All right. I think we're gonna get started with our next session today. My name is Adam Samuelson. I'm the agribusiness analyst here at Goldman Sachs. This is usually not presenting at the Global Energy Conference, but we're very happy today to have Darling Ingredients, who does a fair amount of energy-related biofuels work. I think this is a very natural audience for it. Very happy to have Randy Stuewe, their chairman and CEO here with us. It's gonna be a fireside chat. There are microphones in the room, so as we get later on, I'm happy to take questions from the audience as we get going. First, Randy, thank you for being here.
Maybe to start, let's just level set, just talk about the business, and we've just finished calendar 2022. Maybe just provide a general business update on both the Diamond Green Diesel business, where you've been ramping up an expansion, as well as the parent base business, and we can use that as a jumping off point for discussion.
All right. Always, Adam, thank you for having us, and always great chance to tell the Darling story. We're 140 years old, and we're a growth company. I don't think anybody else can say that today. Today, you know, for those, I see some friends, and investors, and shareholders, and stakeholders in the rooms, and others are new. For those who don't know the Darling story, it dates back to 1882. We were the original byproducts processing unit of the Swift meatpacking family, based out of Chicago. Over the years, you know, the business grew. Today, Darling is the largest slaughtered animal byproducts processor in the world. You're saying: What does that have to do with energy?
It's a fascinating piece of how we kind of intertwine into the decarbonization story. If you think about it, one out of every 6.5 animals in the world passes through one of our 270 factories in 22 countries and 16,000 employees, I don't know, a top 20 or 30 trucking fleet in the world today to support the business. Really, at the end of the day, the company produces two products: fats and proteins. Proteins you would know for any of those that had a little too much to drink last night, you'd know as a gel cap. That's collagen.
For those that have joint issues in skin, and beauty, and health, you'd know that as collagen peptides, predominantly under the leading brand Vital Proteins. We produce feed ingredients and fuel ingredients. Animal fats, you know, historically, you know, out to 1989, you know, the largest consumer of animal fats in the world was McDonald's. I don't remember, it was Formula 40 something to fry french fries, then you convinced them that frying in hydrogenated soybean oil was a better idea. Animal fats fell out of favor. As the world evolved, Adam, in the sense of seeking a decarbonization solution, we figured out how to basically make a hydrocarbon out of animal fats. We've now entered the...
We are 10 years old this year in the hydrocarbon business. We are the one, if not the one or two, largest producer of animal fat-based hydrocarbons in the world with our partner, Valero. We seek out Valero 10 years ago to bring an expertise in the engineering, and optimization, and processing side, while we brought the supply chain. We've built this incredible business now that people should take note of. We're also I think the top three largest green energy producer in Europe today in the biodigesting biomethane business. We're also the largest processor of green energy from the rendering disposal business in Europe today.
The business, or back to your question now that we've educated everybody and they're all experts. You know, the business has continued to evolve. Last year, we would say was a transformative year. You know, everybody gets nervous when you say that. At the end of the day, you know, we've now balanced the world with our green energy business of Diamond Green Diesel 1, 2, and 3. We now process or have the capability of processing 65% of North America's waste fats and greases into the, probably the lowest CI, carbon intensity scoring, tailpipe emission reducing hydrocarbon in the world. You know, we just finished up the year. You know, It's a record year.
We're maintaining guidance that we've given at 1,550 for the year, even though I have not seen December yet. I'm hoping I'm right there. We're gonna step out today and give a guidance of another 20% growth next year. That's just on bringing up Diamond Green Diesel 3 now in Port Arthur.
Let's unpack that near-term environment between Diamond Green Diesel and the parent business. Maybe at Diamond Green Diesel, just talk about the startup of the DGD 3 in Port Arthur, kinda where we are in terms of that getting to full rate, where that product is going, as you think about not having a pathway to California at the outset, and the feeds, what that's done to the feedstock markets as it's ramped up and significantly increased the feedstock lag.
