Darling Ingredients Inc. Q1 FY2023 Earnings Call

Good morning. And welcome to the Darling Ingredients Inc. Conference Call to discuss the company's First Quarter 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.

Thank you. Thank you for joining the Darling Ingredients first quarter 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 Ms. Sandra Dudley, Executive President of Renewables and U.S. Specialty Operations. Our first quarter 2023 earnings news release and slide presentation are available on the Investor Relations page under Events and Presentations tab on our corporate website, and 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 and 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 statements. I will now hand the call over to Randy.

Thanks, Suann. Good morning, everybody, and thanks for joining us for our first quarter 2023 earnings call. We have had a very solid start to the year. All business units performed as expected and our DGD system attained full rate during the month of March. Looking at our segments in detail, for the first quarter 2023, we ended the quarter at $418.4 million in combined adjusted EBITDA. The Feed Ingredients segment ended the quarter at $213.1 million, our Specialty Food Ingredients segment earned $73.2 million, while our Fuel segment earned $153.6 million in EBITDA, with approximately $129.3 million attributed to Diamond Green Diesel. Turning to the Feed Ingredients segment in detail. Globally, raw material volumes were up 39% compared to first quarter 2022. While we saw a decline in global fat prices, protein prices remain strong around the world. While lower fat prices will modestly impact the segment, it will be more than offset by higher earnings in Diamond Green Diesel in future quarters. Integration of our recent acquisitions remains a key focus. I'm pleased to report that once again we realized sequential gross margin improvements. We continue to make improvements at our recently acquired Eastern USA plants that will improve reliability and efficiency, as well as allow us to produce and market higher value finished products. We are pleased with the progress and believe by year end, we will be nearly complete. Turning to our Specialty Food Ingredients segment. The global collagen and gelatin business remains robust. We closed on the Gelnex acquisition on March 31st, and integration work has already started. Together, we believe we have the strongest and most robust collagen system in the world with a pipeline of new products for years to come. Moving to our Fuel segment. Diamond Green Diesel is running very well and set another sales record in first quarter. We have achieved a milestone with the DGD system operating at 1.2 billion gallons annually. It should be noted that March shipments were light with ship loadings moving into Q2. With lower fat prices and inbound logistics running smoothly, second quarter is shaping up to be a record for Diamond Green Diesel. Now with this, I'd like to hand the call over to Brad to take us through the financials, then I'll come back and discuss my outlook and thoughts on the balance of 2023. Brad?

Okay. Thanks, Randy. Net income for the first quarter 2023 totaled $185.8 million or $1.14 per diluted share compared to net income of $188.1 million or $1.14 per diluted share for the 2022 first quarter. Net sales were $1.79 billion for the first quarter 2023 as compared to $1.37 billion for the first quarter 2022 or a 31% increase in net sales. Operating income increased 10% to $255.8 million for the first quarter of 2023 compared to $232.9 million for the first quarter of 2022, primarily due to a $78.4 million increase in gross margin. As Randy said, the gross margin continued to sequentially improve for all segments. Darling's share of Diamond Green Diesel's earnings increased $22.5 million quarter-over-quarter, which more than offset depreciation and amortization increasing $36.8 million, SG&A increasing about $33.4 million and $4.5 million in additional restructuring costs primarily related to the Peabody closure. Total other expenses increased approximately $21.7 million quarter-over-quarter with an increase in interest expense of $34.7 million, partially offset by an increase in foreign currency gains of $6.1 million and an increase in other income of $6.9 million, which was primarily due to casualty loss insurance proceeds received for the prior year Tacoma plant fire. Now turning to income taxes. The company recorded income tax expense of $27 million for the first quarter of 2023 with an effective tax rate for the first quarter of 12.4%, 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 $39 million of income taxes in the first quarter. For 2023, we are projecting an effective tax rate of 14% and cash taxes of approximately $140 million for the remainder of the year. The balance sheet now exceeds $10 billion in assets with the inclusion of Gelnex. Since Gelnex closed at the very end of the first quarter, no earnings activity was recorded during Q1. The company's total debt outstanding at first quarter 2023 was $4.7 billion after the Gelnex acquisition as compared to $3.4 billion at fiscal year end 2022. In conjunction with the Gelnex funding, we entered into a three year interest rate swap to fix $600 million of floating rate debt at an average swap rate of 3.78% and also entered into a two year cross currency swap of $557 million to hedge a euro intercompany loan, which synthetically converted US debt to euro debt and reduced the interest rate by 1.2%. Our bank coverage leverage ratio at the end of the first quarter was 3.19 times as compared to 2.54 times at fiscal year end 2022. We continue to maintain strong liquidity, with $866 million available on our revolving credit facility as of quarter end. Capital expenditures totaled $111.3 million in the first quarter with $454 million of expenditures anticipated for the remainder of the year. The company repurchased approximately 773,000 shares of its common stock for $43.8 million during the first quarter. With that, I'll turn it back to you, Randy.

