Darling Ingredients Inc. (DAR) Earnings Call Transcript & Summary

So welcome, everybody, and thanks for taking time to listen. And I love to tell the Darling story, 141 years old. I think we're 2 years older in Coca-Cola, believe it or not. So -- but -- and ever hear a CEO, say a 141-year growth story. So today, what we'll do with Paul is we're appreciative of Paul's coverage. It's one of the best in the industry today. It's kind of trying to enlighten you a little bit on what's fun, unique about Darling. Darling has no peers. Darling has built a global platform around the world converting 1 out of every 7 animals byproducts into food ingredients, feed ingredients and now renewable green energy. And it's a fun story. So if you think out of -- 1 out of every 7 animals after the meat goes to the grocery store, we take the rest. And so today, to try to comp our own is very difficult. To peers, very, very -- there aren't any, kind of the mantra within the company as we break off the rearview mirrors because we don't ever look back if we go fast enough. So over the last 20 years, we have taken the company from 20 locations, 600 people to now 270 locations, 16,000 employees and 270 factories around the world, processing 17 million tons of waste product.

Fantastic.

So it's a fun story to tell. The unique part that we get to talk to you about today was about -- it will be 10 years in July this year that we started up our first renewable diesel plant with our partner, Valero. It was a career bet for me. It was a balance sheet bet for my CFO, Brad, and I. It had never been done. Never had anybody taken animal fats, basically hydrotreated and cracked off the light ends and made diesel. I can report, 40 quarters later, we've never not been profitable. And we averaged $1.26 a gallon for the first 5 years, $2.26 a gallon for the next 4. Last year was a little bumpy with all the Ukrainian and industry volatility, and the fossil business, $1.18 a gallon. But if you would have adjusted it for some decisions made on procurement and hedging, probably closer to $1.50. So -- and that's on a $3 a gallon investment. So these are wonderful investments today. And as people know, we've started up our third factory in Port Arthur, Texas, and now have global capacity of 1.2 billion gallons. And then we announced recently that we're earmarking to start up, sometime in '25, our first jet fuel plant. Just basically an addition of a module for fractionation on top of the Port Arthur plant. So really exciting times, Paul.

Great. And curious that, Randy, do you think the market fully understand your value proposition? And if not the way you think they may be missing?

The answer is, I'm probably not the first CEO that ever stand in front of people saying, "I'm underappreciated and undervalued." But the answer is absolutely not. I mean if you look at the track record of earnings here for the last 5 years, it's been significant growth each year. Part of it, commodity cycle-driven, of course, but most of it related to the build-out and balancing of our core ingredient business. So if you stop the world and say, "What business are we in? We collect, transport, evaporate, separate. So you think you collect the animal byproduct, you transport it to a factory, you use energy, nat gas, electricity to separate or to heat it up, evaporate the water, the #1 product we make in the world today is water. And then you separate the fat from the protein, and the process is called rendering. So anybody in here I get the -- knowing honorary renders if you've ever cooked bacon or sausage or hamburger in a skillet, we just do it on an industrial scale. And then the proteins end up in pet foods, aquaculture feeds, organic fertilizers. And then -- or if the food proteins, gelatin or collagen. And for anybody that took an Advil for the hangover this morning, that gel cap is you have a 1 in 4 chance of that being us in the world, soon to be 1 in 3 chance after we close on a Brazilian acquisition. And then the fats, the fats are what then go to the hydrocarbon business. And they used to go back before you guys all got healthy on me. You used to eat McDonald's french fries in the '80s, and they tasted good. And after that, they really didn't have a home in the diet. So as we embarked on the dream here, as I call it, and Brad has heard me say, my CFO, for many times. I said, "My goal was to get respect for animal fats." And animal fats have been a $200 or $300 a ton discount to any other vegetable oil in the world. And so if you want to go with the value proposition of the entire circular, if we create more value for animal fats, we create more value for the slaughterhouse, which the slaughterhouse can pay more to the livestock producer for the animal, and we can make meat more affordable in the world to feed people. And so we have people who now know how I'm wired. And so by the way, I have the two things in life, people want, food and energy. And we can make meat more affordable. And we can create an energy product, it's not going to replace fossil fuels, but it's going to help with decarbonization. So back to your question, do people understand it? No, it's too complicated. The story, people get lost in the weeds of what do you do? Well, we process animal byproduct and we make protein and fat. And if hydrocarbon prices go up, we make a little more money over here, and we make a little less money on the core ingredient side. And vice versa, if fat prices go up, we make a little less money in the business over -- in the hydrocarbon business, and it just balances. And so at the end of the day, under the low carbon fuel program, that really started back in about 2018 of any scale, you're seeing a global decarbonization move, led a little bit by California, but Canada is just as big and Europe is even a bigger leader in it, blending this product into heavy transportation fuels for reduction in tailpipe emissions.

