Good morning, and welcome to the Darling Ingredients Inc. conference call to discuss the company's fourth quarter of 2021 and fiscal year 2021 results. After the speakers' prepared remarks, there will be a question-and-answer period, and instructions to ask a question will be given at that time. Today's call is being recorded. I would now like to turn the conference over to Ms. Suann Guthrie. Please go ahead.
Thank you, Tom. Welcome to the Darling Ingredients fourth quarter and fiscal year 2021 earnings call. Participants this morning are Mr. Randall C. Stuewe, Chairman and Chief Executive Officer, Mr. Brad Phillips, Chief Financial Officer, Mr. John Bullock, Chief Strategy Officer, and Ms. Sandra Dudley, Executive Vice President of Renewables and U.S. Specialty Operations. There is a slide presentation available on the investors page under Events and Presentations on our corporate website. During this call, we will be making forward-looking statements, which are predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results can materially differ because of factors discussed in yesterday's press release and the comments made during this conference call and in the Risk Factors section of our Form 10-K, 10-Q, and other SEC filings with the Securities and Exchange Commission.
We do not undertake any duty to update any forward-looking statement. Now I would like to hand the call over to Randy.
Thanks, Sue Ann. Welcome to Darling, Sue Ann. Good morning, everybody, and thank you for joining us for our fourth quarter and fiscal 2021 earnings call. 2021 was another record year for Darling Ingredients, and we carry solid momentum into 2022. We finished the year with combined Adjusted EBITDA of $1.235 billion. Our global ingredients business had a record year with $851.4 million of Adjusted EBITDA, and Diamond Green Diesel demand remains strong with 370 million gallons sold at an average EBITDA of $2.07 per gallon. We have sustained strong growth in our core business over the last four years, and we are poised for significant cash generation during 2023.
At the end of December, we announced that we entered into a definitive agreement to acquire all the shares of Valley Proteins for $1.1 billion ± various closing adjustments. We estimate this acquisition will drive about $200 million in savings over the next three years and will be nicely accreted. We are currently awaiting government approval for the acquisition. Valley operates 18 major rendering and used cooking oil facilities throughout the Southern, Southeast, and Mid-Atlantic regions of the U.S. and is primarily a poultry tonnage company, but has significant used cooking oil business, which will expand our ability to provide additional low CI feedstocks to fuel the growing demand for renewable diesel.
As we have discussed in the past, our strategy is to continue to acquire low CI feedstock businesses that will de-risk and protect our supply chain, making us the number one and most efficient producer of renewable diesel in the world. Now, turning to DGD in more detail. It is producing a phenomenal return for all of us. While EBITDA per gallon is lower than last year, it is not unexpected, and I continue to be very optimistic. Our supply chain is unparalleled in the industry. We have tremendous tailwinds. Demand should continue to grow as energy prices increase and more states look to implement LCFS mandates. We ultimately believe LCFS prices and RIN prices will normalize and improve to reflect the growing demand and realization of higher input costs. No matter how you look at it, DGD is well positioned in 2022 and beyond.
Now, moving to our fuel segment in Europe. On February 25, we closed on the acquisition of Op de Beeck. Superior returns and flexibility for our European assets. The biodigestion facility in Belgium currently has the capacity to produce 67 GWh per year of green electricity. Today, we're announcing a major capacity expansion, which will grow the renewable electricity production to 101 GWh annually. Coupled with our existing assets in Belgium and the Netherlands, Darling's total annual green energy production in Europe will be 163 GWh annually. Our feed ingredients business had an incredible year due to growing global demand for fats and proteins, and a focus on decarbonization through the use of lower carbon intensity feedstocks.
We ended the year with $613.7 million of Adjusted EBITDA versus $317.8 million in 2020. The capacity we added over the last five years positioned us well to handle this tremendous growth flawlessly. Food ingredients also had a strong year with $194.9 million of Adjusted EBITDA versus $167.1 million in 2020. Driven by strong demand for collagen peptides in the health and nutrition markets, this segment has been growing at a three-year compound annual. Our fuel segment also had a strong year with $483.1 million combined Adjusted EBITDA versus $411.9 million in 2020. This was primarily due to the DGD 2 expansion, which came online in October 2021. As the world drives towards decarbonization, Darling is at the forefront.
We have set a goal to be net zero greenhouse gas emissions by 2050. We plan to submit a commitment letter to the Science Based Targets initiative by the end of 2022, committing to set a science-based 1.5-degree aligned greenhouse gas emissions reduction target. With support from our new ESG committee at the board level, I have no doubt we can achieve these targets. Additionally, we identified both short-term and long-term targets in our 2021 ESG report published last fall and are currently working on setting midterm targets. As far as our short-term targets are concerned, we are investing in various capital improvements at our plants that will reduce our energy intensity. As for water, we are investing in a new state-of-the-art recovery system in our Ghent, Belgium, Rousselot factory that will reduce water consumption by nearly 46%.
