Darling Ingredients Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 13 speakers on the call.

Operator

Good morning, and welcome to the Darling Ingredients, Inc. Conference Call to discuss the company's Second Quarter 2024 Financial Results. After the speakers' prepared remarks, there will be a question and answer session 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

Great. Thank you for joining the Darling Ingredients Q2 2024 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 Q2 2024 earnings news release and slide presentation are available on the Investor page under the Events and Presentations tab on our corporate website and will be joined by a transcript of this call once it's available. During this call, we will be making forward looking statements, which are predictions, projections or other statements about future events.

Speaker 1

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 today'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 statement. Now, I will hand the call over to Randy.

Speaker 2

Thanks, Sue Ann. Good morning, everybody, and thanks for joining us for our 2nd quarter earnings call. In our last earnings call, I mentioned that the team is focused on making the necessary adjustments to adapt to a deflationary and volatile global ingredients market and a renewable diesel market that continues to suffer from perceived overcapacity and an uncertain regulatory environment. I challenged the team to accomplish several things during the Q2 and I'm pleased to report on their successes. Since the Q1, we were able to improve gross margins, control capital spending without sacrificing operational excellence, pay down debt, repurchase common stock and most importantly, we received a much anticipated dividend from DGD.

Speaker 2

For the quarter, our combined EBITDA was $273,600,000 While slightly lower sequentially, our performance reflected a nice improvement in our core ingredients business. Turning to the feed ingredients segment, global raw material volumes remained strong and we have seen global fat pricing improve, indicating more demand for low carbon intensity feedstocks for renewable diesel. Our feed business showed sequential improvement in margins as we made adjustments in raw material procurement arrangements and our operational excellence and cost cutting programs are beginning to deliver. With fat prices on the rise, our continued focus on operational excellence and effective cost cutting and spread management, I feel confident we should see improved earnings in the feed segment for the back half of the year. Turning to our food segment, Our RUSLEO business continues to benefit from being a supplier of choice in the gelatin and hydrolyzed collagen market.

Speaker 2

While we have seen several quarters of customer destocking, we are starting to see signs of that beginning to slow. As I have mentioned in previous earnings calls, we are preparing to launch NexTida GC, a natural collagen solution for managing glucose moderation. We are having a number of conversation with customers and look forward to more discussions at Supply Side West and Food Ingredients North America Trade Show in October. Turning to our fuel segment, Diamond Green Diesel continues to prove it's the best in class. Demand for our products remains robust, but margins remain challenged given the lack of clarity in the regulatory markets for RINs and LCFS.

Speaker 2

Last quarter, we mentioned that cash was rapidly building at Diamond Green Diesel, and I'm pleased to report on July 18, Darling Ingredients received a $77,100,000 cash dividend from the joint venture. Our sustainable aviation fuel unit continues to move ahead of schedule and on budget with the anticipated start up in the Q4 of 2024. We continue to work to build out a strong sales book with both domestic and international supply opportunities. Now with that, I'd like to hand the call over to Brad to take us through some financials, and then I'll come back and discuss my thoughts for the rest of 2024. Brad?

Speaker 2

Thank you, Randy. Net income for the Q2 of 2024 totaled $78,900,000 or $0.49 per diluted share compared to net income of $252,400,000 or 1 $0.55 per diluted share for the 2nd quarter of 2023. Net sales were $1,500,000,000 for the Q2 2024 as compared to $1,800,000,000 for the Q2 2023. For the 1st 6 months of 2024, net income was $160,000,000 or $0.99 per diluted share as compared to net income of $438,200,000 or $2.69 per diluted share for the 1st 6 months of 2023. Net sales for the 1st 6 months were $2,900,000,000 compared to net sales of $3,500,000,000 for the same period in 2023.

Speaker 2

Operating income decreased $208,200,000 to $148,500,000 for the Q2 of 2024 compared to $356,700,000 for the Q2 of 2023, primarily due to $168,800,000 decline in our share in the equity and net income from Diamond Green Diesel Earnings as compared to the same period in 2023. Additionally, the 2nd quarter gross margin declined $71,000,000 as compared to the same period in 2023. Operating income decreased $326,900,000 to $285,700,000 for the 6 months of 2024 compared to $612,500,000 for the 6 months of 2023. The decrease was primarily a result of 180 $4,700,000 decline in our share in the equity and net income from Diamond Green Diesel Earnings as compared to the same period in 2023 along with the $191,600,000 decline in gross margin. The company recorded income tax expense of $800,000 for the 3 months ended June 29, 2024, yielding an effective tax rate of 0.9%, which differs from the federal statutory rate of 21 percent due primarily to the relative mix of earnings among jurisdictions with different tax rates, nontaxable chains and falls contingent consideration, certain taxable income inclusion items in the U.