Yeah. It's been a kind of an incredible journey. The engineering and construction group actually brought this facility online six, eight months earlier than we had anticipated. We got ahead of the cost curve of any inflation. We're ready to come online here in about, you know, mid-November. We've been really debottlenecking in some of the issues that happen when you start up a facility. This is the largest facility of its kind in North America today. You know, as people start to try to run the math, and while we call the boilerplate 470 million gallons, it's north of that. It, you know, it takes, you know, I don't know, 4.5 billion pounds of fat to run it.
If you take a 200,000 pound rail car, you can start to do the math that the logistics to support one of these facilities is rather incredible. So we've been online now. We've been operational for 30-something days. You know, obviously, the cold weather that the Arctic blast that flew through Texas didn't make a startup in December and operating very easy. It looks like the team is ready to, if you will, push the pedal to the metal and take it on up to full rate. We've got a sales ledger around the world that is very meaningful and, if you will, committed.
The opportunity that kind of makes us different than others is because we have boilerplate, I don't know, 670 million gallons over in St. Charles or Norco, Louisiana, 700 million gallons. We can arbitrage those sales. Even though we don't have a pathway at number 3 today because of California, we can apply number 3 sales to number 1 and 2 and put number 1 and 2 into the California market without any margin disruption. Things are going good. It's always the team has a learning curve that amazes me. The vessel sizes are bigger than number 2 here. Pretty much similar technology, but it is rocking and rolling.
I think it's pretty safe to say that we'll step out at, we'll make 1.2 billion gallons this year. Margin structure remains very robust.
Got it. As you think about, I think previously you talked about $1.10 a gallon as the kind of framing margin. That really is to not assume getting any sales to California or getting having that DGD 3 pathway. If you're actually able to export out of Texas, that's could be additive to that framework if that if you actually are able to act to realize that. Is that correct?
Yeah. It's fascinating to watch. The, you know, understanding and learning and participating in the carbon markets around the world, they're evolving. You know, if I said to you we were shipping product to Texas today, would you believe that? It's being blended with... If I said we're shipping products to the East Coast today to be blended without mandate, it's happening. Decarbonization is happening all over the country. It's growing rapidly here, Canada, Europe. You know, when we take the, you know, the dartboard and throw a margin guess for the year, it is a guess.
What we try to rely on is we say, "Okay, what is our competitive advantage on labor, yield, location, feedstock, and customer shipments?" Add it up, and everybody goes, "Okay, let's pick $1.10." You know, right now spot margins are north of that, even after, you know, as we've met with, I don't know, 50 investors today, and they called the Renewable Volume Obligation a disappointment. I'm going, "Well, it really hasn't hit margins much, so life's pretty good.
Okay. That was on my question list, so you just brought market had a pretty to the RVO that was issued at the beginning of December. I mean, how does that change your view of the domestic market for renewable diesel, biodiesel, renewable fuels?
You know, I think we, as I tell people, for 20 years, I've woke up in the chair of optimism and feel pretty good about things, and I still feel good about them. At the end of the day, I think the farm community and the different alliances that are out there were optimistic that maybe overly optimistic that they had made their case to the EPA through their trade associations lobbyists. They were expecting a bigger number. The disappointment was that it wasn't as big as they'd hoped. It was larger. That's one thing. You know, I think as you'll never know the internal workings of the sausage grinder at the EPA.
At the end of the day, clearly they were weighing the view, you know. They had the, t he Biden administration clearly believes electrifying everything is the solution. They weighed to that. You've got the weighting to food versus fuel. They were hearing that if we grow the RVO, it's gonna use food oils, and consumer prices for, you know, ranch dressing was gonna go up. Then the farm community, we got, you know, $13, $14 soybeans, you know, $5.50, $6 corn. They're in good shape. The easy button was the one they pushed. At the end of the day, I think, you know, we're out for public comment now. I'm sure it's gonna be a pretty robust set of comments.
It would not surprise me to see them edge up maybe not 2023, but 2024, 2025, quite a bit more as we go forward. End of the day, I don't really see anything here as disappointing by any means. I think it also signals the administration's view that they really wanna see growth in SAF versus road fuel.
On SAF, I mean, it kind of ties into the Inflation Reduction Act and some of the incentives there. Is SAF viable at current economics with the policies that are actually in place today?
