Darling Ingredients Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 14 speakers on the call.

Operator

Good morning, and welcome to the Darling Ingredients, Inc. Conference Call to discuss the company's 3rd Quarter 2023 Results. After the speakers' prepared remarks, there will be a question and answer period and instructions to ask a question will be given at that time. Today's call is being recorded. I would now like to turn the call over to Ms.

Operator

Sue Ann Guthrie. Please go ahead.

Speaker 1

Good morning. Thank you for joining the Darling Ingredients Third Quarter 2023 Earnings Call. Here with me today are Mr. Randall C. Stuewe, Chairman and Chief Executive Officer Mr.

Speaker 1

Brad Phillips, Chief Financial Officer Mr. Bob Day, Chief Strategy Officer and Mr. Matt Jansen, Chief Operating Officer of North America. Our Q3 2023 earnings news release and slide presentation are available on the Relations page under Events and Presentations tab on our corporate website. Anne will be joined by a transcript of this call once it is available.

Speaker 1

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 the 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 ks, 10 Q and other recorded 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.

Speaker 2

Thanks, Sue Ann, and good morning, everyone, and thanks for joining us for our Q3 earnings call. Darling's global ingredients platform delivered as predicted and DGD faced some headwinds and operational challenges during the quarter. Overall, We feel good about the momentum we are carrying into Q4 and 2024. Turning to the Feedingredients Segment, raw material volumes were flat compared to Q3 2022. Our gross margins have returned to pre acquisition levels, Demonstrating our ability to successfully integrate Valley and Fazza.

Speaker 2

Our work is not done and we expect further improvement. Fat prices were lower year over year, but sequentially improved late in Q3. Turning to our Specialty Food Ingredients segments, Raw material volumes increased 18% year over year due to Gelnex acquisition. Our global collagen platform delivered solidly and we continue to shift our Product mix into higher margin products. Hydrolyzed collagen remains an important part of our long term growth strategy within the Food Ingredients segment.

Speaker 2

Earlier in the quarter, we commissioned a new spray dryer in Epitacio, Brazil, adding much needed capacity to continue our growth. I'm also excited to share that our research and development efforts in this segment have resulted in our ability to formulate a product that targets specific health concerns such as glucose moderation. We are currently in scientific trials and expect to bring this ingredient to market during 2024. On October 26, we announced that DGD volumes for the Q3 were lower due to a regularly scheduled turnaround at number 2 in St. Charles, Louisiana that took the unit offline for 27 days.

Speaker 2

After that turnaround, DGD2 had a minor operational disruption. So in total, DGD2 was offline for 37 days in the quarter. This resulted in lower gallons produced, higher costs and lower than expected operating profits. Year to date, DGD has sold 910,000,000 gallons of renewable diesel at approximately $1.02 per gallon EBITDA And Darling has received $163,600,000 in cash dividends year to date. With that, I'd now like to hand the call off to Brad and then I'll come back and discuss the rest of my thoughts

Speaker 3

Okay. Thanks, Randy. Net income for the Q3 2023 totaled 125,000,000 or $0.77 per diluted share compared to net income of $191,100,000 or 1.17 Per diluted share for the Q3 of 2022, net sales were $1,630,000,000 for the Q3 2023 as compared to $1,750,000,000 for the Q3 2022 or a 7% decrease in net sales. Although Darling's Q3 2023 gross margin increased $10,100,000 and was 23.8 Percent as compared to 21.5 percent for the Q3 of 2022, operating income decreased $90,000,000 or 33 And a half percent to $178,400,000 for the Q3 of 2023 compared to $268,300,000 for the Q3 2022, primarily due to Darling's share of Diamond Green Diesel earnings decreasing $49,000,000 Additionally, depreciation and amortization and SG and A Increased about $21,000,000 $32,600,000 respectively as compared to the Q3 of fiscal 2022 primarily due to the Gelnex and Fazza acquisitions. Now moving to non operating results, Interest expense increased from $39,800,000 in the Q3 2022 to about $70,300,000 in the Q3 2023 primarily as a result of increased indebtedness due to the acquisitions.

Speaker 3

For the 3 months ended September 30, 2023, The company reported an income tax benefit of $15,400,000 and an effective tax rate of negative 13.6 percent, which differs from the federal statutory rate of 21% due primarily to the relative mix of earnings among jurisdictions with different tax rates and biofuel tax incentives. The company's effective tax rate excluding the biofuel tax incentives and discrete items is 25.9% for the 3 months ended September 30, 2023. The company paid $40,000,000 of income taxes in the 3rd quarter. For the 9 months ended September 30, 2023, The company reported income tax expense of $52,300,000 and an effective tax rate of 8.4%. The company's effective tax rate excluding the biofuel tax incentives and discrete items is 28.4% for the 9 months ended September 30, 2023.