Speaker 2

S. Based on foreign earnings and biofuel tax incentives. The company's effective tax rate excluding the impact of the biofuel tax incentives and discrete items was 29% for the 3 months ended June 29, 2024. The company also paid $23,000,000 of income taxes in the 2nd quarter. For the 6 months ended June 29, 2024, the company recorded income tax expense of $4,700,000 and an effective tax rate of 2.8%.

Speaker 2

Excluding the biofuel tax incentives and discrete items, the effective tax rate was 27.2% for the 6 months ended June 29, 2024. The company also has paid $56,000,000 of income taxes year to date as of the end of the second quarter. For 2024, we expect the effective tax rate to remain about the same at 3% and cash taxes of approximately $45,000,000 for the remainder of the year. Now in the second quarter, we paid down $51,000,000 of debt. The company's total debt outstanding as of June 29, 2024 was $4,409,000,000 compared to $4,427,000,000 at year end 2023.

Speaker 2

Our bank covenant projected leverage ratio at Q2 2024 was 4.24 times and we had $814,400,000 available to borrow under our revolving credit facility. Capital expenditures totaled 98 $1,000,000 in the 2nd quarter and $191,700,000 for the 1st 6 months. We also repurchased approximately 807,000 shares of common stock during the Q2 of 'twenty four for approximately $29,200,000 As Randy mentioned earlier, on July 18, 2024, we received a $77,100,000 cash distribution from DGD. With that, Randy, I'll turn it back over to you. Okay.

Speaker 2

Thanks, Brad. As we expect continued dividends from Diamond Green Diesel and global finished product price improvement, our focus for the balance of the year is to manage capital outflows and pay down additional debt. Additionally, we will continue our focus on operational excellence and widening margins where possible. We remain optimistic as we've seen prices begin to improve in late Q2, which will be reflected in our Q3 and Q4 earnings. I remain optimistic that we should be able to deliver $1,300,000,000 to $1,400,000,000 of combined adjusted EBITDA for the year.

Speaker 2

So with that, Cindy, let's go ahead and open it up to Q and A.

Operator

Our first question comes from Heather Jones of Heather Jones Research LLC. Go ahead, please.

Speaker 3

Good morning. Thanks for taking the question.

Operator

First question is on SaaS. I was just wondering if

Speaker 3

you could give us what your view is of the supply and demand dynamics for that going into 2025. You got the mandate kicking in, in U. K. And then and the mandate kicking in into the EU. And I would think that maybe Neste would shift some of their volumes into the EU.

Speaker 3

I'm just wondering how you're seeing that shaping up for DGD going into 'twenty five?

Speaker 2

Yes. Thanks, Heather. This is Bob. The South picture is quickly evolving as European regulations really come online in 2025. I think the interesting thing there is the technically compliance around SAF is required later in the period.

Speaker 2

But the tendency of everyone involved is to not want to get too far behind. So it's a somewhat murky picture, but what we're seeing is strong interest to try to get ahead. And so I think we're going to start to see things come together as we move forward here. Yes. Hi, this is Randy, Heather.

Speaker 2

And I think I'd echo real quick with Bob. I mean, we continue to assemble the sales book, obviously. Hopefully, we'll have some announcements out soon on it. But the demand is building out there right now. It's still kind of a little, as Bob said, murky on what the rules are, obviously, on both imports and 45 C and everything.

Speaker 2

And so at the end of the day, I think this will pick up momentum here as we go into Q3.

Speaker 3

Okay. And as a follow-up to that, I mean, for the roughly 250,000,000 gallons that DGD will have, are you is your anticipation that the majority of that will go domestic or are you expecting a strong export pull for that?

Speaker 4

I think that's yet to

Speaker 2

be seen. I think you'll see a blend of both domestic and export sales and that ranges from the U. S. To Canada to the continent. It will be driven by the market and the rules.

Speaker 2

I mean, I think everybody saw Neste's production this morning of SAF. And clearly, the market is evolving there, as Bob says. And ultimately, with the 250,000,000 gallons may seem like a big number of gallons, but it's really not given the book that we were assembling out there at this time.

Speaker 3

Okay. Thank you so much.

Operator

Our next question comes from

Speaker 5

Just wanted to dive a little bit into the margin cadence for

Speaker 6

the second half. What are some of the

Speaker 5

puts and takes? I know 3Q is usually seasonally low, but I mean, if you could share some color on that, please?

