Earnings Call Transcript - DAR Q1 2021

Operator, Operator

Good morning and welcome to the Darling Ingredients Conference Call to discuss the Company’s First Quarter 2021 Results. After the speakers’ prepared remarks, there will be a question-and-answer session, 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 Mr. Jim Stark. Please go ahead.

Jim Stark, Investor Relations

Thanks, Tom. Welcome to the Darling Ingredients Q1 earnings call. Participants on the call this morning are Mr. Randall C. Stuewe, Chairman and Chief Executive Officer; Mr. Brad Phillips, our Chief Financial Officer, and Ms. Sandra Dudley, Senior Vice President of Renewables and Strategy. Mr. John Bullock is attending a college graduation today, and family comes first. There is a slide presentation available, and you can find that presentation on the Investor page under the Events and Presentations link 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 could 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’d like to turn the call over to Randy.

Randall C. Stuewe, CEO

Thanks, Jim. Good morning, everyone. Glad you could join us on the call this morning. A year ago, like many other management teams, we all had the deer-in-the-headlights stare happening as a result of the pandemic. Today, we see a very clear future for Darling Ingredients, as our dedicated global team of over 10,000 employees continues to execute our business strategy in a safe and efficient manner. Our earnings for the first quarter of 2021 were certainly energized by a rising commodity price environment, which undoubtedly had a positive impact and enabled Darling to report a record $284.8 million of combined EBITDA for the quarter. The feed segment’s EBITDA was $124.4 million, which was $34 million better than the fourth quarter of 2020 and $54 million higher than the first quarter of 2020. Protein and fat prices averaged in the range of 40% to 60% higher than the year-ago period and have continued to move higher into the current period. Our food segment turned in a solid performance to start 2021 with an EBITDA of $46.4 million, which was approximately 18% higher than a year ago. We continue to see solid growth in our collagen peptide sales and look forward to our biomedical products making an impact in the future on this segment’s earnings. In the fuel segment, we continue to see solid results from our European bioenergy business, which reported another solid quarter, with $20.5 million of EBIT in Q1. Diamond Green Diesel generated another outstanding quarter with a $2.77 EBITDA per gallon on 78 million gallons sold. Darling’s share was $108.2 million of EBITDA, plus our bioenergy results produced a strong $128.7 million of combined EBITDA in Q1 for the fuel segment. As we noted in the earnings release yesterday, both DGD expansion projects remained on time, on budget, and on target. We continue to experience a favorable commodity pricing environment as the U.S. economy recovers with more and more states lifting COVID restrictions. As travel increases, we are seeing energy prices go higher as ultra-low sulfur diesel is trading about $2 a gallon in the NYMEX spot for the first time in a couple of years. Higher levels of economic activity here and abroad we believe will support continued strength in the demand-driven commodity cycle that I’ll discuss a little later on the call. Now, I’d like to hand it over to Brad to take us through the financials. And then, I’m going to come back and discuss the outlook and our increased guidance for 2021. Brad?

