantial inventories. While we had a pretty big working capital reduction in Q1, there's still more work to do there. So cash generation is is key. And then the dividends out of DGD, we want to get the debt down below 4 billion. And then it puts us in a different position of going forward. You know, we will not walk away from a well-priced bolt on, but we're going to be very, very cautious this year because our priorities are operating cost management, working capital improvement, and really just getting DGD lined out and, and, living through the lower priced inventory. I mean, you know, we're trying, as you step back macroly, what are we trying to do? We're trying to work towards a share base of owners of this company that both understand that, you know, there's going to be some volatility in commodities. We've got a very well managed business model globally. And then ultimately this thing, once we're in position in 25 here, we'll have, chances for all kinds of share repurchases to ultimately considering a dividend. And that's where we're headed. And then ultimately, as we go into 25, we've got some debt maturing or going current, as they say. And we've got to figure out the long-term capital structure. But right now for us, it's really just, as we said, it's just a real focus on margin management, spread management around the world, which I've got to give credit to the team. They've done a nice job And that's what's evident if you look between Q4 and Q1 with a massive price decline, again, of 20%. But yet, other than the inventory adjustment, you were three-something in Q4 and three low in Q1 with a 20% fat price decline. And so that's attributable to people making the changes in the spread management ratios around the world.
spk06: I would just say that we get asked regularly about what about an SAF2 on top of or subsequent to the SAF1 and we've got the engineering for that and that's something that as the year progresses I would say given the fact that we get up and running with Q4 and we are able to contract at the margins and the returns that we are expecting then an SAF2 is something that we've got in the holster for sometime in, you know, potentially 25.
spk08: The next question comes from Adam Samuelson from Goldman Sachs. Please go ahead.
spk02: Yes, thank you. Good morning, everyone.
spk03: Good morning.
spk05: So, I guess, I wanted to come back to the outlook on DGG margins and Randy talked 75 cents a gallon, plus or minus. And you were basically there in the first quarter, excluding the LCM adjustments. And I guess I'm trying to just think about the margin capture at DGD with waste fat still at a healthy discount to veg oils relative to obviously the reduction in margin that that implies in the feed segment. And just how do you think about is that DGD capture kind of satisfactory given kind of the pressure it has on the feed business? Or is the disconnect that the LCFS just needs to work up over 60 to get those values up and that has the double benefit of improving the margin realization of DGD and driving kind of broader demand for the waste fats for the feed business?
spk17: Yeah, and I'll tag this with Matt here. You know, Number one, Adam, I'm just going to step forward and just say, you know, I've learned my lesson here a little bit. We're coming out conservative. Clearly, the LCFS has not reacted to what I think is very positive future look here. I think the RINs S&D is going to tighten up here because this RD capacity isn't real or we wouldn't be a discount and soybean wouldn't be a discount to palm oil. So ultimately, this is just a projection in time that we believe as we approach 25 that that margin structure can improve quite a bit, but that's what we see right now. Matt, Bob?
spk06: I would just say that the other complexity to this is that there's a timing discrepancy here in terms of in our feed business, the fat prices are reflected much more responsibly in the in the results wherein the price movements in a DGD simply because of the supply chain management that's required to sustain a 1.2 to 1.3 billion gallon business. It's got a longer tail to it, and we've seen that over the last few months as prices have fallen. The feedstock prices at DGD haven't fallen as quickly in the numbers, and so there's a little bit of a timing discrepancy there, but in terms of in the bigger, broader picture, it's I would say it's doing exactly what we thought it would.
spk17: Yeah, I think from, Adam, from, you know, not to get too deep in the sausage grinding, but, you know, if we would have rewound the movie a year and a half ago, DGD-3, when it came online, between the system would use two-thirds of North America's waste fat supply. So we made a strategic decision to qualify for feedstock suppliers from around the world, including our own plants in Europe and South America. And that's the length of the supply chain. That's the good news. We qualified other people and found other sources. The bad news was that in a deflationary environment, that supply chain was much longer and that had to play out in Q4 and Q1. And then you top on that is that there was all this expectations between the Some of the Gulf Coast guys were going to pre-treat. The West Coast guys were going to pre-treat. And we've never found a consumer yet for Darling's waste fats in North America. So we woke up in Q1 here, or Q4 and Q1, really with BGD as the only, you know, capable technology of pre-treating our fat.