Speaker 1

Are you talking feed, Dushyant?

Speaker 5

Yes, feed and food as well, please. Well, based on Across all segments, yes.

Speaker 2

Yes, Dushyant, this is Brad. On feed and overall on the core, you may have noticed Q2 here all three segments had improved slightly over Q1, say more or less our expectation. The back half of the year with where prices have kind of moved late in the second quarter. And as Randy kind of mentioned in the intro with the margin management and cost concentration that we placed on the segments, we see momentum there for the back half of the year and those margins continuing to improve.

Speaker 5

Awesome. Thank you. And then just wanted to get your overall thoughts even the macro in terms of like 45 Z credits. Any thoughts on when we expect to hear something over there? Do you think B2C will be extended if we don't hear anything on the 45

Speaker 7

Z? So that was

Speaker 2

sorry, I just want to clarify, I understood the question.

Speaker 1

45 Z, what's our expectation?

Speaker 2

Yes. And Matt, feel free to jump in. But I mean, our expectation is that we believe that we're going to see 45z implemented by January 1 and really all signs are pointing to that. Ethan, you want to add, Matt?

Speaker 8

I mean, that's there's obviously a lot of talk around that with the guidance that is yet to come out and we're like everyone else anxiously awaiting that. But as Bob mentioned, we're still of the view that listen Jan 1 is the day we'll be implementing.

Speaker 2

Matt, anything on the blenders tax credit that we can knock out

Operator

here while

Speaker 8

we Yes, there has been a lot to talk about the blenders tax credit and if that would be extended or another version of it at all. And so far, our view is that at this point is that, no, we still think that the what's in place today in terms of the legislation is

Speaker 4

what's going forward.

Speaker 7

Great. Thank you.

Operator

The next question comes from Manav Gupta of UBS. Go ahead, please.

Speaker 7

I just want to

Speaker 6

hit understand, you know, fax prices are moving up, UCO prices are moving up, D4 RIN prices are moving up. So is that the reason you have been able to reaffirm your guidance because looking at the numbers, you probably need to hit $360,000,000 for each of the remaining two quarters to get to that guidance. So what are the factors which give you confidence that you can get there in the second half?

Speaker 2

Yes. And what kind of tag team this is a group. I mean, clearly, our 1.3 to 1.4 has got a range to it. And at the end of the day, what we're looking at is in the Q1 and Q2, we sold a lot of fat in North America in the mid-0.30 dollars a pound levels. That now is leaving the plants at $0.40 to $0.42 and much improvement in Europe at the same thing.

Speaker 2

South America has been slow to improve at this time. But as we've always said from an optics perspective, every penny is worth about somewhere between $12,000,000 $15,000,000 annually into the really into the earnings stream here, the EBITDA stream and most of that goes to the feed segment. So if you say you're up a nickel, that's $60,000,000 right there. We think there will be further appreciation here. And ultimately, as you look around the horn, you are seeing a lot of what I call you've seen a lot of shutdowns Manav or cancellations or pauses whatever the heck you want to say.

Speaker 2

You've seen 3 plants from Chevron, biodiesel plants shut down, you've seen Shell's announcement, you've seen BP Cherry Point, you've got no pretreatment on yet at whether it's Martinez or Rodeo. So at the end of the day, it takes one of those plants and then we'll see a pretty nice improvement there. The Chinese UCO side that everybody spends a lot of time talking about, clearly the tariffs have been proposed in Europe today. There is a comment period that will take some time, but the world is evolving right now. And so I see I feel pretty optimistic about the fat pricing here as we go to the back half of the year for our business because of our ability to pretreat these fats.

Speaker 2

D4 RINs, when you look at it, we had Port Arthur down for 28 days and we still kicked out some pretty good gallons here 311,000,000 gallons for the quarter. So I think that's part of it. And the fact that you've got some people idling capacity out there, I tend to believe that the S and D D that the sell side had out there had everybody running at full capacity day 1 and we've never seen that. So it's tightening. LCFS, it's still on target for Jan 1.

Speaker 2

I don't know that we would take a different opinion of that today. I don't know, Bob, Matt, you guys want to add anything to it? Yes. I mean, I think when you I mean, what gets us what makes us confident is just our ability to leverage the network of assets that we've got. Whether it's in the collagen business, we can shift to low cost production areas of the world and really the Gelnex acquisition has provided us with that kind of flexibility.

