That links into the production of renewable fuels, and really one of the more interesting stories and certainly one of the more interesting valuations in my coverage universe on a go-forward basis. So, Randy, why don't we get started with maybe just an intro from you, talk about what Darling is, do a better job than I did of explaining how the history of why being green is still cool.
Thanks, Justin. So first off, it's good to be here again, and I'm 22 years in the seat today as we go forward. Darling is still my passion, my love. It's a company that I always like to make people smile because I see some gray hair out here. So your trivia question when you leave the room today, "Where were Michael Milken's last junk bond?" Now you're going to go do your research so to see this, so I got your attention. So I was brought in post that in the restructured debt equity swap. What a fun time to do and meet people at Blackstone that really just charge you a lot of fees. And here we are today. We had 21 plants, 600 employees, and about $300 million in Adjusted EBITDA.
Today, as we sit in front of you, we now process one out of every six animals in the world on all five continents, 22, 23 countries, 16,000 employees, and 270 factories. And so we're, you know, we're—it's an amazing story. You know, I know I get to be a storyteller up here for Justin a little bit. We touch your life every day. We're kind of that name out there. If you think back to the BASF when they were running those ads where something more than a chemical company—well, Darling touches your life, your kids' lives, your life every day, whether it's in food. We're one of the larger producers of different health and wellness ingredients, feed. You know, obviously, one out of every six animals in the world probably eats something we produce. And then fuel.
We are, between Europe and the U.S., one of the largest green energy producers in the world, whether it would be in green electricity or whether it would be in synthetic or, you know, green hydrocarbons. And then the next horizon is SAF or jet fuel. So the business model is pretty simple. You know, we collect, we transport, we evaporate, and separate. I mean, it's just that simple. So we take meat scrap out of whether it's Costco or Albertsons, Publix, Winn-Dixie's, whatever one you're comfortable and familiar with, slaughterhouses, whether it's JBS, whether it's Cargill, whether it's Tyson. And we transport it to our plants, and we're in the business of making two products: fats and proteins. And that's all we do for a living. Really, really simple.
We make fats that can be eaten by humans, fats that can be consumed and converted to hydrocarbons, proteins that can be fed to your pet, proteins for health, wellness, nutrition for a human being, and proteins to feed animals around the world. The business model was founded 20+ years ago by my team as a fee-for-service business, meaning that while if you think about the waste management, Republic Services, etc. of the world, they drive circles, pick up your trash, and they're in the real estate management business. We collect material, we charge to collect material, and then we put a processing fee for the conversion of it. Very similar model in a sense. So it's a managed margin spread business that has huge cash-generating potential. Some years are better than other years.
The way that we make our suppliers enjoy our success and their success is we share with them. And so it's driven off of a return standard that's internal, and then after that, we split the upside with them. And the concept there is very simple for us. If they grow, we grow. The ultimate thing is if you say, "What's the underlying culture underneath the company?" that we always share with people because I think it's such a powerful message. If we can create more value in the animal supply chain, then ultimately we make the price of animal protein to feed the world more affordable. And so that's how our team wakes up every morning trying to create and I think we have 120-something brands around the world that kind of symbolize that value creation.
So, Randy, maybe you touched on the broad process of what Darling is, what Darling does day by day. Maybe give us the history of you've been a leader in the renewable diesel space. You're about to be a leader in the sustainable aviation fuel space. Talk to us about starting up the Diamond Green Diesel joint venture with Valero a dozen years ago now.
Yeah, it makes for a quick, fun story. But, you know, proteins, if you think back when we say animal-based proteins, really early as late as 15 years ago, they were basically just animal feed. And then all of a sudden you decided that your pet should eat better than your children, and you know, that's when we started creating all these high-end value-added pet foods, and that led to a boom within our business. But there was one thing left behind, and this would go back to 2009. We relegated animal fats to basically a caloric enhancer into animal feed since 1989.
It really goes back to and you're going to say, "Well, how does he know 1989?" Well, that's when I bought the animal fat business from a company called Interstate Foods when I was at Cargill and converted McDonald's French fries from animal fat formula 40-something, 49 or whatever, to vegetable oil. And so that day in 1989 was when animal fats no longer had a place in your diet. Number two, as the world produced more and more palm oil in the oleochemical industry, it replaced animal fats. Animal fats had a place in chemicals and soaps and things there. And so then they were just relegated in our business model to simply nothing more than spraying it on chicken feed.
And so if you think of animal economics, you want to get an animal as fat as you can, as quick as you can, as cheap as you can into market and convert it to cash. But my dream, as I looked at it, was animal fats had become somewhere between a $200-$300 a ton discount to palm oil and soybean oil in the world. We were also starting to witness and this is how far back. You know, we saw oil run up to $137 a barrel, I think somewhere in there at that 2009.
