Darling Ingredients - Q2 2023

Transcript

Operator (participant)

Good morning, welcome to the Darling Ingredients, Inc. Conference Call to discuss the Company's Q2 2023 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 call over to Ms. Suann Guthrie. Please go ahead.

Suann Guthrie (SVP of Investor Relations)

Good morning. Thank you for joining the Darling Ingredients Q2 2023 earnings call. Here with me today are Mr. Randall C. Stuewe, Chairman and Chief Executive Officer, Mr. Brad Phillips, Chief Financial Officer, Mr. John Bullock, Chief Strategy Officer, and Mr. Matt Jansen, Chief Operating Officer of North America. Our Q2 2023 earnings news release and slide presentation are available on the Investor Relations page under Events and Presentations tab on our corporate website, will be joined by a transcript of this call once it is available. 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 reported filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. Now, I will hand the call over to Randy.

Randall C. Stuewe (Chairman and CEO)

Hey, thanks, Suann Guthrie. Good morning, everyone. Thanks for joining us for our Q2 2023 earnings call. By all accounts, Darling Ingredients had a fantastic quarter with a record $508.3 million in combined adjusted EBITDA. Excluding a one-time $18.5 million inventory negative impact due to the Gelnex acquisition, our combined adjusted EBITDA would have been $526.8 million for the Q2. As I discussed in our last quarterly call, we told you lower fat prices translates into lower EBITDA on our feed segment. However, it is more than offset by increased earnings in our fuel segment due to the sheer scale of our platform. This quarter, for the first time in our history, you were able to see the strength of the vertical we have built to leverage the Diamond Green Diesel machine.

The power of our integrated waste fats and oils business, combined with best-in-class renewable diesel production capacity, was clearly on display this quarter. Turning to the feed ingredient segment in detail. Globally, raw material volumes were up just over 15% compared to Q2 2022, primarily due to our Eastern USA and South American rendering acquisitions that closed last year. While we saw a softening in global fat prices, protein prices and specialty ingredients demands continues to be very strong. Despite lower fat prices, our gross margins held flat compared to Q1 2023 due to our continued integration efforts. I'm pleased to report that these integration efforts are nearly complete. I feel very good as we head into Q3.

While it's normal to experience some margin degradation due to the extreme summer heat, we are very well positioned to handle the challenges that summer rendering brings. Capital investments have been made, yield adjustments and raw material procurement modifications have also been put in place and completed. We've now optimized our finished product sales opportunities. Turning to our specialty food ingredients segment, the global collagen market and gelatin business remains robust. If we exclude the one-time purchase accounting inventory negative impact of $18.5 million due to the Gelnex acquisition, food segment EBITDA would have been $89.8 million for this quarter. Our integration efforts are going very well. We have cross-pollinated our organizations to form one. We are excited about the scale and long-term opportunities these markets offer us.

Moving to our fuel segment, Diamond Green Diesel had a record quarter with more than 387 million gallons of renewable diesel sold at approximately $1.28 per gallon EBITDA, clearly benefiting from the lower feedstock prices. Darling received $101.4 million cash dividend during the Q2, and subsequent to the quarter close, we received another $62.2 million in cash dividends from the joint venture. DGD completed its turnaround. DGD 2 completed its turnaround and is back to normal production, and DGD 3 has been running very well and above nameplate capacity. We continue to believe 1.2 billion gallons of renewable diesel sold in 2023 is very achievable. Construction is progressing very nicely for our first SAF plant in Port Arthur, and we anticipate completion during late 2024, if all things go as planned.

With that, I'd like to turn the call over to Brad, then I'll come back and continue with an outlook for 2023. Brad?

Brad Phillips (CFO)

Okay, thanks, Randy. Net income for the Q2 of 2023 totaled $252.4 million, or $1.55 per diluted share, compared to net income of $202 million or $1.23 per diluted share for the 2022 Q2. Net sales were $1.76 billion for the Q2 of 2023, as compared to $1.65 billion for the Q2 of 2022, or a 6.5% increase in net sales. Operating income increased $78.1 million or 28% to $356.7 million for the Q2 of 2023, compared to $278.6 million for the Q2 of 2022....

primarily due to Darling's share of Diamond Green Diesel earnings increasing $139.3 million. This more than offset a $20.8 million decrease in the gross margin of our global ingredients business, which, as Randy mentioned, included a one-time $18.5 million negative impact due to purchase accounting for inventory related to the Gelnex acquisition. Additionally, depreciation and amortization and SG&A each increased about $29 million as compared to the Q2 of fiscal 2022, primarily due to the Gelnex and FASA acquisitions. Moving to non-operating results. Interest expense increased from $24 million in Q2 2022 to about $70.2 million in Q2 2023, primarily as a result of increased indebtedness due to the acquisitions. Other income increased to $5.4 million, primarily due to insurance proceeds received for the Ward, South Carolina, facility fire.

Now turning to income taxes. The company recorded income tax expense of $40.7 million for the Q2 of 2023. The effective tax rate for the Q2 is 13.8%, which differs from the federal statutory rate of 21%, due primarily to biofuel tax incentives and the relative mix of earnings among jurisdictions with different tax rates. The company also paid $49 million of income taxes in the Q2. For the six months ended July 1, 2023, Darling recorded income tax expense of $67.7 million and an effective tax rate of 13.2%. The company has also paid $88 million of income taxes as of the end of the Q2.

For 2023, we are projecting an effective tax rate of approximately 14% and cash taxes of approximately $50 million for the remainder of this year. The company's total debt outstanding at Q2 2023 was $4.5 billion, as compared to $3.4 billion at year-end 2022. Our bank covenant leverage ratio at the end of the Q2 was 3.11 times. We continue to maintain strong liquidity, with $956 million available on our revolving credit facility as of quarter end. Capital expenditures totaled $123 million for the Q2 2023, and $234.3 million year to date. The company repurchased approximately 153,000 shares of its common stock for $9.1 million during the Q2.

Stock repurchase year to date is approximately 926,000 shares for a total of $52.9 million. With that, Randy, I'll turn it back over to you.

Randall C. Stuewe (Chairman and CEO)

Hey, thanks, Brad. Our business remains robust around the world. Fat prices have bottomed and are moving up, I expect continued improvement in the back half of 2023. Protein demand and pricing remains consistent with Q2, Q3 volumes for Diamond Green Diesel will be lighter compared to Q2 due to the planned turnaround at Diamond Green Diesel 2. For the year, we are once again reconfirming our guidance of $1.875 billion combined adjusted EBITDA. Our global ingredients business is strong and DGD has completed all turnarounds and should be operating above nameplate for the balance of the year. With that, let's go ahead and open it up to Q&A.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Also, we ask that you please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question is from Manav Gupta with UBS. Please go ahead.

Manav Gupta (Senior Equity Analyst)

Good morning, sir, Randy and team. We saw a lot of commodity price volatility during the quarter. Still, when we look back, you gave a guidance of $485-$525 million on your 1Q call for 2Q, you actually came in at the top end of that guidance, beating the guidance. The question is: help us understand the integrated business model a little better and how DAR is able to withstand the volatility better than most other RD producers. Again, with this beat and higher fats and UCO prices, is the decision not to raise guidance here just being conservative?