Speaker 2

In the rendering business, we continue to have old contracts come up for bid. And as we restructure those agreements based on today's construction costs and environment, we expect better margins as we go forward. So just more generally speaking, we're seeing improvement and we think that the second half of the year is going to continue to get better.

Speaker 6

Perfect. Thank you. A quick follow-up here is one thing which was working against you was the feedstock price lag in the first half, which depressed your capture of the DJD margin. Now that should reverse with the feedstock going up. So would it be fair to assume that at least in 3Q, your capture could be materially higher because that feedstock price lag would now strongly work in your favor versus against you?

Speaker 8

I think that's well said in terms of the right way to look at it, Manav.

Speaker 6

Thank you, sir.

Operator

The next question comes from Adam Samuelson of Goldman Sachs. Go ahead please.

Speaker 9

Yes, thank you. Good morning everyone.

Speaker 2

Good morning, Adam.

Speaker 9

Good morning. So maybe Randy, just keeping on that line of questioning, if I may, just thinking about the guidance to get to the low end, you've got to improve your quarterly EBITDA by a little less than $100,000,000 versus the first half average. The fat price sensitivity that you just gave would give you $15,000,000 to $20,000,000 to that quarterly rate. I just what is the can you help us bridge kind of some of the other pieces there? I mean, just DGD volume certainly would be stronger in the second half if there are no turnarounds planned.

Speaker 9

But can you help dimensionalize kind of how you've thought about the DGD margin structure? Is there any contribution from staff premiums now contemplated in the Q4? And kind of the food business, kind of how much step up you're assuming there? That would be helpful. Thank you.

Speaker 2

Yes. I mean, clearly, the first thing as Bob alluded to is we're managing margins globally. And what I mean by that, and that's really the feed segment, adjusting processing fees. We're watching the new fab prices flow through. Remember, in the U.

Speaker 2

S, it's pretty transparent as those prices move through. In Canada, Europe and South America, there are actual visits to slaughterhouses that have to be made on timing in order to adjust what you're paying for the raw material. We didn't get as much of that as we wanted in Q2. That would exactly that would be very specific for the U. S.

Speaker 2

In some cases and absolutely true for South America. Canada did a very nice job and so did the Europe in moving those, but very different procurement processes. So that will widen out as we go forward. Second thing is we expect DGD, the system to run full out for the balance of the year. And so that's going to be a big contributor.

Speaker 2

We haven't contemplated any earnings from S. A. F. I mean that would be frosting on the cake if we do. And I remain kind of hopeful that we will, but it's hard for that to be material.

Speaker 2

It's just really at the end of the day, it's still doing the things that we've been executing on, little bit of price improvement and then running DGD fallout. And I don't know, you guys got anything on this?

Speaker 8

Like you said, it's just running our business. I mean, obviously, we can do the math. We know what it takes to get to the guidance. I would say though typically I wouldn't imagine or expect that it's automatically going to be 50% in Q3 and 50% in Q4. Q3, typically, we have a lot of challenges operational through the business, although we're absolutely ready for those challenges.

Speaker 8

But I wouldn't just don't want to convey the message that it's going to be a fifty-fifty split automatic for the next two quarters. Right.

Speaker 9

That's helpful color. And if I could just ask a second question. As we think about that transition from the BTC to the 45Z at the start of the year, I mean, how are you kind of framing kind of the risks and opportunities presented by that in terms of the last kind of surge of biodiesel imports or run on production domestically for biodiesel guys before the credit goes away, which would be good for your feedstock good for feedstock demand, potentially create some more RINs and then calendar flips and the volume of renewable fuels coming into the U. S. Should slow pretty dramatically, but also kind of the margin structure for conventional biodiesel, who is a user of fats and oils would come under a lot of stress pretty quickly, we would think.

Speaker 9

And how are you thinking about the push pull between the feedstock demand shifts and the credit generation that shifts that could happen before and after the calendar turns?

Speaker 2

Yes. This is a pretty important point. I think the short answer to your question is, we can approach this whole event with lower risk than the rest of the market. As you're aware, a lot of the RIN generation, 25% or so of the D4 RIN generation has come from imported biofuels, renewable diesel biodiesel. Without a BTC and current margin structure, it doesn't make sense for them to run their businesses on paper.

Speaker 2

And so they're going to have a lot more risk as we approach those deadlines. And we would anticipate that they're going to play that a little more conservatively as we get to the end and not want to risk logistical delays and things like that. So all of that should point to better renewable diesel margins as we near the end of the calendar year. From our standpoint, implementation of PTC, we've seen delays in the past with PTC. But again, we're positioned so that we can manage that risk better.