Brad Phillips, CFO

Thanks, Randy. Net income for the first quarter of 2021 totaled $151.8 million or $0.90 per diluted share compared to net income of $85.5 million or $0.51 per fully diluted share for the 2020 first quarter. Net sales increased 22.7% to $1.05 billion for the first quarter of 2021, as compared to $852.8 million in the first quarter of 2020. Operating income increased 62% to $199.5 million for the first quarter of 2021 compared to $122.8 million for the first quarter of 2020. The 62% increase in operating income was primarily due to the first quarter 2021 gross margin improving approximately $68 million over the prior year and increasing from 24.1% to 26.2%. This is primarily the result of higher protein and fat prices in our feed segment during the first quarter, as Randy mentioned earlier. Depreciation and amortization declined $6.1 million in the first quarter of 2021 compared to the first quarter of 2020. This reduction was due primarily to certain assets in our food segment, which became fully depreciated and amortized by the end of 2020. SG&A increased slightly by $1.2 million in the quarter as compared to the prior year. And there were $778,000 of additional restructuring and impairment charges related to the biodiesel facilities shutdown in the prior quarter. Lastly, regarding the improved operating income, our 50% share of Diamond Green Diesel’s net income was $102.2 million, as compared to $97.8 million for the first quarter of 2020. Interest expense declined $2.7 million for the first quarter of 2021 compared to the 2020 first quarter. Now, turning to income taxes. The Company recorded income tax expense of $28.7 million for the three months ended April 3, 2021. The effective tax rate for the first quarter is 15.8%, which differs from the federal statutory rate of 21%, due primarily to the biofuel tax incentives, the relative mix of earnings among jurisdictions with different tax rates, and excess tax benefits from stock-based compensation. The Company also paid $15.6 million of income taxes in the first quarter. For 2021, we are projecting an effective tax rate of 20% and cash taxes of approximately $30 million for the remainder of the year. Looking at the Q1 balance sheet, our total debt declined $63.5 million to $1.44 billion, and the bank covenant leverage ratio ended the first quarter at 1.6 times adjusted EBITDA. Capital expenditures were $60.8 million for Q1 2021 and is in line with Darling’s planned CapEx spend of approximately $312 million on capital expenditures for fiscal 2021. As you saw at the end of March, Diamond Green Diesel successfully entered into a new $400 million senior unsecured revolving credit facility. The new revolving credit facility matures March 30, 2024, and is non-recourse to the joint venture partners. Use of funds from this revolver are for general joint venture purposes. And as we have indicated in the past, any potential distributions in 2021 wouldn’t be considered until the expansion at Norco, Louisiana is in production in the fourth quarter, later this year. Now, with that, I’ll turn it back over to you, Randy.

Randall C. Stuewe, CEO

Thank you, Brad. I want to discuss our updated guidance that we announced in our press release yesterday, which you can also see on slide five of our investor presentation. We are confident in the increased combined EBITDA range of $1.075 billion to $1.15 billion, driven by improvements in both our feed and fuel segments. The feed segment is benefiting from rising commodity prices for proteins and animal fats. You might wonder how long this higher price environment will last. Like all commodity producers, Darling is monitoring this closely. We believe the current situation stems from a demand-driven event that originated in China, rather than a supply shortage, which has pushed prices up. Demand-driven price increases can take several growing seasons to replenish feed inventories. While commodity prices have risen significantly compared to the futures curve, they remain 30% to 50% higher than historical prices for that future period. For now, we expect the feed segment to perform well for the remainder of 2021. We are maintaining a disciplined approach to managing the volatility of this segment, constantly working to reduce expenses and enhance efficiencies to improve our current margins. The other factor contributing to our guidance increase is the fuel segment. DGD achieved a record EBITDA per gallon in Q1. Currently, we anticipate a Q2 margin range of $2.25 to $2.40 EBITDA per gallon for DGD in 2021. As our joint venture partner announced a few weeks ago, we expect the Norco expansion startup around the middle of Q4. DGD is projected to sell 365 million gallons of renewable diesel in 2021. These higher volumes and the expected EBITDA per gallon will yield Darling’s share of DGD's EBITDA between $410 million and $435 million for the year. The DGD Port Arthur project is making excellent progress, and there's a picture of the site shown on slide 10 of our investor presentation. We aim to have this facility operational in the latter half of 2023, though we are exploring options to accelerate the timeline. Darling is actively pursuing various avenues to expand our feedstock footprint and feels optimistic about achieving this goal soon. We are encouraged by the trend of more states in the U.S. and other countries establishing and advancing legislation for low-carbon fuel standards. We believe that, looking ahead, the demand for renewable diesel will exceed supply over the next three to four years. Additionally, we expect demand for sustainable aviation fuel to start emerging during this period, which will also create demand for DGD. Our DGD joint venture is an innovative platform utilizing cutting-edge processes to convert waste animal fats and oils into one of the world's cleanest hydrocarbons. We regard DGD as a prime investment opportunity for generating high returns for our stakeholders. Beyond this, we have other areas of innovation. Since early 2020, Darling has completely owned EnviroFlight, a leader in sustainable insect ingredients for animal and plant nutrition, aimed at transformative changes in the global food supply. We recently announced plans to expand EnviroFlight’s operations, positioning us as a leading developer of proprietary technologies with the first commercial-scale black soldier fly larvae production facility in the U.S. We're also pleased with the progress of our biomedical technology team in Europe; our latest product, X-Pure or GelMA, enhances our range of ultrapure gelatins and collagens for the medical industry. We expect to grow our product offerings as we advance with new products that generate added value for the industry. Our X-Pure products stand out in the market due to their ultra-low impurities and fully validated traceability of raw materials. Our commitment to innovation continues as we explore ways to enhance our product offerings across all markets we serve. We see our efforts to introduce innovative products and the investments made in expanding rendering capacity over the past few years as vital to enhancing long-term shareholder value. Although market cycles may not always align, when they do, Darling can deliver solid returns and robust free cash flow. I also want to highlight our recognition by Bloomberg and TB Media Group as one of the 50 sustainable climate leaders globally. As the original recycler, we believe Darling Ingredients stands as the greenest company on the planet. I extend my gratitude to our 10,000 employees for their contributions to making Darling the company it is today. Now, let’s move on to the Q&A session. Tom?