2008.
2008, 2009. Yeah. And all of a sudden, here comes the Energy Independence and Security Act. And we said, "Well, how do we participate in that?" And ultimately, the concept was in Europe, they'd been making basically converting and making methyl esters, which people would know as biodiesel, for a lot of years and blending it in their fuel supply. The problem with animal fats into biodiesel was, well, when it gets cold, they get solid. So it doesn't really work very well. It doesn't really work within the distribution system as well as people would like around the world. And that's when we were brought a technology, and we were actually second. So it's kind of funny because the first were the Italians.
Eni was going to take this technology from Honeywell and commercialize it, but they fell into some challenges in 2009. And so Honeywell asked us to take this new technology, this new black box, if you will, and to take a lipid or a triglyceride or let's just say a bottle of, you know, salad oil or anything, animal fat, whatever type of fat you want to call it, and crack the molecule by superhydrogenating. And so many of you will think back to hydrogenation. Oh, that would have been hard fats. That would have been all-purpose shortening. That would be Crisco. And so we're just superhydrogenating to the point we bust off the oxygen and the water, and we create a diesel fuel, by definition, a hydrocarbon. First people to ever do it.
So, end of the day, we started in 2009 down the road trying to find a partner because hydrogen, temperature, and pressure do not work with my guys. I mean, it just really is. It's a little humorous. It's saying, "No way were we going to get into it." I had the honor of courting my old employer, Cargill. I had the honor of going to Decatur, Illinois, to ADM, but they just got a new CEO from Chevron that didn't believe in renewables. I called on every other oil company out there. As I always joke with people, I tell everybody that I met with the business development manager that doubled as the night janitor for renewables and couldn't find anybody to take the order. You know, it was a dream. You know, here we were.
We had a product that could go in the pipeline. You know, it was really cool. And then finally, my CFO, who's in here that's been with me for 20-something years, 40 years at the company, said, "Hey, my cousin runs Valero Port Arthur. Let me give him a call." And that's how relationships start. So today we have a 50/50 joint venture with Valero. We started 137 million gal with one plant, expanded it to 160-275, built a second plant for another 500 million gal, and built a third plant for 500 million gal. We have been profitable every quarter for 10 years. And I think it's an incredible story. We've had a first mover advantage, Justin. We're getting ready to transition to a sustainable aviation fuel. I think that's the next uncharted frontier that's out there.
We'll see how committed cargo carriers and passenger carriers are in the world to decarbonization. Yes, it's government mandate-driven. There's no argument about it. But truly, there is a mandate in Europe. There's not one here yet. There's different incentives around the states and the U.S., but we're seeing incredible interest at this time.
Randy, maybe give us your perspective on kind of the broader renewable diesel industry as it sits today. What's happening in the margin profile? What's the supply and demand balance look like? What's your crystal ball look like for the next couple of years in the RD space?
Yeah, I mean, it's where we're at, and I'm sure there's some really, you know, up-to-the-curve educated people in the room here. I mean, clearly, when you make the kind of money that we've made in that business for 10 years, you're going to attract people. And ultimately, you know, in a sense, there's not much differentiable about it other than your location economics in the sense of what you're producing. You know, we had 10 years of absolute incredible profitability returns anywhere from 25%-37% on a cash return basis. You know, we made $0.81 a gal last year, a little over a billion something, almost a billion one on 1.2 billion-1.25 billion gal. That's on a $3 buildout.
So I mean, you still when you think about it, you're still mid-20 returns, and you can convert that per barrel if that's how you like to think of things. You know, ultimately, the oil companies, you have to say, "Why are you producing the product?" You're producing the product for an obligated party in a mandated environment, whether it's in Europe, whether it's in Canada, whether it's in the U.S., Washington, or California, Washington, Oregon. And so ultimately, you've seen some people decide they want to try to make it too. The challenges are when we look around the spectrum today, and you can pick up a bunch of Justin's colleagues and competitors out there and read any sell side you want, I dare you to find about five of those plants that are really operating.
We operated at 98% capacity last year, you know, and that's a pretty incredible thing. So, you know, people are trying to, they're in it for various reasons. They're in it for environmental avoidance of, they're in it for compliance. You know, I always tell people when Marathon first entered the business, they were releasing their results. And then all of a sudden, it got put into the segment and it just said, "Avoidance of compliance costs." They didn't tell cents per gallon or operating income or anything like that, which for me, I don't mean to pick on them. They're a great company. It just simply that's code for, "We're not doing very well." You've got Vertex on the ropes now.
