Earnings Call Transcript - DAR Q4 2022

Operator, Operator

Good morning, and welcome to the Darling Ingredients Inc. conference call to discuss the company's fourth quarter and fiscal year 2022 results. Today's call is being recorded. I would now like to turn the call over to Ms. Suann Guthrie. Please go ahead.

Suann Guthrie, IR Officer

Good morning. Thank you for joining the Darling Ingredients Fourth Quarter and Fiscal Year 2022 Earnings Call. Here with me today are Mr. Randall Stuewe, Chairman and Chief Executive Officer; Mr. Brad Phillips, Chief Financial Officer; Mr. John Bullock, Chief Strategy Officer; and Ms. Sandra Dudley, Executive Vice President of Renewables and U.S. Specialty Operations. Our fourth quarter and fiscal year 2022 earnings news release and slide presentation are available on the Investor page under the Events and Presentations tab on our corporate website. 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 statements. Now I will hand the call over to Randy.

Randall Stuewe, Chairman and CEO

Hey, thanks, Suann. Good morning, everyone. Thanks for joining our fourth quarter and fiscal year 2022 earnings call. On February 3, 2023, I celebrated with my team my 20th anniversary as Chairman and CEO of Darling. Many of you have heard me tell the story of my early days here. At the time, we had 600 employees in 20 locations throughout the United States. Brad and I were paying utility bills out of a shoebox, prioritizing the ones that needed to be paid first to keep our operations running. Our stock was trading about $1 per share. We had to figure out how to move from surviving to thriving. We had a plan. As I sit here today, 20 years later, I can't help but smile when I tell you we are now 15,000 employees strong in more than 260 locations on 5 continents. We have 15,000 of the most dedicated and talented employees that come to work every day because they know their work matters, not just to themselves and their families, but to meeting the critical needs of our world. What they do every day is making our world a more sustainable place for our future generations. We provide two very needed solutions to the world: food and clean energy. It's no doubt that Darling Ingredients has transformed over the last 20 years. In the process, we created our own unique platform with a deep moat surrounding our castle. We have delivered superior earnings growth driven by our global platform, vertical integration, and diverse segments. In 2022, we closed on three important acquisitions and are in the process of completing two more that will continue to strengthen our foundation for growth in four key areas: the core rendering business, hydrolyzed collagen, green energy, and soon to be sustainable aviation fuel. 2022 also marked the fifth consecutive year of record earnings at Darling Ingredients. Combined adjusted EBITDA for fiscal 2022 was $1.541 billion as compared to $1.235 billion in 2021. Looking at our segments in detail, for fiscal year 2022, our Global Ingredients business came in at approximately $1.1 billion EBITDA. The Feed Ingredients segment ended the year at $810.1 million. Our Specialty Food Ingredients segment earned $256.7 million EBITDA, while our Fuel segment earned $536.6 million EBITDA, with approximately $443.5 million coming from Diamond Green Diesel. Now turning to the Feed Ingredients segment in detail. Globally, raw material volumes were up 27% in 2022 as compared to 2021. I'm happy to report that while we are still very early into our 1,000-day integration plan for Valley Proteins as well as the acquisition of the FASA Group in Brazil that closed in mid-third quarter, we realized an increase in gross margins in the fourth quarter of 2022 as compared to third quarter 2022 despite our Tacoma, Washington and Ward, South Carolina plants being down from significant fires late last year. On February 14, we announced an expansion of our Bellevue, Nebraska plant, which will handle all the raw material from a new 2,000 head per day beef-processing facility being built by Cattlemen's Heritage Beef Company. Our expansion, which will be completed by the end of 2024 will add about 30% more rendering capacity to our Bellevue plant. We also announced on February 21 that Panda Express has chosen Darling Ingredients as its preferred nationwide provider for used cooking oil recovery services. Darling will collect and recycle used cooking oil from more than 2,400 Panda restaurants in the United States. These projects, coupled with our strategic acquisitions, illustrate how Darling is continuing to build its market presence and strengthen its vertical integration to derisk the supply chain for Diamond Green Diesel. Now turning to our Specialty Food Ingredients segment. Our strategy is to continue to increase our product sales and higher value hydrolyzed collagen, which today represents about 25% of our collagen sales within the Food segment. To accommodate that growth in the market, we are adding more hydrolyzed collagen capacity in our existing processing facility in Epitacio, Brazil, which is due to come online at the end of the first quarter or early second quarter this year. We are super excited that our previously announced acquisition of Gelnex should close sometime in the second quarter. Gelnex operates six facilities: four in Brazil, one in Paraguay, and one in Portage, Indiana in the U.S. and has the capacity to produce approximately 46,000 metric tons of gelatin and collagen peptide products. Gelnex is a very well-run business and will be immediately accretive. Depending on when it closes, I estimate that Gelnex should add anywhere between $75 million and $100 million of EBITDA to our 2023 earnings. As we modify and bring our technology to these facilities, I anticipate we could see the Food Ingredients segment approaching an EBITDA of $350 million to $400 million over the next two to three years. Now moving to our Fuel segment. Our record year was driven by the strength of our DGD joint venture, higher sales volumes and prices in Europe, and the continued expansion of our European green energy business that is performing extraordinarily well. Diamond Green Diesel set another sales volume record in the fourth quarter with the successful commissioning and start-up of our new Port Arthur, Texas renewable diesel plant. The plant came online mid-November and was completed nine months ahead of schedule and under budget. For the fourth quarter, DGD sold 208 million gallons of renewable diesel and recorded $1.40 per gallon EBITDA. For fiscal 2022, the joint venture sold 754 million gallons of RD at $1.18 per gallon. Our latest expansion brings DGD's annual production capacity to approximately 1.2 billion gallons and 50 billion gallons of naphtha. As many of you know, on January 31, we announced our entrance into the sustainable aviation fuel market, expected to be completed in early 2025. The project will allow us to upgrade about 50% of our production at Port Arthur to SAF and is estimated to cost around $315 million. With the completion of the project, DGD is expected to be one of the top SAF manufacturers in the world. Ultimately, if the market develops as we anticipate, additional capacity could be built in Norco, Louisiana. We're very excited about this project as we believe the conversion gives us tremendous optionality and once again, deepens our moat as we assist the world in decarbonizing. Now with that, I'd like to hand the call over to Brad to take us through some financials, and then we'll come back and I'll give you some thoughts on the balance of 2023 here.

