Good morning, and welcome to the Darling Ingredients Inc. Conference Call to Discuss the Company's Second Quarter 2023 Results. After the speakers’ prepared remarks, there will be a question-and-answers 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.

Good morning. Thank you for joining the Darling Ingredients second 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 Mr. Matt Jansen, Chief Operating Officer of North America. Our second 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 or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results can materially differ because of factors discussed in yesterday's press release and the comments made during this conference call and in the Risk Factors section of our Form 10-K, 10-Q and other reported filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. Now I will hand the call over to Randy.

Hey, thanks, Suann. Good morning, everyone. Thanks for joining us for our second quarter 2023 earnings call. By all accounts, Darling Ingredients had a fantastic quarter with a record $508.3 million in combined adjusted EBITDA. Excluding a one-time $18.5 million inventory negative impact due to the Gelnex acquisition, our combined adjusted EBITDA would have been $526.8 million for the second quarter. As I discussed in our last quarterly call, we told you lower fat prices translate into lower EBITDA in our Feed segment. However, it is more than offset by increased earnings in our fuel segment due to the sheer scale of our platform. This quarter, for the first time in our history, you were able to see the strength of the vertical we have built to leverage the Diamond Green Diesel machine. The power of our integrated waste fats and oils business, combined with best-in-class renewable diesel production capacity was clearly on display this quarter. Now turning to the Feed Ingredients segment in detail. Globally, raw material volumes were up just over 15% compared to the second quarter of 2022, primarily due to our Eastern USA and South American rendering acquisitions that closed last year. While we saw a softening in global fat prices, protein prices and specialty ingredients demand continues to be very strong. Despite lower fat prices, our gross margins held flat compared to Q1 2023 due to our continued integration efforts. I'm pleased to report that these integration efforts are nearly complete. I feel very good as we head into the third quarter. While it's normal to experience some margin degradation due to the extreme summer heat, we are very well positioned to handle the challenges that summer rendering brings. Capital investments have been made, yield adjustments and raw material procurement modifications have also been put in place and completed, and we've now optimized our finished product sales opportunities. Turning to our Specialty Food Ingredients segment, the global collagen market and gelatin business remains robust. If we exclude the one-time purchase accounting inventory negative impact of $18.5 million due to the Gelnex acquisition, Food segment EBITDA would have been $89.8 million for this quarter. Our integration efforts are going very well. We have cross-pollinated our organizations to form one and we are excited about the scale and long-term opportunities these markets offer us. Moving to our fuel segment. Diamond Green Diesel had a record quarter with more than 387 million gallons of renewable diesel sold at approximately $1.28 per gallon EBITDA, clearly benefiting from the lower feedstock prices. Darling received $101.4 million cash dividend during the second quarter and subsequent to the quarter close, we received another $62.2 million in cash dividends from the joint venture. DGD completed its turnaround, DGD 2 completed its turnaround and is back to normal production and DGD 3 has been running very well and above nameplate capacity. We continue to believe 1.2 billion gallons of renewable diesel sold in 2023 is very achievable. Construction is progressing very nicely for our first SAF plant in Port Arthur, and we anticipate completion during late 2024 if all things go as planned. Now with that, I’d like to turn the call over to Brad and then I’ll come back and continue with an outlook for 2023. Brad?

Okay. Thanks, Randy. Net income for the second quarter 2023 totaled $252.4 million or $1.55 per diluted share compared to net income of $202 million or $1.23 per diluted share for the 2022 second quarter. Net sales were $1.76 billion for the second quarter 2023 as compared to $1.65 billion for the second quarter 2022 or a 6.5% increase in net sales. Operating income increased $78.1 million or 28% to $356.7 million for the second quarter of 2023 compared to $278.6 million for the second quarter of 2022, primarily due to Darling's share of Diamond Green Diesel earnings increasing $139.3 million. This more than offset a $20.8 million decrease in the gross margin of our global ingredients business, which as Randy mentioned included a one-time $18.5 million negative impact due to purchase accounting for inventory related to the Gelnex acquisition. Additionally, depreciation and amortization and SG&A each increased about $29 million as compared to the second quarter of fiscal 2022, primarily due to the Gelnex and FASA acquisitions. Now, moving non-operating results. Interest expense increased from $24 million in Q2 2022 to about $70.2 million in Q2 2023, primarily as a result of increased indebtedness due to the acquisitions. Other income increased $5.4 million, primarily due to insurance proceeds received for the Ward, South Carolina facility fire. Now turning to income taxes. The company recorded income tax expense of $40.7 million for the second quarter of 2023. The effective tax rate for the second quarter is 13.8%, which differs from the federal statutory rate of 21%, due primarily to biofuel tax incentives and a relative mix of earnings among jurisdictions with different tax rates. The company also paid $49 million of income taxes in the second quarter. For the six months ended July 1, 2023, Darling recorded income tax expense of $67.7 million and an effective tax rate of 13.2%. The company has also paid $88 million of income taxes as of the end of the second quarter. For 2023, we are projecting an effective tax rate of approximately 14% and cash taxes of approximately $50 million for the remainder of this year. The company’s total debt outstanding at second quarter 2023 was $4.5 billion as compared to $3.4 billion at year end 2022. Our bank covenant leverage ratio at the end of the second quarter was 3.11x. We continue to maintain strong liquidity with $956 million available on our revolving credit facility as of quarter end. Capital expenditures totaled $123 million for the second quarter 2023 and $234.3 million year-to-date. The company repurchased approximately 153,000 shares of its common stock for $9.1 million during the second quarter. Stock repurchase year-to-date is approximately 926,000 shares for a total of $52.9 million. With that, Randy, I’ll turn it back over to you.