Additionally, we have begun an engineering study to evaluate water usage at some of our U.S. plants. We hope this work will provide us with a blueprint for best practices in water use and reuse and recycling in an effort to meet our short-term goals of reducing water withdrawal by 5% per unit versus our 2020 values. Now, you've heard me say that we are the original recycler. At our core, we help our customers have a positive impact on the climate. We have embarked on a journey to better tell our carbon handprint story, the solutions we provide to our customers that decrease their carbon footprint. For example, we produce meat and bone meal as an alternative soybean meal. This positively impacts land use change and carbon emissions. The carbon intensity of the renewable diesel produced at DGD is up to 85% less than fossil diesel.
We play a critical role helping to protect the planet, creating better lives, and we can do so while providing our shareholders superior financial returns. With this, now I'd like to turn the call over to Brad to take us through some financials. After that, I'll come back with a little outlook for 2022 and beyond. Brad?
Okay. Thanks, Randy. For comparison purposes, note that our fiscal 2020 results included an additional week of operations, which occurs every five to six years. In fiscal 2020, the additional week occurred in the fourth quarter and increased net sales and operating income by approximately $73 million and $8 million, respectively. Now, net income for the fourth quarter 2021 totaled $155.8 million or $0.94 per diluted share compared to net income of $44.7 million or $0.27 per diluted share for the 2020 fourth quarter. Net sales were $1.3 billion for the fourth quarter 2021 as compared to $1 billion for the fourth quarter 2020.
Net income for fiscal year 2021 was $650.9 million or $3.90 per diluted share compared to net income of $296.8 million or $1.78 per diluted share for fiscal 2020. Now, turning to operating income, we recorded $211 million for the fourth quarter 2021 compared to $74.4 million for the fourth quarter 2020. The primary contributors to the improved operating income was a $72.5 million increase in the gross margin, a $7 million increase in our portion of the earnings from Diamond Green Diesel, as well as lower depreciation, amortization, and SG&A. In addition, the fourth quarter of 2020 included a $38.2 million restructuring and asset impairment charge related to the closure of the biodiesel units.
Operating income for fiscal year 2021 was $884.5 million as compared to $430.9 million for fiscal year 2020. The increase in operating income was primarily due to the gross margin increasing $358.9 million, a $36.5 million increase in our portion of the earnings from Diamond Green Diesel, and a $33.8 million reduction in depreciation and amortization, which more than offset a $13 million increase in SG&A. As just mentioned, fiscal year 2020 included biodiesel restructuring and asset impairment charges. Interest expense declined $1.9 million for fourth quarter 2021 as compared to the 2020 fourth quarter and declined $10.6 million when comparing fiscal year 2021 to fiscal year 2020.
The year-over-year decline was mainly due to a reduction in our term loan balance during the year as well as lower amortization of deferred loan costs. Now turning to income taxes, the company recorded income tax expense of $164.1 million for fiscal 2021. The effective tax rate was 20%, and cash tax payments for 2021 were $46.4 million. For 2022, we are expecting the effective tax rate to remain about the same at 20% and cash taxes to increase to approximately $120 million. Our balance sheet remains strong with our total debt outstanding at the end of fiscal year 2021 at $1.46 billion and the bank covenant leverage ratio ended the year at 1.57 times.
Capital expenditures totaled $82.4 million in Q4 and $274 million for full year 2021. The company also repurchased $167.7 million shares of common stock in fiscal 2021. Lastly, you will note we increased and extended our revolving credit facility from $1 billion-$1.5 billion and added a $400 million delayed draw term loan A, which was undrawn at year-end 2021. Now I'll turn it back over to you, Randy.
Hey, thanks, Brad. I'd like to conclude with my thoughts on how I see 2022 shaping up. At the start of the call, I said we carry tremendous momentum into 2022. Our base business is currently operating at around $950 million-$1 billion Adjusted EBITDA. Depending on the timing of the close on Valley Proteins, we could well exceed the $1 billion Adjusted EBITDA in our base business. Regarding DGD, diesel pricing is improving. RIN should react to the higher feedstock prices, and LCFS should improve as we go through the year. While the nameplate capacity at DGD is currently 700 million gallons, we are seeing tremendous efficiency gains, and it wouldn't surprise me to see us exceed 750 million gallons for the year. Additionally, DGD is progressing well ahead of schedule, with commissioning set for Q1 2023.