Thanks, Brad. Again, Darling is off to a tremendous start for 2023. Raw material volumes are in line with expectation, integration activities are on target, energy prices in Europe have moderated, our global collagen and gelatin business is quite strong, and Diamond Green Diesel is expected to perform very well with lower raw material prices, strong green premiums and robust global demand. The earning power of our unique vertically-integrated business we have built will become very evident over the next few quarters. Finally, we remain committed to our financial management policy that we have previously discussed. DGD is now nearly delevered and dividends should become a reality very soon. Leverage post our Brazilian acquisition has peaked and we will target a 2.7 leverage ratio by year-end along with the goal of investment grade for 2024. Other than our previously-announced Miropasz bolt-on acquisition in Poland, which is expected to close by year-end, our M&A activity has been paused so we can concentrate on integration, value creation and deleveraging. I have high expectations for the second quarter. And if the operating environment continues, we are estimating combined adjusted EBITDA to be in the range of $485 million to $525 million. For the year, we are once again reconfirming our guidance of $1.875 billion combined adjusted EBITDA. Now with that, let's go ahead and open it up to Q&A, please.

The operator provided instructions on the Q&A process. Our first question will come from Manav Gupta of UBS.

Congrats on a very good quarter. Great to see continuous improvement in the Feed gross margin. Randy, you have got some push back on your recent M&A deals, but looks like things are really falling in place now. Those deals are giving you a big volume bump, which far exceeds market expectations. My question is with regards to demand for your products which support these higher volumes. Do you think the demand for fats, proteins and UCO will actually hold up well for the next 12 to 24 months? And can we actually see an increase in demand for your products, both Feed and Food, in the medium to longer term?

John Bullock and I will tag team a little bit here on some thoughts. Yes. Global demand for proteins remains incredibly strong. Pet food demand remains strong, and pricing premiums are as expected. Clearly, the fats and oils business around the world has come off a little bit with palm oil leading the way and soy following, and waste fats, other than the CI premium, cannot attain a considerable premium above the two biggest fats and oils in the world. With that, demand is good. Diamond Green Diesel is running at capacity. That is different than the fourth quarter when we were continuing to struggle with logistics down in Port Arthur. Demand is going to continue to be very strong whether it comes from domestic or import; it will depend on the arbitrage. Most importantly, as a management team, we want people to understand the concept and the strategy that we built Diamond Green Diesel under. The one piece of information that people just continue to ignore is that Darling doesn't supply 100% of Diamond Green Diesel. It can't. It's too big. Our system has the ability globally to supply up to about half if we want to, if we don't have better markets. It's not near that today. So what does that mean to the Feed segment and to the overall business? It's simple. We have told shareholders for years that every penny the fat prices move up or down is somewhere around $10 million to $11 million annually in US dollar EBITDA. So if fat prices are down, say, $0.12 to $0.15, call it, that's $150 million to $165 million of EBITDA. So using simple math, $0.10 a pound with standard yields in a Diamond Green Diesel plant translates to about $0.90 a gallon of potential improvement in margin. If we capture half or two thirds of that times 1.2 billion gallons, you've got somewhere between $500 million and $700 million of EBITDA improvement, of which Darling gets half. So in simple investment terms, an investment that returns multiples is attractive. We want people to focus on the system. That's the system we built. Diamond Green Diesel: collective demand drives a larger share of earnings for Darling. John, anything you want to add to this?

Yes. The reason we scaled is because we know what the value of low CI fats are in the world, and the Valley deal and the FASA deal massively scaled our ability to have low CI fats available for Diamond Green Diesel. We're either going to get it in the form of higher fat prices in our core system or we're going to get it at Diamond Green Diesel in the form of higher margins. Basically, we're going to win no matter how the cards are dealt.

