Darling Ingredients Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 19 speakers on the call.

Operator

Good morning, and welcome to the Darling Ingredients, Inc. Conference Call to discuss the company's Q1 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 I'd now like to turn the call over to Ms.

Operator

Sue Ann Guthrie. Please go ahead.

Speaker 1

Thank you. Thank you for joining the Darling Ingredients' Q1 2023 earnings call. Here with me today are Mr. Randall C. Stewie, Chairman and Chief Executive Officer Mr.

Speaker 1

Brad Phillips, Chief Financial Officer Mr. John Bullock, Chief Strategy Officer and Ms. Sandra Dudley, Executive Vice President of Renewables and U. S. Specialty Operations.

Speaker 1

Our Q1 2023 earnings news release and slide presentation are available on the Investor Relations 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 could materially differ because of factors discussed in yesterday's press release and the comments made during this conference call and in the Risk Factors section of our Form 10 ks, 10 Q and other reported filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward looking statements.

Speaker 1

I will now hand the call over to Randy.

Speaker 2

Hey, thanks, Sue Ann. Good morning, everybody, and thanks for joining us for our first We have had a very solid start to the year. All business units performed as expected and our DGD system attained full rate during the month of March. Looking at our segments in detail, For the Q1 of 2023, we ended the quarter at $418,400,000 in combined adjusted EBITDA. The Feed Ingredients segment ended the quarter at 213 Team point 1, our Specialty Food Ingredients segment earned $73,200,000 while our Fuel segment earned $153,600,000 in EBITDA, with approximately 129.3 attributed to Diamond Green Diesel.

Speaker 2

Turning to the Feed Ingredients segment in detail. Globally, raw material volumes were up 39% compared to Q1 2022. While we saw a decline in global fat prices, Protein prices remain strong around the world. While lower fat prices will modestly impact the segment, it will be more than offset by higher earnings in Diamond Green Diesel in future quarters. Integration of our recent acquisitions remains a key focus.

Speaker 2

I'm pleased to report that once again we realize We continue to make improvements at our recently acquired Eastern USA plants that will improve reliability and efficiency as well allow us to produce and market higher value finished products. We're pleased with the progress and believe by year end we will be nearly complete. Turning to our Specialty Food Ingredients segment, The global Collagen and Gelatin business remains robust. We closed on the Gelneck acquisition on March 31st And integration work has already started. Together, we believe we have the strongest and most robust collagen system in the world with a pipeline of new products for years to come.

Speaker 2

Moving to our fuel segment, Diamond Green Diesel is running very well and set another sales record in Q1. We have achieved a milestone with the DGD system operating at 1,200,000,000 gallons annually. It should be noted that March shipments were light with Chip loadings moving into Q2. With lower fab prices and inbound logistics running smoothly, 2nd quarter is shaping up to be a record for Diamond Green Diesel. Now with this, I'd like to hand the call over to Brad to take us through the financials, then I'll come back and discuss my outlook and thoughts on the balance of 2023.

Speaker 2

Brad?

Speaker 3

Okay. Thanks, Randy. Net income for the Q1 2023 totaled $185,800,000 or $1.14 per diluted share compared to net income of $188,100,000 or $1.14 per diluted share for the 2022 Q1. Net sales were $1,790,000,000 for the Q1 2023 as compared to $1,370,000,000 for the Q1 2022 or a 31% increase in net sales. Operating income increased 10% to $255,800,000 for the Q1 of 2023 compared to 232 $900,000 for the Q1 of 2022, primarily due to a $78,400,000 increase in gross margin.

Speaker 3

As Randy said the gross margin continued to sequentially improve for all segments. Darling's share of Diamond Green Diesel's earnings increased 22 $500,000 quarter over quarter, which more than offset depreciation and amortization increasing $36,800,000 SG and A increasing about $33,400,000 $4,500,000 in additional restructuring costs, primarily related to the Peabody closure. Total other expenses increased approximately $21,700,000 quarter over quarter with an increase in interest expense of $34,700,000 partially offset by an increase in foreign currency gains of $6,100,000 and an increase in other income of $6,900,000 which was primarily due to casualty loss insurance proceeds received for the prior year Tacoma plant fire. Now turning to income taxes. The company recorded income tax expense of $27,000,000 for the Q1 of 2023 with an effective tax rate for the Q1 of 12.4%, 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 company also paid $39,000,000 of income taxes in the Q1.

Speaker 3

For 2023, we are projecting an effective tax rate of 14% and cash taxes of approximately $140,000,000 for the remainder of the year. The balance sheet now exceeds $10,000,000,000 in assets with the inclusion of Gelnex. Since Gelnex closed at the very end of the 1st quarter, no earnings activity was recorded during Q1. The company's total debt outstanding at first Quarter 2023 was $4,700,000,000 after the Gelnex acquisition as compared to $3,400,000,000 at fiscal year end 2022. In conjunction with the Gelnex funding, we entered into a 3 year interest rate swap to fix $600,000,000 of floating rate debt at an average swap rate of 3.78 percent and also entered into a 2 year cross currency swap of 557,000,000 to hedge a euro intercompany loan, which synthetically converted U.

Speaker 3

S. Debt to euro debt and reduced the interest rate by 1.2%. Our bank coverage leverage ratio at the end of the Q1 was 3.19x as compared to 2.54x at fiscal year end 2022. We continue to maintain strong liquidity with $866,000,000 available on our revolving credit facility as of quarter end. Capital expenditures totaled $111,300,000 in the Q1 with $454,000,000 of expenditures anticipated for the remainder of the year.

Speaker 3

The company repurchased approximately 773,000 shares of its common stock for $43,800,000 during the Q1. With that, I'll turn it back to you, Randy.

Speaker 2

Hey, thanks Brad. Again, Darling is off to a tremendous start for 2023. Raw material volumes are in line with expectation, integration activities are on target, energy prices in Europe have moderated, Our global Collagen and Gelatin business is quite strong and Diamond Green Diesel is expected to perform very well with lower raw material prices, Strong green premiums and robust global demand. The earning power of our unique vertically integrated business we have built will become very evident over the next Finally, we remain committed to our financial management policy that we have previously discussed. DGD is now nearly delevered and dividend should become a reality very soon.

Speaker 2

Leverage post our Brazilian acquisition has peaked and we will target a 2.7 leverage ratio by year end along with the goal of investment grade for 2024. Other than our previously announced Mirapaz bolt on acquisition in Poland, which is expected to close by year end. Our M and A activity has been paused, so we can concentrate on integration, value creation and deleveraging. I have high expectations for the Q2 and if the operating environment continues, we're estimating Combined adjusted EBITDA to be in the range of $485,000,000 to $525,000,000 For the year, we are once again reconfirming our guidance of 1.8 $75,000,000,000 combined adjusted EBITDA. Now with that, let's go ahead and open it up to Q and A please.

Operator

We will now begin the question and answer session. At this time, we will pause momentarily to assemble our roster. And our first question will come from Manav Gupta of UBS. Please go ahead.

Speaker 4

First, congrats on a very good quarter. Great to see continuous improvement in the feed gross margin. Randy, you have got some pushback on your recent M and A deals, But looks like things are really falling in place now. Those deals are giving you a big volume bump, which far exceeds market expectations. My question is with regards for demand for your products, which support these higher volumes.