Randall C. Stuewe (Chairman and CEO)

Okay, I think no, I appreciate the comment, Manav, and I, you know, I think that was one of the, the 2 or 3 points we wanted to, you know, leave the stakeholders with today, was we, we provided the guidance. We came in at the high end of it. You know, ultimately, you know, fat prices were down somewhere between $0.05-$0.07 a pound, a little more actually in Brazil and a little more in Europe. You know, that translates, you know, on an annualized basis, to $70-$80 million of, of EBITDA run rate into our system. You know, divide that by 4, and you're down about $20 million in the quarter.

If you look at the feed segment, volume was about 100,000 tons lighter than prior sequential quarter, and earnings were off, I think, about $26 million. It was all fat price. Now, as we said, the reason we were comfortable in, in trying to put out the guidance there was because the Diamond Green Diesel machine, you know, is about 4 times larger than the Darling machine, and it originates from around the world and was able to both benefit, you know, from the lower fat prices that Darling provided, but also from around the world. You know, it seemed pretty straightforward to us. John, you want to add anything to this?

John Bullock (Chief Strategy Officer)

Yeah, I think the interesting thing, and probably the hard part, looking on the outside into Darling, is the Q2 of this year is really the Q1 that you've been able to see Darling with the vertical integration at Renewable and its scaled state now, where we've added so much extra feedstock.

supply around the world with our acquisitions. Diamond has scaled from essentially 300, 400 million gallons to 1.2, 1.3 billion gallons. This is your first look at that. What you see is, quite frankly, when fat prices go up, Darling wins. When fat prices go down a little bit, Diamond wins. The bottom line is now we're consistently hitting on that $450-$550 million EBITDA run rate, which is exactly where we told the street we were gonna be when we went into the scaling process a couple of years ago.

Manav Gupta (Senior Equity Analyst)

Perfect, sir. My quick follow-up here is, you are moving ahead with the SAF projects, positive updates there. It's still early, but do you think on a per gallon profitability basis, you will be more profitable in SAF than RD? I'm just trying to understand, if you make like $1 in EBITDA margin in RD, do you actually think you can make, like, $1.75 or $2 per gallon in SAF, fully understanding it's very early in the process?

John Bullock (Chief Strategy Officer)

Yeah, Manav, this is John. Absolutely. I mean, we think that the SAF market is a market that there is an insatiable demand for and an extremely limited supply. Quite frankly, most of the alternatives that have been promised to the airline industries around the world for SAF are high pie in the sky, don't exist ideas. We're gonna have insatiable demand for our SAF. We already see that coming to us. We're gonna be receiving a premium for this product.

Operator (participant)

The next question is from Derrick Whitfield with Stifel. Please go ahead.

Derrick Whitfield (Managing Director)

Good morning, and congrats on another solid quarter.

Randall C. Stuewe (Chairman and CEO)

Thanks, Derek.

Derrick Whitfield (Managing Director)

For my first question, I wanted to ask a question on your prepared comments on the record temperatures we're seeing across several of your operating areas. As you noted, your feed margins have historically compressed during the summer, due to lower fat yields. What have you experienced so far in Q3, and how should we think about your general preparedness this year versus last year?

Randall C. Stuewe (Chairman and CEO)

Yeah, the always the challenges in summertime rendering are that the free fatty acids go up, meaning that the raw material degrades as quick or quicker than you can get it processed into the plants. So therefore, some of the premium markets that you're serving, you're not able to achieve that. So far, you know, we've made it through, you know, I think we're in the month of August now, so we've made it through almost, you know, 1 third, a little over 1 third of the summer, with very limited issues around the world so far. You know, at the end of the day, we're watching, as I said, Derek, we're watching fat prices. They've bottomed, they're coming back up. I mean, the U.S. is moving a little quicker up than the rest of the world.

I think, well, you know, we've just completed a board meeting yesterday. The European side feels like it's moving up now. You know, clearly, there's been some unplanned downtime throughout Europe in the RD business that made fat available and made it available to Diamond Green Diesel. Then, obviously, Brazil got a little bit behind here, the system, and we've been bringing in a lot of Brazilian. At the end of the day, it's a normal summer. It seems hot. What we're seeing a little bit more, just color for everybody out there, is just, you know, the slaughterhouses, the animal numbers are not as large as they were last year.

At the end of the day, the, the, the extra tonnage that sometimes we get in the summer times from the integrated slaughterhouses breaking down has not been as great as it was last year. At the end of the day, I would tell you that's good news and bad news. The bad news is less tonnage. The good news is it's less stress on the system here for us, and we've been able to kind of survive a little better than we got punched in the nose last summer. You know, Q3 is not over yet, but that feels pretty good right now. Matt, anything you want to add?

Matt Jansen (COO, North America)

Oh, yeah. Thanks, Randy. You know, I would just say that compared to same quarter last year on Q3 or over the last 12 months, the team has worked really hard in getting some of the wrinkles ironed out and getting some of the efficiencies improved, especially in some of the Valley assets. You know, we're in as good a position as we can be to go through this, this, you know, warm and seasonal period.

Derrick Whitfield (Managing Director)

Great. Then as my follow-up, I wanted to ask if you could elaborate on your comments on the fat market as you look into the second half and even beyond. How would you frame the supply-demand fundamentals over the next several quarters? While global collection efficiency has improved, I can't imagine it's improved to the level where you could cover 1 billion gallons of RD demand that's already in construction in the U.S. and existing SVO-focused operators that would likely want a lower CI feedstock to qualify for a CFPC credit.

John Bullock (Chief Strategy Officer)

Let me answer the question this way. As long as you have the most efficient, best machine in the industry, you're always gonna be able to source the fats you need. Quite frankly, that's what we have at Diamond Green Diesel. You know, the supply of fat is always out there for us because we're in the right place with the right pretreatment capabilities and the ability to market to the different markets to maximize the value of our finished product, we're gonna get the fat. You know, we're not worried about the fat supply.

What's interesting about it is this: you know, we operated at production levels of 330, 340 million gallons in Q2, which, quite frankly, if you take 340 and multiply it by 4, you get a number that's over 1.3 billion gallons, and we sourced the fat for that into our machine without a problem. The reality is, the shortage is a problem for people in bad places with bad machines. It's not a problem for a person in the right place with the right machine.

Operator (participant)

The next question is from Dushyant Ailani with Jefferies. Please go ahead.

Dushyant Ailani (Senior Equity Research Analyst)

Hi, team. Thank you for taking my questions. My first one is on free cash flow with, you know, DGD distributions coming in. Could you just remind us on how you would prioritize free cash flow for the next, you know, year, possibly?

Brad Phillips (CFO)

Yeah, Dushant, this is Brad. Yeah, the 164 we've now received, as of today, year to date, we do anticipate additional distributions between now and the end of the year. As we said before, our, our number one priority, along with integration, is really to continue through the end of this year at a minimum, to delever. We do anticipate, you see, we were at, you know, we decreased our leverage slightly here in Q2. We'll see the cadence of that continued through the end of the year to where it will be clearly below three times, you know, at year-end, if not before.

Dushyant Ailani (Senior Equity Research Analyst)

Brilliant. Thank you. Then my second question was just on the DGD capacity. I think you guys have mentioned that barring the turnarounds, you have been operating above nameplate capacity. So is there a new, I don't know, limit that we can think of for DGD in terms of, you know, what's the capacity you can think of?