Speaker 3

The company also has paid $127,700,000 of income taxes year to date as of the end of the third quarter. For 2023, we are projecting an effective tax rate of 9% and cash taxes of approximately $30,000,000 for the remainder of the year. The company's total debt outstanding at Q3 2023 was $4,400,000,000 as compared to $3,400,000,000 at year end 2022. Our bank leverage covenant leverage ratio at the end of the 3rd quarter was 3.25 times. We continue to maintain strong liquidity with $1,000,000,000 available on our revolving credit facility as of the quarter end.

Speaker 3

Capital expenditures totaled $146,200,000 for the Q3 $23,380,600,000 for the 1st 9 months. With that, I'll turn it back over to you, Randy.

Speaker 2

Hey, thanks, Brad. As previously announced a few weeks ago, we revised company guidance to $1,600,000,000 to $1,700,000,000 of combined adjusted EBITDA for the full fiscal year 2023. For Q4, we carried good momentum in from the Q3 around the world. Raw material volumes have slightly softened, but our diversified geographic footprint makes the impact negligible. Clearly, the global fats and oils have softened as a direct reflection of an ample supply of global fats and oils and delayed start ups and inconsistent operations of renewable diesel plants.

Speaker 2

While we've seen a lot of press and noise about significant gallons of new renewable diesel Coming to the market, the numbers appear to tell a very different story. If more capacity outside of Diamond Green Diesel was operating, Fat prices undoubtedly would be higher. DGD is performing well and we do not have any planned turnarounds in Q4. Margin structures are adjusting We are very encouraged with the conversations we are having with a variety of interested parties regarding sustainable aviation fuel and our ability to deliver the margins in line with what we have communicated. Looking forward to 2024, While the heavy lift of our integration work has been completed, there are still a few opportunities that can add some margin improvement in our Feed segment And our Food segment should continue to reflect our product mix shift.

Speaker 2

From an earnings perspective, we see 2024 shaping up nicely and expect to deliver and delever with an improved performance globally. The table is set with an improved outlook for the LCFS, Growing demand for SAF, strong demand for our low CI feedstocks and favorable stack structures. Given the environment we see for 2024, At this time, we anticipate combined adjusted EBITDA to be in the range of $1,700,000,000 to $1,800,000,000 In 2024, We plan to lower capital expenditures, focus on improving our working capital usage, and we anticipate regular dividends from Diamond Green Diesel. This will all help us accomplish our leverage targets by year end. Given the anticipated dividends from DGD and the strength of our global ingredients business, We should be well on our way to achieving our target leverage ratio of about 2.5 by year end 2024.

Speaker 2

With that, let's go ahead and open it up to And then I'll come back with some closing comments.

Operator

We will now begin the question and answer session. In the interest of time, please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble the roster. And our first question will come from Manav Gupta of UBS. Please go ahead.

Operator

Good morning, team. My question first is on

Speaker 4

the little bit on the macro side. How do you view the recent staff proposal by CARB, which increases compliance by 50% by 2,030, also has the AAR mechanism, which pulls forward the program In case of over generation of LCFS, do you believe this will be supportive of RD Economics once it kicks in, in 2025?

Speaker 5

Hi, good morning, Manav. This is Matt. So first of all, the answer is yes. We do believe that Supportive to the RD business. As you know, the LCFS is an important component to the margin build in the RD space.

Speaker 5

And given that the SORIA that was put out a couple of months ago and the Expected legislation that is forthcoming. There are several components that we think are supportive for the RD and even the SAF Business. So obviously volume is an important part. And then there's the component for We'll have an SAF in California of up to in the neighborhood of 150,000,000 gallons, Which will line up very nicely with the RSAF project. And there's even the component of timing.

Speaker 5

There's the possibility of an earlier implementation. Right now, it's set for 2025, but there is the chance and We all have to stay tuned on this, but there is the chance for even sometime in Q3 or Q4 An implementation coming on this. So again, all in all, we are very optimistic and quite satisfied With the LGFS.

Speaker 4

Okay. I'm assuming you're basically referring to the fact that the AAR will pull forward the program 2024, so the program could actually start in Q3 2024?

Speaker 5

That's a potential, yes.

Speaker 4

Okay. Thank you. Very quick follow-up is on slide 11. You indicate lower fat sales volume were a $32,000,000 year over year headwind And lower protein sales volume were $13,000,000 year over year headwind. Given that integration is going well for both Valley and Fossa, Should we assume this was just a temporary blip and the volumes will come back as we go ahead?

Speaker 2

Yes, Manav, this is Randy. I mean, what we're seeing in my script, I commented on it. That's directly related to lower cattle slaughter numbers Predominantly in North America. And clearly the cattle economics have changed in the U. S, the herd is low, but Being replenished and that's just directly related to year over year comparisons.

Speaker 2

If you think of it this way, the red meat has the most fat, The most protein and then pork and then chicken. And so that's what that is. The volumes in South America are relatively flat right now. Europe's in good shape, but that's all pretty much North America. Canada is in good shape.

Operator

The next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.

Speaker 6

Yes. Thank you. Good morning, everyone.