It is very close. You know, it's something that as a partner with Joe Gorder and team, we've been studying, trying to get the right technology. You know, if you think about it, what's the difference between road fuel and then high altitude fuel? It can't freeze. You know, you've got to take some waxes out. So at the end of the day, you know, we were trying to figure out how to make this work. We lobbied hard as trade associations and for a bigger subsidy in the Inflation Reduction Act. We didn't receive it. We got about, you know, 80% of what we wanted, but that's okay. The economics now are much closer.
The challenge with SAF is if you are an airline and, out there, you know, the numbers that are lobbed out there, I don't know, 20% of their, you know, operating costs or fuel. If all of a sudden you're gonna buy Jet A at $4 a gallon or you got to buy SAF at $8 a gallon, that's a big, big number for them. Trying to make it viable without a mandate is challenging. The question ultimately will become, does it leave meaningful is absolutely meaningful to us because it will give us the chance to arbitrage between road and air as the margins move around. Today, they're close to parity to answer your question.
You know, if we make the decision here in 2023 to go ahead and commence construction, it, you know, it's a 2024, 2025 type of build-out, spend out, we would be then the largest producer of that and own the optionality. That's really for me, from a de-risking of the model here than, you know, by owning that optionality, you really created an opportunity. Whether or not the SAF stays in private aviation here, commercial aviation, cargo, or it gets exported, it really won't matter. It's any new gallons is great gallons.
Okay. Maybe in that vein, let's talk the other kind of key regulatory piece. There's many but, is California and the Low Carbon Fuel Standard. LCFS credits now are about $70 a ton, well off where they were 18 months ago. You've had CARB looking at advancing and increasing the carbon reduction targets. What can happen out of the California market to change that calculus and really be additive to the, to the market today, especially one that's already pretty saturated with renewable diesel or it's already a pretty significant part of the Pacific coast diesel pool?
I mean, California, I think you can step back pragmatically and look at it and said, I don't know, was it two years ago, two and a half? Time just flies for me as an old guy now. carbon was $206 a ton. That is a signal to New York and Washington, Oregon, New Mexico, Pennsylvania, New Jersey, that maybe the cap-and-trade program there didn't really work. At this price, now they say, "Wow, this does work," because it incents production and the system's efficient. The current price, I think is kind of caught the California Air Resources Board maybe a bit off of guard here and is now giving them the courage now to accelerate their reduction targets or blending targets.
You know, you still have California that's slowly returning to 2019 miles. You've got a myriad of RNG investments going on in the dairies. You got electric forklifts. You got electric cars. The program is truly working. You know, we're excited that we think California, they just completed their, whatever, rescoping. They're going to public comment now. Sometime in 2023, they're going to tell you what that trajectory is. I will tell you that the deficit in credit bank is while it's tipped to the credits right now, with an acceleration will quickly turn to the deficit side again, and will move back on up. You know, at the end of the day, has it impacted margins a little bit? Yeah.
Not really for waste fat or low CI producers. The other piece that's contemplated right now is maybe a mandatory California SAF program. Any gallons there, once again, become really, really positive to the S&D.
Okay. Wanna switch over to the parent business. Done a bunch of acquisitions over the course of the last year, one still pending. Would love to just maybe think about kind of where the platform is today and been operating, and where it can go once you get these deals properly integrated and at their full margin potential.
Yeah. It's, you know, for those, as we look at where the business has come from. In 2003, there were 20 plants, 600 employees, and we processed, I don't know, you know, I can't even remember now, 48 or 60 million pounds a week. I can't even think of that in tons. Today, we'll process somewhere between almost 17 million tons of slaughtered animal byproducts. You know, essentially, we have successfully, not declaring victory yet, rolled up family companies from around the world to build this, the new platform. You know, yeah, we've had some challenges in some factories we bought. You always ask, you know, why do people exit businesses?
You know, it's either, A, the time to sell, B, there's a succession issue, or C, they're in trouble. you know, we always try to buy good businesses with great management teams, and you pay a fair price, and then you make sure that whoever built that spreadsheet, if they're 100% wrong, you've not lost your company. you know, we've done that this year. It's kind of interesting. We look back when we had a board meeting in 2005, we doubled the company. In 2010, we doubled the company. 2015, we doubled the company, became global. we had the little COVID interruption here, but in 2022, we almost doubled the company again.