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

The first question is from Manav Gupta with UBS. Please proceed.

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

Okay. I think – no, I appreciate the comment, Manav. And I think that was one of the two or three points we wanted to leave the stakeholders with today was we provided the guidance, we came in at the high end of it. Ultimately, fat prices were down somewhere between $0.05 and $0.07 a pound, a little more actually in Brazil, a little more in Europe. And that translates on an annualized basis to $70 million to $80 million of EBITDA run rate into our system. Divide that by four and you’re down about $20 million in the quarter. And if you look at the Feed segment, volume was about 100,000 tons lighter than the prior sequential quarter. And earnings were off, I think about $26 million. So it was all fat price. Now as we said, the reason we were comfortable in trying to put out the guidance there was because the Diamond Green Diesel machine is about 4x larger than the Darling machine, and it originates from around the world and was able to both benefit from the lower fat prices that Darling provided, but also from around the world. And so, it was very – seemed pretty straightforward to us. John, you want to add anything to this?

Yes. I think the interesting thing and probably the hard part looking on the outside into Darling is the second quarter of this year is really the first quarter that you’ve been able to see Darling with the vertical integration at renewable and its scaled state now where we’ve added so much extra feed stock supply around the world with our acquisitions. And Diamond has scaled from essentially 300 million, 400 million gallons to 1.2 billion, 1.3 billion gallons. This is your first look at that. And what you see is, quite frankly, when fat prices go up, Darling wins, when fat prices go down a little bit, Diamond wins, but the bottom line is now we’re consistently hitting on that $450 million to $550 million EBITDA run rate, which is exactly where we told the Street we were going to be when we went into the scaling process a couple of years ago.

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

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

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

Good morning and congrats on another solid quarter.

Thanks, Derrick.

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

Yes. Always the challenges in summertime rendering are that the free fatty acids go up, meaning that the raw material degrades as quick or quicker than you can get it processed into the plant. And so therefore, some of the premium markets that you’re serving you’re not able to achieve that. So far we’ve made it through – I think we’re in the month of August now, so we’ve made it through almost one-third – a little over one-third of the summer with very limited issues around the world so far. So at the end of the day we’re watching, as I said, Derrick, we’re watching fat prices, they bottom, they’re coming back up. I mean the U.S. is moving a little quicker up than the rest of the world. I think we’ve just completed a board meeting yesterday. The European side feels like it’s moving up now. Clearly there’s been some unplanned downtime throughout Europe in the RD business that made fat available and made it available to Diamond Green Diesel. And then obviously Brazil got a little bit behind here in the system and we’ve been bringing in a lot of Brazilian. But at the end of the day, it’s a normal summer. It seems hot. What we’re seeing a little bit more just color for everybody out there is just the slaughterhouses, the animal numbers are not as large as they were last year. And so at the end of the day, the extra tonnage that sometimes we get in the summertime from the integrated slaughterhouse is breaking down, has not been as great as it was last year. But at the end of the day, I would tell you that’s good news and bad news. The bad news is less tiny. The good news is it’s less stress on the system here for us. And we’ve been able to kind of survive a little better than we got punched in the nose last summer. But third quarter’s not over yet, but it feels pretty good right now. Matt, anything you want to add?

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

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

Let me answer the question this way. As long as you have the most efficient, best machine in the industry, you’re always going to be able to source the fat you need. And quite frankly, that’s what we have at Diamond Green Diesel. So, the supply of fat is always out there for us because we’re in the right place with the right pre-treatment capabilities and the ability to market to the different markets and maximize the value of our finished product, we’re going to get the fat. And so, we’re not worried about the fat supply. And what’s interesting about it is this, we operated at production levels of 330 million, 340 million gallons in Q2, which quite frankly, if you take 340 million and multiply it by four, you get a number that’s over 1.3 billion gallons. And we source the fat for that into our machine without a problem. So the reality is the shortage is a problem for people in bad places with bad machines. It’s not a problem for a person in the right place with the right machine.

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

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

Yes. Dushyant, this is Brad. Yes, so the $164 million we’ve now received as of today year-to-date, we do anticipate additional distributions between now and the end of the year. As we’ve said before, we – our number one priority along with integration is really to continue through the end of this year at a minimum to delever. So we do anticipate, you see we’re at – we decreased our leverage slightly here in Q2. And we will see the cadence of that continued through the end of the year to where it’ll be clearly below 3x at year end, if not before.

