Darling Ingredients - Q2 2024
July 25, 2024
Transcript
Operator (participant)
Good morning, and welcome to the Darling Ingredients, Inc. conference call to discuss the company's second quarter 2024 financial results. After the speaker's prepared remarks, there will be a Q&A session 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 (Head of Investor Relations)
Great. Thank you for joining the Darling Ingredients second quarter 2024 earnings call. Here with me today are Mr. Randall C. Stuewe, Chairman and Chief Executive Officer, Mr. Brad Phillips, Chief Financial Officer, Mr. Bob Day, Chief Strategy Officer, and Mr. Matt Jansen, Chief Operating Officer of North America. Our second quarter 2024 earnings news release and slide presentation are available on the Investor page under the Events and Presentations tab on our corporate website and will be joined by a transcript of this call once it's 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 could materially differ because of factors discussed in today'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 recorded 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 Stuewe (CEO)
Thanks, Suann. Good morning, everybody, and thanks for joining us for our second quarter earnings call. In our last earnings call, I mentioned that the team is focused on making the necessary adjustments to adapt to a deflationary and volatile global ingredients market and a renewable diesel market that continues to suffer from perceived overcapacity and an uncertain regulatory environment. I challenged the team to accomplish several things during the second quarter, and I'm pleased to report on their successes. Since the first quarter, we were able to improve gross margins, control capital spending without sacrificing operational excellence, pay down debt, repurchase common stock, and most importantly, we received a much-anticipated dividend from DGD. For the quarter, our combined EBITDA was $273.6 million. While slightly lower sequentially, our performance reflected a nice improvement in our core ingredients business.
Turning to the feed ingredients segment, global raw material volumes remain strong, and we are seeing global fat pricing improve, indicating more demand for low carbon intensity feedstocks for renewable diesel. Our feed business showed sequential improvement in margins as we made adjustments in raw material procurement arrangements and our operational excellence and cost-cutting programs are beginning to deliver. With fat prices on the rise, our continued focus on operational excellence and effective cost cutting and spread management, I feel confident we should see improved earnings in the feed segment for the back half of the year. Turning to our food segment, our Rousselot business continues to benefit from being a supplier of choice in the gelatin and hydrolyzed collagen market. While we have seen several quarters of customer destocking, we are starting to see signs of that beginning to slow.
As I've mentioned in previous earnings calls, we are preparing to launch Nextida GC, a natural collagen solution for managing glucose moderation. We are having a number of conversations with customers and look forward to more discussions at SupplySide West and Food Ingredients North America Trade Show in October. Turning to our fuel segment, Diamond Green Diesel continues to prove it's the best-in-class. Demand for our products remains robust, but margins remain challenged given the lack of clarity in the regulatory markets for RINs and LCFS.
Last quarter, we mentioned that cash was rapidly building at Diamond Green Diesel, and I'm pleased to report on 18 July, Darling Ingredients received a $77.1 million cash dividend from the joint venture. Our sustainable aviation fuel unit continues to move ahead of schedule and on budget, with the anticipated startup in the fourth quarter of 2024. We continue to work to build out a strong sales book with both domestic and international supply opportunities. Now, with that, I'd like to hand the call over to Brad to take us through some financials. Then I'll come back and discuss my thoughts for the rest of 2024. Brad?
Brad Phillips (CFO)
Thank you, Randy. Net income for the second quarter of 2024 totaled $78.9 million, or $0.49 per diluted share, compared to net income of $252.4 million or $1.55 per diluted share for the second quarter of 2023. Net sales were $1.5 billion for the second quarter of 2024, as compared to $1.8 billion for the second quarter of 2023. For the first six months of 2024, net income was $160 million, or $0.99 per diluted share, as compared to net income of $438.2 million, or $2.69 per diluted share for the first six months of 2023.
Net sales for the first six months were $2.9 billion, compared to net sales of $3.5 billion for the same period in 2023. Operating income decreased $208.2 million to $148.5 million for the second quarter of 2024, compared to $356.7 million for the second quarter of 2023, primarily due to a $168.8 million decline in our share in the equity and net income from Diamond Green Diesel earnings as compared to the same period in 2023. Additionally, the second quarter gross margin declined $71 million as compared to the same period in 2023.
Operating income decreased $326.9 million to $285.7 million for the six months of 2024, compared to $612.5 million for the six months of 2023. The decrease was primarily a result of a $184.7 million decline in our share in the equity and net income from Diamond Green Diesel earnings, as compared to the same period in 2023, along with a $191.6 million decline in gross margin. The company recorded income tax expense of $0.8 million for the three months ended 29 June 2024, yielding an effective tax rate of 0.9%, which differs from the federal statutory rate of 21%
due primarily to the relative mix of earnings among jurisdictions with different tax rates, non-taxable gains, and financial contingent consideration, certain taxable income inclusion items in the U.S. based on foreign earnings and biofuel tax incentives. The company's effective tax rate, excluding the impact of the biofuel tax incentives and discrete items, was 29% for the three months ended 29, June, 2024. The company also paid $23 million of income taxes in the second quarter. For the six months ended 29, June, 2024, the company recorded income tax expense of $4.7 million and an effective tax rate of 2.8%.