You know, at the end of the day, you've got a couple of plants. The challenges in the business are it's a location business. And as we looked at it, and my background at 40+ years and kind of really food, ag, and commodities in general, you've got to have the right economics. And, you know, you've got to be able to originate the lowest cost.
Yep.
Crude, if you will, or feedstock. You got to be on the pipeline, and you got to be able to send it back out.
Randy, maybe dive in a bit further on the competitive advantage that you guys bring to the table with Valero for Diamond Green Diesel in and of itself, the purpose-built nature of what you're producing in the first place in terms of actually building these plants from scratch as opposed to converting an old petroleum refinery, and what Darling brings to the table in terms of the feedstock supply advantage maybe too.
Yeah, the marriage was built on two things. One, my old background is one of the animal fat refiners in the country, so we call it pretreatment in the business today. What are you trying to do there? You're trying to remove the nitrogen, the impurities, the alkali metals. Why? Because they're catalyst killers. Just simple that. It's uptime. It's utilization rate. It's yield within the plant. So that was our expertise. We had no idea of pressure and temperature and cracking a, you know, a hydrotreater or hydrocracker. So we built a system, you know, plant one, two, and three now. They're all clones of each other, little tweaks here and there for better uptime. We learned the hard way.
What I mean by that when I share with people is, the plant started up in July of 2013 on a Sunday night at 9:30 P.M. in September, and I don't remember the day. I got a call. It says, "Hey, turn on KNOL," which is New Orleans TV, and went on the internet and saw my plant on fire. Why? We learned that this reaction is very challenging. And what I mean by that is you put under temperature and pressure, and all of a sudden, if you don't get it right on the downstream or the downpressure side, you will create lots of acid, and you will eat every piece of stainless steel in that plant. And so we learned the hard way, and we didn't kill anybody.
We were down for months and months trying to put the plant back together and replace different areas with alloys. And that's what we know today. We know catalyst. We know alloys. We know it's just been an incredible marriage of just really subject matter experts on both sides of the fence. You know, we often are asked, "Well, Randy, what's the most important piece?" Feedstock knowledge. We have, you know, plants in five continents, 23 countries. You know, not all feedstocks created equally. And what do I mean by that? Well, we don't run much chicken fat, to be honest with you, or poultry fat. Why? What's a chicken do? Eats dirt, right? Picks on the ground. What do you get from that? Metals. What how do you kill catalysts? Metals. And so you learn what you need.
What's the best fat to process? Beef tallow, animal or beef fat. Why? It's the most saturated. What are you trying to do? Superhydrogenate, best yields. But you got to have the ability to get the impurities and nitrogen out or your catalyst killer. So it's been a long learning curve. We would like to tell people that we're still learning today, which I would tell you we are. You know, the conversion junkies that are out there that are taking these old hydrocrackers or hydrotreaters and turning 100,000 barrel a day, you're going to stay on to 5,000 barrels. They know how to do it. They'll get it right. But the question is the robustness, the uptime, the yield, and all the things that go into building a business.
You know, ultimately, as I said, when a business commoditizes, ultimately, you have to look at it and say, "Am I in the right place?" That's really the Gulf Coast. There's nothing better in the world than where we're at today.
Yep. Randy, you've got sustainable aviation fuel coming up later this year into 2025 as a new source of supply to the story here for Diamond Green Diesel. Maybe give us a sense of what your expectations are for the SAF market, both in the near term and how things look over the next handful of years in that market?
Yeah, and you go back, you've got to kind of go back up to 80,000 feet here with me for a minute, and whether it's the Paris Climate Accord, and you then had the different people that signed on to greenhouse gas reductions. The airlines, predominantly the Europeans, led the way here. So now you under RED II, the Renewable Energy Directive II, you have a series of stepdowns in the amount of greenhouse gas emissions off of an Airbus or a Boeing or a Rolls-Royce or Pratt & Whitney engine that's going to kick in here starting in 2025. In the U.S., you had the Inflation Reduction Act, which is kind of a misnomer, but buried in that was an incentive to produce SAF.
And so you're really kind of on the early stages of developing this market. There really are no tangible gallons that are made today of any scale in the world. It's a fascinating product. I would tell you to stay tuned. You have voluntary markets in the U.S., mandated in Europe, some mandates going into British Columbia. It's a market that I think if you just think of just taking just a tiny little piece, 46 billion gal, give me a 2% or 3% or 5% blend of that, and it's bigger than the renewable diesel business in the world. And so we're excited about it. I think somewhere here in the next 60 days, hopefully, you'll hear some announcements from us. We have a ton of interested parties. It's a challenge for the customer.