The next question will come from Tom Palmer of JPMorgan.

I know there's some moving pieces, feedstock pricing and what that means for both the base business and at Diamond Green Diesel. In the past, you've provided within your guidance some outlook for EBITDA per gallon at DGD and then also kind of what you're thinking in terms of base business earnings. I didn't hear that today. I know there are moving pieces, especially with feedstock pricing. Do you have any kind of rough construct of how that $1.875 billion EBITDA outlook splits between the two sides of the business?

We want people to focus on the system rather than trying to segment down to Food, Feed and Fuel. It's a dynamic situation, and as John said, we win under either scenario. That's where we're coming from when we say $485 million to $525 million for Q2. How do we get to $485 million? It's the overall math of the company. The lower fat prices will create opportunity for bigger gallons in Diamond Green Diesel in Q2. As I also noted, boat loadings are not always linear and some gallons moved from Q1 to Q2, which is part of why we gave the larger guidance for Q2. We're largely on target, and earnings will move from one side of the ledger to the other as markets and logistics evolve.

Maybe a quick follow-up on the gallons comment. Looking at the last couple of years, last quarter there was about a $20 million under shipment relative to production and then last year it was a bit closer to $30 million. Is there inherently in the business, given it's so much bigger, an accumulated amount of inventory being held that will unwind? Should we think of a $20 million unwind or closer to $50 million over the year?

I'll let Sandra comment a little bit, but ships come and go, bills of lading get created, and if you miss a day the recognition timing can move. Also, when Darling ships to the Diamond Green Diesel system, until it's unloaded, it doesn't get recognized in our business. Those timing items are always present. Looking at the $418 million and the bill of lading dates, maybe it would have added $15 million to $20 million to the quarter in Q1. That's about as granular as we can get. Inventory will build and decline as we load rail, barge or ship, so nothing to overthink beyond those normal timing variations.

Since DGD ships are loaded and timing can shift, there are always timing differences. We've improved inbound logistics and unloading, which was an issue in Q4, and that's helped. Our units are running well and that cleans up the amount of railcars and inbound tonnage that we had. So the shipment timing in Q1 versus Q2 is the primary driver of those differences.

And our next question comes from Derrick Whitfield of Stifel.

Congrats on a solid start to the year. For my first question, I wanted to focus on EBITDA guidance. From our perspective, every segment is outperforming our model and margins in Q1 and you seemingly have tailwinds now in nearly every segment, including Gelnex's margin contribution in Food, Valley's margin uplift in Feed and your 4:1 net-net EBITDA gain in DGD margins as a result of lower fat prices. Having said that, isn't it reasonable for us to think that your 2023 guidance of $1.875 billion is relatively conservative?

My personal opinion is that it is conservative, but keep in mind the marketplace is still inverted on fats and proteins as the world expects larger crops again this year. Our Diamond Green Diesel system has a significant competitive advantage, and that's been evident. We are forecasting carefully. Earlier guidance for DGD was around 1.2 billion gallons and $1.25 per gallon EBITDA; spot margins are higher now due to lower feedstock. In the Feed segment, our operations team has done a tremendous job bringing that system in line. Our Brazilian operations are performing well. The gelatin and collagen business is strong, and Gelnex integration adds more capacity. Yes, there are tailwinds but this is largely solid operations with proper risk management.

We are a margin management company. As fat prices go up and down, that impacts our core rendering business. But we have an embedded offset inside the system now, which may act as a multiplier on lower prices. We can manage our raw material costs across markets, and the embedded offset insulates us. Markets will move, but we feel very good about how we are positioned to have sustainable EBITDA under varied market conditions.

And perhaps with my follow-up, with respect to Gelnex. Could you speak to, A, what you've learned about the assets now that you've integrated it into Darling and B, the potential synergies you see between it and Rousselot?

I spent the last three weeks with the Gelnex team. The Gelnex organization is as good as any organization I've seen. These are top professionals, well managed, excellent group of employees; their plans and marketing efforts are strong. We cannot be more excited to bring Gelnex into the Darling family.

And our next question will come from Dushyant Ailani of Jefferies.

My first one is on the Feed segment. It looks like you're seeing recovery in the margins, which is good. How do we think about base recovery? Previously, you've talked about a 1,000-day integration. Could that timeline be sooner, what's a good gross margin to think about for Feed segment on a normalized basis?