Excluding the biofuel tax incentives and discrete items, the effective tax rate was 27.2% for the six months ended 29, June 2024. The company also has paid $56 million of income taxes year-to-date as of the end of the second quarter. For 2024, we expect the effective tax rate to remain about the same at 3% and cash taxes of approximately $45 million for the remainder of the year. Now, in the second quarter, we paid down $51 million of debt. The company's total outstanding debt as of 29, June 2024, was $4.409 billion, compared to $4.427 billion at year-end 2023.
Our bank covenant projected leverage ratio at Q2 2024 was 4.24 times, and we had $814.4 million available to borrow under our revolving credit facility. Capital expenditures totaled $98 million in the second quarter and $191.7 million for the first six months. We also repurchased approximately 807,000 shares of common stock during the second quarter of 2024 for approximately $29.2 million. As Randy mentioned earlier, on July 18, 2024, we received a $77.1 million cash distribution from DGD. With that, Randy, I'll turn it back over to you.
Randall Stuewe (CEO)
Okay, thanks, Brad. As we expect continued dividends from Diamond Green Diesel and global finished product price improvement, our focus for the balance of the year is to manage capital outflows and pay down additional debt. Additionally, we will continue our focus on operational excellence and widening margins where possible. We remain optimistic as we have seen prices begin to improve in late Q2, which will be reflected in our Q3 and Q4 earnings. I remain optimistic that we should be able to deliver $1.3 billion-$1.4 billion of combined adjusted EBITDA for the year. So with that, Cindy, let's go ahead and open it up to Q&A.
Operator (participant)
We will now begin the Q&A session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. Please limit yourself to one question and one follow-up question. At this time, we will pause momentarily to assemble our roster. Our first question comes from Heather Jones of Heather Jones Research LLC. Go ahead, please.
Heather Jones (Founder)
Good morning. Thanks for taking the question. My first question is on SAF. I was just wondering if you could give us what your view is of the supply and demand dynamics for that going into 25. You got the mandate kicking in in U.K., and then, and the mandate kicking in into the E.U., and I would think that maybe Neste would shift some of their volumes into the E.U. And just wondering how you're seeing that shaping up for DGD going in 25.
Bob Day (Chief Strategy Officer)
Yeah. Thanks, Heather. This is Bob. The SAF picture is quickly evolving as, you know, European regulations really come online in 2025. I think, you know, the interesting thing there is technically, compliance around SAF is required later in the period, but, you know, the tendency of everyone involved is to not want to get too far behind. So it's a somewhat murky picture, but what we're seeing is a strong interest to try to get ahead. And so, you know, I think we're gonna start to see things come together as we move forward here.
Randall Stuewe (CEO)
Yeah, hi, this is Randy, Heather, and I think I'd echo real quick with Bob. I mean, we continue to assemble the sales book, obviously. Hopefully, we'll have some announcements out soon on it, but the demand is building out there right now. It's still kind of a little, as Bob said, murky on what the rules are, obviously on both imports and 45Z and everything. And so at the end of the day, I think this thing will pick up momentum here as we go into Q3.
Heather Jones (Founder)
Okay, and as a follow-up to that, I mean, for the roughly 250 million gallons that DGD will have, is your anticipation that the majority of that will go domestic, or are you expecting a strong export pull for that?
Randall Stuewe (CEO)
I think that's yet to be seen. I think you'll see a blend of both domestic and export sales, and that ranges from the U.S. to Canada to the continent. It'll be driven by the market and the rules. I mean, I think everybody saw Neste's production this morning of SAF, and clearly, the market is evolving there, as Bob says, and ultimately, it, with the 250 million gallons, may seem like a big number of gallons, but it's really not, given the book that we're assembling out there at this time.
Heather Jones (Founder)
Okay, thank you so much.
Operator (participant)
Our next question comes from Dushyant Ailani of Jefferies. Go ahead, please.
Dushyant Ailani (VP)
Good morning, guys. Thanks for taking my questions. Just wanted to dive a little bit into the margin cadence for the second half. What are some of the puts and takes? I know three Q is usually, you know, seasonally low, but, I mean, if you could share some color on that, please.
Suann Guthrie (Head of Investor Relations)
Are you talking feed, Dushyant?
Dushyant Ailani (VP)
Yeah, feed and food as well, please.
Suann Guthrie (Head of Investor Relations)
For business.
Dushyant Ailani (VP)
Across all segments. Yeah.
Suann Guthrie (Head of Investor Relations)
For summer heat.
Brad Phillips (CFO)
Yeah, Dushyant, this is Brad. On feed and overall on the core, yeah, you may have noticed, Q2 here, all three segments had improved slightly over Q1, saving more or less our expectation. The back half of the year, with where prices have, you know, kind of moved, late in the second quarter. As Randy kind of mentioned in the intro, with the margin management and cost concentration that we've placed on the segments, we see momentum there for the back half of the year, and those margins continuing to improve.