Speaker 1

Good morning.

Speaker 6

Good morning. So I guess first question, Randy, I mean, if you think about the updated kind of outlook for the balance of this year and you gave And as a framework for 2024, can you first quantify in the quarter The head there was an illusion in the preannouncement to a hedge loss at Diamond Green. Can you quantify that? And as we think about Diamond Green for the Q4, if there's no scheduled turnarounds, should we be thinking about production A lot closer to where you were in the Q2, which if true and even at 3rd quarter margin levels would imply make it pretty tough to get to the low end of the way you frame the full year. So can you just help reconcile that?

Speaker 2

I don't know that I would frame it the way you just finished that sentence. No. Clearly, there's always a timing issue How the fat prices in our core business flow through. And also remember a significant portion of the North American Portfolio ends up at Diamond Green Diesel as the purchaser. So you had a little bit of a double wham here.

Speaker 2

Number 1, the prices started to accelerate in Q3 again, but we'd already sold Diamond Green. And so those sales now are coming to be fruition in Q4 for our core ingredient business. On the other side, We saw heating oil spike up. You do get some hedge losses. You can go into the or you can go straight to the financials and the derivative on the Valero release and you can see what that number is.

Speaker 2

And it was a significant number. At the same time, you had higher fat prices flowing through, Then you had heating oil now coming off. And so at the end of the day, that's my comment about margins are adjusting. If you think about the efficiency of the D4 RIN, when that thing came down, what did it say? It said fat prices had to come down to put Some type of margin back in the business.

Speaker 2

So clearly the margins in DGD are coming back very nicely In Q4 here and they'll finish the year strong and then that's what gives us then the momentum into next year. I mean, like we said, we're trying to we've always said, we're not going to guarantee you no volatility in DGD because there's a lot of moving parts there. But at the end of the day, 910,000,000 gallons at $1.02 for year to date, We said coming into the year, we'd be somewhere between $1, $1.10 We're using $1.10 for next year. We'll finish up somewhere Within our guided range for the year, it just depends on how everything flows through. But no, from what we see right now, we're right on target.

Speaker 6

Okay. That's helpful. And then just in the Feed segment, can you maybe just Maybe the quarter on quarter EBITDA decline helped bridge some of that. So EBITDA was down 20 $6 or so $1,000,000 versus the Q2. Can you help bridge how much of that was seasonality?

Speaker 6

How much of that was the Commodity prices, maybe some of the weakness in pet ingredients. And if you think about the Q4 kind of with where commodity prices Len, can you help us think about some of the key items in EBITDA and in feed moving forward?

Speaker 2

Yes. And I think you've Kind of answered most of your question there. I mean, typically the seasonality hits in this business, especially in North America and Europe in 3rd quarter The feed segment because you're being the quality of the raw material in the summer times is much harder to process That's code for it's harder to get the fat out of the product and leave it in the protein. So you kind of have lower quality fat, Less fat and that's how it flows through it has for 142 years. The pet food business is something Put your finger on right now, pricing remains good in that area.

Speaker 2

Demand was weak, but it's picking back up again. You've got a little bit of a trade down going on. It appears around the world right now in the pet food side. But overall, when we're looking at 24 versus 23, It looks pretty stable there. Protein prices on most products are in pretty good shape.

Speaker 2

I mean, there's a little bit of trade disruption in the world right now, in different areas that are moving proteins around. Matt, what else you want to add Yes.

Speaker 5

I mean, I would say, the Q3, as you all know, was a typical very hot summer and our businesses did As expected, feel that. And so, but we are seeing, especially now in Q4, a quick return to the pickup and recovery.

Speaker 2

Yes. Keep in mind, Adam, a year ago today, not sequentially, but a year ago, here was we still have Ward South Carolina Great. And North America here. Ward South Carolina is going to be key to 24 for us as it comes back online here. The plant is completely rebuilt.

Speaker 2

We are still landfilling a significant amount of product right now that we can't process in our system. So as we guide higher next year, if you say what, you always have to assume fats and oils prices and protein prices in there and energy, But most importantly for us, it's being able to bring back our system to full strength on the Eastern seaboard.

Operator

The next question comes from Derrick Whitfield of Stifel. Please go ahead.

Speaker 7

Good morning, all, and thanks for the 2024 commentary this morning. For my first question, I I wanted to lean in on DGD and focus on the sustainable margins of your business, which really should drive the value of that business beyond 2024. When we analyze your system margins by assessing the value of your feedstock streams relative to a marginal unit of production, there appears to be a very meaningful positive Spread with what you own differentially versus industry. As you optimize the economics of DGD, is it reasonable to assume that that sustainable margin you've talked about in the past at a Buckton per gallon still stands even with the press before rent prices given your ability to increment tallow at DGD?