Brad Phillips, CFO

Okay. Thanks, Randy. Net income for the fourth quarter 2022 totaled $156.6 million or $0.96 per diluted share compared to net income of $155.8 million or $0.94 per diluted share for the 2021 fourth quarter. Net sales were $1.77 billion for the fourth quarter 2022 as compared to $1.31 billion for the fourth quarter 2021, representing a 35% increase in net sales. Net income for fiscal year 2022 was $737.7 million or $4.49 per diluted share compared to $650.9 million or $3.90 per diluted share for fiscal year 2021. Net sales were $6.53 billion for fiscal '22 as compared to $4.74 billion for fiscal '21, representing a 37.8% increase in net sales. Operating income increased 18.1% to $249.2 million for the fourth quarter of 2022 compared to $211 million for the fourth quarter of 2021, primarily due to a $67.7 million increase in gross margin, and Darling's share of Diamond Green Diesel's earnings increasing $53.8 million quarter-over-quarter, which more than offset depreciation and amortization increasing $36.6 million, and SG&A increasing about $24 million quarter-over-quarter, both primarily due to the FASA and Valley Proteins acquisitions. Additionally, a $21.1 million asset impairment charge was recorded as the company made a decision to close the Peabody, Massachusetts collagen location in 2023 in order to optimize our global collagen network. In the fourth quarter of 2022, we incurred $2.7 million in acquisition and integration costs. Operating income for fiscal year '22 was $1.03 billion as compared to $884.5 million for fiscal year 2021. The increase in operating income was primarily due to a $287.6 million increase in gross margin and a $20.7 million increase in Darling's share of DGD earnings year-over-year, which more than offset depreciation and amortization increasing $78.3 million and SG&A increasing about $45 million for fiscal year '22 as compared to 2021, both primarily due to the acquisitions of FASA and Valley Proteins. For the year, there were $29.7 million in asset impairment charges for fiscal '22 as well as $16.4 million in acquisition and integration costs primarily related to our acquisitions of Op de Beeck, Valley Proteins, and FASA as well as the previously announced pending Gelnex and Miropasz acquisitions. Total other expenses increased approximately $34 million quarter-over-quarter and $71.6 million year-over-year, primarily due to increases in interest expense of $31.2 million and $63.5 million, respectively, from increased debt. Turning to income taxes, the company recorded income tax expense of $146.6 million for fiscal year '22. The effective tax rate was 16.4%, and cash tax payments for '22 were $113 million. For 2023, we are expecting the effective tax rate to remain about the same, around 16%, and cash taxes to increase to approximately $180 million. As mentioned last quarter, in August 2022, President Biden signed the Inflation Reduction Act, which includes a new 15% alternative minimum tax based upon book income, a 1% excise tax on stock buybacks, and tax incentives for energy and climate initiatives, among other provisions. We do not currently expect the new book minimum tax and/or excise tax on stock buybacks will have a material impact on our financial results. The blender tax credits, which are refundable excise tax credits, have been extended two years through December 31, 2024. After 2024, the clean fuels production credit, a nonrefundable income tax credit, becomes effective from 2025 through 2027. The clean fuels production credit will be available to producers of qualifying on-road and aviation transportation fuel. We are assessing these tax incentives, which can materially change our pretax or after-tax earnings and impact our tax rate in future years. We will continue to evaluate the applicability and effect of the act as more guidance is issued. Now turning to debt. The company's total debt outstanding in fiscal year 2022 was $3.38 billion as compared to $1.46 billion at fiscal year-end 2021. Our bank covenant leverage ratio at the end of the year was 2.54x as compared to 1.57x at fiscal year-end 2021. We continue to maintain strong liquidity with $1.31 billion available on our revolving credit facility as of December 31, 2022, as well as $800 million of undrawn term loans to be borrowed for the anticipated closing of the Gelnex acquisition. Capital expenditures totaled $134.1 million in the fourth quarter and $391.3 million for fiscal '22. The company repurchased approximately 336,000 shares of its common stock for $22.5 million during the fourth quarter, which brought the fiscal year total shares repurchased to 1.9 million for approximately $125.5 million, leaving the company $374.5 million remaining in its share repurchase program as of fiscal year-end 2022. With that, Randy, I'll turn it over to you.

