It's my pleasure to welcome everyone to our 51st annual Scotia Howard Weil Energy Conference, one of our marquee client events here in the U.S. We would like to welcome everyone to Miami. New Orleans, where we have held the conference for the majority of the years, has a lot of significance for the Scotia Howard Weil brand and for the energy industry. We're excited to have this new venue and a more North American-focused event. We have representatives from some of the top energy companies and energy investors across North America participating in the conference this year. We hope you enjoy the full agenda. The energy sector has been a core one for Scotiabank for decades.
We believe in the industry, the value, and the role it plays as a driver of prosperity in the communities in which we live and work. The industry and the investment landscape for energy has evolved greatly over the years. We at Scotiabank have evolved alongside the industry and understand the pressure and challenges it faces today and moving forward. In the last year alone, we witnessed the impacts of geopolitical conflict in Europe and how that impacted global energy supply, along with rising demand and fueled volatility and higher energy prices. At the same time, we see an increasing focus on renewables that continues to intensify, and the speed of transition has started to accelerate across the energy industry to greener energy sources.
The transition is leading to innovation in the industry, new advanced technologies, and a pursuit that presents significant opportunities for those in the sector working on transition. While the transition is imperative to our future and gets discussed quite a bit, the traditional oil and gas business remains key to providing low-cost energy solutions for years to come around the world. Our bank, Scotiabank, is uniquely positioned to help you seize those opportunities with lending solutions, deep industry expertise, and seamless execution across our global footprint. Many of our top equity research analysts from across our platform in the Americas will join us over the next two days. They will speak with you about the energy industry today and over the coming years. We hope that you enjoy those conversations and gain new insights from these sessions.
On behalf of our entire team, thank you for your business and your ongoing trust in us. We do not take it for granted. We obviously hope to do more business and continue to grow partnerships with each of you. I'll now pass things over to Paul Cheng from our U.S. equity research team. Paul's work is well-recognized in the analyst community. Paul covers the refining and the global integrated oil companies, as well as the U.S. large cap E&P names. He also spearheads our global macro research on oil. With that, Paul, over to you. Come on up. Hold on.
Okay. I appreciate it. Please, Wendy. Thank you, Jay, for the quick introduction, and Wendy, the kind word. Our first session that to kick off the conference today is with Darling Ingredients. We are extremely excited to have the CEO and Chairman, Randall Stuewe, with us. Randy, welcome, and thank you for joining us.
Thanks, Paul.
Randy, we will cut to the chase and ask that, we are a stock investor. Tell me, what is the Darling value proposition, and how does you differentiate against your peers, in the S&P and other, comparable companies?
The, you know, welcome everybody, thanks for taking time to listen. You know, I love to tell the Darling story. 141 years old. I think we're two years older than Coca-Cola, believe it or not. You know, ever hear a CEO say I'm a 141 year growth story? Today what we'll do with Paul is we're appreciative of Paul's coverage. It's one of the best in the industry today. Is kind of try to enlighten you a little bit on what's fun, unique about Darling. Darling has no peers. Darling has built a global platform around the world, converting one out of every seven animals byproducts into food ingredients, feed ingredients, and now renewable and green energy.
It, it's a, it's a fun story. If you think out of one out of every seven animals, after the meat goes to the grocery store, we take the rest. Today, to try to comp Darling is very difficult. To peers, very, very, there aren't any. I mean, you know, as a, we kind of the mantra within the company is we break off the rearview mirrors 'cause we don't ever look back if we go fast enough. Over the last 20 years, we have taken the company from 20 locations, 600 people, to now 270 locations, 16,000 employees, and 270 factories around the world, processing 17 million tons of waste product. It's, it's.
Impressive
... it's a fun story to tell. The unique part that we get to talk to you about today was about, it'll be 10 years in July this year that we started up our first renewable diesel plant with our partner Valero. It was a career bet for me. It was a balance sheet bet for my CFO, Brad, and I. It had never been done. Never had anybody taken animal fats, you know, basically hydrotreated them, cracked off the light ends and made diesel. I can report 40 quarters later, we've never not been profitable. We averaged $1.26 a gallon for the first five years, $2.26 a gallon for the next four. Last year was a little bumpy with all the Ukrainian and industry volatility when, in the fossil business, $1.18 a gallon.