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question comes from Ben Bienvenue with Stephens Incorporated. Please go ahead.

Ben Bienvenue, Analyst

I want to start with your guidance, and in particular, the margin per gallon guidance for DGD. Just help us think about what’s embedded into your outlook there. Where do you think elements of variability are? Obviously, we had very strong margins in the first quarter. We’ve seen some components of margin pressure things a little bit in 2Q. But still, as you said, spot demand looks favorable. I just want to better understand what’s going into your outlook.

Randall C. Stuewe, CEO

Ben, this is Randy, and I’ll tag team with Sandy here a little bit on this one. The margin environment in Q2 is very similar, if not better, than Q1 right now. What’s driving it is really the biodiesel industry, which obviously we don’t participate in, as they have to pay substantially more for feedstock than we are, as the majority of biodiesel is made from soybean oil. You can see that’s at least on the Board of Trade trading at $0.65 on the non-deliverable option here in July. Those running refined, bleached deodorized oil are paying somewhere between $0.75 and $0.85 a pound delivered at their locations today. You take that and you have to drive marginal profitability in order to produce those gallons. The green premium we refer to, which is a combination of the RINs and the blenders tax credit, are having to do the work. The blenders tax credit is fixed. Therefore, it comes down to the RIN. We’ve seen some strong escalation in the RIN. That has been supported by lower feedstock costs at DGD because of waste fats and oils and our pretreatment technology, plus the RIN, plus the LCFS has rebounded a little here in the last 30 days. We’ve set up a Q2 now that I think will impress. The balance of the year, I think it’d be easier to take guidance up from here than where we’re at. We’re going to watch from here and see where we’re at. I think that’s fair enough. Sandy, anything you want to add to that?

Sandra Dudley, SVP of Renewables and Strategy

Yes. I think we’re very pleased with the margin environment. Historically, you’ve seen that our margin’s been very good, regardless of the environment that it’s been. There are some things that we’re going to continue to watch, especially as we get further out into the year. So, there’s a Supreme Court ruling on small-refinery exemptions, RVOs, and how feedstock prices progress. That said, again, you’ve seen very solid performance out of DGD for an extended period of time, regardless of the environment.

Ben Bienvenue, Analyst

Okay, perfect. When we think about the feed ingredients business, kind of a two-part question here. It seems like the outlook there is a reflection of what we see in the futures strips. Is there a point at which you foresee any sort of demand destruction or price resistance? I know the demand backdrop for the feed environment is quite good, and all the protein processors continue to consume at high margins, ethanol is coming back online which supports corn. So it does seem like there’s a great demand backdrop for the grain environment. But I want to get a sense of how you think about that unfolding through the year relative to your guidance, and understanding what’s in your guidance, if it is reflective of the current futures.