Great. Excellent. And by the way, that I would say that Randy your decision 10 years ago to set up DGD is really terrific and a brilliant move. I think it transformed the industry and transformed Darling. So that -- I want to say that congratulations on that.

Glad we got it right.

So far, it has been. So maybe then talking about the growth because DGD has been a major growth engine for you. But how are you going to balance between growth and capital return now? I mean with DGD, I think, at this point, the growth rate will slow down, mainly that you're probably not going to sense a DGD for anytime soon. With the SAF, yes, you're going to see some growth. But how are you balancing between capital return and growth? And what will be the level of dividend once that you're in that?

Yes. It's -- for me, as we built this out, there was always this dream of where we're at today. So I don't want to ever declare a finish line because we still have 4 very big pillars of growth around the world. We're -- in the Benelux countries, we're the largest green energy biomethane producer, organic food waste. We're the largest processor in the world of animal byproducts. We have 7 more plants under construction. We're the largest collagen peptide and gelatin company in the world and you say, "What the heck is that?" Well, you produce it from bones and skins of animals, and it's our most profitable product. And then you look at SAF. So we have four pillars of growth that are going to continue around the world. The basic thesis, and I'll get the capital return here, is that we still believe in population growth. We still believe in wealth creation. We believe that the world's short 2 things, food and energy. And on the food side, it will involve center of the plate dining. You'll have some protein. I know a couple of years back, you all were thinking impossible burger and all this stuff. It may happen sometime, but it tastes horrible. But if you think about a China man and the Chinese people, you think about the Indians, you think about Nigeria, the third largest population center in the world, they don't have access to protein yet. So our world is we see another 100 years of growth around the world, and we'll keep converting product. Now as we get back to this business, the stock today is valued at $65, in my opinion, 6.5, 7x, which is grossly unfair relative to ag peers in food and ingredient and even some green energy, Neste. So I looked at the stock and say, okay, we should be a 12 to 15 valuation, putting us in a market cap somewhere in the mid-20s. We'll get there. We'll get to respect. So -- but what people have looked at is the returns that we've been able to achieve from 10 years ago are so tremendous in this business, not only if you think of -- I'm going to just kind of give you a snapshot. The little business we had, we doubled the size, again, since 2018, $540 million of EBITDA, 8.16, 8.40, $1.235 billion, $1.541 billion last year, and we're giving guidance of $1.8 billion to $1.85 billion this year. The last 2 years, I've missed by $4 million. To think you can call this business with 0.25%, I probably should go to Vegas. But at the end of the day, as we look at it, we've been reinvesting in returns that are 30% to 40%. Now we're at an inflection point where we want to watch the world. We want to see the demand develop. We brought 1 billion gallons of renewable diesel on in the last 13, 14 months. No one in the world has done that, and we've been able to market it profitably. It's all committed around the world. So you feel very good about the demand side. You're watching the SAF side rapidly develop out there. I have a personal opinion on SAF if you -- give you a little -- a few optics out there that are kind of fun. Your wonderful airline and cargo carriers have pledged 11 billion gallons of SAF to be bought by, I think, 2025 to 2030. Let's put that in perspective. If that was even remotely possible, that would involve utilizing 4 of the U.S. soybean crops, 4x the quantity, meaning you all ain't eating any french fries or having any ranch dressing in the future if this is true. So we know it can't happen. But nonetheless, they have stepped out in a green way and said they're committed to decarbonization. So Neste, out of Finland, they got a plant coming on right now in Singapore, and we're 1.5 years plus out on ours. So we see SAF. What's that mean? That's another $300 million or $315 million out of the cash flow out of Diamond Green, but it's fully delevered. So as people get to see -- so if you think about this, and Paul, I always love your perspective on it. In the investment world, you guys like complete transparency and you like these wonderful stories that you can linear and graph out. So about 2 years ago, the SEC -- we positioned the SEC to allow us to move equity in an unconsolidated joint venture, Valero's a consolidator, into operating income. It took the SEC 1 day to say yes. And so now it's up in operating income. Well, what's the next step? Asked the SEC, "Can we consolidate?" Be the first company on the NYSE in the U.S. to double consolidate. But our income in DGD is darn near equivalent to the core ingredient business. So -- but how does an algorithm, an ETF, how do they value that? How do they see that in the valuation? Today, we report we're at $4.5 billion, $5 billion revenue company because we don't consolidate. If we double consolidated, we'd be a $15 billion company, somewhere in the Fortune 200. But today -- so it's hard. But at the end of the day, if you just deliver earnings, the marketplace will figure this out. But -- so end of the day, we're going to -- as I said, the guidance is there. It's $1.2 billion on the core ingredient side, $600 million, $650 million on the Diamond Green Diesel side, which is our half, and Valero gets the other half. And that's where we're at today.