Randall Stuewe, Chairman and CEO

Hey, thanks, Brad. Well done. No doubt, 2022 was a great year for Darling Ingredients, and we carry tremendous momentum into 2023 as we continue our laser focus on the integration of our new businesses around the globe. While fat prices have eased in Q1 due to turnarounds and unplanned downtime by global renewable diesel producers, we should see improvement as these situations remedy. Global protein demand for animal production and pet food supplies remains robust and modestly stronger than last year. Capital investments in 2023 are estimated to be about $565 million, with more than 20% allocated to expansion projects to drive new profitable growth. These projects include expansion of our green energy business in Europe, growing capacity at our existing U.S. rendering plants to accommodate both customer growth and increased waste feedstock supply for renewable diesel production and increased spray-dry capacity for hydrolyzed collagen production. With respect to Diamond Green Diesel, we expect sales volumes to be about 1.2 billion gallons in '23, making DGD North America's largest renewable diesel producer. DGD's superior logistics, Darling's vertical integration, and access to global waste feedstocks combined with our pretreatment technology positions DGD as the premier renewable diesel provider in the world. Recognizing LCFS prices were lower in 2022 compared to '21 and the RVO created some noise in the markets sending feedstock prices lower, our performance in 2022 shows that DGD is profitable and will continue to be profitable. For 2023, I expect DGD to sell 1.2 billion gallons of renewable diesel at a minimum of $1.10 per gallon. Our plan for 2023 is to build on our growth strategy and continued success. We expect to grow earnings between 15% and 20% by the end of the year, and we're still giving guidance of $1.8 billion to $1.85 billion in combined adjusted EBITDA. Those numbers don't include the closing of the Gelnex acquisition until we see it happen. We finished the year with a bank covenant leverage ratio of 2.54x. With the anticipated closing of Gelnex shortly, our debt ratio will peak slightly over 3x. But as we expect DGD to start distributing regular dividends, we anticipate being sub 3.0x by the end of the year. Make no mistake, our financial priorities will be to pay down debt and work toward investment grade. We are committed to continuing our opportunistic share repurchase program, as Brad said, with $374.5 million remaining as approved today. Finally, with the large acquisition behind us after we close on Gelnex, we will continue our laser focus on integrating all our businesses. Darling Ingredients offers tremendous shareholder value. There are very few companies that can show consistent strong earnings growth while setting high standards for sustainability. Darling Ingredients is the only publicly traded company that eliminates waste from the meat industry and upcycles those products to their highest value. In December 2022, we committed to the Science-Based Targets initiative, undertaking significant Scope 1 and 2 emissions reductions in the midterm aligned with the 1.5-degree Celsius pathway and achieving net zero by 2050. We are currently in the process of quantifying our Scope 1 and 2 reduction targets while accounting for the recent growth of our business and completing our Scope 3 inventory, which will guide us on where we need to focus our reduction activities. Additionally, we are in the process of completing a new materiality assessment as we know our footprint and stakeholders have changed over the past two years. As I've said for many years, we were green before green was cool. This year, we will process approximately 16 million metric tons of raw material that could have gone to the landfill or been incinerated. We recognize that our carbon avoidance story is why many of our shareholders believe and invest in our company. We are actively researching how we can calculate our carbon avoidance number, report it, and hopefully one day monetize it in the form of carbon credits. I feel very good about our progress, and I'm even more excited about the opportunities ahead. So with that closing, let's go ahead and open it up to Q&A, and we'll try to answer your questions. Thank you.