Randall C. Stuewe, CEO

Yes. Ben, this is Randy again. The optionality that is built in the feed segment, we’ve talked about for the last three or four years. If pricing comes back to the 10-year average, everyone will be pleased with our investments. We’ve now driven past the 10-year average in the core rendering business and the derivatives from the slaughtered animal byproducts. They’re benefiting from rising corn pricing, soybean meal pricing around the world. It’s fascinating. Our guidance in the feed segment performance has likely been conservative since prices have improved. We benefit when corn and soybean meal rise, as we’re an alternative ingredient in many rations around the world. So we are fairly set. Our fats and oils are trading today, delivering to Diamond Green Diesel at mid-50s while the bean oil board's at 65. That is a historical discount. So, for anyone with fears about our feedstock, there is plenty of feedstock available for us. The proteins have now moved up to mid-4s. For livestock producers, there’s enough profitability in the chain itself to keep producing versus contracting. It looks pretty good around the world for us. Raw material volumes aren’t up sharply compared to a year ago, but they’re still up against population growth.

Ben Bienvenue, Analyst

Okay. Very helpful. Thanks, and good luck.

Operator, Operator

The next question comes from Manav Gupta with Credit Suisse. Please go ahead.

Manav Gupta, Analyst

Hey, guys. Congrats on the beat and excellent raise. My question here is, we have seen a number of small players out there who have never actually done this, come out and sign sustainable aviation fuel contracts for fuel they are nowhere even close to producing. And then, we look at you guys, the best in the business, who have not announced anything major in sustainable aviation fuel yet. My question is, why are the two best guys in the business holding back while some of the other players out there are announcing these contracts, which we are not even sure are suitable?

Sandra Dudley, SVP of Renewables and Strategy

Hi, Manav. This is Sandy. In terms of next steps for SAF, first, our immediate future really involves completing the St. Charles expansion and the Port Arthur Greenfield. We know that these facilities will provide significant carbon reduction opportunities for our customers. Both projects will be completed very soon. We’ve also given ourselves space at the Port Arthur facility in anticipation of future opportunities. When the market develops, particularly in transportation and aviation, we’ll have more for you. And be assured, when we do move, we’ll move swiftly, in line with our first-mover reputation. We’re well aware that SAF is of extreme interest to a lot of folks, and we believe there will be significant support from the administration for reduced aviation emissions. SAF will happen; it’s just a matter of time. We need the mandates and incentives to turn this nascent industry into a real one. We’re in preliminary engineering at DGD as we speak. As the economics pencil out, we want to be a part of it.

Manav Gupta, Analyst

Okay, great. I think you mentioned this a little bit in the prepared comments. We saw a little bit of fallback in the carbon prices in California. I think it’s seasonal, but I would like to know your view. And also, do you think as Washington, Canada, and other places open up, there’s a sustainable support for carbon prices, or do you think the supply that is building is a little too high so carbon prices can trend down?

Sandra Dudley, SVP of Renewables and Strategy

With regard to California, I think what you’re seeing there is really a matter of them getting hit hard by COVID. They’re starting to open up, and things will get better. I think as we advance through the summer and see transportation pick up, you’ll also see that LCFS pricing improve. In terms of demand worldwide, yes, there are a number of programs that exist today; California, Oregon, DC, now we can expect Washington to join the list of jurisdictions with CFS. We also recently saw New Mexico come close to passing CFS. So, we think that momentum is building going into 2022. New York is also working on getting a CFS in place. The Canadian CFS final regulation will be out at the end of this year and implemented in December 2022. Provinces like Quebec are enacting their own mandates, and we see targets becoming increasingly aggressive. So, we believe there is great momentum for future demand.

Operator, Operator

The next question comes from Tom Palmer with JP Morgan. Please go ahead.

Tom Palmer, Analyst

Good morning, thanks for the question. So, you’ve seen a big step up in feed segment EBITDA over the past couple of quarters. I know this has been covered various times over the years. I just had a couple of questions to clarify your pricing model. You’ve given helpful detail on how a penny of higher fat prices translates to $8 to $10 million EBITDA in the feed segment. Has there been thought about providing similar figures for the other products in the segment, like protein or used cooking oil? And then, I would just like to clarify the timing of your revenue recognition in that segment. If we see spot prices at a certain level today, should we be thinking about that as the price you’re recognizing immediately, or do pre-sell and higher prices today flow through on a slight lag? Thanks.