John Bullock (Chief Strategy Officer)

Yeah, this is John. Well, I mean, if you take a look at what we did in Q2 and multiply by 4, you get a number well in excess of $1.3 billion. We're always going to have, you know, operational hiccups that's never going to allow you to run at 100% pure capacity. The reality is, Diamond Green Diesel, I think we've had 1.2 billion gallons out there, is the capacity for Diamond on an annualized basis, even taking into account scheduled downtime and some operational inefficiencies from hiccups here, here or there. It's pretty easy for somebody to do the math and figure that 1.2 billion gallons a year is way low for what that machine can produce on an annualized basis.

You know, certainly 1.25 shouldn't surprise anybody on a capacity on what we can produce this year. You know, I wouldn't be surprised if there are years that Diamond can't do well in excess of 1.3 billion gallons.

Randall C. Stuewe (Chairman and CEO)

We're always trying to make sure we're aligned with our partner. I think in their call about 10 days ago, they actually acknowledged that it can run in excess of $1.2 billion. They didn't raise it. I don't want to be the guy that raises it. As John says, 4 times 340 kind of gives, gives you the reality of what's out there.

Operator (participant)

The next question is from Sam Margolin with Wolfe Research. Please go ahead.

Sam Margolin (Senior Equity Research Analyst)

Hey, good morning, everybody.

Randall C. Stuewe (Chairman and CEO)

Morning, Sam.

Sam Margolin (Senior Equity Research Analyst)

You guys always have a really good perspective on competitive capacity, wherein, you know, sort of the eighth inning of commissioning or, or startups on some of these high-profile projects. I think what's interesting is that the margin spread between, you know, an advantaged facility like the DGD system versus sort of a marginal facility that might be using pretreated soybean oil is very wide. It's, it's reminiscent of, like, 2021. Are you seeing anything like as far as feedstock competition or, or, you know, I guess, other facilities in the market sort of pulling away the advantage feedstocks? Do you think that, you know, the startups we're seeing now are mostly on the pretreated side and aren't really affecting you right now?

Randall C. Stuewe (Chairman and CEO)

Well, I, I think there's a couple embedded, you know, relevant points here that, that, that you pointed out. Number one, feedstock markets are moving up a little bit for us right now. They'd probably move up more if there wasn't so much resale material out there available from the guys that can't run, that bought it and have to resell it. You've seen a compression in the, the RBD soybean oil versus the crude spread right now because they're having to resell RBD out there because they can't even operate with the, you know, what I'm, what I'm going to call champagne in, in the sense of processing. The other thing that, that becomes very and should be very obvious to the listeners is that Diamond Green Diesel is a real estate play.

It's a real estate play on the Gulf Coast that gives it access to all feedstocks in the world and allows the commercial team to optimize the lowest priced fat in the world. Today, the lowest priced fat in the world is Brazil. More boats are coming in from Brazil, Europe's moving back up, and, you know, given some turnarounds over in the eastern part of the world, you know, we're moving feedstock from there, too. Ultimately, as it affects when I think about the whole business model for us, it's allowing us, as Darling Specialty Ingredients supplier, to provide fat to some that can try to pretreat. There aren't many out there yet today. Ultimately, we own the arbitrage that we've always talked about.

You know, I think about a year ago, if I reflect, everybody on here said there was gonna be a feedstock shortage and how we were gonna allocate it. I think I've made the comment, it would be okay if I didn't supply a pound of Diamond Green Diesel because it means they can buy it for cheaper, and I can sell it for more. So ultimately, that arbitrage exists today, and we're moving product both from the world into the DGD system, and we're selling our quality products out to other people. John, anything you want to add to that or?

John Bullock (Chief Strategy Officer)

Yeah, I, I think it's always interesting to read all the press reports about all of the capacity that's going to be coming up in the next quarter. We've read those press reports now for 3 years, and, and quite frankly, every quarter, the same companies come out and talk about how well next quarter we're actually gonna get there. It's, it's hard to run a renewable diesel machine. It's like riding a unicycle. These things are much more difficult to operate. I think people find that out over a period of time. I think it's also interesting that everybody always adds up the stated capacity that's coming online and assuming that those guys are gonna run efficiently. Many of those people are running 2 and 3 catalyst turnarounds a year, and they've got to figure out their machines. These guys are smart.

Some of them will figure it out over a period of time. Then when you shorten the list on the amount of people that actually have putting in pre-treatment systems or put in pre-treatment systems that are actually capable of pre-treating the material to protect the catalyst in the machine, that list starts to shrink really, really, really fast. There's a lot of discussion about capacity out there. Quite frankly, most of the capacity that's being discussed aren't competing with us. They're in an entirely different business than we are. We're comfortable with the business we're in, and we love the vertical lock that we have between Darling Feedstock and Diamond Green Diesel. It allows us, as Randy says, we own the arbitrage. It allows us to maximize profitability regardless of what happens in the marketplace, and that's the position we're in.

It's exactly where we said we were gonna be. We're extremely comfortable with the machine and extremely proud of all the hard work from the people in Darling and the people in Valero that have allowed us to create this machine.

Sam Margolin (Senior Equity Research Analyst)

Understood. That's super helpful. I actually don't have a follow-up, so thanks, thanks very much.

Operator (participant)

The next question is from Andrew Strelzik, with BMO. Please go ahead.

Andrew Strelzik (Analyst)

Hey, good morning. Thanks for taking the questions. My, my first one, I guess, I'm hoping that maybe you could compare and contrast kinda the back half of the year outlook with the front half of the year. I guess where I'm coming from is, if, if I annualize that first half, EBITDA, take out that Gelnex charge, you know, you'll be running ahead of the guidance, which is great. You also had, in the first half, lower fat prices, only one quarter of Gelnex. Valley's getting better, DGD's ramp. I guess, is there anything where you expect things to get worse in the back half or some of the strength to not hold? I'm just trying to make sure that I understand the back half outlook relative to the front half.

Randall C. Stuewe (Chairman and CEO)

No, you know, I think, number 1, it's very difficult to try to predict this thing segment to segment, quarter to quarter. You know, so I think we've been pretty, pretty darn close in the last couple of fiscal years. Clearly, as I would point out to you, I think Q3, I would suggest to you, is gonna be weaker than Q2. Why? Because fat prices may be moving up, but the quality of summer rendering is always weaker. You know, historically, over my 20 years, that's just proven out. Gelnex will contribute fully in Q3. You know, the food segment's gonna be strong, if not stronger. The feed segment should improve slightly from where it's at today.

Then ultimately, the question is, you know, how many gallons can we get through the DGD system in Q3? DGD 2, I believe, went down in July and came back up in the first week of August here. You know, we missed 20-something, 24, 27 days of production there against, as John said, the 344 production in clearly in Q2. Clearly, the contribution of DGD by pure volume, with margins holding or improving in DGD, it will be less in Q3, and that's where we kinda say the core business, specialty ingredients business, right now, you know, 40 days into the quarter, looks stronger than Q2, and DGD just has less gallons. That would be the way that I would frame it.

John, anything you want to add to that or?

John Bullock (Chief Strategy Officer)

That's exactly right.

Randall C. Stuewe (Chairman and CEO)

Okay.