Speaker 4

Do you think the demand for fats, proteins and UCO will actually hold up Well, for the next 12 months to 24 months and can we actually see an increase in demand for our products, both feed and food in the medium to longer term?

Speaker 2

Yes. Thanks, Manav. And John Bullock and I will kind of tag team this a little bit here on thoughts here. But yes, I mean global demand for proteins remain Incredibly strong out there. Pet food demand remains strong.

Speaker 2

Pricing premiums are as expected. Clearly, the fats and oils business around the world seems to have come off a little bit with palm oil leading the way and soy following and then waste fats Can't other than the CI premium can attain a considerable premium above the 2 biggest fats and oils in the world. With that, demand is good. I mean, Diamond Green Diesel is running at capacity. And so at the end of the day, that's Different than, if you will, the Q4 as we were continuing to struggle with logistics down In Port Arthur.

Speaker 2

So yes, demand is going to continue to be very strong, whether it comes from domestic It will depend on the arbitrage, but most importantly, as a management team, we want people to understand The concept and the strategy that we built Diamond Green Diesel under. The one piece of information that people just continue to ignore is Darling doesn't supply 100 percent of Diamond Green Diesel. It can't. It's too big. Our system has the ability globally to Apply up to about half if we want to, if we don't have better markets.

Speaker 2

It's not near that today. So what's that mean to the Feed segment and to the overall business. It's very simple. We have told shareholders for a year that every penny that fact prices move up or down is somewhere around $10,000,000 $11,000,000 annually in U. S.

Speaker 2

Dollar EBITDA. So, fat prices are down, I don't know, dollars 0.12 dollars 0.15 dollars Let's call it that's $150,000,000 to $165,000,000 of EBITDA. So easy math, dollars 0.10 a pound With standard yields in a Diamond Green Diesel plant for us, call it $0.90 a gallon of potential improvement in margin. Half of that is $0.45 And so if you just capture half or 2 thirds then times 1,200,000,000 gallons, you've got somewhere between $500,000,000 $700,000,000 of EBITDA improvement, Which we get half of. So in the sense of basic amateur investment thesis, if you give somebody $150,000,000 and they're going to give you back $300,000,000 or $400,000,000 that's a pretty good investment.

Speaker 2

So we want people to focus on the system And that was the system that we build. Diamond Green Diesel, its collective demand drives a larger share of earnings for Darling. John, anything you want to add to this? So, I hope

Speaker 5

Yes. I think you mentioned it in your kind of statement there, Manav. The reason we scaled is because We know what the value of low CI fats are in the world and with the Valley deal and the Fazda deal, we massively We scaled our ability to have low CI fats available for Diamond Green Diesel. We're either going to get it in the form of higher fat prices in our core system or we're going to get it at Diamond Green Diesel In the form of higher margins at Diamond Green Diesel. So basically, we're going to win no matter how the cards are dealt.

Speaker 4

Thank you for a very detailed response. Congrats on a great quarter. I'll turn it over. Thank you, guys.

Operator

The next question will come from Tom Palmer of JPMorgan.

Speaker 6

Good morning and thanks for the question. I know there's and you just walked through a little bit, some moving pieces, right, with feedstock pricing and what that means for both the base business At Diamond Green Diesel. But in the past, you provided within your guidance some outlook for EBITDA per gallon at DGD and then also Kind of what you're thinking in terms of ACE business earnings. I didn't hear that today. And again, I know there's some moving pieces, especially with the feedstock pricing.

Speaker 6

But do you have any kind of rough construct of how that $18,750,000 EBITDA outlook splits between the two sides of the business?

Speaker 2

Good question, Tom. That's the part that we want people to focus on the system rather than trying to Segment down to food, feed and fuel. It's a dynamic situation. And as John Bullock said, We win under either scenario. So at the end of the day, that's where we're coming out and saying $485,000,000 So how do I That get $485,000,000 well that's $18,750,000,000 minus $4.18 divided by 3 last time I checked.

Speaker 2

And then At the end of the day, we believe that the lower fat prices will have some opportunity for bigger gallons in Diamond Green Diesel in Q2. As I also made my earlier comments, boat loadings are not always linear and some gallons move from Q1 to Q2. So That's where we're given the larger guidance, but we're largely on target. And as we said, it'll move from one side of the ledger to the other side of the ledger as we go forward.

Speaker 6

Thanks for that. And maybe I could just quickly follow-up on the Gallant's comments. So If I look at the last couple of years, last quarter there was about a $20,000,000 undershipment relative to production and then last year It was a bit closer to $30,000,000 So is there inherently in the business, just given it's so much bigger that that kind of accumulated $50,000,000 in inventory is a portion of that just paid going forward. There's always going to be a little bit more inventory being held. I'm just trying to get a sense of how much when you're kind of talking about this unwind coming In terms of shipment timing, we should be thinking about it.

Speaker 6

Is it that $20,000,000 or is there this larger pool closer to $50,000,000 that should unwind as the year plays out?

Speaker 2

No. And I'll let Sandy comment a little bit. But as I go back and look at, been in the business for 40 years and like I said, Ships come and go, bill of landings get created and you miss a day and you don't recognize it. Also you have to understand when Darling Ships to the Diamond Green Diesel system until it's unloaded, it doesn't get recognized in our business. So there's always those pieces in here.

Speaker 2

But obviously, if I look at the 418 and I look at the bill of lading Dates here, maybe it would have added, I don't know, dollars 15,000,000 to $20,000,000 to the quarter in Q1. So that's about as granular as we can get there. But Inventory is going to build and go as we load rail or we load barge or we load ship here. So nothing there to try to overthink.

Speaker 7

Okay. Thanks so much.

Operator

And our next question comes from Derrick Whitfield of Stifel.

Speaker 8

Good morning, all and congrats on a solid start to the year.

Speaker 2

Thank you. Good morning, Derek.

Speaker 8

For my first question, I wanted to focus on EBITDA guidance and I apologize, Randy, but just really want to better frame the setup For your business and the value of your business, from our perspective, every segment is outperforming our model Q1 and we seemingly have tailwinds down nearly every segment, including Gilenex's margin contribution in food, Valley's margin uplift in feed and your 4:one net net EBITDA gain in DGD margins as a result of lower fat prices. Having said that, isn't it reasonable for us to think that your 2023 guidance of $1,875,000,000 is relatively conservative?

Speaker 2

My personal opinion is that it is, but I want to keep in mind that the marketplace is Still inverted on fats, proteins around the world as the world expects bigger crops of everything again this year. Ultimately, as we've tried to tell people, the our Diamond Green Diesel system has a very significant And I think it's been obvious with the other releasers of earnings out there. And What we're trying to do is make sure that we believe that the Diamond Green system we're trying to forecast. I mean, we gave earlier guidance in the year of what Sandy, Yes, 1,200,000,000 gallons and $1.25 Right now those margins on a spot basis are quite a bit higher. Why?

Speaker 2

Because of higher feed or lower feedstock. But at the end of the day, we're kind of sitting there going in the feed segment. Clearly, Our operations team has done a tremendous job of bringing in that system and getting it aligned with the normal Darling operations. Our Resilient operations are performing very well. Our gelatin and collagen business around the world is doing very well.

Speaker 2

And we're about to add another 6 or 7 plants in the system here in the Q2 with Jonex being integrated in. So And then our green energy business in Europe. So I mean, yes, there are a bit of tailwinds here, but not really. These are just solid operations that are going on now With proper risk management. John, anything you want to add to that?