Speaker 2

I mean fundamentally, Derek, that's what we believe. I mean clearly the volatility in Q3, The turnaround offline, 37 days, we disrupted our logistics both inbound and outbound there And move boats to Q4 that should have loaded etcetera, etcetera. The D4 RIN plays an important part In the value of that business down there. Clearly, we were not a hedger of D4 rents and we got And the volatility there with higher fat prices, lower green premium as we say, and you saw that flow through. But overall, Our thesis still remains the same.

Speaker 2

As Sue Ann pointed out to me, she said, even under Our investment case in this was $0.79 10 years ago on a $3.23 a gallon bill. We still believe in that. We believe it's even better now, given our CI advantages, given our both inbound, outbound Logistic advantages. I mean, keep in mind, why are fat prices a little lower in North America? Because Diamond Green is the largest importer now of fats In North America because it has the logistical capability to convert and pretreat those fats.

Speaker 2

So that's Phase 1. Phase 2, as the script alluded, We're working hard with the interested parties and we won't say who the interested parties are, so please don't ask, but we're very close And SAF is real. The demand is real and the margin opportunities as we've explained out there remain very real and doable. If you look at this business in 2024, Matt said, okay, I think there's a chance we could get the LCFS Implementation online a little sooner, even if it doesn't come till the back end of the year, just the fact when CARB publishes and everybody says, oh, here is the script, here's the playbook. That's positive and we'll see it, we'll see an improvement there.

Speaker 2

Number 2, as we look around the world for next year, the SAF side, our plant is progressing nicely. We made it through hurricane season. I know technically that's got another week or 2, but it looks like we've made it through hurricane season. We'll be buttoning it up, Steel's up, equipment's there and hopefully as we progress through the winter time and next summer we'll be mechanically complete And do a normal start up here. And that's if you look at it 2 to 3 years from now, You'll have 250,000,000 gallons of SAF in 24 or I mean 25 for sure.

Speaker 2

And then SAF 2 is on the drawing board here. Clearly, as we've communicated to people, that decision won't be made until we have complete Proof of concept of both the technology and the margin structure. But at the end of the day, if you look at 2024, 2025, 2026, you can Start to think out that our portfolio will include substantial gallons of SAF along with RD And then we'll have we'll own that arbitrage again as we go forward. So it's a as we look forward that we don't See any downside from our case. There may be a little low here that the market seems to want to price in.

Speaker 2

Matt, anything else you want

Speaker 5

to add? I would just say that one thing to keep in mind is that as this SAF comes online, The feedstock is renewable diesel. And so our plant is boiler plated for 2 50,000,000 gallons. And so when we turn on with that plant, that's 250,000,000 gallons of RD It's coming out of the RD market and going into the SAF market. So that's another, let's say, friendly component to the even the outlook for RD.

Speaker 7

That's great. And maybe Stan on DDD, I wanted to see if you could offer some additional color on the apparent delay you're seeing in RD capacity Expansions, weather delays or simply just difficulty of running that nameplate, which is more challenging than I think we all appreciate. We see the same, but I'd like your views on that as well.

Speaker 2

Yes. And I'll tag team this with the team in here. I mean, Clearly, as we look around the horn, we're both buyers and sellers of fats and oils around the world. And When I say buyers, I mean that's the DGD hat and sellers, that's the Darling hat. And clearly, we're not seeing the demand from The renewable guys in North America, in fact, we're absolutely we're buying material back from them.

Speaker 2

I think I guess if we say frustration that might be too strong. Our curiosity and a bit of frustration is that when People started whether it was Bloomberg or others putting out these S and Ds on D4 RINs, they forget multiple components of it. Number 1, they assume If Phillips 66 announces a plan, it's going to be online Jan 1 and run at capacity. If Vertex, at PBF, I HollyFrontier finally hit 52% capacity, yay. At the end of the day, you just keep reading this stuff.

Speaker 2

Well, that doesn't generate the level of RINs that they're saying. And then the world doesn't understand when you export Material, which is a significant portion of Diamond Green because of its location on the Gulf Coast that goes around the world. At the end of the day, those RINs get retired in 60 days. There's a delay there. So, at the end of the day, you kind of have to go back and rebalance this Saying with reality.

Speaker 2

So, we're buying back fat, we're not selling and selling means they don't have the pretreatment units That they claim they do or they would be buying the cheapest fats in the world. Matt, anything else you want to add?

Speaker 5

As I think many of these are learning. This is not necessarily an easy business to operate. And whether it's, call it, the CI component The quality of the raw material and the pretreatment component requires more CapEx and if Someone tried to cut corners and save on CapEx, then they find out that, gee, now this product, we can't process it or it's at The capacity that we wanted. So, this is a it is a complex and not easy business To operate in and I think some of these people are finding that out.

Operator

The next question comes from Dushyant Aliyan of Jefferies. Please go ahead.