Dushyant Ailani (VP)
Awesome. Thank you. And then just wanted to get your overall thoughts on in the macro in terms of, like, 45Z credits. Any thoughts on when we expect to hear something over there? Do you think BTC will be extended if we don't hear anything on the 45Z?
Randall Stuewe (CEO)
So I just want to clarify, I understood the question was?
Suann Guthrie (Head of Investor Relations)
45Z, what's our expectation?
Randall Stuewe (CEO)
Oh, yeah.
Dushyant Ailani (VP)
Yeah.
Randall Stuewe (CEO)
And, Matt, feel free to jump in. But, I mean, our expectation is that, you know, we'll believe—we believe that, we're gonna see 45Z implemented by January first, and really, all signs are pointing to that. Anything you want to add, Matt?
Matthew Jansen (COO of North America)
No, I mean, that's, there's obviously a lot of talk around that, with the guidance that is yet to come out, and we're, like everyone else, anxiously awaiting that. But, as Bob mentioned, we're still of the view that, listen, January 1 is the day will be implemented.
Randall Stuewe (CEO)
Matt, anything on the Blenders Tax Credit that we can knock out here while we?
Matthew Jansen (COO of North America)
Yeah, there's been a lot to talk about the Blenders Tax Credit and if that would be extended or, you know, another version of it and all. And so far, you know, our view is that at this point is that, no, we still think that what's in place today in terms of the legislation is what's going forward.
Dushyant Ailani (VP)
Great. Thank you.
Operator (participant)
The next question comes from Manav Gupta of UBS. Go ahead, please.
Manav Gupta (Senior Equity Analyst)
I just want to understand, you know, fat prices are moving up, UCO prices are moving up, D4 RIN prices are moving up. So is that the reason you have been able to reaffirm your guidance? Because looking at the numbers, you probably need to hit $360 million for each of the remaining two quarters to get to that guidance. So what are the factors which give you confidence that you can get there in the second half?
Randall Stuewe (CEO)
Yeah, and we'll kind of tag team this as a group. I mean, clearly, 1.3 to 1.4 has got a range to it, and, you know, at the end of the day, what we're looking at is in the Q1 and Q2, we sold a lot of fat in North America in the mid-30-cent-a-pound levels. That now is leaving the plants at 40 to 42, and much improvement in Europe at the same thing. South America has been slow to improve at this time, but as we've always said, from an optics perspective, every penny is worth about somewhere between $12 million and $15 million annually into the really into the earnings stream or the EBITDA stream, and most of that goes to the feed segment.
So if you say you're up a nickel, that's $60 million right there. We think there'll be further, you know, appreciation here. And ultimately, as you look around the horn, you know, you're seeing a lot of what I call, you know, shutdowns, Manav, or cancellations or pauses, whatever the heck you want to say. You've seen three plants from Chevron, biodiesel plants shut down. You've seen Shell's announcement, you've seen BP Cherry Point. You've got no pretreatment on yet at whether it's Martinez or Rodeo. So at the end of the day, it takes one of those plants, and then we'll see a pretty nice, you know, improvement there. You know, the Chinese UCO side that everybody spends a lot of time talking about, clearly the tariffs have been proposed on-...
In Europe today, there's a comment period that'll take some time, but the world's evolving, you know, right now. And so I see, I feel pretty optimistic about the fat pricing here as we go to the back half of the year for our business because of our ability to pre-treat these fats. You know, D4 RINs, you know, they're good. You know, when you look at it, you know, we had Port Arthur down for 28 days, and we still, you know, kicked out some pretty good gallons here, 311 million gallons for the quarter.
So I think that's part of it, and the fact that you've got some people idling capacity out there. I tend to believe that the S&D that the sell side had out there had everybody running at full capacity day one, and we've never seen that, so it's tightening. LCFS, you know, it's still on target for January 1. I don't know that we would take a different perspective, you know, opinion of that today. I don't know. Bob, Matt, you guys want to add anything to?
Bob Day (Chief Strategy Officer)
Yeah, I mean, I think when you. I mean, what gets us, what makes us confident is just our ability to leverage the network of assets that we've got. You know, whether it's in the collagen business, we can shift to low-cost production areas of the world, and really, the Gelnex acquisition has provided us with that kind of flexibility. In the rendering business, we continue to have old contracts come up for, for bid, and as we restructure those agreements based on today's construction costs and environment, you know, we, we expect better margins as we go forward. So just more, you know, generally speaking, you know, we're seeing improvement and, and we think that the second half of the year is gonna continue to get better.
Manav Gupta (Senior Equity Analyst)
Perfect. Thank you. A quick follow-up here is, one thing which was working against you was the feedstock price lag in the first half, which depressed your capture of the DGD margin. Now, that should reverse with the feedstock going up. So should it be fair to assume that at least in 3Q, your capture could be materially higher because that feedstock price lag will now strongly work in your favor versus against you?