But how about going back into the question about capital return to shareholder?

Yes. So this year, we'll close on our gelatin acquisition here, hopefully, here by the end of the quarter, early second quarter. That will put another $1.2 billion in debt on the balance sheet, taking us up to about 4. Yes. 3.3 levered. We're going to pull capital back out of DGD in the form of dividends and the core business will be cash flow positive. We'll delever back down to about 2.75 by the end of the year. Once -- we've made a promise to the 3 rating agencies to be sub 3.0 by the end of the year, such that we can, once again, ask or beg or pray for investment grade. And so that's number one. Once we're there, then all cards are on the table. And what I mean by that is we have to look at growth opportunities, which I don't see any out there. Our world of M&A, as I tell people, it comes every 5 years. We doubled the company in '05, '10, 2015. Here comes COVID in '19, '20. And in '22, we doubled the size again. We've got added 4,000 employees. We had a little bit of work to do in about 9 countries over the next year, 1.5 years. So you won't see us out there in the world. And to be honest with you, I think we own anything of any scale out there now. So we will continue our opportunistic buybacks. We think the company is undervalued, but we're balancing our mission to get into investment grade versus stepping in. If I didn't care about investment grade, we'd be buying more stock back today and return on share of cash that way. Once we get into '24, you're going to have an $800 million to $1 billion free cash flow. You're going to be at 2.5x leverage even coming down further. Then you got real decisions to make.

Great. Before I continue my question, let me see if there's any question on the podium here. On the floor here. Okay. So maybe let me continue. Randy, if we look at post the start-up of DGD 3, what will be the company expected EBITDA growth between this year and 2027, per se?

Yes. And so we start -- we're giving guidance, like I said, 1.8 this year. The thing about it, that's assuming DGD run 3. The system run on 1.2 billion gallons. That's let's call it, 750 over 1 and 2, 450 over at #3, boilerplate, 470 We'll find out. The thing I've always been very comfortable and confident with our partner is, is that the facility is designed to have a little more capacity in it. So you'll continue to see and clearly in '24, we will creep the rates if we can. And number three, we will have 4 years of acquisitions of Gelnex and the other acquisitions we've done. We've got 7 more plants under construction, with probably another 7 contemplated around the world. And so ultimately, provided -- these are always hard. If we see fats and protein stay consistent, you're going to add easily another $50 million of EBITDA per year as you go forward, just with the organic growth that we were up to. So if you think back only 2 years ago, we broke the $1 billion mark in EBITDA. That was an unbelievable moment for me personally. Now $2 billion is the number I want. And I have a triple-digit stock number in mind, Paul. I really do.

Yes. I mean the stock is clearly [indiscernible]. Well, maybe in order, Randy, to achieve your organic growth target, what kind of CapEx refinement that we're talking about?

This year, we're talking $565 million, with about 20%, 22% of that going back into the growth projects. Growth projects or I've got a new plant going in, in Boise, Idaho, a new plant in Turlock, California, a new one going in, in Bellevue, Nebraska, one in the central part of Brazil, one in the northern part of Brazil, two digesters in our biomethane plants in the Netherlands and Belgium. I'm probably forgetting about another three or four -- another gelatin spray or collagen spray dryer in Central Brazil. And then you add the Gelnex business, and we'll add a couple more spray dryers to that to meet the growing collagen peptide demand. So that's for this year. Next year, Brad, what do you think? A $400-ish, it was what it takes to maintain? For those who don't know, I mean, we operate in North America and in Europe, one of the largest trucking fleets, because animal byproduct, believe it or not, is considered not hazardous, but as a specialty waste. And you just can't call up any trucker and have them pick it up for you. So it has to be in our own equipment, and that takes annually anywhere from $50 million to $75 million around the world just to maintain the fleet.