spk16: Bobby, anything you want to add? Yeah, I'll just provide some color from a broader S&D perspective on, you know, renewable diesel. I think, you know, There's a really different picture between 2024 and 2025. In 2024, we always knew that the RIN S&D was going to be a bit heavy. We'll produce 8 or 8.5 billion D4 plus D5 RINs this year versus an RVO of 5.55 and maybe a shortfall in D6 of 1. So it's about 2 billion RIN oversupply. But when we get to 2025, the RVO increases to 5.95. And if we move to the producer's tax credit, really imported biofuel and domestically produced biodiesel, it loses a lot of support. And that represents almost four of the eight to eight and a half billion RINs. So it's a significant change. And if you kind of look at where biodiesel is today – at, you know, call it a 20 cent per gallon margin, without the blender's tax credit, it goes to minus 80. And so in order for biodiesel to be at break even, the RIN has got to do the work. And so, you know, we're bullish RINs as we get into 2025. And then if you just look at CARB's estimates through the regulatory impact assessment, they estimate we're going to be seeing $1.30 a gallon type LCFS credit values. At least that's what they're aspiring to. And so if you layer that all on top, it really bodes well for a renewable diesel margin as we play out. And as we get to the end of 2024, we believe the market's going to see that and we'll start to react to that type of an S&D reality.
spk05: Okay. And if I could just maybe follow on that last point, and it kind of goes back to the original question, how... Do we think about maybe flat price veg oils in that scenario where that's a pretty significant amount of veg oil demand and waste fat, veg oil in particular, that is going to be challenged to find homes in the biodiesel market that, yes, maybe the waste fat discounts to veg oil narrow or go away. but that could put downward pressure on the veg oil market broadly. Are you concerned about that in any way?
spk16: Well, I think, look, the RVO is what it is, and if we have a stronger LCFS in California, it's going to be more supportive of demand overall. But, I mean, you're right. It favors renewable diesel over biodiesel. Biodiesel is generally produced from vegetable oil. Renewable diesel... you know, outside of Diamond Green Diesel, a lot of it's vegetable oil as well. But as we go forward, we should see more animal fats. I mean, I think what it points to is increased demand for Yukon animal fats and less demand for vegetable oil. And so, you know, those spreads should come together. But the overall demand for fats and oils really shouldn't change. It's really about the spreads between, you know, the different products.
spk17: The only thing that I'd add is it would come down to ultimate crush capacity and whether or not crushed given the new crush plants out there, do they start to scale back? That always takes longer than you think it does, but that's kind of the wild card that's out there.
spk16: And that's a really good point. Sorry, but that's a really good point because crush margins, soy crush margins are not very good right now, and they're not projected to look really good here over the next couple of years. And so, you know, one way to control supply as an industry of Vegetable oil is to lower crush, and at $25 a ton crush margins, you're not far away from slowing that down.
spk06: You know, it would surprise me to see imports drop off, as well as I think that freestanding biodiesel refiners will be disadvantaged.
spk08: The next question comes from Manav Gupta from UBS. Please go ahead.
spk00: Guys, you said you are constructive on the LCFS prices. Recent CARB workshop for the first time introduced the concept of a 7% step down or 9% step down for 2025 versus the proposed 5% step down. Do you think CARB is finally recognizing that the prices are too low and there is a strong possibility that now when the revised numbers come out, you could see a 7% step down or a 9% step down, which actually hits the credit bank pretty hard?
spk16: Yeah, look, I think we're projected to be at 13.75, so a 5% or a 7% or a 9% step down. All of them are a significant increase to where we are today. What we know is that through the regulatory impact assessment, they've got goals as far as where they would like to see LCFS credits trading, and really we believe they're going to – put a step down in place that, you know, they believe is going to allow that market to move to the prices they think it should be at. You know, we had the workshop recently. There's a lot of constructive dialogue going on. And in all scenarios, it's a step down from where we are today, where that might not have been the way the discussion was going a while ago. So it's hard to speculate as to where they're going to land. But, You know, we think it's going to be based on good data and analysis when they make that decision.
spk17: Yeah, and keep in mind, Manav, it's always been a 2025, you know, kickoff, if you will. You know, maybe everybody got a little optimistic, aggressive, and thinking that CARB would move faster here. It's still a very, you know, regimented and gated process there. And I think you'll, you know, I think they're going to publish here shortly. I think it'll go to a board meeting in July and then after that. what we'll see on the execution time.