Operator, Operator

And the first question will be from Derrick Whitfield from Stifel.

Derrick Whitfield, Analyst

For my first question, I wanted to focus on your feed business. With the improvement you experienced in margins sequentially despite seasonal and weather impacts with UCO, could you offer some perspective on how we should think about your trajectory of margin recovery over the next couple of years as you bring additional Valley plants up to Darling specs?

Randall Stuewe, Chairman and CEO

Yes. This is Randy, Derrick. I'll come at a high level, and Brad and John can assist if I miss out on something. But clearly, as we've tried to articulate to people, we're 200 days into a 1,000-day integration plan at Valley Proteins. Their margins were under half of what ours were. When you put together their business with our USA business, you can see the margin pressure and the progress we're making. It ranges from renegotiating raw material agreements, optimizing plant labor situations, and ensuring the systems are at full capacity. They were moving material around in ways they shouldn't have, and then ultimately moving to our customers where they were exporting, they're now shipping Diamond Green Diesel. You can see that coming through. You're going to see continued progress in Q1 and Q2. I want to say, as always, we talk about fat prices. Fat prices are down a little bit in Q1, driven by people trying to position against the Diamond Green Diesel start-up and also the amount of global fat we're bringing in along with our downtime and three or four other people's downtimes around the world and turnarounds. The fat just backed up a little bit. That will remedy itself, as we said, as we go forward. So there may be a little pressure there in Q1. But remember in Q2, DGD then benefits from those lower fat prices, and that translates back through in the Fuel segment. I want people to think about the total offering, not just down to a segment level because it can move around from time to time.

John Bullock, Chief Strategy Officer

No, I think Valley is exactly what we thought we were getting: a huge block of volume that's very well geographically positioned. We can already see tremendous improvements that are happening as we get the Valley folks together with our U.S. rendering folks. It's going to take a little time, but they're moving at an extremely fast pace. We're very excited about what we're seeing out of that acquisition.

Randall Stuewe, Chairman and CEO

Yes, Derrick, and I would add, I mean, as people were looking at the performance in Q4. The Ward, South Carolina plant lit up on fire on Thanksgiving Day or evening; I can't remember which. It's a total loss. We are insured around the horn at Tacoma and in Ward with business interruption, but there are rules around accounting that's when we can recognize that. Just for example, in Q4 in December, the Ward, South Carolina plant transferring the volume around to keep the customers happy was around $4.5 million. So it's a pretty easy bridge to see where we're headed. We had a little bit of bad luck, but it's going to be built back bigger and better. It'll be online towards the end of the year. The systems are being able to handle it now. Hopefully, sometime later this year, Brad will inform us that we can set up an accrual for the business interruption payment that's expected.