Speaker 5

Yes. I think what oftentimes we look we're a margin management company, right? There's no doubt about it that as fat prices go up and down, that's going to have an impact on our core rendering business. But we have an embedded offset Inside the system now that actually may be an embedded offset with a multiplier and lower fat price times. So at the end of the day, we're able to manage our raw material costs around our system in all of our marketplaces.

Speaker 5

And the only place where we've got any type of an embedded tremendous impact or even not a tremendous But an impact on our core rendering business is the fat segment. And now we've embedded an offset that insulates us from that. So At the end of the day, markets are going to go higher and markets are going to go lower, but we feel very, very good about how we position the company to have sustainable EBITDA, no matter what the market conditions are out there.

Speaker 8

That's terrific. And Perhaps with my follow-up, with respect to Gelnex, could you speak to A, what you've learned about the asset now that You've integrated it into Darling and B, the potential synergies you see between it and Ruzilol?

Speaker 5

Yes. So this is John. Yes, I spent the last 3 weeks with the Gelnex team. I can tell you that the Gelnex organization is As good an organization as I've ever seen in my life. These are top professionals.

Speaker 5

It's well managed, Excellent, excellent group of employees. Their plants are tremendous. Their marketing efforts are tremendous. They're just a tremendous organization all the way around. We cannot be more excited To bring Gelnex into the Darling family.

Speaker 8

Very helpful. Thanks for your time.

Operator

And our next question will come from Dushyant Aliyanese of Jefferies.

Speaker 9

Hi, team. Thank you for taking my questions. My first one is on the Feed segment. Looks like you're seeing recovery in the margins, which is good. I guess my question is, how do we think about the pace of recovery?

Speaker 9

I know previously you've talked about a 1,000 day integration. Could that timeline be sooner? What's a good gross margin to think about for Feed segment, a normalized margin?

Speaker 3

Mitch, Dushyant, this is Brad. Say, we have continuing improvements yet to be Still gained in our system. So yes, you've noticed, I mean, there is a definitely, Randy pointed out our operations guys And what's transpired there the last two quarters, we expect will continue. So let's say in the mid-twenty percent Level, which is somewhere in the ballpark where we were back before Q3 last year.

Speaker 2

Yes. And this is Randy. I mean, clearly, you guys want to focus on Vale, but also the Brazilian rendering system down there. We've had to put procurement and risk management and spread management systems in place down there as the markets have kind of moved around here. It's going to normalize out in the mid-20s as Brad says, and it seems to be very manageable right there.

Speaker 2

We still got work to do with it in the Eastern Shore plants as I call them now. Their margins still have some opportunity to be expanded there as we Learn to make different products and learn to operate plants more reliably. And then we still got some raw material agreements that have to be Modified in the coming year, year and a half. But for the most part, as I said, that integration by year end should be Very, very near complete other than a couple of raw material procurement agreements. I mean, in Q1 between a fire that we had in Tacoma Last summer and then in November of the fire we had in Ward, South Carolina, I expect that there was somewhere between $5,000,000 maybe up to $10,000,000 of additional expenses Just flowing through the system there related to transportation and loss of margin.

Speaker 2

So the system is very complex around the world, but overall it's I think that you're seeing it in the margin management as we move forward being done quite well.

Speaker 9

No, yes, I definitely see that. Thank you for that. And My second question is in your slides, you mentioned there's going to be a modest improvement or you expect a modest improvement in flat prices in the back half of the year. So how do we think about DGD margins then? Is 2Q going to be a peak in margins for DGD?

Speaker 2

So I always sit here and I have to be, I don't know, a little bit calm. You can't have it both ways. You can't tell me all this renewable diesel capacity is coming online and fat prices are going to continue to go down. And then the other side is you can't tell me that prices are going to go down and we can't earn a better margin at DGD. So it doesn't work that way.

Speaker 2

So long story short, and I'll defer to Sandy here a little bit is we believe that margins for the balance of the year in DGD will remain strong. It's kind of hard to always forecast beyond the next 60 days as we've seen April now. So, but I wouldn't call them by any means of Pete. What would you Hey, Sandy.

Speaker 10

Yes. I think I would say that we don't know what feedstock prices will do. But as John had mentioned, we have a great system. And so if we see feedstock prices go down, we'll benefit in DGD. If we see feedstock prices go up, we'll benefit in our base business.

Speaker 10

So at this point in time, I don't know where they're going to go, but I know that we're going to have an advantage and it's going to be great for us.

Speaker 2

Yes. And I think the other thing we would say is that the system we have a global system, we're bringing fats out of Brazil because it's The best market from our rendering plans that's helping margins there. And we're shipping our first boat out of Europe, which should be a wake up call to everybody in Europe. The fat prices have bottomed in Europe now as Diamond Green comes in and pulls away from The HVO or the R and D guys in Europe. So that's the reason we believe fat prices have bottomed and we think margins We'll remain quite strong in DGD for the balance of the year.

Speaker 9

Perfect. Thank you. I'll turn it over.

Operator

And our next question comes from Ryan Todd of Piper Sandler.

Speaker 11

Great, thanks. Maybe following up on the feedstock markets within the renewable diesel business. I I mean, the market seemed to absorb the addition of DGD Phase 3 without too much pain. You've got some very large capacity additions either ramping Or likely to come online by the end of the year. Are you seeing any signs of material tightness in the on the low CI Speed part of your business, improvements on the supply side at all that have helped on with that and any other kind of knock on effects of some of the additional R and Capacity in the market that you see within that business?

Speaker 2

And Sandy can help me here a little bit. From my seat, the answer is not really. I mean, clearly, we have shown that by locating Port Arthur And St. Charles on the water, we have the ability to originate from everywhere in the world and that took some pressure off The Diamond Green Diesel 3 startup. The second thing was clearly we had some logistical inbound unloading challenges there that have now been remedied.

Speaker 2

And so ultimately if you say, well, what rate were you running before and what rate are you running now? It's quite a bit higher from where we were In Q4 and ultimately we're cleaning up the amount of railcars and inbound tonnage that we had. So Sandy, what else do you want to add to that?

Speaker 10

Yes. Since DGD III has been online and we always worry when we bring a new facility online, what that feedstock market is going to look like. We haven't had any issues getting feed Doc, now our mix has maybe changed a little bit. We brought in some more international supplies. Some of those are actually Darling supplies by our FASA entity.

Speaker 10

And we've looked throughout the world and found other supplies as well. We also were able to obtain more Valley supply or supplies for Valley, entity that we bought. So we've just we've grown as Darling and in turn we're able to better serve DGD for that.

Speaker 11

Are you willing to roughly say like how much of the feed is in this last quarter came from international sources?

Speaker 10

Yes, I don't think that's something that we share.

Speaker 2

No, that'll move around from quarter to quarter, month to month. I mean, clearly, I think that the big piece and what you're seeing like in the margin improvement in the feed segment is the valley proteins material was headed offshore, the majority was before. Now it has the ability to go there. Relative to your other question, Ryan, on the other guys out there, we have no visibility to We read you guys' report and apparently there's a lot of capacity out there that we've never sold a pound to. And we get to see the only and then the soybean guys that I'm still close to, are selling a little bit of RVD to them And they all claim to have pretreatment systems.

Speaker 2

So that's all we see here.