Andrew Strelzik (Analyst)

That's, that's super helpful. Thank you. Then maybe just one follow-up on the DGD margins. Obviously, there's been a lot of volatility. You know, there's, there's always a gap relative to what, what, what we would calculate or, or other numbers out there. You're talking about Brazil being the cheapest kind of feedstocks right now. Can you just from a level setting perspective, like, how, how should we think about the DGD economics today or, or, or through the back half? Just, you know, there's always that gap, and so, so any help would be, would be helpful. Thanks.

Randall C. Stuewe (Chairman and CEO)

Yeah, I think, John, and I'll tag this. I mean, clearly, you know, we've, we've, we've watched heating oil or crude oil and heating oil move back up sharply here. Hopefully, that, that will widen a little bit of margin. There's no, no lack of volatility, as John says, in that, that business. You know, spot margins have, have ranged from $1.20-$1.50 in there. I think for the end of the balance of the year, I think somewhere, I don't know, John, what do you want to put out there? $1.20, $1.25 for the balance year is what looks pretty achievable?

John Bullock (Chief Strategy Officer)

Yep. Right. I mean, at the end of the day, we're always gonna see volatility on Diamond's margins on a quarter-by-quarter basis because you have a massive amount of feedstock going to it, a lot of different markets that we're selling into, and then we've got heating oil moving around, we have RINs moving around. By the way, the disastrous news on the RIN pricing that came out after the RVOs came out, the RIN market is up about $0.08 a gallon since that point in time. All that's right in play with where we thought it was gonna be. The margins move around a little bit. You kinda see, because of the supply chain being so huge and fairly long, kind of a lead lag type of a thing that happens on a quarter-by-quarter basis.

I've said it in the past, don't get too excited about really high earnings from Diamond on a quarterly basis, or a little less per gallon from Diamond on a quarterly basis, because when you even that out over the last 12 months, you kind of come to the conclusion that Diamond's running about that $1-$1.25 a gallon. The only difference is, we used to make 300 million gallons of this stuff, and now we're making 1.2 billion-1.3 billion gallons of this stuff, and that math adds up quite differently.

Operator (participant)

The next question is from Ryan Todd with Piper Sandler. Please go ahead.

Ryan Todd (Managing Director and Senior Research Analyst)

Thanks. Maybe a question on margins. As we think about your feed and food business, you've had, you know, material acquisitions, and most of those, it's Valley Proteins and a couple others on the feed side and Gelnex on the food side. You know, you, you held margin, gross margin flat in the feed business sequentially. Food was down a little bit, but adjusted for the adjusted for the inventory charge, it looked like it would have been still around 26%. As we think about those post these acquisitions, should we still expect, you know, is the food-- the right way to think about the food margin still kind of in the 25%-26% and maybe the same on the feed side?

Are there, post-acquisition, or are there things that would drive those margins one way or the other?

Randall C. Stuewe (Chairman and CEO)

Yeah, I mean, I, I think, take the feed segment, I think the gross margin % held quarter-over-quarter. Clearly, that's, you know, indicative of the progress that has been made in the North American Valley Proteins integration acquisition. I mean, there were many things, as we said, that had to happen there, from changing of raw material formulas to yield adjustments, to labor attrition and just operating reliability and efficiency, and many of those things are happening. Still some work to do there. While we feel that we've got our plan complete, as we've reminded people, some of the raw material formulas are not changeable in that system until the end of this year, one more next year, and then one in 2026. That was always the 1,000-day integration plan that laid out there.

Long story short, the, the margins in that business have now, you know, improved quite a bit. You've seen that. I think we're pretty consistent there. In the, in the food segment, yeah, I think what you're seeing is pretty, you know, symbolic of, of what's achievable there. We continue to move our product mix more towards the collagen peptide. That's what's driving those margins there. Clearly, you know, as we told people, the, the Gelnex margins were consistent or better in many of the, the, the different products and geographies that we didn't operate in, and you'll see over time that work its way through. No, I think, Ryan, I think it's, it's pretty symbolic, and that's, that would be consistent with my comments of Q3 core ingredients being better than Q2 core ingredients.

Ryan Todd (Managing Director and Senior Research Analyst)

Great. Thank you. Then, maybe one follow-up on, you, you just made some comments about it briefly, but, the final RVO guidance came out during the quarter. You know, any thoughts on, you know, takeaways from that, from that final guidance, what it means for your business and maybe the biofuel sector in general as you look forward over the next few years?

John Bullock (Chief Strategy Officer)

This is John. Yeah, I mean, at the end of the day, it was, it was interesting because when we saw that RVO rule come out internally, we were like, "Well, that's great." Kind of in line with what we were hoping for. All of a sudden, the marketplace had all sorts of headlines about, you know, disappointing, terrible, awful, rotten. Of course, the RINs market has gone up since that RVO dip for a couple of days and went right back up.

The reality is this, while the 650-page document that the EPA puts out every year is massively painful to read through, when you do so, what you see is this: they've been fairly effective at managing to a 20% RINs bank on a forward-look basis, and that will keep the marketplace in a $1.25-$1.75 RINs prices, depending on what the psychology of the moment is. The only time that didn't work is when the EPA came right out of left field with the Small Refinery Exemptions and hit the marketplace with a big destruction of demand for RINs, that the EPA was unable to predict in their previous rulemakings.

At the end of the day, this thing's been condition stable, right where the EPA has managed it to or wants it to be, it seems like, which is a very nice market for us. It's a very adaptable market for the marketplace. The cost out there is not too great for folks, and we're able to market the product and have a nice margin out of it. It works very well. We're very pleased with how that RVO came out. Renewable diesel, in particular, it's great positioning within that RVO profile that just came out. We liked it a lot. We were surprised when the marketplace didn't.

Operator (participant)

The next question is from Adam Samuelson with Goldman Sachs. Please go ahead.

Adam Samuelson (VP in Equity Research)

Yes, thank you. Good morning, everyone.

Randall C. Stuewe (Chairman and CEO)

Morning.

Adam Samuelson (VP in Equity Research)

Morning. Maybe, John, if I could maybe follow on that last kind of comment that you just made. If you think about 2025 and this shift to the 45Z, where existing renewable diesel producers and existing conventional biodiesel producers won't get kind of either the full or partial portion of the Biodiesel Tax Credit that they currently enjoy, do you see risk or potential that that changes the paradigm on RINs pricing as you move out, as ultimately that kind of, that gap that people are now earning on the BTC has to get filled by other parts of the different credits and in the marketplace?

John Bullock (Chief Strategy Officer)

It, the 45Z is a very interesting piece of legislation. I think it surprised people when they went back to the Producer's Tax Credit, the income tax credit, late in the game as they were deciding how to extend. At the end of the day, you're exactly right, you do see CI adjust on that tax credit. When you look at it on an absolute basis, you can say, well, you're gonna get less than $1. Here's what we loved about it for Darling. Fact of the matter is, we produce, in Darling, low CI feedstocks. Diamond Green Diesel is capable of taking that low CI feedstock and turning it into the highest value renewable diesel in the world.