There's a commitment to decarbonization, but it's twice the price of Jet A. So they're moving slowly. They don't want to be the first mover. They don't want to be the last mover because there's finite gallons. But I can tell you it's going to span private aviation, cargo carrier, and passenger carriers, both here and in Europe. The beauty of our system today is, number one, plant is going to be done hopefully later this year. Really don't have any much impact there. It was, as of two weeks ago, about 35% done, all the steels up and everything. The tanks are constructed. So hopefully here later this year, we'll be starting up.
The beauty of that is it's in Port Arthur, Texas, and it has the cheapest freight rate back to Europe that you can have in the business today. Number two, we'll be in St. Charles, Louisiana, not making a financial investment decision today. My colleague at Valero and I are in sync. The commercial team has to bring us the contracts on number one yet to show us that the proof of concept, there's real demand there at a real price. We're seeing margins $1-$3 over renewable diesel. So this is a very, very powerful business. The cost to construct, number one, is about $315-$320 million $1 a gal, $1.25 a gal.
So, you know, we went into it with an FID decision in the mid-40s of saying what we needed to make in order to cannibalize the RD business, and we will exceed that. We'll make the decision on plant number two probably later this summer, late fall, be a couple of years out then. Probably haven't seen a real schedule there, but ultimately, we're going to convert a 1.25 billion gal system to roughly, you know, 50/50 SAF, road diesel, own that arbitrage around the world.
Randy, now that we've covered the high-level aspects of the Darling story, maybe we get into the weeds a little bit on your 2024 outlook, how you're thinking about the business, and maybe update us in terms of what your crystal ball looks like for the overall earnings profile of Darling over the next two years.
Is that like code asking for guidance?
Yep.
That's what I thought it was. No, it's interesting. I always like to share with people as sitting in the seat. We do a stop-the-clock or stop-the-moment-in-time program. Some people call it an operating budget. We don't really call it a budget. We say, "We're going to stop the business for one day a year, and we're going to say, 'Here's the tons you're going to run. Here's the natural gas costs. Here's the electricity costs in all the countries around the world. And oh, by the way, here's the six or eight or 10 major products we make, and here's the selling price.'" It's a cash generation exercise because you just kind of want to stop the world.
You want to say, "Okay, if the business operates at this and the team is asking for Y, Y in the form of CapEx, and the bankers are asking for Z in the form of of of, you know, interest payments, and then the the G, the government's asking for some taxes, you know, what do you have left? What do you have left to give back to the shareholders?" And and so ultimately, that exercise is a one-day event. Why I share that with you is on December 8th, I think this year, we did that, and it said the business was going to generate somewhere around $1.8-$1.85 billion of Adjusted EBITDA. 60 days later, that model has taken out between $250-$300 million out of it just on fat price declines in the world.
It goes back to your earlier guidance or your earlier question on what's going on with renewable diesel.
Yep.
Well, if renewable diesel was truly being consistently produced by the plethora of people that are saying they're making it out there at the capacity they say they're making it out, then fat prices would not have gone back down. It's impossible. It's a finite bucket. And so that's where we're at today. You know, no, I'm not sitting here going to pick a number today.
Good.
What I'm trying to telegraph is fat prices have declined. They're going to pick back up on the balance of the year if this capacity runs. And I think we should be in position with a run rate in the back half of the year that will exceed what we did last year. But it's just we're going to come out of the block slower this year.
Yep.
And then as we transition to SAF, first mover advantage again, even though you take 250 million gal, let's do simple math at 2. That's $500 million over what we were making before. So there's another $250. You're going to see us launch in Geneva here in May. It's one of the most exciting sets of products that I've ever been associated with. And I always like to share this with people because I am truly passionate about where this product's going. You know, remember, we take everything from the slaughterhouse: the bones, the skins, the hoof, the hair. You know, as it was once said to me, we process everything other than the, you know, the moo, the oink, and the cluck . And so we're taking bones and skins. We're extracting native collagen out of them, and we're producing products.
I mean, the product you're probably most familiar with today would be that blue jar called Vital Proteins. That's us, hydrolyzed collagen peptides. We don't own the brand. Nestlé does. We're in that jar. The next phase of that business is separating and concentrating the different peptides. In May, we're going to launch a product in Geneva at the show that's going to be a glucose moderation drug or an insulin moderation drug that we were asked last week, "Well, are you competing with Ozempic?" I don't like to get involved with Big Pharma. This is a supplement, a nutraceutical, but the clinical studies show that it's glucose moderation, and it's very, very effective. We're in the second clinical trials now of our dementia drugs or dementia powders, if you will, that will go into food application.