If you would've adjusted it for some decisions made on procurement and hedging, probably closer to a buck and a half. That's on a $3 a gallon investment. You know, these are wonderful investments today. As people know, we've started up our third factory in Port Arthur, Texas, and now have global capacity of 1.2 billion gallons. We announced recently that we're earmarking to start up sometime in 2025 our first jet fuel plant. Just basically an addition of a module for fractionation on top of the Port Arthur plant. Really exciting times, Paul.
Right. Curious that, Randy, do you think the market fully understand your value proposition? If not, where you think they may be missing?
You know, the answer is I'm probably not the first CEO to ever stand in front of people and say I'm underappreciated and undervalued. You know, the answer is absolutely not. I mean, you know, if you look at the track record of earnings here for the last five years, it's been significant growth each year. Part of it, you know, commodity cycle driven, of course, but most of it related to the build-out and balancing of our core ingredient business. If you, if you stop the world and say, what business are we in? We collect, transport, evaporate, separate. You think you collect the animal byproduct, you transport it to a factory, you use energy, natural gas, electricity to separate or to heat it up, evaporate the water.
You know, the number 1 product we make in the world today is water. Then you separate the fat from the protein. Now that's the process is called rendering. Anybody in here, you know, and I get to anoint you honorary renderers, if you've ever cooked bacon or sausage or hamburger in a skillet, we just do it on an industrial scale. Then the proteins end up in pet foods, aquaculture feeds, organic fertilizers. Then or if they're food proteins, in gelatin or collagen. For anybody that took an Advil for the hangover this morning, the that gel cap is, you have a one in four chance of that being us in the world, soon to be one in three chance after we close on a Brazilian acquisition. Then the fats.
The fats are what then go to the hydrocarbon business. You know, they used to go with back before you guys all got healthy on me, you know. You used to eat McDonald's french fries in the eighties and they tasted good. After that-
Right
... they really didn't have a home in the diet. You know, as we embarked on the, on the dream here, as I call it, you know, and Brad has heard me say to my CFO for many times, I said my goal was to get respect for animal fats. Animal fats had been a $200 or $300 a ton discount to any other vegetable oil in the world. If you want to go with the value proposition of the entire circular, if we create more value for animal fats, we create more value for the slaughterhouse, which the slaughterhouse can pay more to the livestock producer for the animal, and we can make meat more affordable in the world to feed people. Now people now kind of know how I'm wired.
By the way, I have the two things in life people want: food and energy. We can make meat more affordable, and we can create an energy product. It's not gonna replace fossil fuels, but it's gonna help with decarbonization. Back to your question, do people understand it? No. It's too complicated.
You know, the story people get lost in the weeds of what do you do? Well, you know, process animal byproduct, and we make protein and fat. If hydrocarbon prices go up, we make a little more money over here, and we make a little less money on the core ingredient side, and vice versa. If fat prices go up, we make a little less money in the business over here, in the hydrocarbon business, and it just balances.
At the end of the day, under the Low Carbon Fuel Standard that really started back in about 2018 of any scale, you're seeing a global decarbonization move led a little bit by California, but Canada's just as big, and Europe's even a bigger leader in it, of blending, you know, this product into heavy transportation fuels for reduction of tailpipe emissions.
Great. Excellent. By the way, that I would say that, Randy, your decision 10 years ago to set up the DGD is really a terrific and brilliant move that I think has transformed the industry and transformed Darling. That, want to say that. Congratulations on that.
Glad we got it right.
Far has been. Maybe that talking about the growth because the DGD has been a major growth engine for you. How are you going to balance between growth and capital return now? I mean, with DGD, I think at this point, the growth rate will slow down, mainly that you probably not going to sanction the DGD four anytime soon. With the SAF, yes, you're going to see some growth. How are you balancing between capital return and growth? What will be the right level of dividend once that you enact?