Randall Stuewe (CEO)
I think that's well said, and in terms of the right way to look at it, you know?
Manav Gupta (Senior Equity Analyst)
Thank you, sir.
Operator (participant)
The next question comes from Adam Samuelson of Goldman Sachs. Go ahead, please.
Adam Samuelson (Senior Equity Research Analyst)
Yes, thank you. Good morning, everyone.
Randall Stuewe (CEO)
Morning, Adam.
Adam Samuelson (Senior Equity Research Analyst)
Morning. So just keeping on that line of questioning, if I may, just thinking about the guidance to get to the low end, you've got to improve your quarterly EBITDA by a little less than $100 million versus the first half average. The fat price sensitivity that you just gave would give you $15-$20 million to that quarterly rate. I just what is the. Can you help us bridge kind of some of the other pieces there? I mean, just DGD volume certainly would be stronger in the second half if there are no turnarounds planned. But can you help dimensionalize kind of how you've thought about the DGD margin structure? Is there any contribution from SAF premiums now contemplated in the fourth quarter? Kind of the food business, kind of how much step up you're assuming there? That'd be helpful. Thank you.
Bob Day (Chief Strategy Officer)
Yeah, I mean, clearly, the first thing, as Bob alluded to, is we're managing margins globally. And what I mean by that, that's really the feed segment, adjusting processing fees. We're watching, you know, the new fat prices flow through. Remember, in the U.S., it's pretty transparent as those prices move through. In Canada, Europe, and South America, there are actual visits to slaughterhouses that have to be made on timing in order to adjust what you're paying for the raw material. We didn't get as much of that as we wanted in Q2. That would be very specific for the U.S. in some cases, and absolutely true for South America. Canada did a very nice job, and so did Europe in moving those, but very different procurement processes.
So that, that'll widen out as we go forward. The second thing is we expect DGD, the system, to run full out for the balance of the year. And so that's gonna be a big contributor. We haven't contemplated any earnings from SAF. I mean, that would be frosting on the cake if we do, and I remain kind of hopeful that we will, but it's hard for that to be material. It's just really, at the end of the day, it's still doing the things that we've been executing on, little bit of price improvement, and then running DGD full out. And I don't know, you guys got anything on this?
Randall Stuewe (CEO)
Yeah. Like you said, it's just running our business. Yeah. I mean, obviously, we can do the math. We know what it takes to get to the guidance. I would say, though, typically, I wouldn't imagine or expect that it's automatically going to be 50% in Q3 and 50% in Q4. Q3, typically, we have a lot of challenges operational through the business. Although we're absolutely ready for those challenges, but I wouldn't. I just don't want to convey the message that it's gonna be a 50/50 split automatic for the next two quarters. Right.
Adam Samuelson (Senior Equity Research Analyst)
That's helpful color. And if I could just add a second question. As we think about that transition from the BTC to the 45Z at the start of the year, I mean, how are you kind of framing the risks and opportunities presented by that in terms of the last kind of surge of biodiesel imports, or run on production domestically for biodiesel guys before the credit goes away, which would be good for your feedstock? Good for feedstock demand, potentially creates some more RINs, and then calendar flips
And you, the volume of renewable fuels coming into the U.S. should slow pretty dramatically, but also kind of the margin structure for conventional biodiesel, who is a user of fats and oils, would come under a lot of stress pretty quickly, we would think. And how are you thinking about the push-pull between the feedstock demand shifts and the credit generation that shifts that could happen before and after the calendar turns?
Randall Stuewe (CEO)
Yeah, you know, this is a, this is a pretty important point. I think, you know, the short answer to your question is, we can approach this whole, event with, you know, lower risk than, than the rest of the market. You know, as, as you're aware, a lot of the RIN generation, 25% or so of the RIN generation, default RIN generation has come from imported biofuels, renewable diesel, biodiesel. Without a BTC and current margin structure, it, it doesn't make sense for them to run their businesses on paper. And so, they're, they're gonna have a lot more risk as we approach those deadlines.
And you know, we would anticipate that they're gonna play that a little more conservatively as we get to the end and not wanna risk logistical delays and things like that. So, you know, all of that should point to better renewable diesel margins as we near the end of the calendar year. From our standpoint, you know, implementation of the PTC, we've seen delays in the past with PTC, but again, you know, we're positioned so that we can manage that risk better. You know, we're very confident in the implementation of that, of 45Z and what that, you know, how that's gonna play out. You know, because of all those things, we should be able to run full going into the end of the year, and really, we should see margins improve as we get to the end of 2024.
Adam Samuelson (Senior Equity Research Analyst)
All right. Appreciate that color. I'll pass it on. Thank you.
Operator (participant)
The next question comes from Matthew Blair of Tudor, Pickering, Holt. Go ahead, please.