Today, DGD margins are around $1.25 per gallon, but I believe we're gonna see improvements as we move through the year. All that said, I'm forecasting combined Adjusted EBITDA to be about $1.5 billion-$1.6 billion for the year. As we move through the year, I'll try to provide you with a narrower range. With that, let's go ahead now and then open it up to Q&A.
We'll now begin the question-and-answer session. If you'd like to join the question queue, press star, then one. If you are using a speakerphone, please pick up your handset before you press any keys. If you'd like to remove yourself from the question queue, press star, then two. The first question comes from Manav Gupta with Credit Suisse. Please go ahead.
Thanks, guys. Hi, my question here is that over the last six months, renewable diesel bears have floated the argument that LCFS prices are going to crash to $80 a ton and RINs will be massively oversupplied. Now, Chevron is one of the best dealmakers in this space. We saw that with the Ne-Nobel acquisition. Doesn't Chevron willing to buy REG tell us that over longer term, renewable diesel fundamentals are going to be strong, and while margins may normalize, they'll still be healthy. My question is, don't you think that betting against RD producers, especially high-quality names like Darling, these bears are just being too myopic and ignoring that over longer term, carbon prices will actually move up and not down? World needs to decarbonize so the carbon price actually moves up and not down.
John, why don't you take that?
Hey, thanks, Manav. Yeah, I think the place to start here is, and you said it, Chevron is obviously a large petroleum company in California. They know that market very well. I think you certainly have to respect their views on how they see the carbon world going forward. There's absolutely no doubt about it that over the long term, the pattern and the direction has been set on this and in the short and medium term as well. We are going through decarbonization policies. As we go through decarbonization policies, the best short-term and medium-term alternative to decarbonize is renewable diesel and biofuels.
That means we're in the right place at the right time, and I think we obviously have all known that when we saw margins that were up in the $2-$3 a gallon range, that that wasn't continued for a long period of time. Those margins are simply outsized. The reality is our strategy, and we had it out in front of everybody, was simply to substantially increase our volume at very low capital cost for the volume that we were increasing. What have we done? We went from an operation that was selling 160 million gallons four years ago. Last year, we sold close to 370 million gallons, the year before, 275. We're running at a 750 pace this year. Next year, we're gonna be at 1.2 billion gallons.
It's interesting to me and to us, we see all of these announcements. Quite frankly, so many people in the industry have started to run a math exercise. Oh, this guy's announced. Oh, this capacity is gonna be here. The reality is, who's the people that's actually building the substantial capacity today? The name in the United States is one, Diamond Green Diesel. That's the one that's putting the real capacity online right now. Our project is real, and I think the more important point is this, and we've talked about this, but the message doesn't ever seem to get out there. The plants we're building are in the right place with the most flexibility to see different types of feedstock, with the ability to process different types of feedstock, and the ability to hit all of the different carbon markets.
Because we tend to think of the carbon market as just California, but it's not. Oregon, Washington's coming online. New Mexico came within one vote of coming online. California or New York is working on bringing an LCFS up. Currently, Canada is in the regulatory development phase on their LCFS. We see massive developments in decarbonization occurring around the world. Diamond Green Diesel is positioned to hit every one of those markets. Not just one market, but every one of those markets. We've got the right machine, which means we're always gonna be maximizing margins in this space. There's no doubt decarbonization is going to continue. That's gonna create value.
The other thing that I think that we are constantly amazed at is if you look at the renewable diesel producers in the world, there's only one that owns a substantial oil field, and that name is Darling. As we've seen, as we've driven up fat prices, in part as a response to the decarbonization policies that are developing around the world, we've benefited from that on the other side of our business. There's simply no other renewable diesel producer in the world that can say that. We think the trend is clear. The short term mathematical exercise of, oh, there's gonna be too much capacity this month or that month, I think that misses the larger point.
The larger point is we're just massively well-positioned because we built ahead of this thing, and we've got the right assets in the right location with the right supply chain. Therefore, at the end of the day, we forecast and think that we'll be making more and more out of this, not less and less, as some have seemed to be implying over the last couple of months. Brad?
Thank you. I completely agree with you guys.
Thanks, Manav.
Thank you for taking my question.
The next question comes from Ben Bienvenu with Stephens. Please go ahead.
Hey, thanks. Good morning, everybody.
Morning, Ben.
I wanna ask, starting on the expansion in DGD, and you note, you know, the potential to produce in excess of 750 million gallons. How should we be thinking about the build to that kind of new run rate? You know, 148 million gallons in the fourth quarter. I know, you know, you're ramping to capacity. Is that something we should expect to ramp through the year? And then just roughly taking a shot at it, kinda what do you think is a normal run rate capacity as you get to your full capacity level?