Yeah. It's, you know, it, for me, as we built this out, there was always this dream of where we're at today. I don't want to ever declare a finish line, 'cause we still have, you know, four very big pillars of growth around the world. We're in the Benelux countries, we're the largest green energy biomethane producer, organic food waste. We're, you know, largest processor in the world of animal byproducts. We got seven more plants under construction. We're the largest collagen peptide and gelatin company in the world. You say, what the heck is that? Well, you produce it from bones and skins of animals, and it's our most profitable product. Then you look at SAF. We have four pillars of growth that are gonna continue around the world.
The basic thesis, I'll get to capital return here, is that. You know, we still believe in population growth. We still believe in wealth creation. We believe that the world's short two things, food and energy. On the food side, it will involve center-of-the-plate dining. You'll have some protein. I know a couple years back, y'all were thinking Impossible Burger and, you know, all this stuff. Eh. You know, it may happen sometime, but it tastes horrible. But there. You know, if you think about the, a Chinaman, and the Chinese people, you think about the Indians, and you think about Nigeria, the third-largest population center in the world. They don't have access to protein yet. Our world is, we see another 100 years of growth around the world, and we'll keep converting product.
Now, as we get back to this business, you know, the stock today is valued $65. In my opinion, 6.5, seven times, which is grossly unfair relative to ag peers in food and ingredient and even some in green energy, Neste. I, you know, I look at the stock and say, "Okay, we should be a 12 to 15 valuation, putting us at a market cap somewhere in the mid-20s." We'll get there. We'll get the respect. But what people have looked at is the returns that we've been able to achieve from 10 years ago are so tremendous in this business, not only if you think of... I'm gonna just kinda give you a snapshot. The little business we had, we've doubled the size again since 2018.
$540 million of EBITDA, $816 million, $840 million, $1.235 billion, $1.541 billion last year, we're given guidance of $1.8 billion to $1.85 billion this year. The last two years I've missed by $4 million. You know, to think you can call this business within a quarter of 1%, I probably should go to Vegas. End of the day, as we look at it, we've been reinvesting in returns that are 30% to 40%. Now we're at an inflection point where we wanna watch the world. We wanna see the demand develop. We've brought a billion gallons of renewable diesel on in the last 13, 14 months. No one in the world has done that, we've been able to market it profitably. It's all committed around the world.
You feel very good about the demand side. You're watching the SAF side rapidly develop out there. I have a personal opinion on SAF. If I give you a few optics out there that are kind of fun. Your wonderful airline and cargo carriers have pledged 11 billion gallons of SAF to be bought by, I think, 2025 to 2030. Let's put that in perspective. If that was even remotely possible, that would involve utilizing four of the U.S. soybean crops, four times the quantity, meaning y'all ain't eating any french fries or having any ranch dressing in the future if this is true. Nonetheless, they have stepped out in a green way and said they're committed to decarbonization.
Neste out of Finland has got a plant coming on right now in Singapore, and we're a year and a half plus out on ours. We see SAF. What's that mean? That's another $300 million in or $315 million out of the cash flow out of Diamond Green Diesel , but it's fully de-levered. As people get to see... If you think about this, and Paul, I always love your perspective on it. In the investment world, you guys like complete transparency, and you like these wonderful stories that you can linear and graph out. About two years ago, the SEC, we positioned the SEC to allow us to move equity in an unconsolidated joint venture, Valero's the consolidator, into operating income. It took the SEC one day to say yes. Now it's up in operating income. What's the next step?
Ask the SEC, "Can we consolidate?" Be the first company on the NYSE in the U.S. to double consolidate. Our income in DGD is darn near equivalent to the core ingredient business. How does an algorithm, an ETF, how do they value that? How do they see that in the valuation? Today, we report we're what? A $4.5 billion to $5 billion revenue company because we don't consolidate. If we double consolidated, we'd be a $15 billion company, somewhere in the Fortune 200. Today, it's hard. At the end of the day, if you just deliver earnings, the marketplace will figure this out. End of the day, we're gonna, you know, as I said, the guidance is there.