What that all adds up to is we've always enjoyed, in the LCFS programs, this CI adjusted concept that maximizes the value of our fat and maximizes the value of what Diamond Green Diesel can produce. What we just saw in the 45Z, was that same concept, is now implemented into the federal incentive structure. That's advantage for Diamond Green Diesel over time. At the end of the day, our margins are going to be defined by our competitive advantage versus the alternatives that can supply biomass-based diesel into the marketplace. That advantage just got greater with this piece of legislation. One other thing to consider is it's a Producer's Tax Credit. That means the product has to be produced in the United States of America. We are the largest producer in the United States of America. Again, another huge win for Team Darling.

Randall C. Stuewe (Chairman and CEO)

also, John, I, I think, you know, relative to, and Adam, to, you know, by then, when the Producer's Tax Credit hit or 45Z comes into play, we're gonna be in the SAF market.

John Bullock (Chief Strategy Officer)

Yep.

Randall C. Stuewe (Chairman and CEO)

We hold that arbitrage at the same time, that, that absolutely favors low CI feedstock and low CI SAF. You know, I think for anybody to say this is a static, "Oh, it's less than $1," will the, as we call it internally, the green premium, have to adjust to keep the marginal producer profitable? Maybe. But I think, you know, I don't know that we spend a lot of time thinking about that right now. We just think that optimizing margins between the RD SAF markets are gonna be what drives the future profitability here, and whether or not you're getting $0.75 or $1, I don't think that plays into the thinking of us around here.

Brad Phillips (CFO)

Adam, since the, the spread, since the last time we spoke or last quarter, they've ruled on or allowed transferability as well under, under that rule. So, that's gives it more flexibility from a tax incentive perspective.

Adam Samuelson (VP in Equity Research)

Okay. No, that's that's helpful. If I could just have a follow-up on, on capital allocation, and obviously, there's a DGD distributions happened in June, another one in the Q3, whether that was July or August. Should we look at kind of the cumulative kind of total that you've received in the last, in the last few months, and kind of against the operating kind of earnings power of the business at current production rates, and that being a, a reasonable indication of kind of how distributions will, will, will progress moving forward? Obviously, some volatility in cash spend for CapEx and the SAF plant at the JV, but is there anything that would kind of alter that kind of payout in a material way moving forward?

Randall C. Stuewe (Chairman and CEO)

Yeah, I think Brad and I'll tag team this a little bit. I mean, obviously, it was important to me, important to our board, and also to the street, to show you the earnings power of Diamond Green Diesel and to start to bring those dividends. You know, $101 million in Q2, subsequent in July here, was another $62 million. Clearly, Diamond Green Diesel 2 down on a major turnaround for most of the month. We'll use the excess cash. You know, cash comes and goes from that joint venture as the Blender's Tax Credit check comes in. What Brad's been able to do is move this to a monthly calculation instead of a quarterly calculation. You know, ultimately, you know, that calculation gets made at the end of the month, and then we'll see it.

Brad, what do you want to add?

Brad Phillips (CFO)

That, that's, that's the only thing I was gonna point out, Adam, is, is what Randy just hit on. I think you, you know, you know it, big picture, I think you're right on for the year. The cadence here should continue, if you look at it in a real short period with a, with a calculation each month and, you know, you, you hold back some, some cash, you know, you, you repay if, if there's a working capital on the revolving line, outstanding. When we get to the end of the year, what's the total exactly gonna be? It's hard to say. Randy mentioned big BTC flows in, in John's big machine of DGD 1, 2, and 3.

Those are big cash movements, but in the big scheme of things for this year, I'd say what we've seen, ballpark, depending on timing, particularly at the end of the year, is kind of, is kind of how we're seeing it for the rest of the year.

Randall C. Stuewe (Chairman and CEO)

Yeah, I think, you know, trying to put a number on it, it's hard, Adam. I mean, clearly, we're just speaking at the, the ultimate number of being, being below 3 times leverage by the end of the year.

Brad Phillips (CFO)

Yeah.

Randall C. Stuewe (Chairman and CEO)

Then I think you can kind of back into that number against, you know, I've given you all the breadcrumbs of the EBITDA and all of that.

Brad Phillips (CFO)

Yeah. You, and, you know, yeah. Our leverage, you know, we, we've said will be clearly below, below 3 times. That's factoring in some additional distributions, let's put it that way.

Randall C. Stuewe (Chairman and CEO)

Yep.

Operator (participant)

The next question is from Ben Kallo with Baird. Please go ahead.

Ben Kallo (Managing Director and Senior Research Analyst)

Hey, good morning, guys. Congrats, John. I know you're around until next year, congrats on everything. Maybe just going to Gelnex, maybe everything together, Randy. You know, you had the, you know, the one-timer here, the question we get a lot is just, you know, you know, are we going to see more of those? I know you don't have a crystal ball, as you look out, you know, are we kind of see the light in the tunnel with, with the acquisitions and any kind of one-time things related to them?

Brad Phillips (CFO)

Yeah, Ben, this is Brad. I'll just speak up here. You know, we had smaller amounts for the other significant acquisitions. Didn't really speak to them as clearly, because they were about a third this amount. What we'll have, Q3 is just the minimus. It's really in the month of July, so we won't really be even speaking toward it. That, that tight 18.5 is, you know, I don't know, 90% of it.

Randall C. Stuewe (Chairman and CEO)

Yeah. Yeah, that's yeah, I answered to you, Ben. We do have a crystal ball, and, you know, we got another $1 million, $1.5 million of Gelnex up in before the end. Then that's over and, you know, it's, we're operating now. As we said, our, our focus is laser on finishing the integration, you know, moving to one operating computer system around the world and, you know, just paying down debt.

Ben Kallo (Managing Director and Senior Research Analyst)

One, one thing, I think you answered some of this in the previous question or a previous question on Gelnex, but could you just talk to us about, just because collagen is becoming a bigger part of your business, about, you know, your customer base or who customer is, and just how you guys kind of envision growth i-in that business? I know you talked about margin a bit, but just top line growth in it as well.

Randall C. Stuewe (Chairman and CEO)

Yeah, I mean, clearly, the decision to acquire Gelnex was, A, it became available, B, we were out of capacity in our system as we moved our product mix around from, you know, straight gelatin to a, a collagen gelatin mix. So it became a, a pretty interesting opportunity, you know, as we closed on the business and, you know, got to look or deep dive into the sales ledger, what we started to see was, it, it was, it was one of the more fascinating things for me and my, my food and ag career was as always, they were doing a lot of business in geographies and, and also North America, with customers that we weren't. We had very little, I mean, when I say little, very little overlap, so our customer base grew.

The fun part with Brazil is where four plants are. They're very efficient, one in Paraguay and then one up in Portage, Indiana. Gives us a chance to, you know, optimize our product mix around the world and geographic movements of those products. I think the other thing in my earlier comments was Ricardo Cabral, you know, was the operating operations manager of the Gelnex operations. He's now in charge of all of Darling Rousselot worldwide. Their sales manager has moved out of the North America, and he's moved to run our European operations. Clearly, the cross-pollination of the team there is something that we're very, very bullish on.

You know, in, in my case, and I get to sit in the big seat here, our team has a lot to learn from them, and I'm very proud of that. I think, the, the integration is going to go very, very well. It is going very, very well right now. The sales ledger is, is really solid. The other thing, you know, I would comment about our, our global collagen business is this is kind of the completion of, of phase one. Phase two, you're going to hear more about over the coming year, is as we move into the active peptide area. We'll be talking more about the potential growth vehicles in that. We needed the capacity of the Gelnex system to help us move to, you know, phase two of active peptides.