Speaker 2

We're very confident in the implementation of that 45Z and what that's how that's going to play out. So because of all those things, we should be able to run full going into the end of the year. And really, we should see margins improve as we get to the end of 2024.

Speaker 9

All right. Appreciate that color. I'll pass it on. Thank you.

Operator

The next question comes from Matthew Blair of Tudor, Pickering, Holt. Go ahead please.

Speaker 10

Good morning. Thanks for taking my questions here. I was wondering if you have a view on when the changes for the California LCFS program will be implemented. Are you confident that that will be a 2025 start update or do you see a risk that might slip into 2026?

Speaker 8

Our view at this point, Ben, is that it's still something for 'twenty five, not necessarily January 1 of 'twenty five, but we do believe that this will be something for through the probably Q2 of 'twenty five.

Speaker 10

Got it. Got it. And then maybe circling back to the biodiesel comments, you mentioned that next year, they'll probably get tougher for the veg oil based biodiesel producers. But what about this year? Have you been surprised that the utilization rates for some of these biodiesel plants when you have several of your RD competitors reporting negative EBITDA even if they're running low CI feeds?

Speaker 10

I guess we would have thought that the biodiesel utilization would be even lower this year that you'd see more closures like what Chevron announced earlier this year. So is that surprising to you to see the relative strength of biodiesel utilization rates this year?

Speaker 2

So, I'll take that. Really no. I think when you look at who the biodiesel players are, these are largely ag companies that are extremely efficient, effective at managing margin risk And they take advantage of price fluctuations and the opportunity to lock in a margin in the future. They're also looking at an integrated oilseed crush margin all the way through to biodiesel. So for their businesses, they're at least above the line, above they're earning a contribution margin.

Speaker 2

They're going to continue to do that as long as they can lock those margins in. So not really surprised with the run rates we've seen in biodiesel. As we get into 2025, that just gets a lot more difficult. And the amount of gap that they have to overcome is probably too big to continue to run at the rates that they have been.

Speaker 7

That's helpful. Thank you.

Operator

The next question comes from Thomas Palmer of Citi. Go ahead please.

Speaker 7

Good morning and thanks for the question. Maybe I could just start off clarifying on the expected inflection here in the second half. Do you think the current pricing environment supports at least $1,300,000,000 EBITDA for the year? I know you talked about reasons why pricing could continue to improve. I just wanted to kind of clarify the piece of where we sit today versus how it progresses?

Speaker 2

I mean, I think if so the current pricing I think there's a couple of messages here. And one is that in the current price environment, there are things that we expect to do in the second half of the year that will allow us to improve margins. I mean, Randy talked about it, kind of the leveraging our infrastructure and some of the changes that are underway and just extracting more value from what we have. That's a big part of it. I think we do anticipate that we'll see a slightly better margin environment as we near the end of the year.

Speaker 2

And so I guess that's the other part of it.

Speaker 8

These things have to play out. There's a lot of moving parts, a lot of components to this. And it just has to play out over the next couple of quarters.

Speaker 7

I mean,

Speaker 2

Tom, you got P66 out there claiming they're running 50,000 barrels a day, but we've never seen them. Number 2, we're watching them buy animal fats around the world now. So evidently, they've got confidence in their pretreatment system. And so the S and D of this product is just of our feedstocks in the world is not infinite. And so we just believe that if any of these guys are successful, you have Neste come out today and say, well, we're going to be at full capacity at Martinez by the end of the year.

Speaker 2

They reaffirm that again. I mean, so you're talking of converting over whatever that number is, 70,000 barrels a day, 80,000 barrels a day to quote waste tax. I get pretty bullish when I hear that number. So that's where we're at on it. And the risk out here as we always say is, if they don't run, we'll be P66's largest supplier of R and D and we'll be their largest customer of resale animal fats.

Speaker 7

Understood. Thanks for all the color on that. Maybe I could just follow-up quickly on the food side. You noted for 2Q some of the destocking, I think the messaging on the go forward was more constructive. Just want to clarify, I mean, is this kind of the expectation on a sequential basis we start to see improvements in terms of the profitability of the business?

Speaker 2

Yes. I mean, clearly, the food segment really is the anchor is the gelatin hydrolyzed collagen business within that segment. We've seen some challenges in the different continental businesses that we have there with customer demand. But towards the end of June here, we started to see customer demand pick up again, whether it's confectionery, whether it's pharma. So ultimately, we feel pretty good about the back half of the year.