It's, you know, it's $1.2 billion on the core ingredient side, $600 million to $650 million on the Diamond Green Diesel side, which is our half, and Valero gets the other half.
Mm-hmm.
That's where we're at today.
How about going back into the question about capital return to shareholder?
This year, we'll close on our gelatin acquisition here, hopefully here by the end of the quarter, early second quarter. That'll put another $1.2 billion in debt on the balance sheet, taking us up to about four, what? Four? 3.3 levered. We're gonna pull capital back out of DGD in the form of dividends, and the core business will be cash flow positive. We'll deliver back down to about a 2.75 by the end of the year. Once we've made a promise to the three rating agencies to be sub-3.0 by the end of the year, such that we can once again ask or beg or pray for investment grade. That's number one. Once we're there, all cards are on the table.
What I mean by that is we have to look at growth opportunities, which I don't see any out there. Our world of M&A, you know, as I tell people, it comes every five years. We doubled the company in 2005, 2010, 2015. Here comes COVID in 2019, 2020. In 2022, we doubled the size again. We've got, you know, added 4,000 employees. We got a little bit of work to do in about nine countries over the next year and a half. You won't see us out there in the world. To be honest with you, I think we own anything of any scale out there now. We will continue our opportunistic buybacks. We think the company's undervalued, but we're balancing our mission to get it to investment grade versus stepping in.
If I didn't care about investment grade, we'd be buying more stock back today and returning share cash that way. Once we get into 2024, you're gonna have an $800 million to $1 billion free cash flow. You're gonna be at 2.5 times leverage even coming down further, then you got real decisions to make.
Great. Before I continue my question, let me see if there's any question on the on the podium here. On the floor here. Okay. Maybe let me continue. Randy, if we look at post the startup of DGD 3, what will be the company expected EBITDA growth between 2000 this year and 2027, per se?
You know, we're given guidance, like I said, $1.8 billion this year. You know, the thing about it, that's assuming DGD 3. The system run at 1.2 billion gallons. That's, let's call it, you know, 750 million gallons over at one and two , 450 million gallons over at number three. Boilerplate's $470. You know, we'll find out. The thing I've always been very comfortable and confident with our partner is that the facility is designed to have a little more capacity in it. You know, you'll continue to see and, I mean, clearly in 2024, we will creep the rates if we can at number three. We will have full years of acquisitions of Gelnex and the other acquisitions we've done.
we've got seven more plants under construction with probably another seven contemplated around the world. you know, ultimately provided, you know, These are always hard when if we see fats and proteins stay consistent, you know, you're gonna add easily another $50 million of EBITDA per year as you go forward, just with the organic growth that we're up to. you know, if you think back only two years ago, we broke the billion-dollar mark in EBITDA. That was an unbelievable moment for me personally. Now $2 billion is the number I want. you know, I have a triple-digit stock number in mind, Paul.
I really do.
Yeah. I mean, the stock is clearly undervalued. Well, maybe, in order, Randy, that to achieve your organic growth target, what kind of CapEx requirement are we talking about?
You know, this year we're talking $565 with about 20%, 22% of that going back into the growth projects. Growth projects are, I've got a new plant going in in Boise, Idaho, a new plant in Turlock, California, a new one going in in Bellevue, Nebraska, one in the central part of Brazil, one in the northern part of Brazil. Two digesters or biomethane plants in the Netherlands and Belgium. I'm probably forgetting about another three or four. Oh, another gelatin or collagen spray dryer in central Brazil. You add the Gelnex business, and we'll add a couple more spray dryers to that to meet the growing collagen peptide demand. You know, that's for this year. Next year, Brad, what do you think?
At $400-ish it was what it takes to maintain. For those that don't know, I mean, we operate in North America and in Europe, one of the largest trucking fleets because animal by-product, believe it or not, it is considered not hazardous, but as a specialty waste. You just can't call up any trucker and have them, you know, pick it up for you. It has to be in our own equipment, and that takes annually anywhere from $50 million to $75 million around the world just to maintain the fleet.