We have continuing improvements yet to be gained in our system. There have been significant operational improvements in the last two quarters and we expect that to continue. A reasonable normalized gross margin level to think about is the mid-20% level, somewhere in the ballpark where we were before Q3 last year.

You should also consider Valley and the Brazilian rendering system. We have implemented procurement, risk management and spread management systems down there. Mid-20s appears manageable. We still have work to do in the Eastern Shore plants; their margins have upside as we make different products and improve reliability. We also have some raw material agreements to modify over the next year to 18 months. Integration should be nearly complete by year end except for a couple of procurement agreements. In Q1, between the Tacoma fire last summer and the Ward, South Carolina incident in November, I expect $5 million to $10 million of additional expenses flowed through the system related to transportation and loss of margin. The system is complex globally, but you're seeing margin management progress.

In your slides, you mentioned a modest improvement in fat prices in the back half of the year. How do you think about DGD margins then — is Q2 going to be a peak in margins for DGD?

You can't have it both ways: if fat prices decline because of new renewable diesel capacity, you can't also expect margins to rise indefinitely. We believe DGD margins for the balance of the year will remain strong. It's hard to forecast beyond 60 days, but I wouldn't call Q2 a definite peak.

I would say feedstock prices are uncertain. If feedstock prices go down, we'll benefit at DGD. If they go up, we'll benefit in our base business. We can't predict feedstock, but our system gives us an advantage in either case.

We have a global system. We're bringing fats out of Brazil when that is the best market, and we're shipping our first boat out of Europe, which should be a wake-up call for Europe. Fat prices have bottomed in Europe as DGD pulls away demand. That is why we believe fat prices have bottomed, and we think margins will remain strong for the balance of the year.

And our next question comes from Ryan Todd of Piper Sandler.

Following up on feedstock markets within the renewable diesel business: the market seemed to absorb the addition of DGD Phase III without too much pain. You've got some very large capacity additions either ramping or likely to come online by the end of the year. Are you seeing any signs of material tightness on the low CI feed portion of your business, improvements on the supply side that have helped, and any other knock-on effects of additional RD capacity in the market?

From my seat, not really. By locating Port Arthur and St. Charles on the water, we can originate from everywhere, which eased pressure during DGD3 start-up. We had inbound unloading challenges that are now remedied. Our run rates are much higher than in Q4 and we're cleaning up railcars and inbound tonnage. Sandy, anything to add?

Since DGD 3 has been online, we haven't had issues getting feedstock. Our mix has changed; we've brought in more international supplies, some of which are Darling supplies via our FASA entity, and we found supplies throughout the world. We also were able to obtain more Valley supplies. We've grown as Darling and can better serve DGD.

Are you willing to roughly say how much of the feed in this last quarter came from international sources?

I don't think that's something we share.

That will move around quarter-to-quarter and month-to-month. The margin improvement in the Feed segment is in part due to Valley protein material being redirected from offshore to other uses. Regarding other players, we have limited visibility and rely on market observation.

Following up on use of cash: you have a leverage target by year-end. You're buying back some stock. As we think about the likelihood of a dividend, do you need to hit that debt target before the end of the year before you anticipate rolling out a dividend, and how do you prioritize use of excess cash for the remainder of the year?

We are looking at dividends from the JV in concert with our deleveraging target by year-end. We are in sync on the outlook to possibly look at cash dividends before Q2 is over but certainly by mid-year, depending on JV margins. Our goal is to be clearly below 3 times leverage to present a solid story to rating agencies and to achieve investment grade in 2024. We'll aim to get below 3 times this year, be sustainable, and then evaluate options including dividends.

If we carry momentum into 2024, the opportunity set changes and we will evaluate accordingly.

The next question is from Andrew Strelzik of BMO Capital Markets.

First, on Gelnex. When you closed the acquisition, you guided to the contribution to this year being on the lower end of that $75 million to $100 million guidance you previously referenced. What pushed you to the lower end? How should we think about the cadence of the contribution through the year? Is there any reason to think we don't exit this year closer to the $100 million annualized range implied for 2024?

In Q2 on Gelnex, purchase accounting and mark-to-market inventory impacts will affect results, similar to what we saw with FASA and Valley. We closed March 31, so the working capital and inventories will show up on the balance sheet and you'll see effects in Q2. We anticipate some earnings in Q2 from Gelnex. We conservatively annualized the remainder at $75 million, but that $75 million is net of the inventory impact.

