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

[Audio Gap] cover sustainability here at ROTH. One of my favorite names is Darling Ingredients, and I'm really happy to have Randall Stuewe with us. Many of you will know my thesis on Darling is really simple. It's by Darling for the feedstock war. We've got 15 renewable diesel plants that are coming online. They're all going to need feedstock, and they want low CI stuff. Randy is an alchemist because he's sitting on what he calls the green oilfield. So Randy, can you maybe just talk a little bit about the commission there that's supposed to happen over the next couple of quarters. What's going on? How do you see this kind of playing with fast prices and demand sort of incrementally over the next couple of quarters?

No problem. Can you hear me? There we go. So first off, thanks, Craig, for having me back again and having our team back. I mean we love to share the Darling story. We want you to walk away today and realize that we have the downstream and we have the stream product here, and we're set to win in the green hydrocarbon war. And as Craig calls up the feedstock war. I don't know that I -- what I'd tell you I see today is we built a model where about 15% to 17% of the world's slaughtered animal byproducts goes through 1 of our 270 facilities in 22 countries on 5 continents, and we transform these waste products that would be typically destined to a landfill, you can call it carbon avoidance into fats and proteins. We've always found really cool uses, highest and best for the proteins, whether they're food proteins, feed proteins, pet food proteins, organic fertilizer proteins, but fats were always the challenge. What do you do with animal fat? You guys stopped eating it back in 1989 when the saturated fat wars happened and it became kind of this little no one wanted it product. So it was sprinkled on to animal feed around the world for chloric acceleration for lease cost formulation for animals. When we built out the hydrocarbon business, it will be 10 years in July. Our goal was to create a market and create a green hydrocarbon that was homogeneous that could work within the distribution system in the world. And oh, by the way, it reduces tailpipe emissions by 85%. So really kind of cool if you build a product that the world needs, then it's pretty easy to sell. We've now built out the 1.2 billion gallon system over 3 years. And we consume roughly 60%, 65% of North America's waste fats, of which Darling controls a large portion of that supply, along with our partner, Valero in the ethanol business for distillers corn oil. So now we look at the world. The first 5 years from 2013 to 2018, the business made about $1.25 a gallon. The second 4.5, 5 years, about $2.25 a gallon driven by the decarbonization of the world. So in the sense of the world, the market has now moved to decarbonize. You can't deny it. And whether or not you subscribe or you don't subscribe I have an obligation to provide a chance of a green fuel to both heavy transportation and airline fuels. And as I always say, honey attracts flies, right? And so these types of margins, you can put them back on the per barrel crack, but on that sense per gallon, it's pretty darn good business. So now we're watching some repurposed assets. We're seeing very few greenfield assets, if you will, come in and want to play in the market. And so ultimately, there's a finite amount of fat in the world today. And you've got two types of fat: You got edible fat for human consumption. -- and non-edible. We play in, I hate to call it waste, we play in the liquid gold nonedible portion, which is the one that has the lowest CI. In order to process the material, the secret sauce is you'll hear the word, the buzzword, everybody says pretreatment. What's that mean? You got to get out the impurities, the alkali metals, the nitrogen, all the little nasties that are called catalyst killers. And so at the end of the day, we've perfected that for the last 10 years, and that's what we do for a living. So as you look at the world, Craig, what's going to be interesting is we're going to win under either scenario here, either we'll make a fortune in the core ingredient business on the fat side or we'll make it on both. I think we'll make it on both because we have a technology that works. There's -- as the learnings that we've had over 10 years has been, not all fats are created equal. Everything is a little different. Everyone has a little bit different alkali metal and nitrogen component of it. They take a little different treatment. And then ultimately, as we've learned, the metallurgy in these facilities are very critical to reliability and uptime and safety. And so the world is going to have to deal with that. I mean we learned the hard way. We had a fire back in September of 2013, an explosion when we learned what happens in these reactions. And to be honest with you, it's real simple if you're any chemists in the room or non-chemists animal fats or lipids or triglycerides, whatever you want to refer to them as contain chlorides. What happens when you hydrogenate a hydrochloric acid super strong. And so it will stainless will carbon steel in the right situation, so making sure that you have the right metallurgy is so critical in this. And so as we go forward here, we're going to watch people learn. I mean I'm not picking on anybody. I mean I think the Tim Go of HollyFrontier said the other day, said we've got a steep learning curve. They've been at it about 1 year, 1.5 years, nowhere near capacity, nowhere near buying what they thought they would in the business. We've seen Seaboard take a Haldor Topsoe plant up in Hugoton, Kansas. I'm not sure has ever really run. So there's a lot of learning curves out here. And I would say it's really on both sides, whether it's big oil or whether it's the start-ups here. We'll see how it works out.

So then DGD 3 is now up and running, right? And I know these things also are -- there's a shakedown process. Can you maybe just update us on where we stand now and what happened over the last few months?