Okay, great. Randy, you talked about, every five years that you've been doubling the company, and I think, at least that, a portion of that is because of M&A. You guys have been a very successful consolidator, given your position in the rendering business. Perhaps that you can share with us, two or three major matrix when you make an M&A decision.
Yeah. It's You know, as I look back and, you know, and different things and over the career here was I've only violated the rule once, so I'm gonna start with that. That was Valley Proteins here. That was a special case. My job is not only being chairman of the board and managing, you know, nine outside directors and the day-to-day that happens with that, but I spend the balance of my time working with families around the world that own these small or medium-sized companies. We're the only public company in the world in the business. You know, for us, we always say from first date to altar is somewhere between two and three years.
It's really, "Do I wanna marry you?" Not, "Do you wanna marry me?" That's what's always been so important. I know it's cliché, but, you know, you do business with people. Everybody in this room does business with people who share your values. If they don't, you find reasons not to. Essentially we wanna figure out who shares our values. Our values are very simple. You're gonna run your business. You're smarter than we are. The numbers are the numbers. We personally have never been under any pressure for quarterly earnings. We take a five and a 10-year view of where we wanna be, that's a board-driven decision. We call that transparency. The numbers are the numbers. Integrity. The brand's the brand. We've never had a restatement in 20 years as we've grown this thing.
At the end of the day, in the world that we're in of processing materials that don't really smell very good at times, and the wastewater is very difficult to treat, in the world of social media today, if you get on defense, you've already lost. You have to be proactive in the community. We talk in, you know, entrepreneurship, transparency, integrity, and then the two things are, do you share our family values? We operate Darling as very family-oriented. We don't tell people, you know, "If you gotta go to little Joey's soccer game, you go to little Joey's soccer game." The biggest practical joker is the guy sitting in the seat here. So far, I haven't gotten in trouble with it, but I like to have fun with people. We check that.
You're back to saying, "Well, how do you buy people?" Well, I wanna see that they share our values. We buy good businesses. What I mean by that, we buy successful businesses. We know they're gonna cost us more. Ultimately, as we get to know the management team, we make sure they're all coming to work. We know maybe the patriarch or the owner probably won't after they cash the check. We want the next level of management. We career map them, show them where they're gonna be and that. Ultimately, in the, in the census thing, Brad and I put a no-fail capital structure in place. We've always subscribed to that. You've seen us do 15 years ago follow-on offerings.
You know, nobody in here has ever had a spreadsheet that they built that was wrong, I'm sure. We kind of always say, "Even if the spreadsheet that modeled this thing out for the investment decision is 100% wrong, we still own the asset, own the company, and we don't have bankers in here in forbearance or telling us how to run our business." We've always done that, make sure we have enough headroom. You know, these businesses prior to DGD could swing wildly for us. You know, you never knew the timing. Those are the real things. Ultimately, day one, most important day of an acquisition is being on site, being present, sharing your values. Brad and I said there's only three things we want in the first year.
We gotta be able to close the books to meet ours, the treasury, and really the legal function within that. Otherwise, run your business. We'll come back in a year and figure out where we can integrate it then. People always say, "Well, you know, you get two schools out there. One says, 'Blow it up immediately day one, integrate it, and go.'" That destroys culture. If we've done our job on culture, then it just integrates in. The people that don't buy, find the door, and then it's worked. I mean, that. I can tell you, it's worked for 20 years. The Valley Proteins deal was the largest last rendering company in the U.S. with about half our size in the U.S., and the two brothers stopped getting along after their father passed away.
They neglected the business. We bought a broken business with a broken culture, with a lot of tonnage and great locations, we're paying the price for that decision right now. We'll fix it. I mean.
Well, great Randy. I would love to continue discuss on that. Given the time, we're going to call it here and move to the breakout session for additional discussion.
Great. Thank you, everybody.
With that, thank you, everyone.