Gelnex is running extremely strong. Parent market value adjustment associated with inventory will affect Q2, but the business is running very well and we fully expect to achieve the earnings we guided for Gelnex.

On the all-in EBITDA guidance for the year, I understand the math that you discussed and the larger Q2. Does the back half of the year being softer simply reflect shipment shifts from Q1 to Q2, and is there any other reason to expect a softer back half?

We see a solid Q2 and are confident in the $1.875 billion guidance, but I won't try to predict exact quarter-by-quarter shifts beyond Q2. There is no assumption beyond normal shipment timing adjustments.

The next question comes from Adam Samuelson of Goldman Sachs.

This is Guillermo stepping in for Adam. I only have a follow-up on the integration efforts within the Food segment. If you could quantify the synergies realized in the first quarter and your expectation for the rest of the year?

We have not put a specific synergy number out for that business. The Food segment is spread across regions with varied dynamics, so our expectations were based on an overall business case. We're running where we expected and we still believe there is upside. We've implemented rightsizing of personnel, improved raw material procurement contracts, lowered energy costs, improved reliability, optimized trucking and wastewater disposal. We're at our targeted business case and the remainder is upside.

If I could squeeze in another one regarding buybacks: How should we think about the pace of buybacks relative to what you did in the first quarter as you also are trying to delever the balance sheet?

The $44 million of repurchases in Q1 was opportunistic in response to stock price weakness early in the quarter. We remain opportunistic for the rest of the year and will weigh buybacks against our deleveraging strategy.

The next question comes from Sam Margolin of Wolfe Research.

It seems like China is a story on the low CI materials supply front. Darling has a presence in China. Could you give a sense of the addressable market in China for UCO or rendered fat? It seems like it could be meaningful given oncoming RD capacity.

I'll let Sandra address that, but in short, the boats coming in are visible indicators. There's no secret there.

I'm not sure of exact volumes, but there's more availability than we expected. As prices have risen, more fats and oils around the world have become available. In Asia we're seeing low CI fats and ISCC-certified fats, which is beneficial as we look to serve the European market that searches for certified supplies. The market is bigger than we anticipated, but I can't give an exact amount.

We are bringing Category 3 fat from Europe into the US now because economics work—the presence of biodiesel production in China made fats cheaper there. The procurement team at Diamond Green looks globally for low CI fats and seeks ISCC certification for legitimacy. The market continues to grow; as commodities become high priced islands, more supply tends to appear.

On Valley integration: it sounds like integration is going well and capital associated with bringing facilities to Darling standards is better than anticipated. Could it be more capital light than expected, improving deleveraging?

We rebuilt or improved reliability through equipment replacement in about six plants in 2022, and by June 1 we expect three more done and by year-end a fourth with Ward rebuilt. It's not giant money—maybe $10 million this year and a bit more next year as we finish the system. So I wouldn't call it capital light; it's generally on target. Given antitrust constraints during due diligence, some issues were not fully visible until post-close, which impacted early reliability. The team has done a tremendous job and we're now set to run.

The next question comes from Paul Cheng of Scotiabank.

Randy, you have good insight into the RVO and LCFS markets. Any insight you can share about how EPA may revise the RVO proposal and how the California LCFS market might change?

Regarding the RVO, the proposal was a bit disappointing. There's been a comment period and industry feedback; we hope to see a bump when the final is released in mid-June. Regarding CARB, their scoping plan is positive for Darling: they are looking at increasing reduction targets from 20% to 25% or 30% by 2030. They are also considering an LCFS obligation for interstate flights, which would be very positive for SAF as we convert our facility to SAF. CARB is also looking at an acceleration mechanism if the credit bank gets too high, increasing stringency. These are positive developments. The Inflation Reduction Act was a positive step for the industry. If EPA does not step up RVO volumes, we may see stranded assets, which would be unfortunate and could affect crushing plants and missed SAF opportunities. It's important EPA listens to industry on realistic volumes.

We're seeing sustained commitment to decarbonization globally. SAF demand promises outstrip contemplated capacity. CARB actions will help set the tone, but overall the long-term trajectory looks strong and supportive for our investments.

You mentioned international low CI feed entering the US more easily. From that standpoint, what will be the criteria or decision process for expanding to a DGD 4?