Matthew Blair (Managing Director)
Good morning. Thanks for taking my question here. I was wondering if you have a view on when the changes for the California LCFS program will be implemented. Are you confident that that'll be a 2025 startup date, or do you see a risk that might slip into 2026?
Randall Stuewe (CEO)
Our view at this point, Ben, is that it's still something for 2025, not necessarily January 1 of 2025, but we do believe that this will be something for through the probably Q2 of 2025.
Matthew Blair (Managing Director)
Got it. Got it. And then maybe circling back to the biodiesel comments. You mentioned that, you know, next year it'll probably get tougher for the veg oil-based biodiesel producers. But what about this year? Have you been surprised at the utilization rates for some of these biodiesel plants when you have, you know, several of your RD competitors reporting negative EBITDA, even if they're running low CI feeds? I guess we would've thought that the biodiesel utilization would be even lower this year, that you'd see more closures, like what Chevron announced earlier this year. So is that surprising to you to see the relative strength of biodiesel utilization rates this year?
Randall Stuewe (CEO)
So I'll take that. Really, no. I think when you look at who the biodiesel players are, you know, these are largely ag companies that are extremely efficient and effective at managing margin risk. And they take advantage of price fluctuations and the opportunity to lock in a margin in the future. They're also looking at an integrated oilseed crush margin all the way through to biodiesel.
So, you know, for their businesses, they're at least above the line, above, you know, they're earning a contribution margin, and they're gonna continue to do that as long as they can lock those margins in. So not really surprised with the run rates we've seen in biodiesel. As we get into 2025, that just gets a lot more difficult and you know the amount of you know gap that they have to overcome is probably too big to continue to run at the rates that they have been.
Matthew Blair (Managing Director)
That's helpful. Thank you.
Operator (participant)
The next question comes from Thomas Palmer of Citi. Go ahead, please.
Thomas Palmer (Senior Equity Analyst)
Good morning, and thanks for the question. Maybe I could just start off clarifying on the expected inflection here in the second half. Do you think the current pricing environment supports at least $1.3 billion EBITDA for the year? I know you talked about reasons why pricing could continue to improve. I just wanted to kind of clarify the piece of where we sit today versus, you know, how it progresses.
Randall Stuewe (CEO)
I mean, you know, I think if. So the current pricing environment, I think there's a couple of messages here, and one is that, in the current pricing environment, there are things that we expect to do in the second half of the year that will allow us to improve margins. You know, if, I mean, Randy, you talked about it, kind of the, you know, leveraging our infrastructure and some of the changes that are underway and just extracting more value from what we have. That's a big part of it. You know, I think we do anticipate that we'll see a slightly better margin environment as we near the end of the year, and so, you know, I guess that's the other part of it.
Bob Day (Chief Strategy Officer)
Yeah, these things have to play out. There's a lot of moving parts, a lot of components to this, and it just has to play out over the next couple of quarters.
Randall Stuewe (CEO)
I mean, you know, that, you know, Thomas, you Tom, you got, you know, P66 out there claiming they're running 50,000 barrels a day, but we've never seen them. Number two, they're we're, we're watching them buy animal fats around the world now, so evidently they've got the confidence in their pre-treatment system. And, and so, you know, it, it. The, the S&D of, of this product is just, of our feedstocks in the world, just- is not infinite. And, and so we're we just believe that if, if any of these guys are successful, you had Neste come out today and say, "Well, we're gonna be at full capacity at Martinez by the end of the year." They reaffirmed that again.
I mean, so, you know, you're talking of converting over whatever that number is, you know, 70,000 barrels a day, 80,000 barrels a day to quote, waste fats. I get pretty bullish when I hear that number. So that's where we're at on it. And, you know, the risk out here, as we always say, is if they don't run, yeah, we'll be P66's largest supplier of RD, and we'll be their largest customer of resale animal fats.
Thomas Palmer (Senior Equity Analyst)
Understood. Thanks for all the color on that. Maybe I could just follow up quickly on the food side. You noted for Q2, some of the destocking. I think the messaging on the go forward was more constructive. Just wanna clarify, I mean, is this kind of the expectation on a sequential basis, we start to see improvements in terms of the profitability of the business?
Randall Stuewe (CEO)
Yeah, I mean, clearly, you know, the food segment really is the anchor, is the gelatin hydrolyzed collagen business within that segment. You know, we've seen some challenges in the different continental businesses that we have there with customer demand. But towards the end of June here, we started to see customer demand pick up again, you know, whether it's confectionery, whether it's pharma. So ultimately, we feel pretty good about the back half of the year.
I think when you see the financials released, once again, you'll see the decline in revenue in the segment. Really, what I'd tell you to focus on is the margin, 'cause we've been able to, once again, lower what we pay for bones, skins, and hides to maintain the margins we had, and we think that we'll get some pricing improvement the back half of the year, as we go forward here.
Thomas Palmer (Senior Equity Analyst)
Thank you.
Operator (participant)
Our next question comes from Ryan Todd of Piper Sandler. Go ahead, please.