Speaker 8

Good morning, guys. Thank you for taking my question. The first one I had was on the guidance that you've given for 2024, The 1.7% to 1.8%, could you talk a little bit more about what margins do you expect for the Food and Feed

Speaker 2

segment. Not really ready to go there yet, Dushyant. I mean, as I look at it, When we take a shot at producing guidance here, what you can back into here as you can say, what are you thinking on Diamond Green Diesel? Well, we're thinking that we're going to run it at above nameplate capacity and we're going to make $1, $1.10 a gallon next year And it doesn't include any SAF gallons coming on early at this time. It's just too early to make that prediction.

Speaker 2

And so it's not hard to back into that number. And so At the end of the day, where it lands, whether it's in food or feed, we're still we're thinking that the numbers are going to roll up between 1,000,000,000,000, 1,000,000,000, maybe a little more in the core business depending on where fab prices recover. And as we've said, if renewable diesel Capacity is there and has free treatability or even if it doesn't have free treatability, fats and oil prices can't stay where they're at. If you look at the whether it's a soybean oil, S and D, we're at a multiyear low And RVD margins, which most of these guys are running are now 1100 over. So that's $0.11 higher Then we're operating at.

Speaker 2

So that's how we kind of cast it looking forward. Matt, Bobby, anything you want to add to?

Speaker 9

I think that's right. I mean, we're just at a it's a generally tight S and D scenario and we're A lot needs to happen as far as crop production in South America and that's really going to determine what we see with respect to Certainly protein levels and ultimately oil levels as well.

Speaker 8

Thank you. That's helpful. And then one question I had was just kind of your Thoughts on buybacks given where the stock price is today or maybe just in general, I know that the goal is to kind of get to that 2.5 leverage, But any thoughts on any of the higher buybacks given where the stock's trading today?

Speaker 2

It is a discussion point with The Board, we have adequate capacity to do that. Clearly, our focus today is, as we said, is to repatriate cash And get the total debt down and get to at least a discussion point of investment grade as we have some maturities coming in In 2026 and 2027. So it's not off the table. Clearly every year we will buy back Any executive compensation or dilution for sure and after that then it's opportunistic. And as the year goes along and as Brad says, I have a little For cash, we've been given the authority to make those decisions.

Speaker 2

So nothing's off the table here.

Operator

The next question comes from Paul Cheng of Scotiabank. Please go ahead.

Speaker 10

Thank you. Good morning, guys. Good morning. Good morning. Randy, Trying to understand sequentially from the second to third quarter, the feed ingredient revenue is down, The sales volumes is actually flat and all the market indicator whether it's UCO, Taro, all that is actually up.

Speaker 10

We're trying to understand that what causing the sequential revenue drop From 2nd to 3rd quarter in the feed business? That's the first question.

Speaker 3

Yes. Paul, this is Brad. When you're looking sequentially, we have, for lack of a better word, lead and lags in a lot of our contracts. And so there's timing differences there that will often and when you get quick movements where Randy talked about earlier And then with the way the contracts work and the lead and the lag that Can cause a little bit of kind of discolor there, I would say.

Speaker 10

And so Brett, Should we based on that means in the Q4, we should see comparing to the Market indicator, your revenue we see more of an upside or that the lag effect is going

Speaker 2

Yes. Typically what you're going to see then is, if you think of it this way and Today around the world, we have a significant amount of our internal produced fats and oils, whether they're in Europe Or Brazil or North America headed to Diamond Green Diesel. And so as those were if you want to think about it, What we produced in August is sold and it doesn't arrive and be processed until October and September is kind of November And October now is December, January. And so, as we said earlier in the script, so you had a move up of fat prices In Q3 that then were sold and purchased and so those will flow through And those should deliver a pretty good 4th quarter in the Feed Ingredients segment.

Operator

The next question comes from Andrew Strelzik of BMO. Please go ahead.

Speaker 7

Hey, good morning. Thanks for taking the questions. My first one is on Diamond Green Diesel. And I think Randy, kind of over time you've talked about $0.90 or $1 being the cost advantage or the minimum, kind of margin to think about for DGD versus The marginal producer and you kind of talked around this I think a little bit earlier, but I was hoping if you could be a little bit more specific. But do you think that that number has changed at all with New capacity has come on, etcetera, or is that still the right way to think over time about the baseline DGD margin?

Speaker 2

Yes, I don't really see anything changing that competitive advantage out there right now. I mean, I'm looking around the table and I don't

Speaker 5

No, I agree. That's something that we consider as a competitive advantage. We're going to Continue to leverage that advantage going forward, trying to stay, let's say, ahead of the game. And that's again with the even with the SAF project is going Separate us even further from our competition.

Speaker 9

If I could just add, I think one thing to keep in mind is part of that advantage It's DGD's ability to blend all different kinds of feedstocks and the price relationship amongst those feedstocks Changes a lot from time to time. So the relative advantage is not something that you can pinpoint and be as static. But generally speaking, I think that the advantage that we had before continues to be the case today.

Speaker 2

Yes. And I think the DGD Pixology has become even more complicated given whether you've got Cat 3 fat coming from Rotterdam, from our factories Or you got tallows and yellow greases coming from Brazil and Yukos from the Asian countries. You got a timing of when those arrive and then you've got a usage. You can't we don't really run feedstocks neat in a sense. So We make a mix that meets our customers' needs that allows us to get the highest yield that we can and the longest catalyst life.

