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

Yes. I think when the dream was kind of executed on 10 years ago, the goal was to balance the Darling system. And the concept was, well, I wanted to own the animal feed arbitrage to fuel. And knowing that -- and if you think what's animal feed, animal feed is basically soybeans and corn in the world. And if the world grows more, prices go down. If the world grows less, prices go up. I mean it's fungible and as volatile as commodity as there is in the world. And the model that Brad and I built, just no matter how we did procurement, we could not set all that risk. And so as we went down this road, we said, well, let's build out a system. So the first plant was 10,000 barrels a day, used about 11% of North America's waste fats. It could use -- we could supply basically 100% of that. One of the margins for year 1 through 5 were -- and I won't talk per barrel and talk per gallon, were $1.26. We built #2, took us up to 750 million gallons. Now that is roughly $6 billion or 45% of the North American fat. That tapped us out. We were done. Our model was balanced. And so when the investment team and then my Chief Strategy Officer says we want to build #3, I'm grabbing my heart going, oh, no, here we go again. We're going to have to go out, and we're going to be no different than anybody. But we operate on 5 continents. We have access to lots of different streams of fat around the world. And we were telling on the call yesterday, we felt very nervous about 1.5 years ago that we would be able to provide adequate input to #3. And #3 is a plant that's listed at, I don't know, 35,000 barrels a day, roughly 500 million gallons. And if you think about it at 8.5 pounds a gallon, whatever that is, 4.5 billion pounds of fat, which is, I don't know, 25% of the North America. And there's -- so at the end of the day, it's become a real fascinating challenge. And one of the things you highlighted before, we struggled. And when I say we struggled, we struggled not in the factory but in the logistics to move this. You think of a petroleum refinery, they get 100,000 barrels in either pipeline or via some vessel. We get a 190,000-pound railcar. And if that railcar comes out of Omaha, Nebraska in January, it's a block of lard. And it has to be dethawed or steamed, and that just takes time. And in order to stay even in Port Arthur, we have to unload right at 75 railcars a day. So we've become one of the biggest burden loads on the railroads out there. And it just takes a long time to get up the curve here. We're there, but it's just fascinating to look. And the other optic I always give people is 30% of the cost, the capital cost of this business is really just the petroleum unit. The other 70% is what are you cracking, you're cracking a lipid, what do you produce in water. Petroleum refineries aren't used to handling water, so now you got to have a fats, oils and grease wastewater unit. And then you got to unload it, store it, chip it, all this stuff. So there's -- we look at the rest of the world. And while they know how to crack the molecule, there isn't a lot of technology there to be efficient at. It's very different. We fundamentally believe our Gulf Coast advantage is somewhere between labor, hydrogen, capital, know-how, I don't know, $0.75, $1 a gallon advantage. So we prove it.

And you talked about SAF a little earlier. What does that -- I mean, and you're talking about maybe adding on 1 or 2. What does that market size look like? I follow the commercial aerospace industry as well, and they're -- they all talk about it, this net zero 2050 goals, targets. I mean, I don't think anyone sees how they're going to get there, and it seems like maybe the only really functional way is through SAF. Can you maybe just talk a little bit more about that?