Ryan Todd (Managing Director)
Good, thanks. Maybe well, on the political side, which I know is, is difficult, but as you, as you look ahead over the next, over the next six-plus months, we've had a number of moving pieces. I mean, can you talk to maybe any impacts that you see or risks that you see from things like the, you know, the ruling on the Chevron doctrine or, from the election coming up later this year, and what you see, you know, could be, you know, either positives or, or risks in either direction?
Brad Phillips (CFO)
Yeah, thanks. You know, I think technically, these risks exist, but when we dive into it, what we really look for are what's gonna motivate you know the different politicians in their jurisdictions as it relates to you know 45Z in this case or any policy for that matter. You know, what we see is biodiesel, renewable diesel, sustainable aviation fuel really is an you know becomes a nonpartisan issue at the end of the day because of just the broad-based representation of both sides of the aisle in ag states. So, you know, the risks, like I said, technically, the risks are there that policies could change, but practically speaking, we're pretty comfortable with where things stand and how it's likely to play out.
Randall Stuewe (CEO)
And I think I would add, Ryan, I think the thing that the people have to keep their eyes wide open on right now is American agriculture is under extreme pressure right now, given $10 beans and sub-$4 corn. The politicians are gonna have to pay attention to the seven farm states here. I mean, clearly, we would be having lots more fun on this conversation if the EPA had set the RVO to reflect both the capacity and the production of the soy crushing industry. The EPA failed, and so now the politicians are gonna have to, and it's bipartisan, come forward here and continue to push this thing forward. I mean, you know, it's not climate change, it's not energy policy, it's ag policy, and that's true around the world today.
So end of the day, the farmer once again proved that if you get prices where they're at, make fertilizer available and capital available, they will produce more. And that's where we're at right now in the cycle. And so ultimately, what the, you know, as we're transitioning to a PTC, it's very favorable to Darling. It's very favorable to cash flows to Darling. It's favorable to our system, if you will, globally.
So end of the day, you know, we feel pretty good where we're positioned here. But, I don't see, you know. It's hard for me to see that if whoever you wanna put in the Oval Office, if can Trump get his magic pencil out and screw this thing up? Not really. It takes, you know, it takes Congress to get involved, and I don't think there's anybody willing to step forward on that today, given where American agriculture is.
Ryan Todd (Managing Director)
Great. That's helpful. Thank you. And then maybe just one quick follow-up. Any, you know, thoughts on the outlook for dividends from DGD? Should we expect that to continue to be kind of a steady dividend payer from here, or how should we think about those dynamics?
Randall Stuewe (CEO)
Yeah, well, you see, you know, the balance sheet of DGD, that, that, you know, that we posted out there obviously was way down. Therefore, we received a distribution here in the middle of July. Having said that, I think our outlook is we're optimistic for additional distributions the back half of the year from DGD. So with that, our really our outlook for Q3 is additional debt reduction, probably accelerating from where we were in Q2, which, you know, gives us a chance to be kind of in the ballpark, depending on where margins are, cash flows, the back half of the year, to have that debt kind of down in that, you know, closer to that $4 billion number, than we were. And obviously, the distributions from Diamond Green is a significant part of that. So we're optimistic about that.
Brad Phillips (CFO)
Yeah, and Brad, comment a little bit about working capital here. I mean, the DGD is not the only source of
Randall Stuewe (CEO)
Yeah
Ryan Todd (Managing Director)
of debt reduction in this company.
Brad Phillips (CFO)
Yeah, we've said we've got to focus on working capital improvement. Obviously, the balance sheet's not out there yet, but we have momentum there in Q2. So, you know, you'll see that shortly, and rest assured, you'll see, you know, continued improvements. So, you know, on the core, you know, we're trying to really generate cash there as well.
Randall Stuewe (CEO)
And if I could, I would just remind everyone that the DGD dividend, that's a formula that's calculated every last day of the month. And the numbers, so there's really not any subjectivity to that. That's just a matter of the calculation, the dividend is what it is.
Ryan Todd (Managing Director)
Great. Thank you.
Operator (participant)
The next question comes from John Royal of J.P. Morgan. Go ahead, please.
John Royal (Executive Director)
Hi, good morning. Thanks for taking my question. So my first question is on capital allocation. You talked about delevering as the primary focus right now, and I think you just mentioned accelerating the debt pay down in the second half. But you did buy back some stock in Q2. Should we characterize that as being kind of opportunistic when the stock is trading down? And how do you generally think of the decision between the balance sheet and the share buyback when you view the shares as attractive?
Randall Stuewe (CEO)
Yeah, John, this is Randy. I mean, you've answered a lot of your own questions there. You know, debt repayments for us has been priority. Clearly, level of the different shareholders that have been in and out of the stock, it's a clear message to us to get to $4 billion or below. Three ways to get there, you know, generate cash at DGD, repatriate it. Two, you know, run our business, wider margins, and three is to, you know, manage the CapEx outflows. And, you know, we set out the year with a $565 million dollar plan or $500 million, and we're shooting to be under $400 for the year. So that's priority. What we did in Q, you know, Q2 here was an opportunistic.