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

Yes. This is John. Well, I mean, if you take a look at what we did in Q2 and multiply by four, you get a number well in excess of 1.3 billion. We’re always going to have operational hiccups. It’s never going to allow you to run at 100% pure capacity. But the reality is Diamond Green Diesel, I think we’ve got 1.2 billion gallons out there as the capacity for Diamond on an annualized basis. Even taking into account scheduled downtime and some operational inefficiencies from hiccups here or there, it’s pretty easy for somebody to do the math and figure that 1.2 billion gallons a year is way low for what that machine can produce on an annualized basis. Certainly 1.25 billion shouldn’t surprise anybody on a capacity on what we can produce this year. And I wouldn’t be surprised if there are years that Diamond can't do well in excess of 1.3 billion gallons.

And we’re always trying to make sure we’re aligned with our partner. But I think in their call about 10 days ago, they actually acknowledged that it can run in excess of 1.2 billion, but they didn’t raise it. So I don’t want to be the guy that raises it. But as John says, four times 340 million kind of gives you the reality of what’s out there.

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

Good morning, everybody.

Good morning, Sam.

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

Well, I think there’s a couple embedded relevant points here that you pointed out. Number one, feedstock markets are moving up a little bit for us right now. They probably move up more if there wasn’t so much resale material out there available from the guys that can’t run, that bought it and have to resell it. You’ve seen a compression in the RBD soybean oil versus the crude spread right now because they’re having to resell RBD out there because they can’t even operate with the – what I’m going to call champagne in the sense of processing. The other thing that becomes very and should be very obvious to the listeners is that Diamond Green Diesel is a real estate play. It’s a real estate play on the Gulf Coast that gives it access to all feedstocks in the world and allows the commercial team to optimize the lowest price fat in the world. Today, the lowest price fat in the world is Brazil. And so more boats are coming in from Brazil, Europe’s moving back up and given some turnarounds over in the eastern part of the world, we’re moving feedstock from there too. So ultimately as it affects, when I think about the whole business model for us, it’s allowing us as Darling specialty ingredient supplier to provide fat to some that can try to pre-treat. There aren’t many out there yet today. And so ultimately we own the arbitrage that we’ve always talked about. I think about a year ago if I reflect everybody on here said there was going to be a feedstock shortage and how we were going to allocate it and I think I’ve made the comment it would be okay if I didn’t supply a pound of Diamond Green Diesel, because it means they can buy it for cheaper and I can sell it for more. And so ultimately that arbitrage exists today and we’re moving product both from the world into the DGD system and we’re selling our quality products out to other people. John, anything you want to add to that or…

Yes. I think it’s always interesting to read all the press reports about all of the capacity that’s going to be coming up in the next quarter. We’ve read those press reports now for three years and quite frankly, every quarter the same companies come out and talk about how well next quarter we’re actually going to get there. It’s hard to run a renewable diesel machine. It’s like riding a unicycle. These things are much more difficult to operate. I think people find that out over a period of time. I think it’s also interesting that everybody always adds up the stated capacity that’s coming online and assuming that those guys are going to run efficiently. Many of those people are running two and three catalyst turnarounds a year and they’ve got to figure out their machines. These guys are smart. Some of them will figure it out over a period of time. And then when you shorten the list on the amount of people that actually have put in pre-treatment systems or put in pre-treatment systems that are actually capable of pre-treating the material to protect the catalyst in the machine, that list starts to shrink really, really, really fast. So there’s a lot of discussion about capacity out there. Quite frankly, most of the capacity that’s being discussed aren’t competing with us. They’re in an entirely different business than we are. We’re comfortable with the business we’re in and we love the vertical lock that we have between Darling feedstock and Diamond Green Diesel. It allows us, as Randy says, we own the arbitrage. It allows us to maximize profitability regardless of what happens in the marketplace. And that’s the position we’re in. It’s exactly where we said we were going to be. We’re extremely comfortable with the machine and extremely proud of all the hard work from the people in Darling and the people in Valero that have allowed us to create this machine.

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

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

Yes. Dushyant, this is Brad. Yes, so the $164 million we’ve now received as of today year-to-date, we do anticipate additional distributions between now and the end of the year. As we’ve said before, we – our number one priority along with integration is really to continue through the end of this year at a minimum to delever. So we do anticipate, you see we’re at – we decreased our leverage slightly here in Q2. And we will see the cadence of that continued through the end of the year to where it’ll be clearly below 3x at year end, if not before.

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

Yes. This is John. Well, I mean, if you take a look at what we did in Q2 and multiply by four, you get a number well in excess of 1.3 billion. We’re always going to have operational hiccups. It’s never going to allow you to run at 100% pure capacity. But the reality is Diamond Green Diesel, I think we’ve got 1.2 billion gallons out there as the capacity for Diamond on an annualized basis. Even taking into account scheduled downtime and some operational inefficiencies from hiccups here or there, it’s pretty easy for somebody to do the math and figure that 1.2 billion gallons a year is way low for what that machine can produce on an annualized basis. Certainly 1.25 billion shouldn’t surprise anybody on a capacity on what we can produce this year. And I wouldn’t be surprised if there are years that Diamond can't do well in excess of 1.3 billion gallons.