A year and a half ago, many questioned the availability of low CI fat and why we would build DGD3. We believed and continue to believe there is ample supply, though higher prices bring more reclamation of waste fats. We're comfortable with DGD 1, 2 and 3 where we are. Our focus has shifted toward converting part of our processing capacity to SAF, which we view as higher value and higher margin. We have space available in Port Arthur to build DGD4 and are preset to expand, but we haven't entered that process yet. We will monitor the market and do the rigorous economic analyses we always do; Darling will invest only when returns meet our requirements.

The pause on number four was to see demand develop and make sure it's real. We believe SAF demand will be the next horizon and that will influence future expansions. An SAF unit at St. Charles may precede any decision on number four.

We always do a complete economic analysis before greenlighting a project. The number one precondition is acceptable returns on investment.

The next question is from Matthew Blair of Tudor, Pickering Holt.

Randy, congrats on the strong results. You commented DGD Q2 is shaping up to be a record. Was that on total volumes or total EBITDA contribution? If it's EBITDA, that implies a margin of roughly $1.75 to $1.80 per gallon, so a step-up from Q1. Can you comment?

With the system running around 1.2 billion gallons annually, units are producing and shipment timing matters. Earlier guidance was roughly $1.25 per gallon for the year; current margins on a spot basis are between $1.50 and $2.00. How much of that we capture is uncertain, but the quarter is shaping up well.

We're seeing lower feedstock costs than in Q1, and units are running full and very well. We'll continue to push the units to see what they can do. It's a combination of lower feedstock costs and strong operational performance.

We have lost Mr. Blair's connection. The next question will be from Ben Kallo of Baird.

Randy, on SAF, could you talk about commercial and sales discussions and how you see commercialization progressing? Are you expecting long-term agreements or is it too early to tell?

We've been talking to a number of parties, even before our investment decision, and we continue those discussions. We're not ready to set anything in stone and will be closer to making agreements as we near coming online. The Inflation Reduction Act was important in spurring the decision to move to SAF, and premiums are developing as expected. We continue to talk to a wide range of potential customers.

The market is rapidly developing, especially with European procurement leading. The commercial team will decide on sales allocation as availability comes online. There are more commitments than realized capacity today, so we are excited.

If you look at margins in Q1 and where they might be in Q2, and then translate to post-blender's tax credit under the IRA, where would margins shake out?

We haven't fully modeled the post-IRA presentation. The credit will change how things look on the P&L, as the tax credit will offset income tax, so you'll want to view P&L and EPS differently; EBITDA presentation may change.

Randy, you talked about potentially stranded crush facilities if RVO volumes aren't increased. How would increased crush capacity without matching RD capacity impact it? Is that a risk to your core business?

You can't completely separate crushers and RD demand. Many new crush facilities were built with renewable diesel demand assumptions. If there's insufficient pre-treatment capability for crude soybean oil or if pre-treatment doesn't work for these new entrants, soybean oil may be exported or crush margins collapse. There are many unanswered questions: whether beans are crushed domestically or exported, whether China buys finished protein instead of raw beans, or whether palm oil arbitrage changes. It's uncharted territory, but the system can adjust.

Every soybean in the world was crushed before the recent expansion in US crushing. For all those facilities to be filled, we would need more soybeans produced globally, which was always an open question. From our business model perspective, we can adjust to changing conditions.

If the market really is as large as some reports say, it could use up that soybean oil quickly and more. These remain evolving dynamics for international consumers and markets.

Gelnex and collagen: how do you view the growth profile longer-term, and margin expectations?

Gelnex met our acquisition criteria: a great business, strong management and assets. The run rate supports attractive accretion. We have four facilities in Brazil, one in Paraguay and one in Portage, Indiana, which will be integrated. There wasn't much customer overlap, so there is meaningful cross-sell upside. Gelnex operates at a lower cost model than some of our existing assets, and we've been learning from them. For our collagen and peptide strategy, we've been shifting product mix toward collagen peptides, which have marginally better margin. You've seen improvement in the Specialty Food segment; we expect continued volume growth, margin improvement, and product launches over the next one to two years.

We focus on selling high-value products with strong demand. In the collagen space—gelatin and hydrolyzed collagen—we see high-value premium products that translate to excellent margins and profitability. We're very excited about the future of collagen.

The next question will come from Tony Bancroft of GAMCO Investors, Inc.