We wanted to buy back, you know, our dilution within the management programs, and we continue to look at share buybacks as an opportunity. But right now, as we, you know, look forward to the right capital structure for the business long term, ultimately, we want to get the debt down here, and that would be priority one. You know, priority two would be buybacks, and priority three would be any type of growth capital, which we're not really putting in play this year. We took a holiday, as we've said on that.
John Royal (Executive Director)
Great, thank you. That's very helpful. And then, I have to apologize, I have another question on the full year EBITDA guide. I know you've gotten several already, but mine is just trying to dig in a little bit on the DGD side. I know an assumption of $0.75 per gallon for the full year. I think, so, you know, firstly, is that sort of the right number to be thinking about?
And secondly, if it is, my simple math is right, I think you'll have to do about $0.90 or so in the second half to get to those kinds of levels. Maybe just we can talk through some of the moving pieces there. I know you talked about the ag deep stocks and RINs coming up a bit, but, you know, no movement on the LCFS until next year. Just trying to understand how we could, you know, get to that number.
Speaker 16
I think you're asking? Can I clarify? I think you're asking what is our assumption on EBITDA per gallon on DGD?
John Royal (Executive Director)
Yes, I'm sorry. I think you said $0.75 in one Q to get to about $1 billion of EBITDA. So just confirming if that's still the number, and if so, kind of, you know, the math to get there in the second half.
Matthew Jansen (COO of North America)
We have one. I think that we may be talking about investment economics, back when the original investment
Randall Stuewe (CEO)
Well, we came out the year, Matt, and we kind of guided that we thought we'd run closer to $0.75.
John Royal (Executive Director)
Yeah.
Randall Stuewe (CEO)
We beat that in Q1, and we lowered in Q2, and so at the end of the year, it's kind of hard to say how this thing plays out as we go forward. But, clearly, that's built in our 1.3 to 1.4 expectation, but I'm not going to throw a number on that today.
John Royal (Executive Director)
Yeah, fair enough. Thank you.
Operator (participant)
The next question comes from Andrew Strelzik. I'm sorry, Strelzik of BMO. Go ahead, please.
Andrew Strelzik (Senior Analyst)
Hey, good morning. Thanks for taking the questions. My first one is on some of the internal initiatives. You're obviously sounding very confident and optimistic about what that can look like. Is there a way to frame, you know, what kind of contribution that could create for, you know, or kind of how you think about that with respect to- Yeah, I look for the back half of the year, you know, above and beyond maybe what you're expecting from fat prices. And is most of that in the Valley assets or is it broader than that?
Randall Stuewe (CEO)
Go ahead, Bob.
Bob Day (Chief Strategy Officer)
Yeah, I mean, it's a hard question to answer because, you know, how do we frame that? I think, you know, what you're alluding to is, as we have, you know, a lot of our supply contracts are multiyear contracts, and when they come up for renewal, you know, we've repriced those based on the current market environment, which is significantly different today than it was just a couple of years ago, when construction costs were significantly lower and, you know, rendering options just, you know, were lower in cost than they are today. It's hard to frame, you know, what's the potential expected impact that's gonna have on the second half of the year.
I think, you know, it's easier to anticipate what that might look like over a couple of year period. But what I think we can say is that we do have some you know, we've had some pretty significant contracts come up for renewal. You know, today's environment and value, you know, results in a much better margin than where we were based on the previous contracts. Some of that is in the Valley network, but some of that is just more broadly across what has been the Darling network.
Randall Stuewe (CEO)
Yeah, ultimately, Andrew, I mean, I think as Bob alluded, I mean, when I look around the world, Europe has made some very rapid and really beneficial changes in procurement. Canada is a simpler market too, that's able to do that. Does have commodity exposure there, so they're getting lift now. South America, you know, we had our challenges in Q2, I think, for many of. We've not quantified them, but because they're very difficult, but the flooding in southern Brazil was, you know, had us down for a little bit down there, and clearly, that's gonna improve in Q3.
And then North America or the U.S., Matt's got challenges cut out, not only operationally, does hot weather always make it difficult to render, but we've still got work to do. And ultimately, as I said, the U.S., you know, much as we're investors in Diamond Green Diesel, and we're one of the largest importers of fat in the world, we, you know, it impacted our domestic business here. Now, imports are more expensive than domestic, and we're gonna get that benefit back into the domestic system. So it's a little bit of everything everywhere as we look around the horn today. Anything you wanna add, Matt?
Matthew Jansen (COO of North America)
I would just go along those same lines. I mean, we have an action item list by location of steps that we can and intend to take. Those lists are different depending on where you look. Some of those are low-hanging fruit, others take more time and are a little more of a challenge to implement. But it's really a drill down to by location and the actions and the steps that we need to proactively take to help strengthen and fortify the business.