Speaker 2

I think when you see the financials released, once again, you'll see the decline in revenue in the segment. And really what I'd tell you to focus on is the margin because we've been able to once again lower what we pay for bones, skins and hides to maintain the margins we had. And we think that we'll get some pricing improvement the back half of the year as we go forward here.

Operator

Our next question comes from Ryan Todd of Piper Sandler. Go ahead please.

Speaker 4

Good. Thanks. Maybe one on the political side, which I know is difficult, but as you look ahead over the next 6 plus months, we've had a number of moving pieces. Can you talk to maybe any impacts that you see or risks that you see from things like the ruling on the Chevron doctrine or from the election coming up later this year and what you see could be either positives or risks in either direction?

Speaker 2

Yes, thanks. I think technically these risks exist. And but when we dive into it, what we really look for are what's going to motivate the different politicians in their jurisdictions as it relates to 45 Z in this case or any policy for that matter. And what we see is biodiesel, renewable diesel, sustainable aviation fuel really is an becomes a non partisan issue at the end of the day because of just the broad based representation of both sides of the aisle in ag states. So the risk, like I said, technically, the risks are there that policies could change.

Speaker 2

But practically speaking, we're pretty comfortable with where things stand and what how it's likely to

Speaker 11

play out. And I think

Speaker 2

I would add, Ryan, I think the thing that people have to keep their eyes wide open on right now is American agriculture is under extreme pressure right now given $10 beans and sub-four dollars corn. And the politicians are going to have pay attention to the 7 farm states here. I mean, clearly, we would be having lots more fun on this conversation if the EPA had set the RVO to reflect both the capacity and the production of the soy crushing industry. The EPA failed. And so now the politicians are going to have to and it's bipartisan come forward here and continue to push this thing forward.

Speaker 2

I mean, it's not climate change, it's not energy policy, it's ag policy. And that's true around the world today. So end of the day, the farmer once again proved that if you get prices where they're at, make fertilizer available and capital available, they will produce more. And that's where we're at right now in the cycle. And so ultimately, as we're transitioning to a PTC, it's very favorable to Darling.

Speaker 2

It's very favorable to cash flows to Darling. It's favorable to our system, if you will, globally. So, end of the day, we feel pretty good where we're positioned here. But I don't see it's hard for me to see that whoever you want to put in the Oval Office, can Trump get his magic pencil out and screw this thing up? Not really.

Speaker 2

It takes Congress to get involved and I don't think there's anybody willing to step forward on that today given where American agriculture is.

Speaker 4

Great. That's helpful. Thank you. And then maybe just one quick follow-up. Thoughts on the outlook for dividends from DGD, should we expect that to continue to be kind of a steady dividend payer from here or how should we think about those dynamics?

Speaker 2

Yes, Ron, you see the balance sheet of DGD that we posted out there, debt obviously was way down. Therefore, we received a distribution here in the middle of July. Having said that, I think our outlook is we're optimistic for additional distributions the back half of the year from DGD. So with that, really our outlook for Q3 is additional debt reduction, probably accelerating from where we were in Q2, which gives us a chance to be kind of in the ballpark depending on where margins are, cash flows, the back half of the year to have that debt kind of down in that closer to that $4,000,000,000 number that we're working. And obviously the distributions from Diamond Green is a significant part of that.

Speaker 2

So we're optimistic about that. Yes. And Brad comment a little bit about working capital here. I mean the DGD is not the only source of debt reduction in this company. Yes.

Speaker 2

We've said we've got to focus on working capital improvement. Obviously, the balance sheet is not out there yet, but we have momentum there in Q2. So you'll see that shortly. And rest assured you'll see continued improvements. So on the quarter we're really generating cash there as well.

Speaker 2

And if

Speaker 8

I could, I would just remind everyone that the DGD dividend, that's a formula that's calculated every day or every last day of the month and the numbers. So there's really not any subjectivity to that. That's just a matter of the calculation, the dividend is what it is.

Speaker 7

Okay. Thank you.

Operator

The next question comes from John Rehaut of JPMorgan. Go ahead please.

Speaker 11

Hi, good morning. Thanks for taking my question. So my first question is on capital allocation. You talked about delevering as the primary focus right now and I think you just mentioned accelerating the debt pay down in the second half. But you did buyback some stock in 2Q.

Speaker 11

Should we characterize that as being kind of opportunistic when the stock is trading down? And then how do you generally think of the decision between the balance sheet and the share buyback when you view the shares as attractive?

Speaker 2

Yes. John, this is Randy. I mean, you've answered a lot of your own questions there. Debt repayment for us has been priority. Clearly, level of different shareholders that have been in and out of the stock, it's a clear message to us to get to $4,000,000,000 or below.