Speaker 11

Thanks for that. Maybe on a Totally separate note. A follow-up on your you said quite a bit of this in your earlier remarks, but As we think about your use of cash in the near term, you've got a leverage target by the end of the year that you'd like to hit. You're Currently buying back some stock. As we think about the likelihood of a dividend, which you mentioned, Do you need to hit that debt target before the end of the year before you anticipate being able to roll out a dividend?

Speaker 11

Or how do you look at the, I guess the priorities over the next over the remainder of this year in terms of that use of excess cash.

Speaker 3

Yes, Ron, this is Brad. So we do, as our partner said, looking at dividends from the JV, which Is in concert obviously with our deleveraging theme by the end of the year. We do or in sync in terms Of the outlook here in the near term of possibly looking at cash dividend starting Before, let's say before Q2 is over, but certainly here at midyear, from the JV, With the margins that we're seeing now, we feel very confident in that. So that's Combined with what the base business is looking at, I mean, we want to be down in that clearly below 3 times. I mean, if you're looking at investment grade, the rating agencies look at that a little bit different than our bank covenants do.

Speaker 3

So they add back some of Some other things into that equation. So we want to be clearly below 3 times to give us the to give us that Leverage and story with the rating agencies going into 2024. So I think we would not be looking at The dividend, I think, Randy, back to shareholders here in 'twenty three. We're going to be get below 3 times, be sustainable there, Then evaluate our options from there.

Speaker 2

Yes. And clearly, if we're carrying that momentum into 2024, it's a different set of opportunities that exist for us.

Speaker 11

Great. Thank you.

Operator

The next question is from Andrew Strelzik of BMO Capital Markets.

Speaker 7

Hey, excuse me. Good morning. Thanks for taking the questions. First I wanted to ask on Gelnex. When you closed the acquisition, you've guided to the contribution to this year being kind of on the lower end of that $75,000,000 to $100,000,000 that you Maybe I had originally talked about what pushed you to the lower end?

Speaker 7

How should we think about the cadence of the contribution through the year? And is there any reason to think we don't exit this year kind of in that $100,000,000 $130,000,000 range for $24,000,000 that the kind of annualized numbers would have

Speaker 2

Yes. John can help me here. I mean, clearly, we did in Q2 On Gelmex, we've got the way purchase accounting and mark to market inventory just like we did with Fazan Valley had an impact. There's a Pretty good impact here as we bring over a lot of work in progress inventory that's been produced at Gelnex. We closed on it on March 31.

Speaker 2

So that's in, if you're a student of the balance sheet, you will see it out there in the working capital or inventories. So I suspect we'll get some earnings in Q2 from Gelnex. We've annualized the rate right now, I think conservatively at 70 $5,000,000 but that $75,000,000 is net of the inventory impact. Brad or John, anything you want to

Speaker 5

add? No, they're running extremely strong. Obviously, The fair market value adjustment associated with inventory will have an impact on Q2, but the business is running extremely strong. We fully expect to get what we've guided out there in terms of earnings out of John. It's a fabulous operation, fabulous organization and fabulous assets.

Speaker 3

And that $75,000,000 is not an annualized full year. That's the remainder of this year. That's the remainder of this year.

Speaker 7

Right. Completely understand that. Thank you for the color. On the all in guidance, EBITDA guidance for the year, So I understand the math that you did kind of as you thought about 2Q, it does imply a little bit softer Back half, is that simply a function of the shift that you talked about of the shipments from 1Q to 2Q? It sounds like also Gelnex then in the back half would be Stronger, so I guess any other reason to think that the back half on a quarterly run rate basis would be softer than what you're guiding for 2Q?

Speaker 7

Thanks.

Speaker 2

I don't know how to answer that to be honest with you other than the sense that we see a really solid Q2 coming here and then we'll see from there, but we don't have any reason to not believe we won't hit the $1875,000,000 whether that's $485,000 $485,000 $485,000 or whether that's $525,000,000 and $445,000,000 who knows, but we're confident And our forward forecast with what we see today, but to try to call Q4 today, I have no idea.

Speaker 7

Completely understand that. I guess I was just trying to make sure I understood the puts and takes of

Speaker 12

Yes.

Speaker 7

But just if there's anything to keep in mind, that was yes.

Speaker 2

Yes. No, I understand. And I guess the answer is no. There's no assumption of shipments shifting from quarter to quarter. It's Randy's rendering math.

Speaker 7

I like the math. Thank you very much.

Operator

The next question is from Adam Samuelson of Goldman Sachs.

Speaker 13

Good morning, everybody. Thank you for taking my questions. Good morning, Adam. This is actually Guillermo stepping in for Adam. I only have a follow-up on The integration efforts within the FEED segment, if you could quantify the synergies realized The Q1 and your expectation for the rest of the year?

Speaker 2

I don't know that We've never put a synergy number out there. That business is spread out all over the United States in 4 or 5 different regions. So There was no expectations there. At the end of the day, we're running at where we thought we would be and we still believe we have some more upside there as I said. So ultimately, we've done a lot of different things in that business from rightsizing people, Right sizing raw material procurement contracts are improving them, lowering energy costs, reliability, Excess trucking, excess wastewater disposal, we're making lots of progress and that's in the and we're at our target That we showed the board, we're at our business case of where we thought we would be now, the rest of this is upside to us.

Speaker 13

That's very helpful. And if I could squeeze in another one, as it regards to the buybacks, how should we think about the pace of the buybacks relative To the amount that you did on the Q1 as you also are trying to delever the balance sheet.

Speaker 3

Yes. This is Brad again. So the $44,000,000 in the Q1, obviously, the softness in the stock price and early on in the quarter, we just As we've done the last couple of years, just remained opportunistic there. That's not to say we'll remain at that cadence the remainder of the year. We'll just kind of see where the stock level is and we're truly opportunistic there just in weighing that versus our This is our deleveraging strategy here.

Speaker 13

That's super helpful. I'll leave it there. Thank you.

Operator

The next question comes from Sam Margolin of Wolfe Research.

Speaker 12

Good morning, everybody. Thank you. You might not want to answer this question based on an answer to a previous one, but I'll give it a try. It seems like China is a story on the low CI materials supply front and Darling has a presence in China. I'm not sure a lot of people Appreciate that.

Speaker 12

But you're there, you're on the ground. I think you know the country pretty well. And it would be great to get a sense of sort of what the Addressable market is the untapped market of HEICO or rendered fat in China because it seems like it could be pretty meaningful just given the context of Oncoming, our decapacity and balances. Thank you.

Speaker 2

Okay. I'll let Sandy take that and address. I mean, you guys can see the boats Coming in, so I mean there's no secret there.

Speaker 10

Yes. I'm not exactly sure what the volume would be because I think there's more than we ever expected that there would be. As prices have gone up over time, that's brought about more fats and oils around the world that are available to us. One of the nice things that we're seeing out of Asia is that there are low CI, fats, that there are ISCC fats, And that's a real benefit to us. And that's a nice thing as we're trying to look to go to the European market, because that's one of the things that they're searching for.

Speaker 10

And so I think that the market is bigger than we ever anticipated, but to know the exact amount, I don't know.

Speaker 12

Sure. Okay.

Speaker 2

Hey, Sam, this is Randy. One more little piece there. I mean, obviously, I highlighted that we're bringing Cat III fat from Europe into the U. S. Now.