You know, the other piece that's underneath this business is our, our continued strong performance in China. Ultimately, you know, we're going to add a little bit of capacity in China over the coming year in our Northern China plant and ultimately grow that business. You know, clearly, the pharmaceutical or the pharma business, as we call it, from bone gelatin in China, is growing very rapidly as, as that population looks to nutraceuticals and supplements for, for healthcare. John, anything you want to add to this? I mean.

John Bullock (Chief Strategy Officer)

No, I mean, the wonderful part about Gelnex, besides having a fabulous system and a fabulous location, is at the end of the day, it's always people that makes money, and we picked up a fabulous, fabulous, fabulous set of talent in with the Gelnex group in South America. That's going to benefit us not only in the Gelnex organization, but as it already has, and as Randy's mentioned, throughout the entire Darling and Rousselot organization in years to come. We're really excited about it.

Operator (participant)

The next question is from Ben Bienvenu, with Stephens Inc. Please go ahead.

Ben Bienvenu (Managing Director and Senior Equity Research Analyst)

Hey, good morning. Thanks for taking my questions. I, I want to maybe ask a little bit of, in the context of, as you all highlighted, the benefits of vertical integration to the model, despite what was a lot of volatility in the first half of the year, you demonstrated really solid earnings power from the business and some consistency, that I think is quite remarkable. As you think about, you know, this business now being a cash machine and wanting to grow it over the next, you know, decade, do you like the proportions of the various segments of the business today and how they intertwine? How do you think about allocating capital in a balanced way to maintain this competitive advantage that you have down the road?

Randall C. Stuewe (Chairman and CEO)

Yeah, this is Randy. I'll tag team with the, the team here. I mean, you know, I spent a lot of time looking at geographic concentration. I mean, clearly, we've placed a, a pretty sizable bet in Brazil. I think we, we've been bullish Brazil for a lot of years here and waiting on the right opportunity to enter the core rendering and the, the gelatin collagen business and grow it there. Clearly, we've, we've increased our, our exposure there. Why? Because we, we continue to believe that country possesses, you know, land, water, and people, and the ability to produce more animals, and that's where we wanna be. I mean, clearly, we, we placed that bet. We will continue to grow in Brazil. We'll continue to expand the rendering business.

I mean, it's a very, very large country, north to south, east to west. It'll give us a lot more opportunity. We're bringing on a couple more plants as we speak right now there. I mean, as I look at our total portfolio, you know, clearly, I, I still think, as, as, as political tensions potentially ease over time, China deserves a, a deeper look, and then ultimately, Africa over time. The question becomes: What is our, our growth strategy? Clearly, green energy in Europe. You'll, you'll see some additional digester growth from us, potentially this year in that area, both expansion and greenfield. And then ultimately, SAF 2.0.

I mean, clearly, Diamond Green Diesel one and two were not laid out as, as aptly as number three for the addition of a unit, but we're, we're studying that right now for seeing where it fits, and ultimately, that decision will depend on how the market develops. You know, I love John's word, insatiable demand. I'm hoping for insatiable margins, and then we'll build number, number 2.0 there. Core rendering, I mean, you saw the Butterball announcement. There's a couple more out there that we're working on right now, both domestically and internationally, for rendering plant growth. Then ultimately, you know, as the gelatin collagen, we talked about the active peptide market and, and where we're moving there. You know, we feel really good about the trajectory of growth for, you know, for this business.

Ultimately, the, the real estate side, you have to remember, as we said, on the Gulf Coast, I mean, no announcement here on DGD 4.0 or DG number 4, but clearly, our confidence now in originating global feedstocks gives us the opportunity as that market grows or as the SAF market grows, to consider that investment. Then, then ultimately, you know, as Brad, as we get back to, you know, 2.5 times leverage is where we wanna be, which should be nearly achievable by the end of 2024, you know, we've got to start evaluating cash, you know, allocations and what we're gonna do with it. That, once again, puts the, the dividend on the, on the table as a board decision that could be made at that time. Brad, John, anything you guys wanna add?

John Bullock (Chief Strategy Officer)

No. Perfect.

Brad Phillips (CFO)

Okay.

Ben Bienvenu (Managing Director and Senior Equity Research Analyst)

Okay, very good. Thanks, Randy. My second question is, is just related to LCFS markets. What you think the, you know, runway ahead is for potentially changing compliance standards, and what the considerations are as, as you look to, you know, like, the California LCFS market and, what they're thinking through to make that determination?

John Bullock (Chief Strategy Officer)

This is John. I mean, obviously they're going through the mapping process right now to try to figure out where they go. I think one of the things that's great news out of California is CARB has figured out that their program works spectacularly, that they have the ability to accelerate the mandates going forward, and that they know that, quite frankly, at $75-$85 a ton credit, that's probably a little low to create the type of additional incremental low CI feedstock they want in the marketplace. We would anticipate that they'll come forward with a rulemaking that's gonna show a very good demand increase in California. We really like the direction that that's going.

I think CARBs had all the right signals sent to it, that it can substantially increase those mandates going forward, and we would anticipate that they would. They do a nice job on evaluating the future and capabilities of supply and what the demand looks like, but the pattern really seems set that we're in a good position to have growth there.

Randall C. Stuewe (Chairman and CEO)

Matt?

Matt Jansen (COO, North America)

Hi, can you hear me?

Randall C. Stuewe (Chairman and CEO)

Yes, go ahead.

Suann Guthrie (SVP of Investor Relations)

I think we lost our operator, but go ahead, Matt.

Ben Bienvenu (Managing Director and Senior Equity Research Analyst)

My apologies. Hey, I wanted to follow up on the recent Butterball announcement. It sounds like you'll be building a new poultry rendering plant that would raise your feed volumes by about 3%. Could you talk about how this deal came about and whether there might be additional opportunities with Butterball? Thanks.

Randall C. Stuewe (Chairman and CEO)

Well, you know, this is a model that we, we've started, I think it's probably somewhere between five and seven years ago now, with Peco Foods in Pocahontas, Arkansas, and Case Foods in Winesburg, Ohio. Ultimately, it gets to, you know, as we said, this is a transportation logistics business on one hand, with a perishable item that's half water to two-thirds water in some cases. So, you know, we were hauling Butterball a long way, and it just made to our factory. You know, as you know, clearly a year ago today, we had Armageddon in the sense of trying to handle all the, the poultry tonnage in the new Valley Proteins system.

We were either gonna have to build some additional capacity in the Delmarva or on the East Coast to handle the, the tonnage, and Butterball just became a candidate because of their tonnage internally, and then our ability to move third-party tonnage into a site. Take some pressure off of our site, give them improved economics, and, and help them grow. These are just really fabulous deals. I mean, you saw us announce what, Cattlemen's Heritage up in Nebraska. That's the same type of deal, and it's just really, it gets down to a, a transportation savings. You know, trucking is, is not as cheap as it used to be. As you look at the concentration of tonnage, and we're always looking to optimize our system and say: Okay, who's spending what money on freight?

Then, does it make sense to build a plant? In, in this case, their land, their building, our equipment, and a long-term agreement, and better economics with our expertise to both operating, rendering capacity, and our marketing of our product line around the world.