spk00: Perfect. My quick follow-up here is on the DJD margin for the quarter. I mean, it was a big improvement from $0.41 to $0.76. But as you highlighted, there was still a feedstock lag effect working against you. So if we adjust for that, the price decline in the feedstocks, Would it be fair to say that if the feedstock prices had not moved at all, this 76 cents could easily be like a dollar for the quarter? I'm just trying to quantify the impact of the feedstock price lag for the quarter.
spk02: I don't see the exact calculation, but I would say that generally speaking or directly, that seems correct.
spk08: The next question comes from Paul Chang from Scotiabank. Please go ahead.
spk12: Hey, guys. Good morning. Morning. Randy, I don't know if you can comment. DGD, the first quarter sales seems really high compared to their production level. So I assume that we are drawing down inventory. So at this point, how much is the inventory that we remain? In other words, that For the rest of the year, should we assume the sales will be pretty closely aligned with the production volume or that it's still going to be in excess of the production volumes?
spk06: This is Matt. I'll answer that. I would say, first of all, that DGD does not really have a program to store a bunch of finished products. So really the operational intention and expectation is ship what gets produced. And so now what happens is from time to time as you bridge months and bridge quarters, sometimes don't get invoiced in one month and they may get invoiced in the next and therefore you can see a shift. But I would say that's likely what you're talking about right here.
spk17: Yeah, I think for the year, Paul, I mean, we're still out there at that 1.3 to 1.350 in a total production and, you know, produced and shipped hopefully can match up. It's just the timing of vessels and and barges and rail cars of different things here. And obviously, as we start to transition in Q4 to taking 250 million gallons of RD offline, most of that, I think, Matt, you told me, most of the SPK and SAF will move out, what, by rail then? Or barge. Or barge, yeah. So, yeah, it could be a little bit of timing. But, you know, production is what's important to us here, and the timing of sales is what will happen.
spk12: And second question is on the feed volume. I mean, with the small acquisition, you get three more plants, and also that water is coming back. So, Randy, can you give us some idea then how sequentially the volume is going to look like?
spk07: Can you repeat that, Paul?
spk12: If we're looking at the feed ingredient that settlement from the first to the second quarter how's the volumes we should expect given that you just complete a small acquisition that add three plans and then you also have what being rebuilt and is working I know that not add one to one but we're going to see some incremental benefits from a volume standpoint for the feed ingredient when we move from the first to the second quarter?
spk17: Yeah, I mean, Paul, so when I look and Matt can comment more on North America, but globally we've made procurement changes in our spreads in Europe. We're still actively doing it in South America. Raw material volumes are rather large or just the The cattle slaughter shipping, again, from the U.S. down to South America, so the piles of raw material are quite large. North America, clearly Matt already commented about Ward. That is such a blessing to have that online. We were running at 100% capacity and then running through Saturday, so that should take a lot of pressure off the system. And then we've seen some pricing improvement. in the fat side. It's been very modest in North America. It's been a little better in Europe today. It's back, you know, really reflecting palm oil values as their alternative there. So, you know, Q2 within the core ingredients business looks to be stronger at least this moment. We don't have April numbers yet because the month's not closed. but it looks stronger and the operating team feels better about it than Q1. Matt, any thoughts?
spk02: I think you've covered it.
spk17: Okay.
spk08: The next question comes from Andrew Stralzik from BMO. Please go ahead.
spk14: Hey, good morning. Thanks for taking the questions. My first one is a two-parter on the guidance. I think a month or so ago, you maybe were at a conference, and I recognize it wasn't formal guidance or anything like that. But you kind of insinuated that the market environment kind of suggested a 155, 16 billion type of EBITDA number. And so I guess I was just hoping that maybe you could bridge from your comments at that time to now the formal guidance of 13 to 14 billion. And then secondarily, and you kind of alluded a little bit to this in the last question, but you talked about a back half kind of loaded year. Is that just a reflection of the first quarter or is 2Q also a little bit limited and then kind of we see the full acceleration in the back part of the year?
spk17: Yeah. And, you know, number one, Andrew, my crystal ball had fog in it when I gave that prediction before. But it was hinged on a couple of things. One, it was hinged on some optimism that the LCFS market would come back upon realizing what was going to happen to do that with the change of carbon And number two, just believing that waste fats couldn't stay down below world veg oil prices very long. And, you know, first off, I was wrong on both of those. It's a timing thing. You know, we're saying Q2 is going to be stronger than Q1 from the core ingredients side. And then, you know, obviously we've got a turnaround in DGD coming on here for DGD3. And I think that plant ran 15 or 18 months before we turned it around, which is a, An absolute, you know, amazing deal. And that's to do the tie-ins also for SAF1. So, you know, it's really when I talk about back half of the year, you know, we're going to hook up momentum. You know, you get the LCFS announcement out there and people then realize that it's real. People realize that these RV plants aren't running at the rate or going to run at the rate. That should help things. As you get closer to next year, you realize that the RVO is going to have less imports, 800, 900 million gallons. That has to have a positive effect on both RINs and domestic feedstock values. And ultimately, what else am I forgetting, guys? I mean, what else can drive this?