So it's really an exciting time. And you go back to my earlier comments, we're adding value to that animal again and creating some natural proteins that people love. And you know, oh, by the way, we don't have to have that 45-second blip that says, "Oh, by the way, you're going to die," or, "You can't breathe," and call your doctor or whatever.
Randy, you all have been rather busy on the M&A side of things for the past couple, two, three years now, but you've talked about 2024 being a year of paying down debt and delevering the balance sheet. Is that the overarching goal of the business right now, is to improve the balance sheet of what you've got?
Yeah, I mean, if you look back on the 20+ years, we doubled the size of the company in 2005. We doubled it in 2010. We doubled it in 2015. Had to take a little holiday because of that thing called COVID in 2020 and doubled the size again in 2022. The playbook is so obvious. You know, these are family-held businesses around the world. When they come available, you have two choices: buy it or don't buy it. And we have assembled this platform off of relationships with family-held companies. And ultimately, that's what drove the three acquisitions over the year and a half was, I mean, when that's my job. My job is to go out and court these families.
You know, yeah, you'd like to buy one business a year and, you know, and everything, but it never works that way. And so, you know, ultimately, you find when you're in a global uptick of a commodity cycle that these families that are faced with succession planning issues, that's when they say, "Well, we've just had a couple good years. Maybe it's time." And the phone rang. The last one we did was the collagen business in Brazil and Paraguay. And that was a family that we got the call. I'd been close to them, and Dad had dementia. Dad passed away two weeks ago, and the kids didn't want anything to do with the business. They were living off the trust. And so we had to take it in.
Yep.
It's great because we needed it to launch our new peptide products. But your answer is yes. I mean, like I said, I gave you the example. It's a moment in time cash generation. It's always been a great cash generation business. You know, I often tell my team, you know, rather than trying to spend too much time in the weeds, the true thing you manage in this business is the balance sheet. And we're levered at the end of the year 3.26 x. I've run the business with 5.5 x. I've run it with zero. Our goal right now is we have some debt maturing in Q1 of 2026 and Q1 of 2027. It's a couple bonds, very favorably priced.
If you think about the world that we've lived in, we've been in a kind of an inverted interest rate environment for 15 years here or whatever it's been. And so, you know, there's no rush to the market to go refinance and put a cap structure. So at the end of the day, our goal is very simple. We're transitioning the company from this giant growth machine into an income stock. And 2024 is that year where we pay down. Brad and I get to, you know, sub-investment grade in the year. And then ultimately, we have the alternatives that are out there that, you know, it's a three-way highway then. You can find other bolt-ons, expansions, buyback stock, or you can put a meaningful dividend underneath this.
And it's for me, that's the exciting road that lies for this company.
Randy, last question. What's the key takeaway for the Darling story here? What's the thing you want to leave investors with? Why am I right that this stock is worth $75 and not $43 like it trades today?
Well, I like the number 100 better than 75. So let's let's be clear about that. I'm a huge shareholder. I love this thing. I believe in the in the stock. The question's going to be, how does the market ultimately value the multiple on this? You've got the you've got a just an incredible position in the world. If if as I always tell people, if you were sitting in a bar and you're overhearing the guy next door or gal next door telling a story and says, "Well, we have the number one position. One out of six animals goes through our factory." It's a spread management business that generates beaucoup cash every year. It's it's growing up to be, and if you think of the world of food and ag, it's the fastest-growing food and ag story ever in the world today.
And that's with ADM, Bunge, Cargill, Louis Dreyfus. We are the D in the alphabet now. We have the highest margins in the business today, and we do things that are good for people. I look back in 2008. I got invited on a show in New York on one of those TV stations, and I didn't know at the time when I said we were green before green was cool. And you think of the world today, you know, whether if you're a European investor and you want ESG, we are the greenest stock that makes the biggest green. If you're BlackRock, we're in their portfolio because we're green and green. So I look at the business as having incredible runway yet for the next generation as I play to the clubhouse here. And I look at it. Why?
Because population growth, wealth creation, center-of-the-plate dining. Three years ago, we would have been talking about what's that stuff? Impossible to be profitable meat Beyond making profit meat? You know, that that stuff is not in the narrative anymore. And so, you know, you think about China. One out of three people have access to affordable protein today. Nigeria will be the third-largest country in the world in the next five years, and yet they can't feed their people, and it's all poultry. So we look at the world, Justin, as you know, Darling isn't a 90-day hedge fund play. We look at the world when we buy businesses, when we manage the business on five- and 10-year averages, and we say, "If you've got that horizon, you're going to love Darling.
Beautiful. Folks, please join me in thanking Randy for being with us today.