Speaker 2

And so it becomes a far more complicated thing, but the competitive advantage, like I said, versus running RBD soybean oil Right now it's $0.88 a gallon. So that's not even a CI differential there. So I think As you've seen through the year, remember Port Arthur is still waiting on its pathway. We anticipated any time. So Port Arthur has not had the economics that it will have next year again and then that's Port Arthur pre SAF.

Speaker 2

So, I think the advantage is very sustainable and widens out over time. Like I said, I don't want to be somebody that doesn't say there's going to be Less volatility due to timing here, but I think the margins are very achievable.

Speaker 5

And on top of that advantage, there's the value of our integration with our feed And we're producing even the local fat supplies in the U. S. And Canada that a large percentage of that Ends up in DGD and then again one of the other things back to DGD is the producers tax credit going forward. We think that DGB is again one more time more advantaged than the others When that calculation comes into place. So, again, we like our position.

Speaker 7

Okay. That was really helpful color. I appreciate that. Just my second question, on the Following up on some of your commentary around some integration benefits that remain or opportunities that remain, we know I think that there's some Valley contracts that go into effect Jan 1, is that really what you're talking about? And is there any way to quantify that?

Speaker 7

Or more broadly, are you seeing given kind of The bigger asset footprint with all the acquisitions, etcetera, that there's even more opportunity broadly beyond Valley to continue to optimize? Thanks.

Speaker 2

Yes. And I think those comments were in the script. I mean, clearly, the U. S. Operations and procurement teams have made great strides at Valley and then our international team down in Brazil, taking a private company to public is no small task on Either continent here and then if you will, making them darling.

Speaker 2

And we tend to be conservative, we tend to risk manage And we have a margin expectation in our core ingredient business that's very well known and our return standards are etched in And metal there for us. And so at the end of the day, we've made the success of the Valley integration, as we said, has been the Ability to improve the raw material procurement contracts and all the little terms and conditions in there. And then ultimately, as I said earlier, we're still short massive capacity on the Eastern seaboard That's ready to come online, but as we've shared with others, we're waiting on motor control gear That's due to be delivered here this winter. Otherwise, we'd have that plant back up. But the supply chain, we're still moving stuff Inefficiently, 2 plants just to support our supply base out there.

Speaker 2

And once word comes up Next winter or next spring, I mean, in the Q1, we should be back in good shape there. And then we've got capacity Expansion is going on down in Brazil right now that are just in the commissioning stages that should be accretive to us next year. So I mean, The world looks pretty darn good next year. It doesn't look like we'll have 3% to 5% growth of raw material tonnage as we've seen over the Last several years, there's a little bit of contraction of animal numbers out there, whether it's disease or whether it was just margin in Feeding people, but at the end

Speaker 8

of the

Speaker 2

day, you're setting up pretty nice for next year.

Operator

The next question comes from Sam Margolin of Wolfe Research. Please go ahead.

Speaker 11

Hi, good morning. Thanks for taking the question. My first question is on just the vet environment. You've talked a little bit about the relationship to the vegetable oil complex. But Is there a scenario where fats prices next year decouple from veg oils just because If the whole if the pressure in the system is originating from RINs oversupply, you solve that with lower biodiesel production, which would disproportionately impact Soybean oil supply demand versus fats and then if there's a corresponding LCFS rally that might further Benefit tallow and yellow grease prices relative to veg oils.

Speaker 11

Is that a scenario that you think is possible?

Speaker 2

I really don't think so. Number 1, I think as we've said all along, clearly The Gen 1 technology of classic biodiesel would be the one that would become challenged. But the reason it would become challenged Would be because there will be RD capacity that then would take that supply. You just kind of have to do the numbers. If Martinez is really going to run 730,000,000 gallons, That's 3,000,000 tons of raw material.

Speaker 2

If P66 can do half of what they think they can, that's another 1,500,000 $2,000,000 And then you still got the PBFs and you got the Vertexes, you got RAG Geismar, All these guys that seem to be new demand out there. I mean, you can see the scenario quickly change. Now the question is, what is D4Renzu? Bob, you want to take

Speaker 9

a shot at that? Well, I think you're right on, Randy. I think the only way that we would decouple is if RD production were to plummet because of challenges in running and operating, but if that were to happen, RIN values Should go higher and that would significantly benefit our broader network. But we don't really see that happening. What we see is Overall, RD production having some challenges, but continuing to have a significant demand pull and keeping prices Relative prices in line between fats and oils.

Speaker 11

Got it. Okay. And then this is a follow-up, but it's also On the fats outlook, with the LCFS proposal, I mean, obviously, a lot of people are looking at that through the lens of RD margins, But it seems like it would impact the batch market too over time, because CI would become more important So values to intrinsic value of different feedstocks. And so, but of course, it's very regional specific. It's only California.

