Q1 2024 Earnings Summary
- The Sustainable Aviation Fuel (SAF) unit construction is ahead of schedule and on budget, expected to start up in Q4 2024, with management confident in contracting the produced volume and meeting return expectations, potentially boosting future earnings.
- Diamond Green Diesel (DGD) continues to perform strongly, with the company expecting approximately $1 billion in adjusted EBITDA from DGD in 2024, benefiting from lower fat prices and providing potential upside to the conservative guidance of $1.3 to $1.4 billion in combined adjusted EBITDA.
- The Feed Ingredients segment is expected to improve, with the Ward South Carolina rendering plant operational after 481 days offline, and acquisitions like Miropasz adding capacity, enhancing volumes and margins in upcoming quarters. Management feels optimistic about stronger performance in Q2 and the rest of the year.
- Reduction in EBITDA Guidance: Darling Ingredients lowered its EBITDA guidance for 2024 from previous estimates of $1.55-$1.6 billion to a new range of $1.3-$1.4 billion. This revision was due to overestimating the recovery in Low Carbon Fuel Standard (LCFS) credits and the anticipation that waste fat prices would not remain below vegetable oil prices for long. The acknowledgment of these miscalculations suggests that market conditions are more challenging than management previously anticipated, potentially impacting profitability.
- Prolonged Oversupply of Waste Fats: Delays in the ramp-up of renewable diesel pretreatment units are causing an oversupply of waste fats, leading to lower fat prices. This oversupply pressures margins in the Feed Ingredients segment. The company's executives noted that renewable diesel producers are not consuming waste fats at the expected rates, which may prolong the period of lower fat prices and impact the segment's performance.
- Inventory Adjustment in Food Segment: The Food Segment experienced a $25 million inventory adjustment due to overstated inventories at Gelnex. This significant adjustment raises concerns about potential issues with inventory management or integration challenges following the acquisition. Such issues could affect the segment's profitability and indicate risks in future financial reporting.
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Guidance and Fat Prices
Q: Does guidance include LCM reversals? Upside potential?
A: The $1.3 to $1.4 billion guidance reflects current conditions with a small improvement in fat prices, mainly back-half loaded, and doesn't include any SAF early start-up. Fat prices will drive whether that number is $1.3, $1.4, $1.5 billion, or higher as we progress. We remain optimistic about getting an LCFS bump towards the end of the year. -
DGD Margin Outlook and LCFS Impact
Q: How do you view DGD margins amid feed pressure?
A: We're being conservative with our projections; the LCFS hasn't reacted as positively as expected, but we believe margins can improve significantly by 2025. Fat prices impact our feed business immediately, while DGD's supply chain has a longer tail. Policy changes like increased RVO and potential $1.30 per gallon LCFS credit values bode well for renewable diesel margins. -
Leverage Ratio and Dividend Outlook
Q: Updates on leverage ratio targets and goals?
A: The leverage ratio of 3.7 is a point-in-time figure. Cash is building rapidly in DGD, and we remain optimistic on dividends, which will reduce the ratio. It's a rolling 12-month calculation, and the delay in DGD dividends has temporarily influenced it. -
EBITDA Split Between Base and DGD
Q: What's the EBITDA split between base business and DGD?
A: We expect about $900 million from the base business and roughly $1 billion from DGD, calculated as $0.75 per gallon times over 1.3 billion gallons. Remember, this is a point-in-time estimate. -
SAF Production Timing and Contracts
Q: Can you discuss SAF production contracting and contributions?
A: The SAF plant will commission in Q4, a quarter ahead of schedule, and is on budget at $315 million. We're confident in contracting the 250 million gallons annual production. There's no SAF-related EBITDA in our '24 numbers, but we expect to meet volume and return expectations. -
Capital Allocation and Growth Plans
Q: Appetite for M&A and growth CapEx projects?
A: We're aggressively reducing CapEx to around $400 million this year. Our focus is on reducing debt below $4 billion, operating efficiently, and improving working capital. We'll consider well-priced bolt-ons but will be cautious this year. We have engineering ready for an SAF 2 project, potentially in 2025. -
Feed Segment Outlook and Fat Prices
Q: Catalysts for strengthening fat and protein prices?
A: Our Ward plant is now up and running after a rebuild, allowing us to better leverage our footprint and improve efficiencies. Globally, fat pricing drives the segment; we expect improved protein demand and a rebound in fat prices over time. The spread between vegetable oil and animal fats should tighten.
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