Randall C. Stuewe, CEO

Good questions, Tom. The feed segment has a variety of businesses built in. Some have price exposure and optionality; others don’t. When we said before, a penny a pound is $10 million annual EBITDA, that’s all fats and oils globally. Europe is seeing higher prices on fats, which have moved above €1,000 a ton. The model is still intact as we look around. Our proteins have been lagging in what’s going on in the world. The lead-lag becomes particularly affected when the pipeline is full. We came into Q1 with a very short book, which means we didn’t have much sold ahead. Now we’re trying to maintain that strong inverse for the next quarter. There’s probably a 45 to 60-day lag in recognition of higher prices flowing into our P&L now. That’s why there’s potential for increased visibility into those prices in the next quarter. The core costs of fats today are lower than what we see with palm oil and bean oil, so we think there’s good outlook for the segment.

Tom Palmer, Analyst

Thanks for all that color. I just had a follow-up on the fat side. You talked last quarter about once Port Arthur is up and running, about the possibility of sourcing from other parts of the world. In your view, is the animal rendering industry in areas like South America built out to the extent to ensure the supply you would like, or do you see a strategic opportunity for Darling to explore establishing rendering operations?

Randall C. Stuewe, CEO

I would say, none of our strategy or investment is built on global origination. We believe there’s adequate feedstock today in North America to support our investments. We believe that feedstock will be displaced from generation one technology in the biodiesel industry, as we bring capacity online. Secondly, we have access to about 500,000 tons of fat in Europe today that can move here, if the euro and freight rates are right. Yes, South America, Australia, New Zealand, and even China have developed industries that can move fat here as necessary.

Sandra Dudley, SVP of Renewables and Strategy

We feel very comfortable about our ability to secure feedstock, both for the St. Charles expansion and for our Port Arthur facility. Feedstock has always been significant in our investments. We’ve built our facilities around where agricultural products naturally funnel in; that’s no coincidence. We like the U.S. for its feedstock supply, and Darling produces a significant amount of low-carbon feedstocks here. We see continued growth in feedstocks as we enhance our collections and expand our control.

Operator, Operator

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

Sam Margolin, Analyst

Just a follow-up on DGD margins and strength. A lot of people focus on the unit cost spread between the byproducts and fresh vegetable oils. Is there anything else operationally or technically worth calling out, maybe a yield outcome that’s generally better than modeled or something beyond just what people see on a price per pound basis?

Sandra Dudley, SVP of Renewables and Strategy

We’re always trying to improve our DGD facilities. I think the most important thing is our pretreatment facilities. They give us a huge advantage at DGD, allowing us to source the lowest cost feedstocks, which is reflected in our margins today.

Randall C. Stuewe, CEO

The flexibility of our origination that comes into pretreatment is our secret sauce. We have ongoing efficiency targets for operational enhancement and ultimately customer mix. We’ve talked about Arctic-grade and what’s the product mix we’re making. Putting all those together, it’s quietly a definable and unique advantage that we’re recognizing.

Sam Margolin, Analyst

Okay, thanks for that. Just switching gears to the base business, how would you characterize what you’re seeing in demand? Is this a unique year for growth on just a rate of change basis, or is this also the cumulative effect of two decades of China in the WTO, with people moving out of poverty, adding to the structural duration of what you’re seeing?

Randall C. Stuewe, CEO

It’s a great question, and hopefully my crystal ball isn’t foggy. The thesis has always been simple: population growth and wealth-creation, where once there is wealth, you use energy and eat better. These confluences are happening now. The pandemic interrupted that for a year, but we’re seeing historical appetite for protein. China has to de-risk their food supply due to land and water limitations; they’re near full production while facing animal disease risks. Six months ago, they were replenishing their hog herd, and now we see reduced reinforcements. I believe they’ll industrialize larger farms, and they can react quickly in food markets. Every plant we have is fully operational today to produce meat, and I anticipate this demand will continue.

Operator, Operator

The next question comes from Ryan Todd with Simmons Energy. Please go ahead.

Ryan Todd, Analyst

Hey, so maybe just a follow-up on one of your comments regarding distributions and capital management. I know you’ve mentioned external financing for the DGD expansion. You have a revolver there, but I think you commented that you wouldn’t see distributions until Q4 when expansion kicks in. Is that how we should think about it, or will you tap the revolver throughout the year or hold off until expansions begin before distributions to the parent accelerate?