Ben Bienvenu (Managing Director and Senior Equity Research Analyst)

Sounds good. Then, do you have more color on the food segment in Q2? I guess we were a little surprised to see it down quarter-over-quarter, even with Gelnex rolling in. I understand there was the inventory hit, which would just be one time. Is the Gelnex annual run rate still in the $110-$120 million EBITDA range? Could you talk about how things are going so far in Q3 for food?

Randall C. Stuewe (Chairman and CEO)

Yeah, I mean, Q2, I mean, you got to add back the $18.5, you would see that it was, it was up nicely, quarter-over-quarter, representative of the Gelnex contribution. Remember, there's, there's 3 components in the food segment. There's the, there's the, the Rousselot business, there's the edible animal fats business, then there's the casings and heparin business. You know, edible fats, you know, followed the rest of the, the animal fat complex down, so there's a little bit of reduction there. Then the, the casings business was a little bit lower, you know, quarter-over-quarter. You know, that's, that's related to the Russian-Ukraine issue and the Russian sales, that, that aren't in there right now.

Q3, we're, we're, I, I can you know, tell you that, we're back at operating levels that we thought we would. Yes, the, you know, we said that the Gelnex would contribute on the, on the final quarter, you know, at the $75 million rate, post, you know, the $18.5 million inventory charge, and we're, we're at that run rate, at least what I saw in July here. That's about the, the only color I can give you at this time with, you know, 30 days into the quarter.

Operator (participant)

The next question is from Tom Palmer with JPMorgan. Please go ahead.

Tom Palmer (Equity Research Analyst)

Good morning, thanks for squeezing me in. I just wanted to ask on CapEx expectations at Diamond Green Diesel. The Q2 figure is below your depreciation expense, I know you've got the SAF project ramping up. Just any color on maybe how that progresses in the back half would be helpful.

John Bullock (Chief Strategy Officer)

I'm not sure I understand the question, Tom.

Tom Palmer (Equity Research Analyst)

Capital expenditures. Sure. Just your capital expenditure plans at, at Diamond Green Diesel in the back half, they were rather low in the, in the Q2, but I know the SAF project is starting to ramp up.

John Bullock (Chief Strategy Officer)

Oh, I, I got it. Yeah. No, we will see an increasing CapEx run rate out of the SAF project, but the majority of that's still next year, is when we see the majority of the CapEx on that. I think the bigger point on Diamond Green Diesel in terms of cash flow out of it is, it's true, we have a little money we're going to spend each year on turnarounds, and we have some money that we're spending on the SAF project. Compared to the cash flow that we've had going out as we've been building Diamond Green Diesel 2 and Diamond Green Diesel 3, these aren't even drops in the pond. The free cash flow out of Diamond Green Diesel increases tremendously as we've stopped the massive expansion process within Diamond.

That gives us confidence that we'll continue to see dividends coming out of Diamond Green Diesel going forward.

Tom Palmer (Equity Research Analyst)

Okay, thanks. Thanks for that. Maybe I'll, I'll just follow up on that, that dividend comment. I know you, you covered some of this already. In the past, you had a, a more formal criteria to determine the magnitude of distributions. I think if we go back to, like, 2019, 2020. Maybe I missed it, it doesn't seem like there's a, a policy to that extent in place at this point. Maybe what kind of determines the, the magnitude of payouts this time around, and might we anticipate something perhaps more formal at some point in coming quarters?

Brad Phillips (CFO)

Yeah, Tom, this is Brad. Yeah, I think you're probably referencing a $50 million number that we previously, previously, a couple of years ago, when DGD was smaller in terms of a cash hold. That number is up due to the size of the machine now. Won't really speak toward the specific number, that's, I think, maybe a bit of what you're driving at. The mechanics of that is largely, Randy mentioned we went to a monthly rather than a quarterly, so that was a significant move, a number of quarters ago. By and large, other than those items, it's still done the same way.

We, we, we pay that revolving facility down, or we have it in the calculation for it to be paid down, to be factored in it in terms of what the distributions will be. The other thing, just to tag on to what John was, was referencing on, on CapEx at, at Diamond, just, I want to be clear. When, when we think about and, and, and reference to toward distributions the remainder of the year, we are factoring in the presumed or the projected CapEx there. Hope, hope some of that helps you.

Operator (participant)

The next question is from Paul Cheng with Scotiabank. Please go ahead.

Paul Cheng (Managing Director and Senior Equity Analyst)

Thank you. Good morning, guys. Randy, I want to go back, you mentioned about the phase 2 on the collagen business on the growth plan. Can, can you share with us that, what kind of timeline and milestones that we, we should be watching?

Randall C. Stuewe (Chairman and CEO)

Yeah, and I think-

Paul Cheng (Managing Director and Senior Equity Analyst)

Also that, I mean, on that, I mean, that if you can talk about that, the new business, what is the margin comparing to your legacy business so that at least we can have some idea then how the margin improvement may look like on the overall business?

Randall C. Stuewe (Chairman and CEO)

Yeah, I mean, you know, if you think about the, the product line that's being marketed today, the collagen peptides, that, that's just an, an aggregation of the peptide today, meaning they've not been separated. The work that we're doing at the R&D level today that, that gives us a lot of excitement, is isolating and concentrating the different peptides and then doing clinicals and, and different studies on what kind of, you know, reaction the body, the human body gets for taking those peptides. It is just way too early at this moment to, to even think about volumes or margin in that area. Clearly, I believe it'll be substantially better over than, than commodity gelatin.

The applications that, that, that are being worked on today, that we've released, and discussed during some of our, public innovation days are, are absolutely. They're, they're breathtaking. John, what do you want to add to that? I mean, you've been working in this area.

John Bullock (Chief Strategy Officer)

I think what you think about in the terms of active peptides, this is just a continuing example of Darling as an innovation company. We're constantly out there trying to figure out, know our customer base and figure out where these new products the demand is being created for, how we can develop supply chains at higher margins to be able to supply these market chains. Active peptides is a continuation of what we've been doing over the past 10 years. It takes time to develop these, and it's not always a straight line. Everything doesn't happen on a, "This is going to happen this day, and something else is going to happen this day." We've got a doggone good track record, and we've got a phenomenal organization out there working on the innovation stream.

We think there's just a tremendous opportunity in the active peptide world.

Randall C. Stuewe (Chairman and CEO)

Yeah, I mean, Paul, if you think about it, I mean, today, you're, you're seeing a, a really broad product grouping out there that, that, you know, from Vital Proteins, you know, in, in the sense of just taking, you know, collagen peptides and putting it in solution or in a protein bar, but it's just listed as collagen peptides. You know, the, the stuff that we're seeing out here that's being worked on, you know, would be for a specific purpose: joint lubricity, nail growth, hair retention, you know, gut health. I've even heard words, dementia treatment. I've heard words of, of, of ultimately A1C management.

What all that means is, while it's a long runway to get there, it, you know, we're working hard in that area, but it, it broadens the number of products that we can use our product or put our ingredient into around the world. Given the specificity of those ingredients, it will command a premium to what we're doing today. How big those markets are? We'll see. It wasn't seven, eight years ago, we didn't know how big the collagen peptides market was. It clearly, from our research, says this isn't a fad. This has absolutely got proven medical benefits out here, and we're just excited about it, and we'll see where it goes.