spk06: I would just, you know, historically speaking, I would say Q3 is naturally a challenge for us to keep in mind as we plan for this, you know, principally due just to the summer heat and all, but we're ready for it.
spk14: Okay, great. That was helpful. And then my other question is just on the adjustments you're making to the procurement process and the operating costs. which you've been talking about for the last several months, so that's not entirely new. But I'm just curious, you know, are you finding new opportunities within those buckets? And you referenced, you know, some of the evidence that some of that is already playing out. But, you know, I guess how would you frame the extent to which you've realized those benefits versus kind of incrementally what might be to come in future quarters? Thank you.
spk17: No, it's a very fair question. I mean, you know, number one, typically a lot of the procurement formulas in North America were CPI based and, you know, they had to be relooked at. That wasn't enough. You know, in a lot of cases, we've given a lot of labor increases post COVID. And so as these contracts matured and changed, you know, we've had to step out and, you know, then, you know, 7% interest rate on these assets is a different calculation and diesel fuel and, you know, 450 a gallon. So, you know, it's just been a comprehensive look all around and the team has been very open to it. As I said, you know, we've had a tailwind since fourth quarter 2019 and then the winds changed and deflation hit and you have to go look at this stuff and we've done it. I mean, the Brazilian acquisition has really been a, A good acquisition, it's meeting business case, but it's one where we're having to be when you transition from a private owner to a public company. I've always said, and the guys have heard me say, private owners run for tax avoidance, public company runs for earnings, and that requires us to make changes in the raw material procurement from the slaughterhouses down there more often than has been historically done. So, you know, I think there's nothing really tangibly too new of what we're doing here other than we've given the team, you know, number one, you've seen us take CapEx down solidly $100 million for the year. Number two, we've kind of just told them we've had to work with the teams to just say, hey, until we see fat prices come up, you've got to be really cognizant of cost management. And so, you know, that's kind of where we're at.
spk16: You guys, anything you want to add to that? I just say, you know, look, I appreciate the question. It's a pretty prevalent theme around here. Our suppliers, you know, they've got several options. They can go to another rendering plant and meanwhile we're kind of at capacity across the continent. They can go to landfill and landfill is less acceptable and more expensive every day or they can build a new rendering plant and That's a whole lot more expensive than it was a few years ago. And so all that is taken into consideration when we're repricing agreements. We don't realize an immediate impact in a one-month period from restructuring these agreements. And a lot of these, they come up at their three-year agreements. But over time, we're in a really healthy position given the book value of our assets relative to replacement value.
spk08: The next question comes from Derek Whitfield from Stifel. Please go ahead.
spk02: Thanks. Good morning, all.
spk19: Randy, focusing in on guidance and kind of pulling you back closer to your previous crystal ball projection, I can certainly appreciate the conservative EBITDA guidance as your stock doesn't reflect meaningful value for DDD and you've now taken out the bear case with the guidance. Having said that, if we assume fat prices remain depressed in annualized Q1, you could easily be above the top end of your guidance based on DGD spot margins north of a dollar per gallon with no contribution from SAF. And kind of thinking about the interplay between your businesses, assuming static RIN and LCFS prices, lower fat prices are a net positive for Darling as the impact for downstream is far greater than the impact for upstream. Is that fair?
spk02: I missed that last part.
spk09: Lower fat prices are a net benefit to Darling because of the earnings power of DGD.
spk15: Yeah, I think that's right.
spk16: And given the relative size of DGD today and its capacity, it's a very good hedge for the base business at Darling.
spk17: Yeah, and it buys three times more fat than what we produce ultimately or that's logistically feasible globally to it. So, yeah, the leverage is there. But, you know, I also remind people wearing my selfish darling hat that I keep 100% of any fat price increase on this side of the table. You know, what we're really looking for at DGD is some LCFS help, and then it really has a chance to be a double win for us.