Congratulations on the great quarter. From a 30,000-foot view, how much demand is there for Diamond Green Diesel? Given potential regulatory demand growth and expanded SAF expectations, could this support many more DGD or SAF units over time? Could you talk through how you view terminal demand or a sweet spot?

Globally, demand transparency and growth have increased over the last years and our view is constructive. CARB's scoping and potential mandates, LCFS programs in more states, BC's potential obligations for jet fuel, and SAF commitments create significant demand. SAF demand, in particular, appears larger than current contemplated capacity. Taking even low percentage mandates on large fuel pools creates meaningful absolute volumes. As first movers with strong assets and global logistics, we feel well positioned to serve that demand.

There's no better time to be in biofuels. States and countries are accelerating programs and mandates, and SAF interest is growing globally. We've seen a lot of positive developments and excitement across the industry.

Is the competitive moat for DGD and Darling deep enough that it's unlikely to be displaced? What could be transformational to reduce your advantage?

Our position is strong, but what keeps me cautious is when players take uneconomical actions simply to avoid compliance costs; that can distort markets. We produce compliance value, not just gallons, and that complexity can create surprises. However, SAF development offsets much of the generic RD competition risk. Overall, we feel confident about our moat, logistics, pretreatment capability and global sourcing.

We have a tremendous relationship with Valero across their organization. It's a partnership that has worked very well—bridging agriculture and petroleum industries. We expect the relationship to continue to be strong.

The next question comes from Ben Bienvenu of Stephens.

On the Valley integration: you've made solid progress. You had strong pricing realization in Feed even with dipping fat prices. You mentioned increasing realized fat values by selling to DGD. Can you talk about where you are in that process and the contribution in Q1 and going forward?

Eastern Seaboard/Valley integration has been challenging but we're past critical points. Reliability improvements required capital investment in equipment, additional staffing and better operating discipline. The previous system was running to fail with no time for maintenance, causing domino failures and transportation to other plants, degrading material quality. We've worked to reverse that: culture change, investment, and training have improved uptime. We've also seen changes in feed formulations that reduced fat yield in some animals; we've renegotiated raw material procurement agreements and adjusted contracts in March, which will flow through in Q2. On a scale of 10, we're about seven done; most integration should be near complete by year end.

The next question comes from Jason Gabelman of TD Cowen.

On growth in the core Ingredients business after full integration of Valley, Gelnex and FASA: you're still investing and have organic projects. What is the organic growth potential over the next couple of years? Does increased availability of raw materials open the potential for M&A once the balance sheet is at target?

Looking back to our earlier M&A playbook, we focus on global footprint and optimizing logistics to lower transportation cost. We need to grow with our suppliers and ensure the system remains low cost with plants in the right places. Organic projects in process: a major expansion in Turlock, California starting in August; a second line in Boise, Idaho; permitting for a new plant in Nebraska; one or two plants under consideration on the Eastern seaboard; green energy plants in Europe; and potential expansions in Brazil. Globally, it's an organic build-out in the next one to two years. Once the balance sheet is where we want it and we have visibility on DGD, M&A could resume consistent with our capital allocation discipline.

Can you clarify the total number of plants you mentioned and thoughts on incremental EBITDA from that organic growth?

I rattled off several initiatives; I would hesitate to give a precise plant count or incremental EBITDA until we have clearer start dates and ramp profiles. We'll follow up with detail when available.

Next, we have William Lewis Baldwin of Baldwin Anthony Securities.

Quick question: how important are protein exports from the US to your protein business, and has that been growing? Prospects for export markets?

Exporting proteins is a component of our business. We move a lot of containers and are one of the larger container shippers. We have very good markets offshore for specialized proteins in Asia. It's not the largest volume relative to our total, but it's meaningful. We have an excellent network and reputation in Asia for our products.

Currency values and regional dynamics play into export volumes. We're seeing increased demand for proteins in Asia, predominantly China, and are working to grow participation there. Valley had a strong marketing network in Asia which helps. Europe continues to change rules around exports and energy uses, so the market is global and dynamic.

The pet food market and specialized proteins remain resilient and demand is strong, which supports our specialized product sales.

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

All right. Thank you. Thanks, everybody, for your questions. We'll see you tomorrow; we're attending a few more conferences in May, which are listed on our website. As always, if you have any additional questions, reach out to Suann. Stay safe. Have a great day, and that concludes our call. Thank you very much.

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