In the first quarter here, we are doing a scheduled turnaround at Diamond Green Diesel One that's just being completed right now, and that unit should be coming back up here within a few days. Other than that, once Diamond Green Diesel One is back up and running, for the balance of the year, there is no ramp-up. We're running at that rate.
Okay, fair enough. On the core business. In the feed ingredients business, how, you know, as we think about your ability to generate margin leverage, which clearly this business has, you know, is running full speed, performing exceptionally well in what is a very tight global grain, fats and oils environment. As you think about kind of your view of S&D for fats, oils, proteins in kind of the intermediate term as well, and then maybe kind of the 2-3-year view as well would be helpful. Thank you.
Wow. Ben, this is Randy. I mean, clearly, you know, we have you know, we've lived through the lower times, we've lived through the higher times in these businesses, tailwinds and headwinds, as we refer to 'em. You know, we spent a lot of time repositioning this company, both from a capacity and a margin standpoint over the last three or four years, knowing that we were at the lower end, if not the bottom, of a 10-year cycle. We talked about this being different than in the past, meaning that this was a demand driven, you know, cycle, meaning a demand driven on price increases. Now, you throw that with a little bit of, you know, hemispheric droughts, South America's bean crop getting smaller. To a degree, it's dry here.
Now, you throw on a war on top of that, and you've kinda got We cannot bring on enough production around the world yet to fulfill the growing demand. Now, I think it's probably safe to say in some cases, the higher prices will ration some type of demand in different places. Food, for the most part around the world, is resilient to these type of inflationary pressures. At the end of the day, I mean, we're seeing, you know, and John commented about it, not only at Diamond Green Diesel. Diamond Green Diesel is having really nice margins as far as a return on invested capital right now, while we're having really nice returns on invested capital with, you know, $0.70-$0.75 fats, FOB our plants throughout the country and around Europe.
Then the proteins, if you say we have one weak sister in all of it's still kind of the mixed species proteins, but they're starting to move up rapidly as soybean meal is becoming both tight and moving up in price around the world. I just don't see this thing backing off at all in 2022 at this point, and I think 2023 will carry forward with it. John, you got any other thoughts on? Absolutely. I mean, you have to remember the basis of what was the foundation of the higher commodity prices, and that is a combination. It's not just biofuel programs, it is also the fact that we've had fantastic GDPs around the world. All the nations of the world have incentivized their economies with strong fiscal stimulus.
We also have the Chinese reconstituting half of the herd in China, which is 25% of all pigs in the world. As a result of that, we've taken the ending carryout for corn, soybeans, meal, oil, every commodity, including meat inventories around the world, down to just nothing. The reality is, if we keep with the strong demand to rebuild the cushion that we need to be able to restabilize the commodity prices at a lower level, that's gonna take a while. That's not gonna happen overnight. We think we're here for a while. The good news for Darling is we're making fabulous money in our base business, and we're continuing to make outstanding money in Diamond Green Diesel during this period of time. I can't go back to this often enough. We made 370 million gallons last year.
We should make around 750 million gallons this year. We're gonna make 1.2 billion gallons next year. That's a tremendous increase in volume in a profitable business that has a great return, and our production capacity is not now, not an announcement for some future date, as almost all the capacity that we're seeing announced is
Yep, that's great. Okay, thanks. Best of luck.
The next question comes from Adam Samuelson with Goldman Sachs. Please go ahead.
Yes, thank you. Good morning, everyone.
Good morning, Adam.
Morning. I guess, Randy, first, I wanna just clarify some of the pieces of the outlook and just make sure that we're all on the same page. The $9.52 billion for the base business, was that inclusive of Valley or not? I just wasn't immediately clear from how you framed it.
That has a little bit of Op de Beeck in it, and that has zero Valley Proteins in it.
Got it. Okay. Within that, just from a commodity price perspective, is that kinda thinking about the business from obviously we're two months through the year and taking the forward curves as they sit and applying that to the commodity values, they're still pretty backwardated curve from the spot. Is that the base assumption in there?
Yeah. What I'm looking at, Adam, is, you know, clearly we're, you know, we just finished period two here yesterday or Saturday in our business here. You know, I saw January. I'm seeing the prices that were sold both in North America and Europe. Then I'm looking at what I'm seeing on the books for Q2, and I'm seeing some pretty significant increases from Q1 to Q2 in protein prices. Then really fat prices, you know, will have traded in the 60s in Q1, and they're gonna be in the 70s in Q2. That's what's driving the forward curve here for us, is really it's the forward fat prices that we're being able to lock in Q2 forward.
Okay. Then in your prepared remarks, you talked about Valley potentially garnering up to $200 million of savings over several years. I know the transaction hasn't closed yet, but would love to just dig in there and just help, maybe if you could help frame kinda where the opportunities come from for that kind of magnitude of savings. It's pretty significant relative to the purchase price and relative to what I would think the earnings base of Valley kinda is coming in.