Speaker 2

And someone asked us why would you be bringing Cat III fat other than the economics work? Why did the economics work? Because we have Chinese biodiesel now coming into Europe and making fats cheaper there. So as Sandy said, the marketplace is Far more dynamic than I think probably a year, year and a half ago we probably understood. And so it's all interconnected now.

Speaker 2

But I think the key point that we want to say is the procurement team at Diamond Green clearly is Looking for low CI fats around the world, Sandy highlighted, IFCC certified, which is critical to making sure everything's legitimate there. And the question is, we're not sure how big it is around the world. It continues to grow. Ultimately, if you become in the commodity business, a high priced Island, you magically find lots of extra coconuts available to you.

Speaker 12

All right. Thanks. That's really helpful. And then, This is just a follow-up on Vale, because it sounds like the integration is going well. I think you said it was on plan or according to plan.

Speaker 12

And there was some capital associated with, I guess, taking the facilities that you acquired Up to the Darling standard and but you're in a good place now as far as margins and earnings power. And so the question is, is the Valley integration actually maybe going to And actually maybe going to be a little bit more capital light than you anticipated, which then accrues to the balance sheet and the pace of deleveraging. Thank you.

Speaker 2

No, I think in 2022 we rebuild or improve the reliability through big equipment replacement in Six plants and then by June 1 here, I think we'll have 3 more done here. And then by the end of the year, I think with Ward being rebuilt, that'll be the 4th one. So We're a little over from where we thought we would. It's not giant money, maybe $10,000,000 this year and then a little more next year as we Finish out the system. So I wouldn't characterize it as capital light.

Speaker 2

I would just say at the end of the day, it's pretty much on target. As we remind people given the antitrust side of closing this acquisition, while we got to visit the plants, they were really Pretty quick walk throughs and you can't really sound or see the inside of some of the equipment. Is it a little worse than we thought? Absolutely. And that was shown in our prior numbers as we struggled to keep the reliability of the system.

Speaker 2

But the team has done just a tremendous job of moving the ball forward here. And I think we're set to run Now we're feeling really good about it.

Speaker 12

Got it. Thank you so much.

Operator

The next question comes from Paul Cheng of Scotiabank.

Speaker 14

Good morning, everyone. Wendy, that you have good insight in the LVO and the LCFS market and have a lot of contact in the government. So just curious that is there any insight you can share about that how EPA may revise or I'm not revised on the LVO proposal and also how is the California LCFS Master that Credit changes that, what do you think they may do?

Speaker 2

Anne, do you want to take that?

Speaker 10

Yes. I probably need a little bit more help on what your Sorry, firstly, I

Speaker 1

was going to the RVO and LCFS markets here.

Speaker 10

So with regard to the RVO, I think that what we saw It was a little bit disappointing. I think that we're hopeful. There's been a comment period, where the industry, etcetera, has provided additional feedback, comments, information to EPA regarding what actually is out there. And so we're hopeful, that maybe we'll see a bump up here when it comes out in June 14. In terms of carb, I think that carb is a very positive thing.

Speaker 10

As you know, they're going through their scoping plan. And in terms of things for Darling, it's very positive. As they're looking at increasing their reduction targets from 20 to 25% or 30% in 2,030. Other things that they're doing is they're also looking at proposing an LCS obligation for intrastate flights, which should be really great and especially as we're building an SAF facility or converting our facility to SAF, We're really interested in that. And then one of the other things that they're also doing is they're looking at an acceleration mechanism.

Speaker 10

And so if the credit bank gets too high and we did see recently where the credit bank increased, that there would be an alternative mechanism that increases the stringency there. And we think that those are all positive things for us. And then maybe just a little bit back about the RVO. I think that we've had a lot of things with regard to like the Inflation Reduction Act That was a positive step forward. And I think that if we don't get those volumes with the RVO and get that Stuffed up, then what we may see is we may see some stranded assets and that would be unfortunate.

Speaker 10

We would see that in terms of crushing plants Potentially, we would also see maybe some missed opportunities in terms of SAF. And so I think it's very important that EPA is listening to folks about what the volume should be.

Speaker 14

Thank you. And the Second question is that I think Sandy and Randy, both of you have said, you have stopped seeing a lot of The international low CI feed getting into the U. S, so it does not look like the availability of the low CI feed Stock is an issue anymore, contrary to maybe just a year ago that was resolved. And so from that standpoint, What will be the criteria, the decision making process, what will factor into Other we factor into whether that you want to expand DGD into DGD-four?

Speaker 5

Yes. So this is John Bullock. It's kind of interesting because a year and a half ago, everybody on this call was clamoring about the fact There was going to be no low CI fat available in the world and why in the devil would we make Diamond and Diesel 3. And our answer was, There's so much fat available at $0.20 a pound, or when I guess the $0.50 a pound, you may find it to be a different world because higher prices incent more Reclamation of waste fats around the world and that's exactly what we've seen. We're very comfortable now with the Diamond 1, 2 and 3 systems where we are Our focus has been on converting part of our processing capacity to SAF because we think that's the higher value, Higher margin area.

Speaker 5

I should remind everybody though that we do have the space available in Port Arthur to make Diamond Green Diesel 4 and to build Diamond Green Diesel 4. We essentially We reset ourselves so that we have the ability to expand. Haven't really gone into that process at this point in time, but we're certainly capable of doing it. And we'll watch The market as it develops forward over the next year or so and then make a determination on where we are. But we like the size we're at right now.

Speaker 5

We like our focus on converting to SAF to the higher value, and we'll see as this fat market develops going forward if the stuff is available. The one point that I think we've talked about a lot here that we cannot overemphasize though. The reason this all works for Diamond Green Diesel is we have a complete Operating plant. We have the supply chain, the logistics capability and the pretreatment capability. So as these low CI fasts become available, We can actually take this material and convert it into high value renewable diesel.

Speaker 5

The fact of the matter is, the vast majority of our competitors out there can't do that. So we know they're building plants, but they are building plants that are designed to compete with Diamond Green Diesel.

Speaker 14

No, that Fully understand and agree. But I still want to trying to say that, okay, what will be the precondition or that what trigger You and Valero decide to go for DGD-four. What is the precondition in order for that to happen?

Speaker 5

We do a complete analysis anytime we go through this. We will go through the same analysis we've always gone through, which is a tremendous economic analysis. We now understand the engineering and construction extremely well. We'll just have to take a look at the conditions. I don't know that I'm going to necessarily give you a list of the 5 things that we're going to look for.

Speaker 5

But the one thing I can tell you is we always say is Darling It's a for profit operation. And so the most important thing is when we can identify returns that we can get on our investment, that'll be Number one precondition on us making an investment.

Speaker 2

Yes, I think Paul, this is Randy. And I think it's pretty simple. I think the pause in number 4 For the venture has been, let's see the demand develop, let's make sure it's real. And at the end of the day, we believe it's real. Clearly, we're arbitraging or giving ourselves optionality in the SAF.

Speaker 2

As John said, we believe that is the next New Horizon Green Pasture and anybody that even starts to talk about adding whether it's a 1,000,000,000 gallons in the U. S. Or $1,500,000,000 or $2,000,000,000 The promises that have been made in that global SAF market, whether it's Europe or here, Far outweigh any capacity that's been contemplated. So at the end of the day, this thing is set very nicely for the future. And if clearly the SAF demand is there, which we believe it will be, That will help us then move forward to that next step of looking at number 4.