Yes. It's DGD 3 is a boilerplate, 470 million-gallon plant, 35,000 barrels a day, I think, roughly, is that number conversion. The learnings here as I go back once again and tell you the learnings. Plant #1 was 135 million gallons and over the course, went to 160 million, went to 275 million. The logistics to support one of these plants are just mind I mean, to be honest with you. I mean the big oil, whatever you want to call, likes to buy 50,000 barrels through a pipeline or bring a Panamax in from somewhere in the world, unloaded. But 185,000 pound railcar 45,000-pound truck that came out of Omaha, Nebraska in December that is slightly, it's frozen. So it takes steam. And so logistics to unload. When you start backing into the amount of fat that it has, you have to unload daily to maintain a 350 day annualized run rate. It becomes mind boggling. So DGD 1 and DGD 2 can run around 750 million gallons, maybe a little more without a turnaround involved there. You think about that time almost 9 pounds a gallon, you got what was that, almost 7 billion pounds of fat and divide it by 350 days. That's a lot of cars. So we had a partner and invest in a tank terminal 5 miles away that has that capability. So back to Craig's question on 3. Number 3 was married to Howard Energy terminal in the Omniport, an 1,100 acre site, 1 mile away absolutely the most gorgeous place ever for unloading a 100 cars at a time. We have to unload 75 cars a day to stay even. So 100 to get there. We have not been able to do that. When I say we are a partner. They made the promises. They have now reinvested in the facility. They've added bigger pumps. We got hit with the super cold weather, if everybody remembers at the end of December, everything came in there as a brick. And so long story short, we froze up the place. We froze up every car. We're there now. We're back up March 8. We're at capacity now. We're proud of it. Really never a problem of a shakedown in the front end, if you will, or the back end, the hydro treater, was all logistics. But the key learning for people is still you can announce a plan on the West Coast of California, whether it's Marathon or P66, show me the logistics. And then you've got to deal with the pretreatment if you want to run this stuff. So these plants, when they start creeping up at 200 million, 300 million gallons, that's 2.7 billion to 3 billion pounds of fat at 185,000 pounds of car. And oh, by the way, if you don't have your own cars, there's no way to get it there. So there's this whole logistical supply chain that has to fall into place here for this to work.

Thank you for that. So aviation fuels is a hot subject these days, right? And if I look backwards, it's really the success of Darling with Green Diesel that allowed the low carbon fuel standard to work in California. I wouldn't be surprised if we see some similar dynamic over the next few years, right, because you guys know how to make fuel. Can you maybe just update us on where you are in participating in that market? You've invested, you have capacity to serve some of the early demand. What's your vision?

Yes. So as we always say, what we've always been most proud of is our courage to be the first mover with our partner, Valero, I mean 10 years ago, well, 12 years ago when we started construction with serial #01, I still remind myself when I look in the mirror, that was a career bet not only from the balance sheet but from a technology side, and we got it right. So as we started looking at what's the next frontier, I'm going to stop and rewind the movie here. Who do you have in the administration today? You've got the Biden administration that is what? They're pro electrification, they're anti-food versus fuel and their pro in the sense of SAF. So they clearly have said that we're going to move away from heavy transportation fuels in favor of SAF. And if you -- airline emissions are something that are really not well understood by the general public today. It's kind of the, Craig's always telling me, it's kind of that dirty little secret of only measuring emissions in the first 2,500 feet, then god blows the rest of it away. And so you don't have to measure it anymore, but it's a really significant polluter. Now where we're going is we're in second place, Neste, the Finish oil company public, beautiful company. They moved first in Singapore. We had to get #3 online, which we've done. And now we're adding the fractionation module to make 250 million gallons. So between Neste and ourselves we will make 625 million gallons. Now here's the trivia question. How many gallons have American cargo carriers and airlines pledged? They've pledged to buy 11 billion gallons. It's, a, a bit absurd. I love it. I mean it's only bullish for our business going forward. But SAF, we had to get comfortable that it had some type of remuneration or subsidy that's in the Inflation Reduction Act. We wanted to get comfortable that it favored waste fats versus other feedstocks, which it does in a carbon intensity. And then it moved it to a tax -- true tax credit versus a blending credit. So it's made in America, and it's -- it will be available to those that can actually make money at it. The question we have as we go forward is we've got a great guy in the commercial side of the venture that comes from the aviation fuel side. Now, Valero is a huge aviation fuel jet distributor and manufacturers. So we've had visibility to this for a while. I always like to joke with people and say, in 2009 when embarked on the dream and I was able to move Valero into the venture here. Believe it or not, we were building a plant for the U.S. Navy. They wanted fuel. They wanted non-international crude oil. Then, of course, we had to break it to the Commander and the Generals that this stuff was going to cost a little more about double. You know where that ended. So we ended up being in the road transportation business. But now with all these pledges in SAF, someone's got to buy this stuff, and they're going to pay what it takes to do it. It might be private aviation. It might be cargo. I suspect Amazon's more image-conscious than the commercial airlines. But the United Airlines guys, you can see what they're doing out there. They pledged to buy 1.5 billion gallons. So now let's put this in perspective, how many pounds of fat does it take to make 1.5 billion gallons? Almost the entire U.S. edible soybean crop. So you got to step back and say, is that practical realistic? Probably not. So at some point in time, aviation fuel will continue to grow with other crops that may support a cover crops, it can be other oilseeds in the world, but it's going to be a while. But at the end of the day, it's not a U.S. phenomenon. This is European driven. There are mandates in Norway. I can't remember the exact gallons by 2025 or 2030. In the new LCFS scoping plan, there is an intrastate requirement. I think it totals 425 million gallons here in California. So we are extremely bullish on what this can actually deliver to us. We've got the technology. We've got the plant. Long lead equipments ordered. Hopefully, our target is to be online. It's always waiting on the permits. And so the target to be online would be sometime in early '25 and hopefully, the team can do better.