Derrick Whitfield, Analyst

Perfect. That's great color. And perhaps for Randy or Sandy with my follow-up, maybe if you could elaborate on the market opportunity in your prepared comments on SAF. I know you've referenced $0.75 as a breakeven in the past, which is clearly covered by the SAF BTC. However, I suspect the market will bear a greater premium, and there's probably some optimization you could pursue at DGD 3 as well.

Randall Stuewe, Chairman and CEO

Sandy and I will share our insights on this. First, many people are making promises about Sustainable Aviation Fuel, but there isn't any actual production happening yet. The gallons produced will be the first significant output in a system that needs to decarbonize and progress. This also provides us with significant options. While the industry and analysts are focused on the capacity being added in the renewable diesel sector, we are prepared to take the next step. We have always been pioneers in this area, and we'll maintain our flexibility. Sandy can discuss the margins. What we've learned over the long term is that we’ll have the ability to switch between products as needed. In the future, we may decide to add more SAF production units as the market develops. The advantage of our Port Arthur facility is that it can produce the product, transport it to California under the new proposed state regulations, and export it as well. Sandy, is there anything else you’d like to add regarding SAF?

Sandra Dudley, Executive Vice President of Renewables and U.S. Specialty Operations

I think that SAF for us, as you mentioned, helps us diversify our book. We can offer new products and participate in different markets than we participated in before. That gives us optionality. There's a lot of support behind SAF that we're seeing, which I think will eventually increase the premiums available within that market. I mean, we have the Inflation Reduction Act that was passed; that's very positive for SAF. We just saw California in their Scoping Plan is considering instituting an intrastate jet mandate, which is positive for us. Lately, we've seen a number of SAF tax credits. Illinois passed one. Washington is considering one. We're seeing Norway considering increasing their SAF mandates. We're seeing more states with LCFS proposed programs such as New York, New Mexico, Vermont, and Minnesota. There’s just so much going on in that space that’s positive for us.

Randall Stuewe, Chairman and CEO

Yes. To close off the loop, obviously, until you sell something, you can't know what the margin is. But we believe that there's a lot of momentum in that market that gets us really excited. To be honest, we wouldn't make the investment if we didn't believe the margins would be equal to or superior to what we're doing in the road fuel market today.

Operator, Operator

The next question is from Adam Samuelson from Goldman Sachs.

Adam Samuelson, Analyst

Yes, Randy, in your prepared remarks, you talked about making sure that to consider the balance; the earnings might shift between feed and Diamond Green depending on where prices are and where the RD margins are. I'm trying to get a sense; the full year EBITDA guidance is a minimum of $1.10 a gallon, and you talked about upside in the second quarter because fat prices have come down, and that will accrue into DGD. But am I wrong to think that spot margins, certainly in the first quarter, are comfortably north of that $1.10 a gallon? I'm just trying to get a sense of where quarter-to-date margins have been tracking. It seems like that's trending in the right direction for the second quarter based on some easing feedstock prices. Then I've got a follow-up on the feed business.

Randall Stuewe, Chairman and CEO

That's a valid question, Adam. You're observing the situation accurately. When we examine Diamond Green Diesel margins, keep in mind that the $1.10 we mentioned is what we see as our competitive edge compared to other producers currently. To see the advantage, look at HollyFrontier DINO's renewable diesel gallons and earnings from the fourth quarter. This highlights what we do. Indeed, spot margins are surpassing what we are achieving for the entire year. Remember that Diamond Green Diesel 1 was offline for maintenance but is now operating at full capacity. We anticipate significant momentum in the Diamond Green Diesel system over the year. Another point to consider is that if you're optimistic about renewable diesel capacity, you can't simultaneously be pessimistic about fat prices. It doesn’t work that way. Ultimately, you need to decide where to place your bets. If you believe that renewable diesel capacity is coming on stream, then you should also be positive about fat prices, which benefits our core ingredients business. Conversely, if you think that capacity won't materialize, then there’s enough fat to maintain number 3 at strong margins. In the end, people have to arrive at their own conclusions. What we have demonstrated is $1.40 a gallon in Q4. The figures speak for themselves. Now, let's move to the Feed segment, Adam.