Speaker 2

Clearly the decision before was And I was as guilty as anybody. I told John and Sandy, I said, I want to make sure there's enough feedstock in the world because I was starting to believe you guys that we're going to have a feedstock war. We now know that's not true. And now we're waiting to see the SAF market develop such that we can go larger in that And that would drive clearly number 4 and potentially I think the most likely would be an SAF unit at number 12 and St. Charles Would proceed any decision on number 4.

Speaker 14

Okay, great. Can I just ask a real short question for John? The interest rate Swap, you guys exercised. Did you exercise at the beginning of the quarter? In other words, are we going to see incremental interest expense In the Q2 versus the first?

Speaker 3

Yes, that was done, Paul, right at the end of the first Quarter with in conjunction with the funding of Gelnex. So, the effect from that

Speaker 14

Yes, I'm sorry.

Speaker 5

There was no incremental.

Speaker 3

No interest savings in Q1 from that.

Speaker 14

Right. So what's the 2nd quarter versus the Q1 impact from this swap?

Speaker 3

Interest Spence, there will be $1,200,000 savings there, but then obviously we have a debt increase there. So we're still saying for the full year about $230,000,000

Speaker 2

of interest expense.

Speaker 14

I see. Okay, we do. Thank you.

Operator

The next question is from Matthew Blair of Tudor, Pickering, Holt.

Speaker 6

Hey, good morning. Randy, congrats on the strong results. I want to follow-up on your comment that DGD 2nd Quarter is shaping up to be a record. Was that on just total volumes or total EBITDA contribution? If it's on EBITDA, it looks like that would translate to EBITDA margin of roughly $1.75 maybe $1.80 per gallon, so Quite a step up from Q1.

Speaker 6

So I just want to

Speaker 14

clarify that.

Speaker 2

Yes, I mean clearly with the system running 1,200,000,000 gallons divided by 400,000,000 or 300,000,000 gallons now should be being produced, Maybe a little more and being depending on shipments and timings of boats. But clearly, we gave earlier guidance of a buck in Quarter for the year, that's kind of what we saw coming into the year in February. The margins now are clearly Somewhere between $1.5 $2 So what we can capture of that, it's too early to say. Sandy, anything you want to throw there?

Speaker 10

The only thing I would say is that, obviously, we're seeing lower feedstock costs than what we saw in Q1. As Randy and John had mentioned our units are running full. So they're running very well and we'll continue to push those units as hard as we can to see what they can do. So I I think it's a combination of those things.

Operator

Unfortunately, we have lost Mr. Blair's connection. So I will move on to Ben Kallo of Baird.

Speaker 15

Hey, guys. Thanks for taking my questions. Randy, on SAF, I know it's early in the game, but could you just talk about Any kind of commercial discussions, sales discussions and how you think that plays out? Is it long term agreements or is it too early to tell?

Speaker 10

Yes. So this is Sandy. We've been talking to a number of parties, and we were talking to a number of parties Even before we made our investment decision, we continue to do that. I don't think that we're ready to set anything in stone. It will probably be closer to when we're coming online before we make any agreements.

Speaker 10

In terms of agreements, we've always talked about the Inflation Reduction Act was really important in spurring us to make the decision to move to SAF. And now what we're seeing is we're seeing the premiums that we thought we would. And so that's very positive. But we have no The parties in particular right now, we continue to talk to a wide range of folks.

Speaker 2

Yes, Ben, this is Randy. I mean, clearly, That market is rapidly developing led by European procurement now. It'll spill over into the U. S. As we move into later 'twenty three, early 'twenty four and then the commercial team is going to have to decide, do you sell a little bit, so a little bit more or sell all of it And then move on to the decision to build the 2nd plant.

Speaker 2

But right now, clearly there's a lot more promises out there than Didn't realize yet. So we're excited about it.

Speaker 15

Sounds good. So I need some Randy math and it might be difficult. But if we looked at just margins in Q1, or however you want to do it, what you think they are for Q2 for Diamond Green Diesel, And then we translate it to after the blenders tax credit goes into the new program in the IRA. How where would margins shake out for you guys there? Yes.

Speaker 10

This is Sandy. I don't think that we know. I don't think that we've looked at that quite yet. It's going to change how things look on our P and L because it's going to be an offset to income tax. And so I think that you're going to have to start looking at our P and L probably a little bit currently and maybe there's a more focus on EPS rather than EBITDA at that time.

Speaker 15

Okay. Randy, you talked about maybe stranded when the RVO question about stranded crush facilities. What Crush facilities coming online, how does that impact you? I guess, it's better for feedstock, but what about if The end market, the renewable diesel plants don't come online and the crush facilities do come online. What's that risk?

Speaker 15

Is that the risk to your Core business? Hope that made sense.

Speaker 2

I think while you can't break them completely apart, I don't know that they're Totally interdependent on each other. I mean, clearly we've never seen what's about to happen in North America on the amount of crushing capacity. Remember, we're going to grow just a little bit more, not a lot. And that seed, whether it was out Canada in the form of canola or soybeans out of the U. S.

Speaker 2

Were headed predominantly to China. And ultimately the question is going to be, Do those beans get crushed here? Do they get crushed there? Do the Chinese buy finished protein instead of Raw soybeans, do they arbitrage to palm oil instead of soybean oil? There's a lot of unanswered questions here.

Speaker 2

There's probably, I don't know. I don't even know the number, so I'll just stay away from it of how much crush Capacity is coming online. It was all built with the belief that there would be renewable diesel demand underneath it. And that takes Two forms. 1 would be, do you have the process to pre treat crude soybean oil or Super D Gum soybean oil or do you need refined bleach?

Speaker 2

The only refined bleach facility that's been built in the last years and I don't know if I want to say 5 years or 10 years has Been in Quincy, Illinois by ADM. So if the pretreatment business doesn't work for these guys, which we were skeptical of, Then that soybean oil is going to have to be moved out of the country because there won't be anywhere for it to go or the crush margins will go collapse to the point Then the beans are moving out of the country. John, anything you want to add?

Speaker 5

I think that's exactly right. I mean, the fact of the matter is every soybean in the world was crushed Before, we had the tremendous increase in crushing capacity in the United States. So for all of those facilities to be filled up with something to process, We need to raise a lot more soybeans around the world and that was always our question about the soybean expansion that was occurring out there. From a standpoint of our business model, we should be able to adjust.

Speaker 2

Yes, Ben. The other thing is, I mean, if like I said, and I got to be, if you believe All your sell side guys reports on how much capacity is out there. It will use up all that soybean oil very, very quickly and then some. So I mean, it's kind of 1 or the other here that you got to buy, but these are clearly unchartered waters For an international consumer that's been very comfortable buying boatloads of canola and soybeans in the past.

Speaker 15

Just to sneak one in, I know we're going over, but just Gellnex because college has become a bigger part of the business. Could you talk about how you view the growth profile, not this year, another run rate, but as you go forward on the top line? And then Could you talk a little bit about margin and expectations there? Thanks guys.

Speaker 2

Yes. I'll tag team this with John. Clearly, Gelnex met the criteria of the Darling business model of a great business with a great management team with great assets. And we're 100% comfortable and confident in what we've procured and the run rate supports an accretion that we're proud of. So ultimately, as we have 4 facilities in Brazil, 1 in Paraguay and then one In Portage, Indiana, those are all going to be integrated within the system here over time.