Excellent. So I pulled your leg a number of times over the last several years about elephant hunting, right, your M&A program. And you've been after some big game lately and had some pretty nice prizes. Can you maybe just update people here on what you've accomplished this last 2 years? And are you still in the market?

So the history here is about every 5 years, we've been able to double the size of the company. the underlying thesis is very simple population growth, wealth creation, center-of-the-plate dining, and it involves some type of protein, and that's not plant-based. And so we just see the world as a trajectory and a runway that has unlimited potential. We figured out the right way to do business. Our margins would tell you we know how to do it. It's a capital-intensive business, not only domestically but internationally, it's older, wastewater. And so we've been able to look at different businesses around the world in the last, I think -- if you think 2005, we doubled 2010, 2015, we missed 2020 because of COVID. But in 2022, I think we've added another 42 plants, 4,000 employees. And so today, if you want to have fun with the numbers, 1 out of every 6.5 animals goes after the meats con goes through one of our factories. Pretty good number. We still see China having a lot of opportunity, although I'm reluctant to kind of press investment in China at this time. I favor South America. We just bought 16 plants in South America and another 6 gelatin factories or 5 in South America, 1 in the U.S. that will close here in a couple of weeks. So it's been a big undertaking. The question is, can we do more? The answer is we're going to focus '23 on execution and integration. I mean people forget as a public company. We've got to get the numbers right. 20 years now, I've never had a restatement. I don't plan to have one. So we got to get it right. And it just takes time to put in human resource systems, IT systems, get books closed, get the organization structures. Brazil is now our second largest asset base and earner in the world, and so getting those structures in place. And -- but the answer is -- short answer is yes, I'm always looking, Craig, if that's the answer you want.

I love it. So I guess we got time for one more question. A lot of investors out there think that your guidance for this year might have been just a little bit conservative that the volatility in fats is understood and the supply situation of Green Diesel sort of on a macro level, I think it's somewhat understood. If you were being conservative, where would you see potential for things to go really well? And maybe you want to unpack that for us a little bit as far as what the assumptions are. Is this really just being careful given that you have so much integration going on? Or are there headwinds we need to pay attention to in this crazy environment we're in?

Well, I mean, ultimately, it comes down to our credibility, our belief and then how you being the stakeholder base puts a multiple on the company. I mean we -- if you take the last 5 years of $540 million, 8.16, 8.40, $1.235 billion, $1.541 billion. Built in that $1.541 billion last year was [ 1.1 billion ] in the base business, [ 4.43 billion ] in Diamond Green Diesel. Diamond Green Diesel made 750 million gallons. So now it's going to make 1.2 billion. The model is built on the arbitrage. If fat prices go down, Diamond Green makes more. If fat prices go up, Diamond Green has a competitive advantage, what we call the motor round it location, energy technology over anybody in the world. So we have what we believe is a safe haven there. So we gave [ 1.2, ] which you would say, well, if you bought the U.S. assets and the Brazilian assets and you've given guidance of earning about $200 million on those, you should have been [ 1.3. ] We got some energy headwinds in Europe. They've come off quite a bit. We came into the year at EUR 250 per megawatt hour, and we're down to EUR 50 a megawatt hour now. So we're going to get that back to lag second quarter. But at the end of the day, we're [ 1.2, ] we're seeing 600. And then we'll see the Genex acquisition that closes here on or about March 31 should give us somewhere between another 75 and 100. So what I want to say is I feel really comfortable with the 18% guidance. I'm going to be hedge myself a little bit on which side of the fence it lands on, but that's the power of the model.

I love it. So with that, I would say thank you, Randy. Really appreciate you joining us. Thanks, everyone.