Yeah, I mean, it's a fair question. Obviously, while we're awaiting government approval, I wanna be fairly guarded in my comments here. They're very nice, significant plants and factories on the East Coast and two in Texas and a wet pet plant up in Pennsylvania. You know, we look at all kinds of different things from yields to operating costs, all the above, to how we trade species-specific products. Really at the end of the day, we kinda look at our margins, their margins, and say, over the course of three years, that's what we believe we can deliver to the shareholders. It won't be easy by any means. I think the most important point is geographically there aren't what I'm gonna call just, you know, route synergies.
In many of the bolt-on acquisitions we've done in the past, you know, we essentially are picking up at the same account or the same town, and we can eliminate lots of freight and lots of trucking costs. This one is just about really doing it the Darling way. It's a well-run company. That's all we acquire. We just think that as we have looked at our business over the last 10 years and what we've been able to do with how we operate factories, recover products, make specialty products, move them to different markets, that we will be able to to bring Valley a little more opportunity than they've had in the past. I don't wanna take anything away from the management team there by any means. I just think the world is really, really opportunistic for us once the government gives us clearance.
Okay. Well, that's really helpful color. I'll pass it on. Thank you.
The next question comes from Ken Zaslow with BMO Capital Markets. Please go ahead.
Hey, good morning, guys.
Morning, Ken.
Just, Randy, you alluded to the fact that you think that RINs and LCFS credits will start to move higher. What are you seeing that makes you believe that? You know, do you think that imports are gonna slow down? Do you think the policies are gonna kick in? How do you think about that? You know, we're in the same view, but I'm just kind of figuring out what you think the key drivers are to see the RINs and LCFS credits starting to move in the right direction again.
Ken, this is John. Well, I mean, part of the issue around the RINs is, of course, they have moved dramatically higher over the last several weeks. It's not a thinking that they will, they have. We obviously see that, you know, the green premium, and that is in part the RINs, in part the LCFS, and in part the tax credit. That green premium has to be there to incent the production of renewable fuels. As we see the price of fat go up, quite frankly, you know, it's harder and harder for a lot, especially the more inefficient biofuel facilities to actually make any money. That green premium needs to suffice to be able to create the demand or create the supply to meet the demand. We were also extremely encouraged.
Others were not, but we were by what the EPA did with their proposed RVOs. They obviously had to correct the fact that they had established some RVOs prior to the pandemic and gasoline and diesel consumption was down. If you look at what they did, they said, "Listen, we're not gonna do the SREs," which had been the real killer to RINs pricing going forward. They said, "You know, we're going to stabilize the RINs for what actually occurred in the U.S. economy in 2020 and 2021." In 2022, then they leapfrogged forward the demand
That sent a clear signal that the Biden administration is going to push ways that decarbonize the economy that's good for the U.S. farm community as well. I think we're gonna see that pattern continue. The LCFS market, again, has been heavily influenced by the fact that anytime anybody, you know, comes out and says, "God, I'm building a brand-new renewable diesel facility," then all of a sudden everybody puts out a recast S&D on how much volume there's going to be going to California under the LCFS. I hate to say this, but some of these announcements are laughable in what they are. There's gonna be some real competition coming on, don't get me wrong. The reality is the only major capacity that's being currently built in and around it. New Mexico came very close to an LCFS program.
New York is going through the mapping stages on a regulatory implementation of an LCFS. We just think the overall demand situation looks really, really, really good. That doesn't mean in the short term that the LCFS credit's not gonna go from $150 to $130 or $150 to $170. We're obsessing too much on simply mathematical exercises here and missing the larger picture of what's actually happening in the marketplace. It's pretty obvious what's happening. I think Chevron just put a giant stamp on what's happening in this segment on Monday of this week.
What do you think the CARB options are to do in terms of what they might do to. There seems to be some news and thoughts that they might change or enhance the California policy. Have you guys put together some thoughts of what direction it's gonna go in? I know they increased it January first, just from a procedural point of view. It sounds like there's more to come. Do you guys have some thoughts on how that's gonna develop and how positive that's gonna be for you guys?
Yeah. You know what's really interesting about this? We don't view the LCFS going from $200-$150 as a bad thing. What has CARB just learned out of this exercise? They've learned that they can dramatically reduce carbon emissions in the state of California without it being a massive expense to the California consumer. The reality is what that does is it positions them to increase those targets 2025 and forward to much higher levels. We are ecstatic that the market has developed this way because quite frankly, this is going to drive much larger demand for low carbon fuels going forward in the marketplace. Yeah, absolutely. You know, what's the state of California wanting to do? They wanna decarbonize their transportation system. The fact of the matter, LCFS has been a massive success for them.