Speaker 11

So I was wondering what your thoughts on that are, if you think maybe the LCFS proposal is actually a bigger deal For Tallo than it is for underlying RD margins?

Speaker 2

I think we would believe that we would think Clearly favors low CI as does SAF. I mean clearly, I think if we Sum the whole conversation today down to one thing, it's about timing. R and D is a good business. It's got growing demand globally. SAS is going to be a great business.

Speaker 2

It's Incredible growing demand. We've got maritime fuels and oh, by the way, they all favor low CI feedstocks. And we're stuck in this rut of saying, well, what are margins going to be? Where's D4? Where's LCFS?

Speaker 2

And at the long term, as we've always said, The competitive advantage of the Gulf Coast real estate, whether you're shipping SAF by pipeline, boat to Europe Or to California. It's just going to really work out pretty nice. Man, I don't

Speaker 5

know what The only other thing to keep in mind Is that obviously the LCFS is specific to California, but as we're doing business in other markets, The LCFS is a reference in our valuation when we're using to determine whether product is sold to another market or to California. So one way or another that LCFS valuation is built into all of the RD sales, Regardless of whether it goes to California or not. So that's an important component not to overlook.

Operator

The next question comes from Ben Bienvenu of Stephens. Please go ahead.

Speaker 11

Thanks. Good morning. I wonder if we

Speaker 12

could talk about 2024. Randy, you talked about 1 point $7,000,000,000 to $1,800,000,000 of EBITDA.

Speaker 4

What do

Speaker 12

you think that translates to for free cash flow? And then what are your priorities for free cash flow As we start to see CapEx budgets potentially come off of peak at DGD notwithstanding the SAF expansion that you want to engage in?

Speaker 2

Yes. And I think we had this discussion with our board. I mean, as you guys look to valuing the company here, ultimately we can We can talk about combined adjusted EBITDA, but it's actually what is the dividend plus the core ingredient business and then how much CapEx are we going to spend And what's in the M and A pipeline. And so when we look to DGD and we say above nameplate $1.10 a gallon, you can come up with an easy $500,000,000 of dividends there. And then you look at our Core ingredient business and if we're at a $1,000,000,000 $1,100,000,000 there's your number right there, dollars 500,000,000 CapEx.

Speaker 2

If we That's got you probably $100,000,000 of growth projects of the new plants we've talked about building. And then you look at it and you say you got An interest bill of around $230,000,000 and cash taxes $160,000,000 $160,000,000 and then some limited buybacks in there that could be higher We're doing a little better or whatever, but you quickly pull down debt down to around that $4,000,000,000 $3,900,000,000 level.

Speaker 5

We do have one pending transaction that's out there and on a Mirapaz. Mirapaz in Poland, which is €110,000,000 that It's expected to close likely in Q1. But outside of that, I would say 24 is an M and A light year on new acquisitions.

Speaker 2

I call it an M and A holiday.

Speaker 12

Vernon, very good, very helpful and makes sense. On the Q3 in the feed business, I want to ask about in the EUCO segment. The pricing seems to be much weaker year over year Broader UCO quotes would suggest, is there something discrete or specific that's happening in 3rd quarter that we should be mindful of as we think about the relationship between pricing in that segment and the pricing of Used cooking oil out in the marketplace.

Speaker 2

This is Randy. Year over year, I think prices were 55% down to 55%, so off about 20% -ish. Remember Q3 a year ago, Diamond Green Diesel 3 was not operational yet. And so we were still trading a bunch of material around the world. So as Brad said earlier, you got some leads and lags.

Speaker 2

You've got some quality premiums. You've got some training that was going on there. But I don't know anything else you want to add Brad?

Speaker 3

No, that's it. Oftentimes when we're exporting in the past, there can be some premiums built in there With that exporting. So that'll all flush out with now that we have all three units on and are going forward.

Operator

The next question comes from Matthew Blair of TPH. Please go ahead.

Speaker 9

Hey, good morning. Thanks for taking my questions. I guess the first one is, I think in your recent guidance you talked about that you DGD margins higher in Q4 versus Q3. And I wanted to see if that still held. On our modeling, it seems like you would receive a pretty nice tailwind from the hedging side of things, but we were worried that there would still be Some of that price lag impact from your feedstocks versus the low D4 RINs in Q4 That might weigh on margins.

Speaker 9

So I wanted to check on that first.

Speaker 5

Yes, I would say that's The reality of the way our book works, we do have we have to manage the pipeline through DGD. There's Anticipated purchases and so we're chewing through that. But I would say that the if you think about the progression through the quarter, December will be better than October.

Speaker 9

Yes, we see that too. And so just to be clear that the guidance is still That Q4 DGD margins higher than Q3?

Speaker 2

Clearly, we're going to make more gallons. I mean, that's an absolute. And right now, if we had to look at it, as Matt said, as each month goes on and that margin is widening out, spot margins, as you can see are much better. We should have a hedge gain coming back provided there's no major rally again then in the heating oil market and that's Assuming D4s and LCFS really kind of flat.