Randall C. Stuewe, CEO

Yes. Ryan, this is Randy. We’re four months away from starting up the second machine. At that time, you’ll be at a run rate of approximately 700 million gallons, potentially $2.50 a gallon. Dividends could become really possible once this new machine starts. I don’t foresee pulling from the revolver because there is no risk to our capital structure. We’re focusing on the timing of DGD III, looking to bring it online as quickly as possible.

Ryan Todd, Analyst

Thank you. Maybe since you’re talking about expansions, first on DGD II, do you think about how long it takes to ramp up volumetrically? How much do you see in Q4 this year and into early next year? Also, with the construction side, we’ve seen inflation increasing in the market. Is there any risk to DGD III’s capital budget, or did you price these contracts before the escalation kicked in?

Sandra Dudley, SVP of Renewables and Strategy

What we’ve told you is our guidance includes volumes from DGD II coming online as well. We expect to be fully operational in 2022 and likely ahead of that. Regarding construction costs, we’re nearing the end of our St. Charles expansion, and everything is on track and budget. For Port Arthur, we’ve driven pilings, poured foundations, and ordered major equipment early. Our first mover advantage means we’re working with the right timeline, which brings our costs down. We have not projected any increases at this time; everything looks quite positive.

Ryan Todd, Analyst

Thank you.

Operator, Operator

The next question comes from Craig Irwin with ROTH Capital Partners. Please go ahead.

Craig Irwin, Analyst

If you could connect the $1.1 billion in EBITDA guidance to free cash flow this year? I know there’s uncertainty around cash from Diamond Green. But what do you expect from core operations? Should we expect cash flow to strengthen in the second half?

Brad Phillips, CFO

Hey, Craig. This is Brad. On free cash flow this year, we have the $300-plus million, which we've consistently had on CapEx. While our interest expense is coming down, it’ll still be in the $60 to $65 million range; about $40 to $45 million of cash taxes. Working capital will end up involved, opaque with high prices in play. Right now, we feel good about Q1, typical for the toughest quarter. When all components come together with guidance and where we expect the base business, disregarding dividends, I expect noticeable reductions in our debt this year.

Craig Irwin, Analyst

This is a similar environment to when you did the Griffin and Vion acquisitions. Are you hunting again? Is North America attractive for you, or are you looking more for larger opportunities in South America or Asia?

Randall C. Stuewe, CEO

Hunting for zebras. We own all the elephants. For the first time, post-pandemic recovery, opportunities around the world are surfacing again. Yes, the balance sheet is in order, and free cash generation is predictable. We’d like to grow smartly; it’s about building moats around our platforms: renewable energy, EnviroFlight, and biomedical innovation. We’re actively looking globally, and we’re starting to see potential deals.

Operator, Operator

The next question comes from Ben Kallo with Robert W. Baird. Please go ahead.

Ben Kallo, Analyst

Good morning, guys. Good job in the call. Randy, I had to look up 'transcript.' I didn’t know that word. Three questions, two big picture and maybe one neutral. Big picture, regarding the inflation environment. You’ve been through many. How do we navigate that, and how do you deal with predictability? Secondly, we saw ADM facility coming on with soy crush; does the return go to ethanol as everyone enters the business, and what separates that? Lastly, how do we think about SG&A? It appears to pick up a bit. How do you think of controlling costs despite being in a strong business?

Randall C. Stuewe, CEO

Clearly, the crushing industry is responding to increased anticipated demand for feedstock to support renewable diesel investment. The crushing industry will take about three years to build out. The renewable diesel requirements need refined, bleached, deodorized vegetable oil. At this point, the capacity needs to be expanded. Many renewable diesel plants require RBD oil for feedstock for production. So, I don’t anticipate a significant ramp-up in models in these segments. But, we see less competition than anticipated in the near term.

Brad Phillips, CFO

Ben, this is Brad. Regarding SG&A, we saw a slight tick up of about $1.2 million versus a year ago. We’ve accrued for multiemployer pension withdrawal liability. When we strip that away, we see flat trends while certain increases due to FX shift and insurance premiums. Our compensation incentives have adjusted as we expect the compensation incentives earlier in the year rather than playing catch-up. I expect SG&A to remain fairly steady at this level unless extraordinary events occur.