spk19: I completely agree. I think everything comes when LCFS prices go higher. Regarding the progress that you guys have made with your collagen peptide research and products, how should we think about the build-out of that business line or those business lines and what the run rate potential could be?
spk16: Yeah, I mean, look, let me just back up a second. I think, you know, what really excites us about that is not just the progress we've made in developing products, peptide profiles, but the infrastructure that we have globally to deliver on a portfolio of value-added products. So with the acquisition of Gelnex, we essentially have access to low-cost collagen production around the world, and we have the capacity needed to develop this portfolio. So without a significant amount of additional investment, we're in a position to do this. As the announcement said recently that we're coming out with a product that will secrete GLP-1 into the body and have health benefits that way. We have several other products that are in the pipeline right now. It's hard to predict exactly when we can complete that process and when we're going to be launching, but I think we're very confident that we're going to have several over the next couple of years that we're going to be able to bring to market.
spk08: The next question comes from Ryan Todd from Piper Sandler. Please go ahead.
spk02: Thanks.
spk04: Maybe just a couple follow-ups on some earlier questions. As we think about fat prices and how you think about the trajectory over the course of the year, the supply side in particular is hard for us to wrap our heads around because of the wide range of sources on a global basis. Is the biggest single thing that we should be looking at in terms of that price recovery over the course of the year, is it really the ability of the North American renewable diesel industry to ramp up consumption of waste back to the pretreatment units between now and year end? Is that kind of the single biggest driver on the demand side, or are there other big things on the demand or supply side that we should be thinking about in terms of you know, fat market recovery?
spk17: Well, and I'll start, and then Matt and Bob can key in. You know, I'm going to drive on my side of the table here from the global side. I mean, clearly we've had, you know, an abundance now of just ample crops around the world. You know, yeah, we've got a little dryness here, a little dryness there, but at the end of the day, global stocks are very, very strong around the world of oil seeds. There's a major shift in who's crushing or processing those oil seeds underway right now that I don't know that we've seen play out yet. That's number one. Number two is we're seeing oil in the $80 barrel range now. Typically, history would say at those times, you start to see a lot of palm oil disappear into the system in the Asian countries. You know, you saw, I think, yesterday or a couple days ago, I think Malaysia and Indonesia has raised their biodiesel mandate now to 35%, and then South America from 6% to 20%. So you're starting to see people make the movements that are going to start to move. It doesn't take a lot of movement to change the S&D globally of fats and oils. And then the third piece is you throw on the North American side. I mean, you know... As we were building our numbers here, if I took every one of the cell site guys' capacity utilizations out there and what's running, the U.S. is going to have to import 4 billion pounds of fat in order to feed these machines, and clearly they're not. So, I mean, as we look at this thing going forward, the global S&D has got a little bit of work to do. Ultimately, with the number of oil seeds being processed in North America, that's both soy and canola, you have to ask yourself, what's China going to do for fat? Are they going to buy finished product? Are they going to buy seed? Are they going to buy more palm oil? I don't know. I think that's what I mean. Bob, you want to add anything?
spk16: Randy, I think you touched on what's most important, and that's really global demand and in the fuel sector. As you pointed out, palm can kind of go into conventional find its way into conventional fuel. But what we pay attention to here is what is biofuel policy? How is that shaping up as we get into 2025, 2026 and beyond? What we saw was high prices caused a lot of new supply to come to market of waste oils. So there's a bigger opportunity for more regulation and more policy that's going to support biofuel production. That's really where demand needs to come from to absorb this additional supply we've seen on the market.
spk02: Great. Thank you.
spk04: And then maybe just one on your comments on staff earlier. I mean, it seems from discussions with many people that I think the expectation on the commercial side is that you're probably looking at, you know, renewable diesel plus $1 to $2 a gallon in terms of what kind of the SAF economics look like. Is that a fair range? Is it too early to say at this point? And I know there are some cost and yield impacts. I mean, if that's the case, what sort of margin accretion are you talking about in terms of, like, SAF production versus RD production?
spk02: This is Matt.
spk06: I would say that from a SAF margin standpoint, where we have the discussions that we're having right now, they are going to be well within our expectations of our investment thesis, both from a volume as well as a margin standpoint. The plant has yet to turn on. And we're taking the right steps in order to get this in a place where we think it needs to be.
spk02: And so I would just say, you know, stay tuned.
spk08: The next question comes from Ben Kalou from Baird. Please go ahead.