Adam Samuelson, Analyst

Okay. That's really helpful. In Feed, I was hoping you could break down a little more the contribution from Valley and FASA in the fourth quarter. It seemed like the net loss of Valley seems to have actually gotten bigger in the fourth quarter, and maybe there's some accounting noise in there. Can you help us think about the earnings contribution in Feed? It seemed like it degraded through the quarter in part because of the fire and the capacity, but what that implies going into the first quarter?

Brad Phillips, CFO

Adam, this is Brad. So on the net loss mentioned in the K and footnote 3, that is predominantly, and Randy referenced it earlier, the Ward facility—a sizable facility. We also had an insurance deductible charge taken in the quarter contributing to that number being higher than the Q3 rate on that. Other than that on Valley, Randy?

Randall Stuewe, Chairman and CEO

Yes. Ultimately, we're making great progress there. And clearly, we're near business case at our timeline; remember, our 1,000-day integration plan, and we're very close to our business case without the Ward fire. In January, we made a lot of adjustments to raw material procurement agreements that will kick in here in Q1. Those were contracts that had to be renegotiated. We're seeing unique changes as the poultry industry alters diets to adjust for renewable diesel demand for animal fats, where they used to feed animal fats in their diets; they're now taking them out and substituting alternative ingredients and changing different attributes of the rendering materials that we're getting. That has to be accounted for in your procurement formulas. We've done that in Q1, and that will start to flow through towards the end of Q1, early Q2, predominantly from the Valley plants on the Eastern shore, which are poultry plants. Those are sizable numbers as we go forward. The FASA business is running classically right on business case. John, anything you want to add?

John Bullock, Chief Strategy Officer

No, the underlying strength here is the volumes are exactly what we thought they would be. As long as those volumes remain, we are going to be able to get Valley profitability over our timeline within the Darling system, and we will have the type of profitability we anticipated on all these acquisitions.

Randall Stuewe, Chairman and CEO

Yes, the other thing that isn't very transparent, and it's hard to break out, but in Europe, we were paying EUR 210 to EUR 230 per megawatt hour for electricity. We're down to EUR 50 now. The gas prices ran up hard on us. You can't make raw material adjustments that quick in Europe. They've come off, we're now back to $2 natural gas or plus burner tip distribution in the U.S. So gas prices impacted Q4 a little bit, and it’s always hard to see how that flows through.

Operator, Operator

The next question is from Dushyant Ailani from Jefferies.

Dushyant Ailani, Analyst

My first one is trying to understand the CapEx cadence going forward. I know you talked about roughly $565 million for 2023. How do you think about 2024, considering just the Valley integration?

Randall Stuewe, Chairman and CEO

Yes. Clearly, we gave a number of around $125 million that would have to go into those Valley plants over the next couple of years. We're about halfway through that now. A portion of that number is FASA, the two plants under construction. We have a plant under construction in Turlock, California, another under construction in Boise, Idaho. We're going to start permitting the Bellevue, Nebraska plant. We got the Epitacio spray dryer. We've got a wastewater plant in Brazil. We've got the green energy expansions in Europe of the Op de Beeck, Belgium digester and the sun digester. All of that's rolled into there. As we said, about 20% of that is growth projects that would meet our 15% to 20% hurdle rate. The rest is just maintenance and standard CapEx between fleet and operating plants.

Dushyant Ailani, Analyst

Got it. And then my second question was just wanted to talk about the margins for the Food segment. I think it was down quarter-over-quarter. Any kind of drivers around that? And how do we think about that going forward?

Brad Phillips, CFO

Energy prices in Europe are expected to rebound, as Randy previously mentioned. We're starting off well this year. The growth chart for the Food segment clearly illustrates our progress, reflecting a multi-continent strategy. China performed excellently, South America had a strong year, and the U.S. also did well, although Europe faced some challenges in Q4 due to energy prices and raw materials linked to the reduced porcine kill. This should improve slightly in Q1, but overall, we anticipate a very positive year for the Food segment.