Andrew Strelzik (Senior Analyst)
Great. That's super helpful. I appreciate it. And my other question, you know, maybe if we could go back to the food segment and unpack what's going on there a little bit. You guys have been running pretty consistently in the $85-$90 million kind of EBITDA range since the acquisition. If you back out the inventory adjustment last quarter, now you're at, you know, $73 million. So I guess what caused that decline this quarter specifically?
I mean, you really talked about the destock slowing, but I'm curious about the EBITDA deceleration there, and then whether or not that's the right kind of run rate for the balance of the year to think about. Thanks.
Randall Stuewe (CEO)
Yeah, I this is Randy. I mean, clearly, there's about three or four things going on globally. The number one issue was just really customer demand. You know, it we finally felt, as we came into 2024 here, the deflationary pressures around the world, and ultimately, we've, you know, we've seen prices of just what I'm gonna call just generic or commodity gelatin fall pretty rapidly. And you say, "Well, how does that happen?" Well, it happens because we that business, we created a very nice business out there and ultimately attracted a couple large, you know, South American competitors that tried to bring on way too much capacity in a micro market.
If you call the market somewhere around 500,000 tons and somebody brings on 30,000-40,000 tons of capacity, the first thing you don't do is walk into your boss and say, "I can't find a customer yet." The first thing you do is you cut the price and sell it, and then tell him that it was a bad investment idea that he had. But, ultimately, that's what we're seeing pressure on pricing out there. That's reflected in the top line.
Seeing a little bit of margin pressure in the commodity gelatins, but, you know, obviously, our positioning in hydrolyzed collagen and with our Gelnex assets being the lowest cost, most efficient in the world now, it insulates us a little bit. You know, ultimately, we see some pretty strong demand picking up in the back half of the year. And I think, you know, we're still optimistic of the Rousselot model for the balance of the year here.
Andrew Strelzik (Senior Analyst)
Great. Thank you very much.
Operator (participant)
Our next question comes from Ben Kallo of Baird. Go ahead, please.
Ben Kallo (Senior Analyst)
Sorry, guys. Thanks for taking my question.
Randall Stuewe (CEO)
Morning, Ben.
Ben Kallo (Senior Analyst)
Good morning. So first thing, just, on shaping in the back half, you know, you noted the hot weather for Q3, so that's not good for, for, feed. But then, is there a tie in in Q4 to the SAF plant? So just maybe if you could just tell us, like, kind of what quarter is gonna be, you know, heavier or lighter in terms of EBITDA? And then I have a follow-up.
Randall Stuewe (CEO)
Yeah, and I mean, if I, you know, as Matt said earlier, you know, I don't think I wouldn't weight this thing divide by 2 or 50% and 50%. It'll be stronger in Q4 than it is in Q3, Ben, and you know, we, we've not put anything in there for SAF. I, I'm hoping that's the rabbit in the hat here that pushes us closer to the $1.4 than the $1.3 number. So Bob, Matt, Andrew, you guys want to add to that?
Matthew Jansen (COO of North America)
That's right.
Ben Kallo (Senior Analyst)
Okay. Just clarification on the tie-in, is there downtime of the plant when you hook up SAF, or is it, they're completely batch, so it doesn't matter?
Randall Stuewe (CEO)
No, that was completed here when we had Port Arthur down. So, you know, we're in the instrumentation and electrical phase now, and everything's set, and, you know, then it'll be, you know, ready to run, hopefully sometime in Q4 here. So far, you know, the weather has worked pretty well, but it's pretty wet down there right now.
Ben Kallo (Senior Analyst)
All right. And then, there was this report of KKR, you know, buying a stake in the, the Italian company. I just wanted to get your thoughts on it, and, you know, you know, you know, why KKR would do that and, and how it impacts you.
Randall Stuewe (CEO)
There, there's Big Ben, there's blank looks around the table. Give us a little more detail. It's Enilive, a subsidiary of Eni. They have a renewable diesel production that they offered EUR 3.3 billion for a 25% stake in their renewable diesel production. All I can tell you is that makes Darling severely undervalued then.
Ben Kallo (Senior Analyst)
All right. And then, just maybe on the final one on, you know, do we read into the dividend that CapEx is primarily done for the SAF, and then maybe any kind of color on, you know, thoughts around the, if you're gonna do another SAF plant and timing?
Randall Stuewe (CEO)
Yeah, I mean, spending is clearly winding down on the SAF side. We're also, you know, another thing that we didn't spend a lot of time talking about, we've got a pretty significant import terminal for imported fats being constructed at Port Arthur, that's in our capital numbers, it's been flowing through. So that spending will wind down, too, as we go forward here. SAF two, my colleague at Valero, Lane Riggs, and I are sitting here saying, "Sell out number one and bring us the contracts for more gallons, and we'll commit to you to build SAF two." It's engineered, it's costed out, it's plus or minus 10%, ready to go. You know, but then any further investment decision is on hold until we see the lights of the demand here.