Yes. And I always like to start with I'm okay plugging in a truck or a car. I'm not ready to plug in an airplane. So they have very limited options. They're very savvy operators around the world. They clearly have helped out in the legislation in what's called the Inflation Reduction Act. And they supported a subsidy or to kind of incent construction of the industry. And at the end of the day, we've seen the airlines, many of them and the cargo carriers, I mean, it is -- I guess, I'm going to get in trouble, but that's -- everybody knows, Randy knows it's not scared of that here. It's the greatest case of greenwash I've ever seen. And I'll give you an example. Southwest Airlines, God bless home of Dallas across the street from us, 2 billion gallons. They've signed 600 million gallons of SAF nonbinding MOUs. Their hopes are that none of this will be made, so they can just buy carbon credits. We're going to call the bluff here. We got 250 million, 300 million gallons coming on here in about a year. And I think it's going to be one of the greatest opportunities. We're already seeing margin interest that's anywhere $0.75 to $1 a gallon above what we're doing in renewable diesel and road fuel today. So it's very, very exciting. So how big is the market? 50 billion gallons between North America and the continent in Europe. People are becoming realistic now and saying, well, maybe a 2% or 3% blend. That's still huge. Boeing is running experiments right now at 30%. And I'll give you another example. The United Airlines CEO, so he then had me participate in the White House roundtable and announcement when Secretary of Transportation Buttigieg kicked this off. And the United CEO gets up and says we're going to buy 1.5 billion gallons of sustainable aviation fuel. And I go, wow, that's a big number. Did you know he's just going to buy every pound of fat, of soybean oil in the domestic market to feed people in the United States? He has no idea what he just said. And so I'm just going to tell you, you better go stock up on ranch dressing and thousand island if this guy is really going to deliver on his promise. It just can't happen. So I mean, I think someone told me the other day, we totaled up all of their nonbinding MOUs. 11 billion gallons, times 8.5 pounds a gallon, I don't know, I can't even do the math. It's 5x the size of the U.S. soybean crop. So you kind of have to put it in reality. It's not the -- if you will, not the buzzkill people on the opportunity, it is to say that, clearly, someone is going to move. We were talking to people 1.5 years ago before we made -- I'll just say it out loud. I mean, Amazon will buy every gallon. They have a real commitment. But they said, oh, we just want to buy it at Jet A. Jet A today, at least in Dallas, Texas, is about $4 a gallon. SAF is $9. When it's 20% of your cost -- variable cost component, that's a big number. And so I think the cargo carriers are going to move. I think you're going to see the fixed-base operators, the signature aviations, the shelters move. But we see the marketplace as anywhere from 2 billion to 5 billion gallons over the next 3 to 5 years. We were talking yesterday, it wouldn't surprise me to see every gallon that we make in -- outside of Beaumont, Texas on the Gulf Coast, they're called Port Arthur, go to Europe. It may or may not. I mean, Europe clearly has -- their motivation is higher than ours is here. And if you think about it, there's no mandate yet in the U.S., so you're making an economic decision for your consumer. And when we asked one of the airlines about how many of their consumers pay for that offset or whatever that clean fuel offset that you can check that box, less than half of 1%. And so it's going to be an interesting market to develop. But I mean, I think you'll see the cargo carriers at least move a portion there first just so they can say that they're doing it. I think the passenger carriers, much like if you walk up and down Fifth Avenue and you see that little sign called LEED certified, they built a green building, I think you'll see a sticker on an airplane that says, yes, SAF fueled, but they will tell you it's 2%. So...

Yes, got it. That's where it's going, and you're there. Maybe switching over to the other pieces of your business, yes, the feed side. Could you discuss maybe the size of that market domestically, internationally? And where are you seeing the sort of -- where is the supply-and-demand balance? And where is that looking to go?

Yes. I mean, clearly, over the last 3 to 5 years, there's just been a massive expansion of animal agriculture around the world. I mean, it's pretty easy to get your mind around it as wealth is created as there's more population. People want to eat better, and they want nicer clothes or in a better neighborhood and better schools, but food really kind of fuels that whole circularity that's there. And so we've seen massive expansion around the world. And it's also been driven by China's inability to manage disease. And while you may have a central planned economy or government in the CCP, by the time they get down to the province, to the city, they've not figured out how to eradicate or become "biosecure". And I know that's kind of a buzzword. What does it mean? 2 out of every 3 animals is raised in the backyard. You're not going to eradicate animal disease. In Europe today, if an animal dies, you have 24 hours to dispose of it through a licensed rendering company, which would be us. And so -- and they have to pay us to take it away. In China, the dead animals just get thrown in the backyard or slaughtered. And in many cases, you've heard of African swine fever. It has wildly swung the world meat supply and demand. I mean, the Chinese are trying to raise more in large kind of integrated farms, but you still have 1 billion people that have to grow their own food in China. So it's going to be -- at the end of the day, I don't know that there's major changes in the next 3 to 5 years there. So ultimately, that's what fuels our business. And why? Because Canada, the U.S., Brazil will continue to feed the world and China. And Europe right now is now going through a kind of a process of trying to rationalize animal agriculture. It's under attack because of nitrogen concentrations in the soil. Someone took a picture of 1983 and then took it again in 2023 and said, oh, if the concentrations are up, if you think about it, there's more pigs in the Netherlands than there are people. And so that -- all that means is you will spread agriculture into different places in Europe. Poland will be the fastest growing and Spain also and even France to a degree, believe it or not. But -- so the Feed segment is driven off of 11 million, 12 million tonnes. It's our largest segment of picking up meat scrap and bone and separating protein from fat. The protein side can go into basically pet foods, aquaculture feeds, organic fertilizers, and then the fats go back to Diamond Green Diesel. So it's been an incredible growth story for us. We've added 18 new factories in Brazil. We got 3 more under construction. We're going to add, I think, 4 or 5 more in the U.S.A. this year in '23, starting up in '24. So all -- it's just really -- it's been a great growth story around the world. And what else can I add for you?