Operator

The next question comes from Jason Gabelman of Cowen. Please go ahead.

Speaker 13

Yes. Hey, thanks My first one is on the 2023 outlook and it's a 2 parter. The first part of it is You had initially or previously guided to 1.875, you reduced that. In hindsight, where do you think you were off from the prior Current guidance. And then as you think about the $100,000,000 EBITDA range for 4Q, how do you think about what's driving the high The low end of that range.

Speaker 13

And I have a follow-up. Thanks.

Speaker 2

Yes. I think there's 3 letters that drove most of it. DTD in Q3 clearly was a didn't deliver what we thought it was and we're going to be. And clearly we're being somewhat conservative on DGD Q4. Right now, it looks like DGD has got to deliver for us to get to the high end of the range in Q4.

Speaker 2

And then the FAP prices That didn't get recognized in Q3 because they were sold the DGD in Q4 have to flow through. Like we just said, there's timing issues here that puts you that kind of range. I continue to look at myself in the mirror and say, why am I even trying to guide this thing after 20 years. So, it's just like, but we have a pretty good feel for it. I mean, as we came in and I'll just remind The listeners as we came in sequentially out of Q2, we said seasonally we would be lower in Q3 and we were.

Speaker 2

And so plus or minus 5%, not bad. What we didn't see coming at us was the DGD, All the volatility that hit there due to whatever you want to call it, the war in the Middle East and D4 RINs collapse and everything there that could have happened to you The fire took us offline. That was another 10 days or minor disruption as we call it. And The team did a magical job, but it just you got to power down and power back up and that's 6 days with 3, 4 days of repairs. So those That took another, I don't know, 20,000,000 gallons or offline or whatever it was.

Speaker 2

So that's why we're a little more bullish Q4 than we were in Q3 here.

Speaker 13

All right, great. And my follow-up is on the 2024 outlook. And it seems like there's a decent amount of crushing capacity For soybeans coming online in the U. S. And as we sit here, soybean oil pricing is still Decently above where it was relative, I guess, to where it was prior to COVID.

Speaker 13

So it does seem like there's potential for some Downside next year and I know you touched on it earlier, but was just wondering if your outlook factors in all that new crush capacity coming online in North America And how that can impact vegetable oil prices? Thanks.

Speaker 5

Yes. This is Matt. I would say, yes, that is factored into our expectations, Whether it's oil or and including protein. So these The new plants are known projects. It wouldn't surprise me, similar to what we're seeing in the RD space if Some of them get delayed for a myriad of reasons.

Speaker 5

One of the other things we really haven't talked about lately is with This increase in interest rates that we've seen, CapEx and the money it takes to build and operate has gone up. So that means that's just the reality of the business. But at the end of the day, yes, we incorporate that into our expectations.

Speaker 2

Bob, you got any time?

Speaker 9

Yes. I think I would just add that near term imports have had a bigger impact than added crush capacity in the United States For oilseed crush and the other thing is that we are overall as an industry increasing renewable diesel capacity at a much faster pace than we're adding Oil production capacity. Short term, we've got a lot of oil in system and we've seen pressure on prices, but if you Even getting out 12 to 18 months, it's going to be pretty tough for the soybean oil industry to keep up with demand as we see it.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Randall Stuewe any closing remarks.

Speaker 2

All right. Thanks everybody for your questions today. As always, if you have additional questions, reach out to Sue Ann. Please stay safe, have a great holiday season, and we'll look forward to talking to you in the future.

Operator

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

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Key Takeaways

  • Darling reported Q3 net income of $125 million ($0.77/share) on net sales of $1.63 billion, a 7% decline year-over-year, as gross margins rose to 23.8% but operating income fell 33% due mainly to lower Diamond Green Diesel (DGD) earnings and higher depreciation, SG&A and interest costs.
  • The Feed Ingredients segment saw flat raw material volumes and margins back to pre-acquisition levels, while Specialty Food Ingredients volumes jumped 18% on the Gelnex deal and benefited from new capacity in Brazil and upcoming 2024 launches of health-targeted collagen products.
  • DGD volumes were dented by a 37-day turnaround and minor disruptions at its St. Charles, LA plant, yet year-to-date production hit 910 million gallons at about $1.02/gal EBITDA, generating $163.6 million in dividends to Darling.
  • For 2023 Darling trimmed its full-year combined adjusted EBITDA guidance to $1.6–$1.7 billion and sees 2024 EBITDA rising to $1.7–$1.8 billion, supported by lower capex, disciplined working capital, regular DGD dividends and an aim to reach ~2.5x leverage.
  • Management remains optimistic on policy drivers like emerging LCFS enhancements, growing demand for SAF and low-CI feedstocks, leveraging its integrated global platform and Gulf Coast logistics to secure durable competitive margins.
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Earnings Conference Call
Darling Ingredients Q3 2023
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