spk11: Hey, guys. Good morning. Thank you. Just on the guidance and SAF tie-in, could you just talk to us about how You guys factored in the tie-in and how much that impacts the guide. So when we do a bridge for next year, we can think about that.
spk06: So there is no SAF in the 24 guidance. And the tie-in DGD3 is going to do a catalyst change in Q2. and be ready for the tie-in so we won't have to be shutting down our RD facility as the SAF plant is up and running. So we're staggering that to have the DGD3 line ready to go for a full run as we tie in the SAF line and, as mentioned, we'll be operational in Q4 on the SAF site. Okay.
spk11: On the food segment, the one-timer, should we look at it as a one-timer, the expiration or whatever, or is that going to carry into Q2, or how should we think about Q2? I know Nestle, they expect a recovery today in Q2, but how do we think about Q2 food volume? Okay.
spk17: Yeah, I mean, you know, I think KPMG always gets mad at me when I call it a one-timer, so I can't use that word, Ben Kalou. But at the end of the day, you've got to add back that 25, and that's really the solid run rate of what we would say for the food segment this year. And then next year, as Bob was alluding, then hopefully we start to build a portfolio of sales on the new peptides here.
spk08: The next question comes from Heather Jones from Heather Jones Research. Please go ahead.
spk10: Good morning, everyone. Hi. Just first, I was wanting to talk about, so Randy, you alluded to this earlier, but the ARB for Chinese Yuko and Brazilian tallow has closed and for Chinese Yuko by a pretty wide margin. So just Just thinking about, you've mentioned how these RD plants haven't been ramping as they said they would, et cetera. But given that that is closed and DGD, now U.S. fats are cheaper, just if DGD keeps running at its normal speed, wouldn't that result in a substantial improvement in domestic fats in the U.S.? ?
spk02: You know, I think Matt and Bob and I are looking at each other.
spk17: I mean, strategically, we made a decision that we didn't as collectively as the owner and part owner, J.B. owner of VGD, that we felt it was important to own the world arbitrage. And we're making investments in Port Arthur to be able to unload directly there. So ultimately, you know, we can own that. because that's important to margin management in the long term. We've always said the number one thing for DGD was its real estate that it owns and operates on the Gulf Coast, and that's both for inbound and outbound. And so the answer is, from time to time, one geography in the world would be a premium to the other. You're watching that trend right now as the U.S. and Canada are cheaper than imports, and so that should be supportive as we go forward. Ultimately, as you're building a portfolio of suppliers and inputs into the DGD system, you've got different markets around the world, meaning finished product markets that require different or you can qualify different fats for different carbon intensities. You're always going to be playing that arbitrage. That's what gave DGD the superior profitability of anybody out there today in the world. So, you know, it'll move from time to time, but I don't see it going all domestic than a portion of it back, you know, back import because that's just logistically impossible at the scale we're at. I don't know, Matt, you're deeper in.
spk06: I would just say, just to be clear, the driving decision force in DGD is margin. And it senses to buy the cheapest available feedstock, all things considered, including the CI score. So to your question in terms of lower domestic price, that's exactly where DGD is focusing its origination efforts right now.
spk10: Okay, thank you. And then my follow-up is on Ward. So Randy, I think you mentioned on the Q4 call something about dumping like 30-some million pounds in a landfill. It's been down for almost a year and a half. I mean, can you give us, I mean, dumping in a landfill is pretty expensive and, you know, obviously not getting true finished product pricing. So I just wonder if you could give us a sense of what's the magnitude of drag that's been on y'all's business just so we can get a sense of how that by itself could help the remainder of the year.
spk06: I'll try to answer that, Heather. At the end of the day, when that plant went down, we had a series of supply contracts and a series of customers that were relying on the Ward plant to operate in order to process their volume. When that plant went down, then there was all of a sudden this volume that had to find a place to be processed. We did a massive game of shifting around in terms of trying to put as much of that volume into our other plants. But as a result, there was still some product that resulted in, as Bob was talking about, the next best alternative, which was a landfill. And so in terms of quantifying that, I don't have that specific number for you. But what I can say is that plant is up and running now. And our eastern plant, sure plants are essentially at this point running on all 12 cylinders, and so as of April 1st.
spk08: This concludes our question and answer session. I would like to turn the conference back over to Randy Stewie for closing remarks.
spk17: Thanks, everyone. Appreciate all the questions. As always, if you have additional questions, reach out to Sue Ann. Stay safe, have a great day, and I'll turn it back over to the operator to conclude our call. Thank you.
spk08: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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