Paul Cheng (Managing Director and Senior Equity Analyst)

Hey, Randy and John, I think you are doing research with some university on some of the products. When you think that the first product may go to the FDA for approval or maybe go through the phase I? I don't know where they are at this point.

Randall C. Stuewe (Chairman and CEO)

There, there have been several patents received at this time. There are several petitions out there around the world for approval of these products, but, I, I guess that's all we would like to comment at this time. John, anything you want to add?

John Bullock (Chief Strategy Officer)

No, no, that's, that's exactly right. We try not to discuss the stuff we're intending on patenting.

Operator (participant)

The next question is from Jason Gabelman with TD Cowen. Please go ahead.

Jason Gabelman (Director of Energy Equity Research)

Hey, morning. Thanks for taking my questions. The first one is just on the impact of feed prices to the overall business. Randy, last quarter, on the earnings call, you discussed the fact that lower feed prices were a net benefit to the company's earnings, I just want to get your understanding or your comments now that feed prices have kind of rebounded here. Is the inverse true that higher feed prices are going to be a net negative for the overall business, or are there some offsets going on in the marketplace we should be aware of? My follow-up is just on EBITDA. As we think about next year, you know, we could see if we annualize second half 2023 EBITDA, you get to about $1.9 billion.

Is that a fair benchmark to think about for 2024, assuming pricing remains flat, which I know is obviously a big assumption to make, or are there some other things going on in the underlying business that we should think about as well? Thank you.

Randall C. Stuewe (Chairman and CEO)

No, I think good questions, Jason. This might be where I say I got to fog in my crystal ball a little bit, but you know, I think the thing that, that, that I just want to once again reiterate and, and try to say is, okay, fat prices globally were down 5-7 cents a pound, depending on geography, and, and ultimately, at the end of the day, that translates into $70-$80 million annually of EBITDA. Divide that by 4 and you get, you know, what? $18-$20 million. You look at the feed segment and you say: how much was it down? It was down $26 million. You say, well, what was volume? Volume was 100,000 tons lower than it was in the prior quarter.

At the end of the day, it kinda makes sense. Now, as we come into Q3, remember, the pipeline, whether it's coming out of Europe, Brazil, or North America, you know, it's been priced into DGD for 45-60 days already. We won't see the pickup in animal fat prices or yellow grease or UCO until probably September into our system because of the pricing lag. Yes, that's gonna be that'll play positive towards the end of Q3, and that'll carry momentum into Q4. You know, the other thing that you look at as we talked about the food segment, has a little bit of fat in it, so it's, it's down, but it's coming back. Then you look at Diamond Green Diesel, you know, it was offline for basically July, number two was.

You know, that's a, you know, 470-500 million gallon plant offline. It's, it's back up at capacity, and we're also watching, you know, as the crude oil's up, you know, $80 a barrel, quite a bit from what it was in Q2, and, and heating oil's back up. You know, they're not exactly perfectly offsetting each other in the sense, but I think at the end of the day, you could have a situation where you've, you've got higher crude oil prices, improved feedstock prices, and both businesses benefit. John, you wanna try to clean that mess up?

John Bullock (Chief Strategy Officer)

Well, no, I, I, I think at the end of the day, what you see is this: there is not always a one-to-one correlation as fat goes up and fat goes down to Darling core business profitability and Diamond's core business profitability. What you have seen when we're producing 1.2 billion-1.3 billion gallons out of Diamond Green Diesel, we've seen significant adjustments down in the feedstock price. When you look at the combined vertical, what you see is extremely strong earnings. We anticipate that's gonna continue when you look at the combined vertical, as we see fat prices rebound. Randy hit a very important point. RINs have been stable to slightly up. LCFS has been stable, but we've seen the heating oil market go up by $0.80 a gallon in the past 5 or 6 weeks.

Yeah, fat prices are going up, but the baseline at which we sell our renewable has been going up. To some degree, there are circumstances in which we benefit on both sides of the, of the wall here as Darling and as, and with stable margins at Diamond Green Diesel. The combined entity is gonna see some flux back and forth, but because we own the vertical, we're gonna benefit out of that vertical chain. I think that, at the end of the day, is the big message.

Operator (participant)

The next question is from Bill Baldwin with Baldwin Anthony Securities. Please go ahead.

Bill Baldwin (Principal)

Yeah, good morning.

Randall C. Stuewe (Chairman and CEO)

Morning, Bill.

Bill Baldwin (Principal)

Two quick areas. I just wanted to see any color, Randy, regarding the issues that Tyson has with shutting down some of their poultry plants. Do any of your customers pick up volume in this, in what's going on out there? I mean, could that potentially benefit your poultry volumes with them shutting down some plants here in the U.S.?

Randall C. Stuewe (Chairman and CEO)

Yeah, I mean, clearly, I'm not, don't have the inside baseball on that. The 4 plants that Tyson closed are what I would consider to be older, higher labor cost plants, and, and clearly, you know, speed up the chain speed at some of their more efficient plants that have higher levels of automation. I mean, John and John R. have been clear about their, you know, $1 billion, you know, challenge, and they're, they're delivering on that. That's number 1. Number 2 is that, yes, we have picked up some volume and moved volumes around on the East Coast, with some of the closures that are happening. You know, we're still seeing a poultry expansion. I mean, by no means is this, symbolic of the world.

You know, this has been probably the longest, most profitable poultry and, and meat cycle that I think this country's seen. Clearly, you know, there, there is, Bill, you know, clearly some. You're hearing it from the food companies. You're, you're feeling some inflationary, recessionary pressures here and abroad. At the end of the day, it's, it's not a giant deal for us. Yes, we have picked up some volume, moved around as, as different people that were going to some, some of these plants have now decided to, to move tonnage around. We're always looking to optimize tonnage out there and lower freight costs when it's available. The answer is yes, we have benefited.

Bill Baldwin (Principal)

Just second question, Randy. I know you got a number of initiatives going on with expanding, expanding your rendering capacity with new plants, Brazil and other areas. Can you quantify or give some color as to what kind of impact this could have on your overall capacity when those plants are completed? You know, what kind of increase in volume, processing capacity will take place, and some kind of timetable on when you think all that will be completed?

Randall C. Stuewe (Chairman and CEO)

It, it's hard to put a real number on that at this moment. You know, the one thing we, we, we continue to wait on the Polish antitrust authorities to close on the three poultry plants in Poland. That should happen hopefully this quarter. You know, we got a couple plants coming online, just starting up in Brazil, a couple more plants expanding in Brazil. Butterball won't be on until 2025. Cattlemen's Heritage won't be on until 2025. It's, it's a pretty good slug of growth around the country. You know, it's really a late 2024, 2025 timeframe for most of that before it would be transparent. I mean, you know, you look at the last five years, I think acquisitions aside, you know, we've been averaging growth between 5% and 7%.

It feels like we're back, you know, one to two right now as, as the world kinda retraces a little bit, but we're still growing.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Randy for any closing remarks.

Randall C. Stuewe (Chairman and CEO)

Hey, thanks, everybody, for your questions today. As you know, we'll be attending a few conferences in September, which are listed on our website. As always, any questions, you know, feel free to reach out to Suann Guthrie, and stay safe. Have a great day, and appreciate everybody being on the call. That concludes our call.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.