Sort of my next question and hopefully get this last one in here, but you talked about the opportunities in the specialty food business with your acquisitions. And can you sort of maybe just briefly go over that market, frame that market and where the growth opportunities are in the specialty foods, these gelatins and collagens?

Yes. If you think of -- when you -- so part of the moat around the business today is we are a one-stop shop for a slaughterhouse. And if you think of kind of esoterically, philanthropically, whatever -- wherever your mind wants to go on, what's our -- my obligation to society today, and believe it or not, I sit up here with the belief of wanting to feed people more economically, and how do you do that, you create more value for the nonmeat portion of that animal. And so being able to separate edible, inedible and what I'm going to have to call destructible pieces or disposable pieces of that animal created value proposition for a slaughterhouse that no one else can give today. And the Food segment is where we take bones and skins. Those could be just ground up and put back into animal feed, but we actually -- they're one of the greatest sources of collagen in the world. And so we have the #1 collagen platform in the world with 17 factories today on 4 continents. And you say, well, what the heck is collagen and gelatin? Well, for the old folks in the room, you would -- it was the film coating for Kodak. We know what happened to Kodak now, right? So then the next thing was, anybody have a hangover this morning and take an Advil? I did. It's that gel cap. And so that's where gelatin comes from. It's 100% protein, so the body knows how to process it. And then anybody have a gummy bear or yogurt or anything like that? It's an emulsifier, confectionery emulsifier. And then about 10 years ago, we started down the path, Tony, which was really fascinating. And we wanted -- we had identified in the collagen molecule it had 27 of the 28 necessary amino acids. It's missing tryptophan. And then we -- so now you're seeing out there collagen peptides. We've learned how to isolate it. Anybody takes any vital proteins. I know Brad and I do in the morning for joint health and supposed to help the hair growth, but it's not working. I haven't given up yet. But my nails do quite well and -- but that's been really a wonderful growth platform. You can look in our financials, and you can see the kind of the trajectory of that segment over the last 4 to 5 years. And now we're headed to what I call collagen 2.0, which is isolating the individual peptide for health and nutrition benefits. And we have some incredibly exciting stuff. I'm going to still call it a year or 2 out because it's in clinical trials. It ranges from glucose management, hair growth, joint lubricity. I've seen some early information on -- I believe, with dementia. It's hard to believe, but that's what we do for a slaughterhouse is we take that and then -- do we share enough of that data, well, I always say no. But at the end of the day, we are trying to upcycle all of those products into stuff the world needs. And then we've embarked with the University of Berlin. We've now grown off of one of our products what you call biomedical device. And I didn't really know what one of those was until they showed me a pancreas and for diabetic research. So hidden within the Darling system, while everybody wants to talk about DGD, is this incredible platform of collagen and collagen peptides that we have about 30% of the world's capacity in today. And where we go with it, stay tuned.

That's a great overview. You got so many things going on. You're so dynamic and just constantly moving. Thank you for being here today. I'm sorry we don't have time to talk more about it. I can go on forever. Brad, thank you for coming and hopefully have you back next year. Well done.

We'd love to. Thank you.