We still look at the world now as, you know. If you think of China today, and this is really what I always share with people. You know, there are a couple points here. China, one out of three people have access to protein today. Center of the plate dining is still part of people's goals in life. If you think of the world, you know, you've got population growth, wealth creation. You eat a little better, and then you buy better clothes, and then you ultimately move to a better neighborhood. I mean, it's pretty simple. When you look at the world, it is absolutely still craving fish, chicken, pork, and beef.
While we may have had a myriad In the boardroom in 2021, all I had to deal with was, "Are we going out of business because of plant-based proteins?" One day I brought in a group of whatever the Plant-based Whoppers or whatever they were, cut them up into quarters and served them to the board and watched them say, "Never serve that to me again." I said, "Okay, don't ask me the question if we're going out of business again." The world craves protein. Nigeria will be the third most populous country in the world, and one out of three, one out of four have access to protein there.
We continue to see an incredible trajectory for myself for the next five years, and then the next management team after that to grow this thing. You know, really the value that I always share with people, and I don't mean to get on my soapbox, is, you know, we wake up in the morning trying to figure out how to make more money, not only for you, the stakeholder, shareholder, but how to present to the livestock producer, the slaughterhouse, more money such that they can grow, and we can make food more affordable in the world. I don't know that people understand that's how we think. As the world evolved into, and, you know, everybody is like ESG.
20 years ago, we were about the people, the planet, and profits. You know, that's the world we operate in today. The companies we bought over the last year, you know, Valley Proteins for, I don't know, $1.1 billion, Gelnex for $1.1 billion, Miropasz for $100 million. What else did I buy, Brad?
FASA.
That's enough?
FASA.
Oh, FASA for, I don't know, $ 567 million with the Brazilian Real at 5.23. Yeah. Yeah, it was a buying spree.
And I guess that kind of is a capital allocation question in that, in there, and I want to then open up to the audience if anything. Talk about the return thresholds that you're targeting, balancing kind of that inorganic investment versus the returns you're targeting on organic plant investment versus potential increases in shareholder returns down the road.
Yeah. We can go to specifics here. I mean, when you think about how we look at the world, we look at it and said, "We wanna stay in the fairway of what we're good at," and that's, you know, converting, you know, transporting, removing water, and separating fat and protein. That's what we do for a living, and then trying to create value-added products. We benchmark ourselves against 28 public companies. You know, you guys would know all of them from ADM, Bunge, Tyson, Celanese, FMC, you know, Mosaic, Corteva.
We have a view that we said, "If we can operate in the top quartile annually of return on gross investment, we will attract both premier shareholders and will have a shareholder return that is admirable." We wake up in the morning looking at that. Everything that we invest in, we say, "How will this, in fact, affect our return on gross investment in our peer group?" That says that everything that we do has to have between a 15% and 20% return. Now, there's gonna be years it's gonna be lower, there's gonna be years it's gonna be higher. We look at the world both on a 10-year and a 5-year average, we say, "Okay, over five years, would it achieve those returns?
Over 10 years, would it?" There was a period of time between 2015 and 2019 that it was subpar. It was, like, 11%. You know, people, you know, were really questioning both my leadership and the view of the company. Now, you know, all of a sudden now we're at 25%. You know, it comes and goes, and you just have to have a long-term view. We're absolutely blessed with a board with a long-term view that buys into that. All of these businesses have been bought and acquired between 7.5x and maybe 8.5x, 9x multiples pre-synergies that will then meet those targets.
Those are pre-tax or post-tax?
Pre-tax.
Pre-tax returns. Okay. All right. As you think about that, now scaling the company, Diamond Green Diesel is now at a much bigger scale without quite the same prospective volume growth potential as it once did. How do we balance shareholder returns becoming a bigger part of the story now that the cash should be coming in the door?
Yeah. So, you know, I think the question is, you know, we were getting a story that says, "Hey, Randy, would you slow down? You're growing too fast again." Then they say, after we lay out a plan that says, "Well, we're just gonna deleverage, pay this down, repatriate cash to the shareholder." "Well, what are you gonna do for me next? What's the next growth?" So, you know, clearly SAF, we're going there. Rendering expansions or processing expansions, we've got six or eight new plants that are either under construction or will be. We've acquired green energy businesses in Europe.