Operator, Operator

The next question will be from Tom Palmer from JPMorgan.

Thomas Palmer, Analyst

I wanted to clarify the guidance a bit. It sounds as if temporary downtime at RD plants, including at DGD, are contributing to the fat and UCO price weakness we've seen. Could you clarify the expected duration of DGD's turnaround? It sounds like DGD 1's back up and running. Is number 2 down right now? And then is the message that the first quarter because of this might be a little bit below the quarterly EBITDA run rate implied by guidance? Starting in Q2, we see a more substantial rebound?

Randall Stuewe, Chairman and CEO

Yes. Tom, clearly, DGD 1 was down for 18 to 20 days here. Number 3, we don't have the logistics down. We've got a couple of railroads embargoed. We're trying to get the logistics up there. I understand Geismar was down. I understand Neste Rotterdam was down for over a month, and that was 800,000 tons there. The feedstock market is a global market. With the Port Arthur and St. Charles facilities, we're originating from around the world. It won’t take much to turn this thing. If you believe any of this capacity that all of you guys write about is truly starting up. I read of a start-up on PBF for Q1 here. I read about a start-up for Vertex for Q1. HollyFrontier has been trying to start up for a year, but only ran 54 million gallons at three plants. At the end of the day, you have to pick your poison here. But any of those facilities that come on is positive. Once we get DGD 3 up to or above rate, you're going to see it change pretty rapidly here.

Sandra Dudley, Executive Vice President of Renewables and U.S. Specialty Operations

The great thing about DGD 3 or DGD in total is that even despite what's going on here with feedstocks, we're taking in different feedstocks from around the world. That's been a huge benefit to us, bringing those internationally because we're able to take advantage of the lowest priced feedstocks available. That will just increase margins as we go further into the year.

Operator, Operator

The next question will be from Manav Gupta from UBS.

Manav Gupta, Analyst

I wanted to follow up on something you said, and I completely agree. There are some small players out there who are claiming they can produce SAF, they were never actually produced RD. These companies signed like 500 million, 700 million gallons of contracts out there. As you pointed out, there is no SAF behind them, but you will have the real gallons. So my question here is, if Delta, American, and all these airlines come to you and say, 'Please sign a 400 million, 500 million, 600 million gallon contract for 8 or 9 or 10 years,' would you be open to such contracts because you have the real SAF gallons versus these guys?

John Bullock, Chief Strategy Officer

Yes. This is John. You're hitting on something that we see in the SAF market, which is there's a lot of promises for SAF gallons out there that we don't understand how people are going to commercialize and bring to the marketplace. We believe we will be one of the real players in the marketplace. One of the few who will have physical gallons available for folks. I think with all of the promises made, that's going to put us in an ideal position. How we commercialize and sign contracts will evolve over the next year for us. I wouldn't prejudge and say we're willing to be taken out by one individual counterparty. We will have to see how the market develops. There's no doubt, we can already see it starting to churn in the marketplace. People will start moving from phantom gallons to real gallons. When they do, there will only be a couple of doors that people can knock on to get those real gallons. We're one of them.

Randall Stuewe, Chairman and CEO

Yes, that's true, Manav. We are just hesitant to put a number out there until we get antitrust clearance and know the exact close date. But we're telling you that it should contribute between $75 million and $100 million this year if we get to close it as we think.

Operator, Operator

And our next question will be from Matthew Blair from Tudor, Pickering & Holt.

Matthew Blair, Analyst

Randy, have you been following the recent LCFS workshops from CARB? If so, do you have any updated thoughts on where these future LCFS credits are headed?

Randall Stuewe, Chairman and CEO

Yes, I'm excited about it, and I'll let Sandy answer it.

Sandra Dudley, Executive Vice President of Renewables and U.S. Specialty Operations

Yes. We're very excited about the proposed increased stringency among the CARB program going from 20% in 2030 to a reduction of 30%. As you know, CARB's model sells in '24, around $110 per metric ton, then going into 2026 to the 200,000 are meeting the cap beyond that. That's positive in terms of credit prices and green premiums for us. There was another thing that CARB proposed that we're excited about: the LCFS obligation for intrastate flights, which would really support our SAF market. When we come online in 2025, that will provide additional demand. The jet market there is about 400 million to 425 million gallons. We're excited about both of those things; it’s only good news for DGD and Darling.