Speaker 2

What's interesting is we didn't have a lot of overlap Customers. So there's going to be really some nice growth there. They are a lower cost operating model than we are. And while that's kind of hard for my Rousselot team sometimes to accept, we've done a lot to learn from them. And ultimately they look at us from the standpoint in the collagen peptides business.

Speaker 2

We were the leader and are the leader there. And how do we now move their product and their customer base to our quality of product and get paid for it. Clearly, as Brad and Swann and I I've told people we've been on a 3 year, 4 year plan of adjusting our product mix from basically confectionery and pharma gelatins to Collagen peptides and they marginally have a little better margin than what we have and you've seen that in the earnings charts that's out in the earnings call slide, Probably one of the greatest stories out there and we don't see any slowing of that. Number 1 with volume growth, number 2 with margin improvement and number 3 with the portfolio of collagen peptide products that we have ready to launch here in the next 1 to 2 years. John, anything you want to add?

Speaker 5

I think oftentimes what's overlooked is we really focus on the products that we sell and is there going to be demand for those And are those going to be high value products that we can obtain good margins on? And quite frankly, what we see in the collagen space, both on The gelatin side and on the hydrolyzed collagen side is exactly that. Same thing we saw with renewable diesel when we looked at the low CI benefits associated with that product. These are high value premium products that have a great natural role in either the food or the fuel systems and that's going to translate Into excellent, excellent margins, excellent, excellent profitability in that segment of the business. We're very excited about the future of Collagen.

Operator

The next question will come from Tony Bancroft of GAMCO Investors Inc?

Speaker 16

Thanks for taking my question, team. Congratulations on the great quarter. You've talked about this in the past, Randy, and maybe you could just remind us and maybe potentially update us if anything has changed. But For a 30,000 foot view, how much demand is there for Diamond Green East? And I realize a lot of variables, but if you sort of obviously, you've sort of talked about what the Strain is at least at your end on capacity.

Speaker 16

And then if you maintain sort of a whatever you want to call it regulatory growth rate And the demand, sort of the overall demand, how do you see I mean could it be a Diamond Green Diesel or SAF 8, and in either using either of those or both of those, can you sort of maybe just walk us through how you Look at this, I mean, every one of these has been a home run. So I think as an investor, you just want to try to understand what sort of the is there a terminal value? Is there a run rate? Is there a Spot for this, maybe give some comments on that.

Speaker 2

Yes. And I think that's fair enough. Clearly trying to understand the global Potential for global demand, it's clearly been improving, increasing and becoming more transparent over the last couple of years. Sandy, you want to kind of give some Sweet spots there.

Speaker 10

Yes. So I think that there are a number of things going on. And as I think about it, there's no better time to be in biofuels. So First of all, we've talked about it a little bit earlier in this call, is carb scoping plan and they're looking to increase the stringency of that plan. They're also potentially looking to add a potential jet mandate within the state, which would be great.

Speaker 10

That's just more demand for us. We have a number of states that are now looking at LCFS programs. We have a potential LCFS obligation for Jet in British Columbia, I think that recently we've seen that now we may have some mandates for SAF, for maritime fuels, etcetera, in Europe. And so I think that we're seeing more things globally there. And then even within the states On the SAF side, we're seeing that various tax credits are being passed and these are in like non LCFS type states.

Speaker 10

So you have one in Illinois, there's one in Washington that's now been passed. So there's just so much that is creating more demand, adding more dollars to the supply chain, etcetera, that makes these products possible. And so I haven't ever seen this much excitement within our industry.

Speaker 2

Yes, Tony, it's one of those things you're looking around the world and there we came through a Pretty strong inflation period. We came through some headwinds around the world, but yet the one unwavering thing was The commitment to decarbonization that we've seen in the world, it is not slowing. I sit there and wonder if our SAF production And actually stays in the U. S. Or it goes to Europe.

Speaker 2

We don't know yet, but we know the demands out there and SAF demand, whether you're talking the LCFS And California markets clearly going to set the tone here at the end of the year by what they do under rescoping and whether they include SAF. But Ultimately, if you take the 2% 3% mandates and I know they always seem so small when you say 2% or 3%, But on 50,000,000,000 gallons and it really creates a kind of a trajectory for the next 3 to 5 years. It feels pretty darn good And it makes us feel pretty confident as being the 1st mover and with the best assets located in the world to serve that demand.

Speaker 16

And I guess just to follow-up on what you just said there at the end. Is your moat just too deep? I mean, you guys are the best You compete the best on CI, you beat the guess on cost. Input, input, you name it, is the vote too deep? Is there something that could be out there That would cause you to have more less competitive advantage.

Speaker 16

I mean, How do you you wake up every day, how do you sort of look at that?

Speaker 2

I feel very confident. I always in the sense, I always like to be careful with Questions and analysis about the unintended or the unknown here. I mean the challenge in this is clearly, I think we We said years ago, we don't really produce a gallon of fuel, we produce a gallon of compliance. And at the end of the day, when you're competing against Or potentially one day competing against people that have a choice to either produce or buy an offset in the form of a carbon credit or a RIN or an LCFS credit. Economics may not always be perfect in those imperfect world.

Speaker 2

So if you say what keeps me awake Good night. It's when people do on economical things and rather than say how profitable they were in their renewable diesel plant, they talk to you about avoidance of compliance And so that's the only thing, but ultimately I see the SAF side way offsetting anything of the what I'm going to All the generic commodity producers of RD around the world now. Sandy, Anne, you want to add?

Speaker 10

I think you hit it, Randy. I mean, I think we're really excited about It's kind of the next step in the progression that we've taken at Diamond Green. And I think the market is huge.

Speaker 16

And I guess lastly, with again, you guys sort of being a leader in In this industry and your partnership with Valero, long term, 5 years from now, 10 years from now, how do you see that partnership evolving? You talked about a dividend, but Yes, every other energy major has essentially bought what you and Valero have and you're still the best in class. How does Lero look at you in the long term?

Speaker 5

This is John. We have a tremendous relationship with the folks at Valero. Obviously, Great relationship with Joe and Lane has been sitting on our Diamond Reducer Board for the last several years. We were very excited to see him be named as a Placement for Joe, he's a great guy. Our relationship throughout the Valero organization is fabulous.

Speaker 5

I think that's As I've always said, the biggest thing that's a miracle of Diamond Green Diesel is this is the first time the ag industry and the petroleum industry Have figured out how to get married and have the marriage last and it's a fabulous marriage that we have with those folks. We love the people at Valero, really respect them, Bone deep in terms of how we work with them. So we see that relationship just moving forward fabulously.

Speaker 16

Great job. Well done. Thank you.

Operator

The next question comes from Ben Bienvenu of Stephens.

Speaker 16

Hey, thanks. Good morning.

Speaker 8

Congratulations. Just a quick one on the integration on Valley. Obviously, making solid progress there. You had really strong pricing realization in the feed business even in the backdrop of what it seems like temporarily Dipping fats prices.

Speaker 9

One of the things

Speaker 8

you talked about is increasing I realized that value is by selling to Diamond Green Diesel. Can you talk about where you are in that process and kind of what Contribution there might have been to 1Q and what incremental contribution there is going forward? Thanks.

Speaker 2

Yes. I mean, this is Randy, Ben. I mean, clearly the Eastern Seaboard or Valley integration has been as challenging or more challenging We'd hope. I mean, we're clearly down the road and I think we're past the critical points there. But You start looking at reliability and that comes in the form of capital investment and equipment, we're doing that.