I mean, I always share the fun story is, I think we're the top methane, biomethane producer in the Benelux countries, and we're about a third the size of what Shell just paid, what? $2 billion to Danish Crown for. No one even knows that we're the largest there. Then the collagen peptide business. We're the largest collagen producer in the world with, I don't know, 30 %+ market share. There's continued growth in those areas as we look around. I mean, the plan, very simple for us, is to, you know, pay down debt as it allows, we will start to repatriate money. Diamond Green Diesel is debt-free. Everything's online. The JV will start. It has a formal policy.
We'll start paying out dividends here in 2023. Significant. We'll have, I think, somewhere between $800 million and $1 billion of free cash flow this year. We'll be levered if we close on the Brazilian gelatin acquisition in first or second quarter up to 3.1 x. That will bring us back to, once we pay that down, to 2.5 x, headed to investment grade. As I always tell people, you know, that Darling is a company that no one. It appears to be complicated. It's really not. It's in a position that is very, very unique. It's a very defensible moat. If we were. You know, we don't consolidate the revenue out of Diamond Green Diesel today.
If we did and added it back in, we'd be Fortune 300. It's a, it's a giant, little unknown company out there in the alphabet today.
Okay. I mean, if there's questions in the audience, there are mics, happy to make this an interactive-
Sure.
Just in the front here, if we can just wait for the mic. Just give her a second. Sorry.
Coming back. Yeah.
Thank you. My question is, can you talk about competition a little bit? There is this even more unknown company, called Verbio in Europe, that is trying to basically get into the U.S. Just trying to understand, you know, kind of where you overlap or where you compete or, you know, there's maybe synergies.
Relative to competition in the core ingredients business, you know, there's only one major player left in the world out of Germany, SARIA, the Rethmann family. In the green energy businesses, Verbio, I wouldn't say we remotely even cross paths with. You know, we're larger on the biomethane digesting than they are. You know, I really never know how to answer competition because I always try to stay out of trouble and say we don't have any. It's one of those things that there's nobody with the scale and the platform that we've built in the world.
Maybe if I take that question and bring it back to something you alluded to earlier, as you think about Diamond Green Diesel and its kinda margin advantage versus other renewable diesel producers in North America or in Europe and Asia. Kinda how you bucket the feedstock advantage, logistics, operating costs, kinda the where you are on that cost curve, and how steep you think that cost curve really is that really underpins that margin structure.
Yeah. It's, you know, number one, when we embarked on building Diamond Green Diesel One and then the friendship partnership with Valero and Bill Klesse at the time, you know, this was serial number 01. Total investment, $423 million. That was about half our balance sheet. It was a career bet on a technology that had never worked or been done or commercialized. Can honestly say we've been operating 10 years this July and never been unprofitable. it's been hugely successful with 35%-40% annual returns since we built it. You know, as we look to Diamond Green Diesel, when we made the decision to locate it, you know, I'm an old 40-year-old commodity guy or 6-year-old commodity guy, but it's location, location. You know, you don't locate a facility in California.
You locate it in Decatur, Illinois, or if you're in the petroleum business, on the Gulf Coast. We looked at and said, "Where is the best economics for both inbound fats and oils from both rail and water? Where can we connect to the highest number of pipelines? Where's the cheapest natural gas in the country? Where is labor affordable?" Oh, by the way, there it was, St. Charles, Louisiana. And it became that position. As I look at it 10 years later, and I look at potential competition out there's no one that has those advantages. It's really hard to quantify. I mean, the beauty of the Darling Valero Diamond Green Diesel system is the knowledge that we've had over 10 years, the supply chain.
You know, I'm sure there's investors in here that are invested in Neste. You know, congratulations, great company. Who else is vertically integrated in the world in this business? Nobody. Us. You give them a 15x multiple. Give me a break. At the end of the day, the supply chain where we operate, you know, on all five continents on origination and supply chain is a significant advantage. The pretreatment knowledge of what our team has brought to being able to remove alkali metals, nitrogen, and other nasties out of the fat, allows us to have both yield and product quality that's above everybody's in the world. Then, you know, pipeline. You wanna go to SAF? Okay, we're, what are $0.03 or $0.04 cents a gallon from New York Harbor, you know?