John Bullock, Chief Strategy Officer

I think one of the really interesting things is there's always so much wringing of the hands on what's happening with LCFS credits; we've seen a lot of discussion about RINs market. The reality is when you look at what's happening on the policy front around the world—Europe, Canada, California—there's an explosion in the demand for low-carbon fuels. What we've proven is there is more renewable diesel in the marketplace today because of Diamond Green Diesel 2 and Diamond Green Diesel 3. People tend to miss the forest for the trees when they assess all the details.

Matthew Blair, Analyst

Sounds good. Then circling back to the feed margins. I remember Q3 was impacted by hot weather, which led to increased spoilage. Is that how to think about it? The benefits you got back in Q4 from cooler weather were just completely offset by the negative impact of these two fires? Can you quantify the total fire impact? I think you said $4.5 million for Ward. Was there a similar impact at Tacoma? I'll leave it there.

Randall Stuewe, Chairman and CEO

Tacoma is a much smaller factory, but probably a couple of million in the quarter would be my guess. Remember, in Q4 was where the global energy prices ran up, flowed through too. At the end of the day, tonnage was strong. Protein prices were strong. You have to go into our financials, and you can see how much fat is being inbound to Diamond Green Diesel. We don’t recognize those profits that are in there. Those numbers are much bigger now than they've been in the past. That’s down there too; there's deferred going to Diamond Green Diesel right now, and that's a big number from the past.

Operator, Operator

And the next question is from William Baldwin from Baldwin Anthony Securities.

William Baldwin, Analyst

Just a quick question. I know it's early in the game, but what's the thinking regarding the feedstock that you think would primarily be used for SAF? Will it be similar to the feedstocks we're looking at for the RD? Or would that broaden out to include low-carbon ethanol and things of that nature?

Sandra Dudley, Executive Vice President of Renewables and U.S. Specialty Operations

In terms of what DGD does and what feedstocks it sources, it will be very similar to what we're using for renewable diesel. When we produce SAF, we're not only producing SAF, but we're also producing renewable diesel at the same time. We don't anticipate deviating from that model; it will focus on the waste feedstocks. That's going to be animal fats, used cooking oil, corn oil. The great thing is we've begun sourcing worldwide, and we have a plethora of different feedstocks available. We have the great unit to handle all those feedstocks and are in a great location in the Gulf to easily source those feedstocks. We don't anticipate any changes; it should be very similar to what you've seen in the past.

Randall Stuewe, Chairman and CEO

Yes, poultry fat does find its way into the formulas for DGD's feedstocks.

Operator, Operator

And the next question is from Ben Bienvenu from Stephens.

Benjamin Bienvenu, Analyst

I want to revisit the sustainable aviation fuel topic. Obviously, a huge market and opportunity for you guys, and you're moving in a meaningful way with your announced investments. Can you talk about the factors that prompted that announcement now? I know you've been studying this for a while, so maybe it was just reaching the end of the due diligence process. But if you could help us think about key things you'll focus on as you consider incremental expansions beyond what you've announced.

John Bullock, Chief Strategy Officer

The Inflation Reduction Act being passed is a huge trigger in relation to that. We have been careful when we make capital investments in this area. We're one of the few in the renewable space to come in on time or ahead of time and on budget. We're very careful. Valero worked through an extremely careful capital deployment process, understanding our cost and what we will do. We were at the point where we had completed that, and we were waiting for the right policy signals. We saw that with the Inflation Reduction Act. More than that, we see a total commitment from the airline industry worldwide stating they need SAF. We looked around the marketplace and realized that we could be one of the few suppliers that can back up their claims about SAF.

Randall Stuewe, Chairman and CEO

As a result, we think the timing is perfect to put ourselves in a position to begin discussions with airline partners and others who fly packages worldwide. Well, once again, thanks for all your questions today. As you know, we'll be attending several investor conferences this March, which are listed on our website. As always, if you have any questions, reach out to Suann. Stay safe. Have a great day, and I look forward to being back in front of you here this spring to give you a progress update. Thanks again.

Operator, Operator

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