Operator, Operator

The next question comes from Matthew Blair with Tudor, Pickering, Holt. Please go ahead.

Matthew Blair, Analyst

Good morning. With the pricing volatility this quarter, were there any significant shifts in your RD feedstock plays? Are you seeing improvements in UCO or DCO availability?

Sandra Dudley, SVP of Renewables and Strategy

In terms of feedstock plays, we haven’t changed our mix, based on market conditions. The three products we typically use—UCO, DCO, and animal fats—will fluctuate but we will take advantage of that. More pounds are entering the market as restaurants reopen, but we haven’t experienced a substantial supply issue.

Randall C. Stuewe, CEO

The discussion on UCO is always interesting regarding the US market. While we have 40% to 50% market share, we’re still down about 8% to 10% from 2019, particularly on the East and West Coasts where business remains constrained. But I don’t see UCO as a major discussion point for RD producers.

Matthew Blair, Analyst

Thanks for all the details. Regarding the 30 million gallons of renewable naphtha from the Norco expansion, which market will that serve? Is it going to the chemicals market or gasoline? Can you discuss how the economics compare between renewable naphtha and RD?

Sandra Dudley, SVP of Renewables and Strategy

Renewable naphtha is a new product we’ll produce once the expansion is operational. Like renewable diesel, we view naphtha as a global market with potential opportunities to serve as green gasoline or as feedstock in other processes. Many options exist, but we’re still at the early stages.

Operator, Operator

The next question comes from Ken Zaslow with Bank of Montreal. Please go ahead.

Ken Zaslow, Analyst

Could you dimension how each new policy would create demand relative to California? Because there seems to be real runway here in terms of the policies coming down the pike. Can you dimension how much incremental demand will come with each new policy?

Sandra Dudley, SVP of Renewables and Strategy

Yes, a lot of momentum exists. We’re seeing new programs coming out, like Washington State, which is an 800 million-gallon market. New York is a 1.4 billion-gallon market per year. New Mexico is anticipated at about 500 to 600 million gallons. Canada could represent an 8.5 billion-gallon market. Quebec is approximately 1.2 billion. These significant volumes will drive demand and, as we see today, future potential looks quite bright.

Ken Zaslow, Analyst

Regarding cash deployment, the amount of cash you’ll have will be substantial. Would you think about reallocating that to one-time dividends, share repurchases, anything like that? It seems hard to spend all that cash you’ll generate.

Randall C. Stuewe, CEO

In the Boardroom, we referred to it as the ‘cigar box’ building cash. We’d like to pay off around $250 million in Term B efficiently. Our bond in 2022 may be callable, and I suspect we would prefer extending it with the right timing. Typically, the Board will evaluate a one-off dividend versus share repurchases or regular dividends down the road. We're not kicking the can down the road; we still have time to evaluate our priorities.

Operator, Operator

The final question comes from Adam Samuelson with Goldman Sachs. Please go ahead.

Adam Samuelson, Analyst

A lot of ground has been covered. Perhaps I haven't heard much about the food business this quarter and the forward outlook, which was unchanged. I know you've expressed confidence, Randy, regarding growth in collagen peptides and capacity. Can you help us think about the dynamics in play this year and the outlook into 2022?

Randall C. Stuewe, CEO

Great question, Adam. The feed segment looks great, but the food segment has historically provided steady cash flow. We laid out plans to add spray dryers and enzyme conversion units to capture growth in collagen peptides. That capacity is coming online now to meet demand from major clients. Our collagen peptide sales are vital for our business, especially as we expand biomedical applications.

Brad Phillips, CFO

Regarding CapEx, plan for the base business to be about $310 million this year. Our Diamond Green estimates reflect significant support operations costs as well.

Sandra Dudley, SVP of Renewables and Strategy

DGD II and III are significant CapEx projects. We expect high CapEx this year that may continue into next. We’re focused on execution and looking forward to supporting our customers in innovative ways moving forward.

Operator, Operator

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

Randall C. Stuewe, CEO

Thanks, Tom. I appreciate everybody’s time today and hope you all stay safe. In our investor relations deck, there’s a list of upcoming events where we’ll be speaking and we look forward to talking to everybody in August. Thank you for all the questions today.

Operator, Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.