Speaker 2

I would say that we've got we've let attrition take over in staffing. I mean, we've clearly raised the cost In Valley from a people standpoint, because we want a better quality person with and we're going to provide really good health and wellness benefits To keep those people and that's been underway over the last year as we kind of celebrate our 1 year anniversary. Overall, when you look at the business, there was a lot of things going on in that business that weren't Completely transparent to us on day 1, the system was running 130 hours a week and having no time for maintenance. When you do that, you run to fail. What do you do when you run to fail?

Speaker 2

Well, you have to have bigger maintenance departments and those are the most expensive people within the factory. So as you increase reliability, you don't have to have that. You have better uptime and what else happens when you break down. Now you transport it to the next plant and if the next plant doesn't have capacity, they transport it to the next plant. And then by By the time it gets to the 3rd plan, it's really not very good material and it causes you to have bad wastewater that then upsets the entire system.

Speaker 2

So the domino effect I think we have won the battle with the dominoes here. And part of that's culture, part of its investment, Part of it's just teaching people how to operate properly. So we feel very good. And then on the other side, we've seen a Kind of an interesting move that I've never seen in my career on the feeding of animals, especially in the poultry side where they've gone to more lysine Unless feed grains and oilseeds and proteins and fats. And ultimately what's that produced?

Speaker 2

It produces the same pounds of meat out the door, But it produces a less yielding product to the rendering guy and that's in the form of lower fat yield. So we've had to go back for our agreements and test every raw material supplier and those adjustments were made in March and that's going to start flowing through in 2nd quarter. And then ultimately, as we looked at the rendering contracts that were put in place, we've had to make some adjustments To where they provide a fair return for the capital that's being deployed to get that reliability. And we probably on a scale of 1 to And we're about a 7 done on that. And we like we said, why the 1,000 days because there's 2 more contracts that come due in 2024 and 2025 And then it'll be complete.

Speaker 2

So I mean, as I said earlier in my comments, we're pretty far along and we think we'll be near complete other than a couple Raw material agreements here towards the end of the year.

Speaker 8

Okay, very good. Thanks, Randy. I'll leave it there in the interest of time. Best of luck. Thanks.

Operator

The next question comes from Jason Gabelman of TD Cowen.

Speaker 17

Hey, morning. Thanks for squeezing me in here. I just wanted to ask about growth, particularly in the core ingredients business After you fully integrate Valley Protein and Gelnex and FASA, you're still investing in the business. So I'm wondering what is the organic growth potential over the next couple of years? And you've mentioned there are more there's more Feedstock raw materials out there available than what you have previously thought.

Speaker 17

Does that open up the potential for M and A once the balance sheet is back to a target level? Thanks.

Speaker 2

Yes. Jason, this is Randy. I mean, clearly, if we look back at the model that we did when we did the acquisitions In 2014 2015, we followed up with looking at our global footprint and then if you will optimizing the logistics Meaning lowering the transportation costs. So two things, 1, we have to grow with our suppliers. 2, We have an obligation to make sure that the system remains low cost by having plants in the right place.

Speaker 2

We are in the process So we'll be starting up I think in August a major expansion in Turlock, California. We have a second line going into Boise, Idaho. We're in the permitting Process of a brand new plant in Nebraska. We're looking at 1 or 2 plants on the Eastern seaboard in the U. S.

Speaker 2

We've got a couple of green energy plants going in Europe and I think we've got another expansion going on or a potential expansion of Another rendering plant in Brazil today with 2 more in the process of starting up. So globally, it's an organic Build out now for the next 1 to 2 years. And from there, once as you said, once the balance sheet and once we have visibility and Diamond Green Diesel and what we're doing there, I think our strategy has been very, very transparent to the world of how we invest capital. We do have to always get through the cycles, but at the end of the day, when we make investment decisions, we look at 5 10 year average pricing, not The moment in time. And so ultimately we're going to continue to build out feedstock to support the Diamond Green system and 2, Grow with our customers and that's one thing Bali didn't do on the eastern side was maintain adequate capacity as they were grow as their customers were growing.

Speaker 2

So We've got some work to do there, but that's in our capital plan. Great.

Speaker 17

And just to clarify, what's the total number of plants? You kind of Discuss them piecemeal, but the total number and any thoughts on EBITDA contribution over the next couple of years from that organic growth? Thanks.

Speaker 2

I don't know. I think I probably rattled off what 6 or 7 or 8 plants. I'd hesitate to give an EBITDA At this time until I see where what time and starting of them is. So we'll get back to you on that.

Speaker 17

All right. Thanks for the time.

Operator

And next we have Willie Lewis Baldwin of Baldwin Anthony Securities.

Speaker 18

Thank you very much. Just a quick one here. I wanted to get a feel, if I could, on what the Trends have been in the level of protein exports, the exports of protein coming out of the U. S, is that How important is that to your protein business, Randy? And has that been growing or what's the prospects for that

Speaker 9

As far

Speaker 18

as your export markets?

Speaker 5

Yes, this is John. So yes, it is a component of what we do. We We move a lot of containers. We're actually one of the larger container shippers in the world with the containers that we move. So yes, we move a lot of proteins offshore, Have some very, very good markets in some of our specialized proteins offshore to Asia.

Speaker 5

So it's a component. It's not obviously a tremendously large volume versus our overall volume, but it's a component of our demand. And we really have an excellent, excellent network and an excellent reputation in Asia on our products.

Speaker 2

Yes, Bill, and this is Randy. I mean, clearly,

Speaker 16

the value

Speaker 2

of the dollar, the other currencies, all Tend to play into some years are bigger than other years, but I would tell you we are clearly seeing increased demand for Proteins in Asia, predominantly China today and we're working hard. I mean, one of the if you say, okay, everybody wants to talk negative about what we bought With the Valley plants, they had a very strong marketing network in Asia today. And that's really being that's been helpful to us as we balance around. Europe continues to modify rules around what can be exported versus what has to be destroyed or put into green energy. So Very global market for animal byproducts.

Speaker 2

But as I said earlier, clearly China is going to have to wrestle with what happens in the oilseed complex in North America. And I suspect that's going to open up more opportunities to alternative proteins to Asia over the coming years.

Speaker 18

Do we find ourselves competitive in the specialized proteins, the value added proteins in the world markets Despite where the dollar is?

Speaker 5

This is John. Absolutely, absolutely. The United States As well as Europe, we move a lot of those products out of Europe too, but we're primary sources for those for the world.

Speaker 18

So I guess it could be fairly safe to say then is that demand for proteins grows worldwide on a secular basis That this market for Darling could continue to grow.

Speaker 5

We have a strong focus in the pet food market on a lot of these specialized proteins. And the pet food market continues to be extremely resilient through the inflationary period here with very, very good demand. So We feel very, very good about the demand profile for a lot of our specialized products.

Speaker 18

Thank you very much.

Operator

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

Speaker 2

All right. Thank you. Thanks everybody for your questions. Thanks Tony. We'll see you tomorrow.

Speaker 2

We're attending a few more conferences in May, which are listed on our website. As always, if you have any additional questions, reach out to Sue Ann. Stay safe. Have a great day. And that concludes our call.

Speaker 2

Thank you very much.

Operator

The conference is now concluded. Thank you for attending today's presentation.

Powered by Quartr
Earnings Conference Call
Darling Ingredients Q1 2023
00:00 / 00:00