Speaker 2

3 ways to get there, generate cash at DGD, repatriate it. Run our business wider margins. And 3 is to manage the CapEx outflows. And we set out the year with a $565,000,000 plan or $500,000,000 and we're shooting to be under $400,000,000 for the year. So that's priority.

Speaker 2

What we did in Q2 here was an opportunistic. We wanted to buy back our dilution within the management programs and we continue to look at share buybacks as an opportunity. But right now as we look forward to the right capital structure for the business long term, ultimately we want to get the debt down here and that would be priority 1. Priority 2 would be buybacks and priority 3 would be any type of growth capital, which we're not really putting in play this year. We took a holiday as we've said on that.

Speaker 11

Great. Thank you. That's very helpful. And then I do apologize, I have another question on the full year EBITDA guide. I know you've got several already.

Speaker 11

But mine is just trying to dig in a little bit on the DGD side. I know an assumption of $0.75 per gallon for the full year, I think. So firstly, is that sort of a number to be thinking about? And secondly, if it is, my simple math is right, I think you'll have to do about $0.90 or so in the second half to get to those kinds of levels. Maybe just we can talk through some of the moving pieces there.

Speaker 11

I know you talked about the lag in feedstocks and wind coming up a bit, but no movement on the LCFS until next year. Just trying to understand how we could get to that number?

Speaker 1

I think you're asking to clarify, I think you're asking what is 1Q to get

Speaker 7

to about $1,000,000,000 of EBITDA. So just confirming

Speaker 11

in 1Q to get to about $1,000,000,000 of EBITDA. So just confirming if that's still the number and if so, kind of the math to get there in the second half?

Speaker 8

I think that we may be talking about investment economics back when

Speaker 2

Well, we came out the year, Matt, and we kind of guided that we thought we'd run closer to $0.75 And we we beat that in Q1 and we lowered in Q2. And so at the end of the year, it's kind of hard to say how this thing plays out as we go forward. But clearly, that's built in our 1-three-four-four expectation, but I'm not going to throw a number on that today.

Speaker 11

Fair enough. Thank you.

Operator

The next question comes from Andrew Strelzik of BMO. Go ahead please.

Speaker 2

Hey, good morning. Thanks for taking the questions. First one is on some of the internal initiatives. You obviously sounding very confident and optimistic about what that can look like. Is there a way to frame what kind of contribution that could create for or kind of how you think about that with respect to the outlook for the back half of the year above and beyond maybe what you're expecting from fab prices?

Speaker 12

And is most of that in

Speaker 2

the Valley assets or is it broader than that? Yes. I mean, it's a hard question to answer because how do we frame that? I think what you're alluding to is as we have a lot of our supply contracts are multiyear contracts and when they come up for renewal, we repriced those based on the current market environment, which is significantly different today than it was just a couple of years ago when construction costs were significantly lower and rendering options just were lower in cost than they are today. It's hard to frame what's the potential expected impact that's going to have in the second half of the year.

Speaker 2

I think it's easier to anticipate what that might look like over a couple of year period. But what I think we can say is that we do have some we've had some pretty significant contracts come up for renewal. Today's environment and value results in a much better margin than where we were based on the previous contracts. Valley network, but some of that is just more broadly across what has been the dialing network. Yes.

Speaker 2

Ultimately, Andrew, I mean, I think as Bob alluded, I mean, when I look around the world, Europe has made some very rapid and really beneficial changes in procurement. Canada is a simpler market too that's able to do that, does have commodity exposure there. So they're getting lift now. South America, we had our challenges in Q2, I think, for many of we've not quantified them, but because they're very difficult, The flooding in South Brazil had us down for a little bit down there and clearly that's going to improve in Q3. And then North America or the USA, Matt's got challenges cut out, not only operationally does hot weather always make it difficult to render, but we still have work to do.

Speaker 2

And ultimately, as I said, the U. S, much as we're investors in Diamond Green Diesel and we're one of the largest importers of fat in the world, it impacted our domestic business here. Now imports are more expensive than domestic and we're going to get that benefit back into the domestic system. So it's a little bit of everything everywhere as we look around the horn today. Anything you want to add, Matt?

Speaker 8

I would just go along those same lines. I mean, we have an action item list by location of steps that we can and intend to take. Those lists are different depending on where you look. Some of those are low hanging fruit, others take more time and are a little more of a challenge to implement. But it's really a drill down to by location and the actions and the steps that we need to proactively take to help strengthen and fortify the business.