They've managed to create tremendous amount of additional credits, and the consumer in California is not having to pay nearly as high a price as we once feared. Remember three years ago, we were all afraid that we were gonna be at the cap and above under the LCFS. We worried about that because we thought that would be terrible long term for the program. This thing is developing exactly as we would want it to have developed for the long-term development of the growth in California and elsewhere. Because what's every other state and every other region that's seeing the LCFS? They're seeing that they can implement low carbon standards and do it in an economical fashion for their consumers. That's a great message.
My last question is, when I think about the Chevron deal for Renewable Energy Group, I know this is probably a simple question, but I'd like to hear it a little bit more from you guys. How do you compare your business model to REG in terms of your profitability, the way you operate, how you think about it? Because it seems like this would create a floor for value, not a comp. How do you think about that? I'll leave it there, and I appreciate your time as always.
Yeah, way to lob one in there, Ken. I just use one word. You're a smart guy. We're significantly undervalued and underappreciated. I'll turn this over to John now.
If you want to compare us, REG's a great company. I'm not gonna say anything negative about them. They do a phenomenal job. They make somewhere around 90, I think their information says about 90 million gallons for renewable diesel today. This year, we'll produce around 750 million gallons of renewable diesel. Next year, we'll produce 1.2 billion gallons of renewable diesel. REG will produce 90 million gallons of renewable diesel, and their total biofuels, including biodiesel, will be somewhere around 700 million gallons. We'll be 1.2 billion gallons of renewable diesel, which we think is a good technology moving forward in the biofuel space.
In addition to that, and we've seen that in the results in our base business, as the low carbon policies have driven a preference for fats that produce low carbon fuels, we've seen an increase in the price of those low carbon fats. We're positioned as an oil field to supply those low carbon fuel fats to the biofuel world. Again, I go back, we're the only renewable diesel company in the world that has both excellently located and rapidly expanding renewable diesel capacity and the oil field of low carbon fats. Nobody else has that. When you compare like door A, B, and C in this place, it looks to us like we've got an excellent position in the marketplace.
Thank you guys very much.
The next question comes from Thomas Palmer with JP Morgan. Please go ahead.
Good morning, and thank you for the questions.
Morning, Tom.
Last year you gave some helpful detail on expected EBITDA contribution on a segment basis. If we look at the $950 million-$1 billion guidance in the base business, how should we be thinking about contribution from, like, the food segment and fuel segment?
Yeah, you know, I don't have those numbers in front of me. More than happy to think through that and try. We typically wanna put those ranges out as we see the year go on here, is what I'd say. What I'm just doing is benchmarking the $8.50 last year and the higher fat prices that we see running at this time. Remember, I'm only 30 days into the year here. Clearly, the system fat price is up $0.10-$0.14 a pound as we move through the year. Remember, that's versus $0.50 last year. It's not hard to sit there and look at this and say $1 billion could be really light if these fat prices hold where they're at right now, which we tend to believe they will. A little color on the food segment.
You know, we are just continuing to ramp up our collagen peptide business. You know, our demand from our customer base is still accelerating in the high single digits%. Margins on that versus some of the commodity products that we made in the Rousselot brand division, you know, are being replaced with higher margins. You know, we put up $198. I think, you know, I look back at Brad, and that was always, we were kind of $130-$140 in the Food segment, and then we started bringing on the peptide business. You know, now we're looking at that business should be, you know, well into the mid-200s here within a year or two as we bring on additional peptide capacity. The fuel segment, obviously, you know, Op de Beeck is gonna help us grow there.
That was just a very timely acquisition for us. It gives us lots of opportunity to arbitrage plate waste and different waste streams in Europe into biodigestion. We're gonna expand it out pretty nicely. Where green electricity prices are in Europe today, driven by the challenges in Ukraine, I mean, that is a very, very positive accretive acquisition for us. You know, DGD, you know, simply said, 750 times $1.25, half of that flows, $461 or whatever the number is, flows right back into the Fuel segment. A full year at $750, you know, versus what we made, $370 last year. The Fuel segment will
Great. Thank you. Just to follow up on DGD. I know in past quarters there's been some discussion of kind of when we might see distributions flow through, just given the elevated level of CapEx that we're seeing to get Port Arthur built. I mean, is this mainly a 2023 event at this point? Is there still the possibility of some distribution
With the acceleration, which is looking, you know, continues to look very, very positive. The spend being pushed back here in 2022, I guess the way I'd put it is, never say never on some dividends. If we did, it'd be very late in the year and not really extremely sizable or material. You get into 2023, really almost no matter where the margins are, if there is a margin, we're looking at from there and beyond, hundreds of millions of dollars in dividends from there on out with the JV debt-free coming out of the construction. Yeah, and Brad, in 2023, that just really absolutely, even at $1.25 a gallon, gets extremely sizable. The JV will be debt-free coming out of 2022 here.