Okay. Great. Randy, you talked about every 5 years that you've been doubling the company. And I think at least that portion of them is because of M&A. You guys have been a very successful consolidator given your position in the rendering business. And so perhaps that you can share with us two or three major metrics when you make an M&A decision?

As I look back and different things and over the career here was I've only violated the rule 1, so I'm going to start with that, and that was valley proteins here. And that was a special case. But my job is not only being Chairman of the Board, managing 9 outside directors in the day-to-day that happens with that, but I spend the balance of my time working with families around the world that own these small or medium-sized companies. And there's -- we're the only public company in the world in the business. So for us, we always say from first date to altar is somewhere between 2 and 3 years. And it's really, do I want to marry you not do you want to marry me? And that's what's always been so important. And I know it's cliche, but you do business with people. Everybody in this room does business with people who share your values. If they don't, you find reasons not to. So essentially, we want to figure out who shares our values. Our values are very simple. You're going to run your business, you're smarter than we are. The numbers are the numbers. We personally have never been under any pressure for quarterly earnings. We take a 5- and a 10-year view of where we want to be. That's a Board-driven decision. And then we call that transparency, the numbers are the numbers, and then integrity. The brand is the brand, and we've never had a restatement in 20 years as we've grown this thing. And at the end of the day, in the world that we're in of processing materials that don't really smell very good at times, and the wastewater is very difficult to treat. In the world of social media today, if you get on defense, you've already lost. So you have to be proactive in the community. So we talk entrepreneurship, transparency, integrity and then the two things are, do you share our family values? We operate Darling as very family-oriented. We don't help people, if you got to go to a little Joey's soccer game, you go to a little Joey soccer game. And then the biggest practical jokers is the guy sitting in the seat here. So far, I haven't gotten in trouble with it, but I like to have fun with people. We check that. So you're back to saying, "Well, how do you buy people?" I want to see that they share our values. We buy good businesses. And what I mean buy? We buy successful businesses. We know they're going to cost us more. And then ultimately, as we get to know the management team, we make sure they're all coming to work. We know maybe the patriarch or the owner probably won't after they cash the check, but we want the next level of management. We career map them showing where they're going to be and that. And then ultimately, in the sense this thing, Brad and I put a no fail capital structure in place. And what -- we've always subscribed to that. You've seen us do 15 years ago, follow-on offerings. Nobody in here has ever had a spreadsheet that they built that was wrong, I'm sure. And so we kind of always say, even if the spreadsheet that modeled this thing out for the investment decision is 100% wrong, we still own the asset, own the company. And we don't have bankers in here in forbearance or telling us how to run our business. So we've always done that, make sure we have enough headroom. These businesses, prior to DGD, could swing wildly for us. And so you never knew the timing. So those are the real things. And then ultimately, day 1, most important day of an acquisition is being on site, being present, sharing your values. And then Brad and I said, there's only three things we want in the first year. We've got to be able to close the books to meet ours, the treasury and really the legal function within that, otherwise ruin your business. We'll come back in a year and figure out where we can integrate it then. So people always say, well, you get two schools out there. One says, blow it up immediately, day 1, integrate it and go. That destroys culture. And so if we've done our job on culture, then it just integrates in the people that don't buy in the door and then it's worked. I mean that's why I can tell you, it's worked for 20 years. The Valley Protein deal was the largest last rendering company in the U.S., with about half our size in the U.S. and the two brothers stopped getting along after their father passed away, and they neglected the business. So we bought a broken business with a broken culture with a lot of tonnage and great locations and then we're paying the price for that decision right now, but we'll fix it.

Well, Greg, I would love to continue to discuss on that. But given the time, we're going to call it here and move to the breakout session for additional discussion.

Great. Thank you, everybody.

Thank you, everyone. The breakout session is going to be Hong Kong A. It's at the end of the hall over there. You should see the sign. Thank you.