You have all these inbound, outbound advantages. We look at it and you say, "What's the how do you quantify it?" I say it's $1 a gallon. Even if the naysayers in the room say we're going to ethanol 2.0 in the renewable diesel business, we might be. We'll still be $1 black.
Well, if the guidance for this year is $1.10, you're saying nobody else in the renewable diesel industry is all that profitable right now, implicitly.
Mm-hmm.
Maybe coming back to the capital return question. There was a sequencing point there that you talked about. Gelnex, this acquisition's happening. You're gonna start accelerating the distributions up from the Diamond Green Diesel joint venture to the parent. Parent deleverages to 2.5 x. View that that gets you an investment grade rating from the rating agencies. Is that when a common dividend becomes a real discussion, or can the common dividend happen before that?
I mean, it's always been. You know, the dividend discussion is always an interesting one, and it's, you know. I know from you know, we take a lot of advice from the Goldman team, and they have sold us that, you know, it will attract another level of shareholder and a longer term shareholder with a small dividend. We have other folks that say, "That's an admission, Randy, that you don't have anything to grow with." The opportunity that is in front of us is by third quarter, fourth quarter next year, we will have achieved or this year, achieved our leverage ratios. Hopefully, the rating agencies acknowledge that we would be you know, investment grade caliber.
As the cash builds, you know, we've got multiple options. Do you know, some type of accelerated buyback? Do you put a meaningful 1.5%, 2% dividend underneath it? You know, those are, you know, decisions above my pay grade. It's the first time in, you know, 140 years that we're faced with that opportunity. You know, as we look forward, I'm already into 2024. I've already seen 2023 now, and I know that we're only five days in, but that's when it is absolutely, you know. What are you gonna do with, you know, $5 and $6 a share of free cash flow? You're gonna have to do something.
Is there maybe and to that point, is it both? Is the answer both? There's or all of the above is the probable answer.
It's a multiple choice. It's all of the above. You know, we'll spend it organically if it makes our hurdle rates. We'll buy back shares opportunistically if those make sense against, you know, investment alternatives. You know, we'll see what happens in the renewable fuels business. You know, we're so large in Europe and in South America now, does it make sense to build a renewable diesel plant on those continents?
I just wanna be sensitive. Any other questions in the room? Maybe time for last kind of high level question then. If we think about where Darling is three to five years from now, Diamond Green Diesel is already 1.2 billion gallons. We've talked about SAF, and maybe we do something on another continent, what does the company look like three to five years from now different? If it's different, why would it be different? It seems like there's just a lot of integrating what you've just announced and do more organic things, less sizable capital investments in the RD business. How does the business kind of evolve from here?
Yeah, you know, it's kind of fun to think about that. You know, it, you know, it gets interpreted as, "Well, we're gonna turn into this boring company." And it's like, "No, we're gonna keep growing." You're gonna see investments. I mean, we were very close to an investment in Ukraine. Thank God we didn't do that. We still see so much growth opportunity around the world to participate and to create value. Whether it's in energy, whether it's in food, whether it's in animal feed, or whether it's in disease mitigation, all of those avenues become available to us. I mean, you know, it, you know, if you think of geographic investment for us today, the U.S. is number one, Europe's number two, Brazil's number three.
Closing of Gelnex will move Brazil up to number two, Europe number three, and then China number 4. I mean, China is somewhere that we have operated for 25+ years. Absolutely successful in China. Very profitable. There's no core animal processing businesses in China. You know, I know you're gonna smile when I say this, 'cause they eat everything. They've got a huge disease issue over there, as we all know, with African swine fever and bird flu and other foot-and-mouth disease. That business is gonna need to be developed over time, and hopefully, we can participate in that.
Okay. Well, on that cheery note, maybe we will leave it there. I wanna thank everyone for their time. Randy, thank you for joining us, and everyone have a great day.
Thank you.