If I can just add, I want to make sure we're clear. We are at or below our cost estimate for Diamond Green Diesel three at this point in time. The only thing that's happened is we've been able to accelerate the project so that a little more dollars have had to be spent in 2022. That obviously is one of the reasons why we don't really see at this point in time large significant dividends in 2022. All that means is we're done with our capital in 2022. When we get to 2023, you know, we're largely dividending what we make, right? Except for a maintenance capital that we need in the business.
Great. Thanks for the color, guys.
The next question comes from Matthew Blair with
Revenue was up 20%, quarter-over-quarter. UCO revenue up 60% quarter-over-quarter. I was hoping you could just provide a few more details here. How much of this was pricing? How much was volume? How much was seasonality? And you know, can you hold onto these levels into 2022? Thanks.
The only thing I would give color on there, Matt, would be really as we've talked about sensitivity on fat prices. I mean, that's kind of bigger picture this last year. I'd say what we put
Where a lot of the pickup that Randy's been talking about this morning is, that bears out and those prices are up here as we've entered into 2022. I'm sorry, those bore out in 2021.
Yeah.
That momentum's here in 2022.
Yeah. I think, Matt, the you know, part of it's volume. We've seen a strong you know, the rendering volumes around the world remain extremely strong. The UCO volumes kind of you know, up and down pretty strong fourth quarter with a lot of reopenings going on. You know, but you know, remember, people love to talk UCO. It's a material contributor in the sense of earnings, but volume doesn't move around. None of our volumes move around much, so it really is a price-driven event here of how we've got the procurement formulas written on this material.
Are the UCO volumes back to normal, with restaurants reopening, or do you still see some upside there?
This is John. Not quite back to where we were pre-COVID, but getting pretty close as we, you know, continue to see the kind of reopening of the economies of the United States and Canada.
I mean, clearly New York, the Northeast is really dragging its feet to come back to where it was.
Got it. Finally, the guidance of $1.25 EBITDA margins for DGD this year. I guess I'm just you know just trying to think through that. We had a pretty significant increase in diesel prices. You have expectations of higher RINs, higher LCFS moving forward. You know, you just put up I think $1.14 in Q4. I guess this is the way that we should think about that just you're expecting higher feed costs to you know sap out most of the gains from higher diesel and LCFS as we progress through the year?
You know, I'll take a stab and John and Sandy can also. I mean, we're throwing, you know, if you think of the first five years that Diamond Green Diesel operated, it operated at $1.26 a gallon. The next four or five year, $2.26 a gallon, and then last year down to $2.07. We're being conservative as we step out front here. We're seeing feedstock prices run up, you know, rapidly. I think the bid delivered Diamond Green Diesel today is nearly $0.80 a pound. You know, we've never
That's $938 million. That goes up, it's even higher. DGD is one of the highest, you know-
That may get broken up into smaller bills. One might have a climate focus, and we would expect that staff would be a part of that.
Approximately how much it'll cost. When we get the economics right, we are ready to actually start to produce real-
Carbon prices normalizing. Historically, when the market goes through a period of volatility, the smaller biodiesel gets squeezed out first. The guys with little five and 10 million gallon plants running on soy oil or canola oil. You know, and that really tends to set a bottom in the market. Since we have had the blenders credit and a fairly nice RIN environment, you know, those guys have taken a little bit longer to come out. But did you maybe see or can you share anecdotally with us whether or not you saw substantial capacity come offline over the last number of months, with the pressures on these little plants that that face tricky economics, in periods of volatility?
John, Sandy, do you wanna take a shot at that?
You know, I would say that we probably don't pay a ton of attention to whether or not an individual biodiesel facility is online or offline. I think what we're more focused on is, you know, what's important to us. We've always said that we've created, you know, a really unique machine in terms of Diamond Green Diesel that's going to be able to, you know, outcompete any facility, whether that's biodiesel or renewable diesel. John had mentioned before, you know, we really have superior logistics. We built our facilities, you know, in the Gulf of Mexico, where agricultural products generally funnel into. You know, those also are great in terms of outbound logistics because they can basically transport all over the world. We can transport from our facilities. We have multiple capabilities.
We can transport by rail, you know, we can transport by water, we can transport by pipeline. We have just significant logistical capabilities. We also have pretreatment capabilities which differentiate us, and that allows us to run the cheapest, most economical feedstocks. We also have access to feedstocks through our partners, and John's been mentioning that throughout the conversation today. I think one of the things that we don't talk about, and we haven't yet talked about on this call, is that we've seen a lot of other renewable diesel type projects want to emulate that supply chain. They've gone out, and they've tried to contract for long-term supply agreements.