Speaker 2

Great. That's super helpful. I appreciate it. And my other question, maybe if we could go back to the Food segment and unpack what's going on there a little bit. You guys have been running pretty consistently in the $85,000,000 $90,000,000 kind of EBITDA range since the acquisition.

Speaker 2

If you back out the inventory adjustment last quarter now, you're at $73,000,000 So I guess what caused that decline this quarter specifically? I mean you really talked about the destock slowing, but I'm curious about the EBITDA deceleration there and then whether or not that's the right run rate for the balance of the year to think about? Thanks. Yes. This is Randy.

Speaker 2

I mean clearly there's about 3 or 4 things going on globally. The number one issue was just really customer demand. We finally felt as we came into 2024 here the deflationary pressures around the world and ultimately we've seen prices of just what I'm going to call just generic or commodity gelatin fall pretty rapidly. And you say, well, how does that happen? Well, it happens because we that business, we created a very nice business out there and ultimately attracted a couple large South American competitors that tried to bring on way too much capacity in a micro market.

Speaker 2

And so if you call the market somewhere around 500,000 tons and somebody brings on 30,000 tons, 40000 tons of capacity, the first thing you don't do is walk into your box and say, I can't find a customer yet. The first thing you do is you cut the price and sell it and then tell him that it was a bad investment idea that he had. But ultimately, that's what we're seeing pressure on pricing out there. That's reflected in the top line. Seeing a little bit of margin pressure in the commodity gelatins, but obviously our positioning in hydrolyzed collagen and with our Gelnex assets being the lowest cost, most efficient in the world now, it insulates us a little bit.

Speaker 2

But ultimately, we see some pretty strong demand picking up the back half of the year. And I think we're still optimistic of the Rousselow model for the balance of the year here. Great. Thank you very much.

Operator

Our next question comes from Ben Kallo of Baird. Go ahead please.

Speaker 12

Good morning guys. Thanks for taking my question.

Speaker 2

Good morning, management.

Speaker 12

Good morning. So first thing just on shaping in the back half, you noted the hot weather for Q3, so that's not good for feed. But then is

Speaker 2

there a tie in in Q4 to the SAF plant? So just maybe if

Speaker 12

you could tell us like kind of what quarters could be heavier or lighter in terms of EBITDA? And then I have a follow-up.

Speaker 2

John, I mean, if I as Matt said earlier, I don't think I wouldn't wait this thing divide by 2 or 50% and 50%. It will be stronger in Q4 than it is in Q3, Ben. And we've not put anything in there for SIF. I'm hoping that's the rabbit in the hat here that pushes us closer to the 1.4% than the 1.3% number. So Bob, Matt, Ann, you guys want to add

Speaker 8

to that? That's right. Okay.

Speaker 12

Just a clarification on that, Randy. Is there downtime of the plant when you hook up SAF or is it they're completely batch, so it doesn't matter?

Speaker 2

No, that was completed here when we had Port Arthur down. So we're in the instrumentation and electrical phase now and everything's set. Then it will be ready to run hopefully sometime in Q4 here. So far, the weather has worked pretty well, but it's pretty wet down there right now.

Speaker 12

All right. And then there

Speaker 2

was this report of KKR buying a

Speaker 12

stake in the Italian company. I just want to get your thoughts on it and why KKR would do that and how it impacts you?

Speaker 2

There's Big Ben, there's a blank looks around the table. Give us a little more detail. It's Eni Live, a subsidiary of Eni. It's a they

Speaker 12

have a renewable diesel production that they offered €3,300,000,000 for a 25% stake in their renewable diesel production.

Speaker 2

All I can tell you is that makes Darling severely undervalued then.

Speaker 12

All right. And then just maybe on the final one on do we read into the dividend that CapEx is primarily done for the SAF? And then maybe any kind of color on thoughts around if you're going to do another SAF plan and timing?

Speaker 2

Yes, I mean spending is clearly winding down on the SAF side. We're also another thing that we didn't spend a lot of time talking about, we've got a pretty significant import terminal for imported fats being constructed at Port Arthur that's in our capital and it's been flowing through. So that's spending a wind down too as we go forward here. SAF II, my colleague at Valera, Lanericks and I are sitting here saying sell out number 1 and bring us the contracts for more gallons and we'll commit to you to build SAF2. It's engineered.

Speaker 2

It's costed out. It's plus or minus 10%, ready to go. But any further investment decision is on hold until we see the lights of the demand here.

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Earnings Conference Call
Darling Ingredients Q2 2024
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