DGD is really different in this respect because while its partners have feedstocks, and it has access to feedstocks, we don't have any minimum take requirements, and we are not tied into any one feedstock. We have the complete capability to optimize and arbitrage our feedstocks on a day-to-day basis, and that makes us totally unique. Not only do we have it, but we can arbitrage around it. While, yes, you know, there are many more projects that are gonna be built like DGD, there may be other biodiesel facilities out there, you know, what we've been focused on and what we feel confident on, you know, is really our capability to compete.
Thank you for that. Congrats again on strong execution.
The next question comes from Ben Kallo with Baird. Please go ahead.
Hey, guys, congrats on the quarter. Just going back to, you know, when Valero talked in their conference call, they talked about maybe having, I think, switching kind of feedstock to, you know, to maybe more soy oil. Maybe I got that wrong, but could you just tell us about, you know, the flexibility there at Diamond Green and what that means for the core business?
Yeah. I think, you know, we have the capabilities to not only process crude dedu-degummed soybean oil, but also RBD soybean oil. On any day, what we're gonna be doing is we're gonna be looking at the economics of what is the cheapest given the CI, you know, benefit of that. We have complete flexibility to process any of those, and we would process soybean oil if it is the most economic. Absolutely.
Yeah, Ben, this is Randy. I think, I'll decode for you what Sandy just said. You know, typically in the Jan-Feb window, you will see the food service business really kind of fall off of the new year. We saw animal fats and UCO run up into the seventies in Jan, Feb, and we saw RBD soybean oil trade sub-CI equivalency. As Sandy said, we can arbitrage around, and we did, and there were no secrets out there to maximize margins. That it's real, it's flexible, it's quick, and we're very agile down there.
Neste has a couple turnarounds, I think one Q3, one Q4. Does that impact the market? How about you guys just for your turnarounds?
John, anything?
Well, I mean, obviously, you know, turnarounds are a regular part of being in this business. As that happens, that's gonna reduce the supply that comes from individual facilities over a period of time. If you look around the world, the reality is, you know, there are only a limited number of significant production facilities around the world. Having any one of those down at one point in time is gonna have an impact on the supply that's available during that period of time. This is a regular thing that's gonna happen every year in the business. One of us or two of us are gonna be involved in some type of turnarounds at one or two of our units. It's just normal course of the run business.
Yeah. I mean, 18-20 days offline doesn't change the global S&D, 'cause once your catalyst is fresh, you can run a little faster again.
How should we think about just the debt level there at the JV in going forward? Thank you, guys.
Yeah, Ben, this is Brad again. The debt level, we have had some contributions here in Q4, there toward the end of the year and a little bit right after the first of the year. That was again due to the downtime from the hurricane starting up in the process of starting up number two with working capital. As we come out of that and with the acceleration that we talked about earlier, coming out of that and where it's running now, we'll see as we go through the year debt level come down. As I said before, we expect when DGD 3 is completed, the JV to be debt-free.
Thank you.
The next question comes from William Baldwin with Baldwin Anthony Securities. Please go ahead.
Yeah. Good morning. I just wanna say what a insightful job you all have done in your core business the last several years. Execution's been unbelievable here. Good job. Just wanted to ask on the Diamond Green Diesel, what would be kind of the expected level of maintenance CapEx on that facility? As we look at it, you know, this year and then going out with the Port Arthur coming on, how should we look at that for maintenance CapEx?
Right. I think if you're talking maintenance CapEx, it will depend on what type of turnaround we're doing. That's probably $30 million-$50 million. Now we have two units online. We will have one that is going through a catalyst change out right now. In future years, you know, the second facility is a little bit more, but it is not scheduled to have a catalyst change out this year. I think you're probably in terms of maintenance, close to $30 million.
Thank you.
I think one of the things, just to add to that, one of the things as we designed Diamond Green Diesel Two and Diamond Green Diesel Three is these are facilities that will have significantly greater catalyst loading capability. Our hope is that we will significantly lengthen the period of time between turnarounds, which if we're able to accomplish that, will mean significantly greater production over a two to three year period of time, and obviously less capital associated with turnaround times or turnarounds.
Thank you, John.
Thanks, Will.
This concludes our question and answer session. I'll turn the conference back over to Randy C. Stuewe for any closing comments.
Thanks again, everybody. Appreciate everyone's time today. Hope you stay safe and healthy. We got a busy March coming up, doing lots of conferences. There's a list of upcoming events in our presentation that Suann provided with the call, and we look forward to hearing and seeing you guys all very soon. Thanks again.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.