Earnings Call Transcript - DAR Q1 2024

Operator, Operator

Good morning, and welcome to the Darling Ingredients Inc. Conference Call to discuss the company's First Quarter 2024 Financial Results. Today's call is being recorded. I would like to turn the call over to Ms. Suann Guthrie. Please go ahead.

Suann Guthrie, IR Manager

Thank you. Thank you for joining the Darling Ingredients First Quarter 2024 Earnings Call. Here with me today are Mr. Randall C. Stuewe, Chairman and Chief Executive Officer; Mr. Brad Phillips, Chief Financial Officer; Mr. Bob Day, Chief Strategy Officer; and Mr. Matt Jansen, Chief Operating Officer of North America. Our first quarter 2024 earnings news release and slide presentation are available on the Investor page under Events and Presentations tab on our corporate website and will be joined by a transcript of this call once it is available. During this call, we will be making forward-looking statements, which are predictions, projections, and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in yesterday's press release and the comments made during this conference call and 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, CEO

Thanks, Suann. Good morning, everyone. Thanks for joining us for our first quarter 2024 earnings call. As I mentioned during our last earnings call in February, the global ingredients markets are facing challenges due to replenish global oilseed and grain stocks, slower global consumer demand for premium ingredients, and most importantly, delayed or canceled renewable diesel start-ups. For the quarter, our combined adjusted EBITDA was $280.1 million, but it included a $25 million out-of-period inventory adjustment within the Food segment. As you can see on the slide, this is the third quarter in a row we have dealt with deflationary pricing, but we now feel strongly we are seeing the winds begin to change in a positive direction. Now turning to the Feed Ingredients segment. Global raw material volumes remain strong, and we are seeing PAT prices slowly improve. Palm and soy oil continue to hold a strong premium over waste fats and imported fats are now a premium to North America. This shows me that we are still waiting for renewable diesel capacity and pretreatment to ramp up. Global fat prices illustrate that these announced renewable diesel producers are not yet taking advantage of the economics and lower carbon intensity of waste fats and feedstocks. Also during the quarter, we completed the Miropasz acquisition on January 30, adding 3 poultry rendering plants to our portfolio. The plants are performing quite well, and I expect them to be accretive this year. And after 481 days offline, our Ward South Carolina rendering plant is operational, providing us much-needed capacity in the Eastern United States. Now turning to our Food segment. Our Rousselot sales volumes remain robust. Segment revenue was lower quarter over last year - Q1 over last year due to a decline in selling price in collagen, gelatin and our edible fats business. Adjusting for the $25 million out-of-period adjustment related to the Gelnex inventory, gross margins in the Food segment actually widened to around 30%. This is a testament to our laser focus on spread management and a declining price environment. Now we announced earlier this month that we have identified a portfolio of collagen peptide profiles that are believed to provide targeted health and wellness benefits. During scientific trials, these active collagen peptide profiles have demonstrated that collagen can be beneficial in reducing the post-meal blood sugar spike in a very natural way. This is a game-changing discovery that opens the door for many new product launches worldwide. Our first active peptide will be available this fall in 2024. Turning to our fuel segment. Feedstock prices tended to trend lower and improved DGD earnings compared to Q4 2023. However, weak RINs and LCFS prices and a lower of cost of market adjustment impacted DGD earnings. The margin outlook remains favorable due to lower fat prices and our competitive advantage plus an optimistic view we have on the LCFS. Our sustainable aviation unit construction is running ahead of schedule and on budget and is planned to start up in the fourth quarter of 2024. We continue to work with a number of interested parties on SAF purchases and remain confident in our outlook for SAF. Now I'd like to hand the call over to Brad to go through the financials, and I'll come back and give you my views on 2024.

Brad Phillips, CFO

Okay. Thanks, Randy. Net income for the first quarter of 2024 totaled $81.2 million or $0.50 per diluted share compared to net income of $185.8 million or $1.14 per diluted share for the first quarter of 2023. Net sales of $1.42 billion for the first quarter of 2024 as compared to $1.79 billion for the first quarter of 2023. Operating income decreased $118.7 million to $137.2 million for the first quarter of 2024 compared to $255.8 million for the first quarter of 2023, primarily due to a $120.6 million decrease in the gross margin, which as Randy previously referenced included a $25 million out-of-period adjustment of overstated Gelnex inventories. Also, our share of the equity in Diamond Green Diesel's earnings were $15.9 million lower than the first quarter of 2023. Depreciation and amortization was $11.5 million higher, primarily due to the addition of Gelnex. We did recognize $25.2 million of income from the change in fair value of contingent consideration related to lowering an earn-out liability. Nonoperating expenses increased $14.9 million primarily due to interest expense increasing $12.6 million, attributable primarily to additional debt related to acquiring Gelnex, April 1, 2023. The company reported income tax expense of $3.9 million for the three months ended March 30, 2024, yielding an effective tax rate of 4.6%, which differs from the federal statutory rate of 21% due primarily to biofuel tax incentives and the relative mix of earnings among jurisdictions with different tax rates. The effective tax rate, excluding the impact of the biofuel tax incentives is 25.4% for the three months ended March 30, 2024. The company also paid $33 million of income taxes in the first quarter. For 2024, we expect the effective tax rate to remain about the same at 5% and cash taxes of approximately $70 million for the remainder of the year. The company's total debt outstanding as of March 30, 2024, was $4.465 billion compared to $4.427 billion at year-end 2023, primarily due to the acquisition of Miropasz on January 31. Our bank covenant projected leverage ratio at Q1 '24 was 3.71x and we had $811.1 million available to borrow under our revolving credit facility. Working capital noticeably improved in the first quarter 2024. Capital expenditures totaled $93.8 million in the first quarter as compared to $111.3 million in the first quarter '23. No cash dividends were received from Diamond Green Diesel in the first quarter, and there were no share repurchases in the first quarter. With that, I'll turn it back over to you, Randy.

Randall Stuewe, CEO

Thanks, Brad. For several years, we've enjoyed tailwinds from a demand-driven global economy and strong global commodity and specialty ingredient prices. We are now adapting to the new reality of abundant global supplies. In my 21 years plus at this company, I've seen this cycle many times, and I am confident in the team's ability to make any necessary adjustments in our procurement processes and lowering our operating costs to regain margin leverage. In April, we saw nice progress in our core ingredients business, and DGD has finally worked through its higher-priced feedstocks. With SAF starting up in Q4, several contracts are underway, and we remain optimistic on LCFS and DGD margin outlook remains favorable. Our goal to reduce debt and work our way toward investment grade has not wavered. Through aggressive CapEx management and a focus on improving working capital, along with improved performance at DGD, I still believe we can attain by the end of the year-end of '24. Additionally, as we discussed in February, we're doing a comprehensive review of our global portfolio and continue to put a strong emphasis on cost and spread management. For the full year, given what we see today around the globe with solid raw material volumes, improving premium protein and collagen demand, along with slowly improving fat prices and DGD performance we feel optimistic that momentum will be built during the year, and we will be able to deliver $1.3 billion to $1.4 billion combined adjusted EBITDA, all while setting the table for a much improved 2025. So with that, let's go ahead and open it up to Q&A.

Operator, Operator

The first question comes from Dushyant Ailani from Jefferies.

Dushyant Ailani, Analyst

I just had the question on the guide that you have for the $1.3 billion to $1.4 billion, does that include any reversal of the LCM adjustments? Or could there be additional upside to that?

Randall Stuewe, CEO

No, this is Randy. The $1.3 billion to $1.4 billion is really what we see today with a small improvement of fat prices, but really back half loaded here. It doesn't include any SAF early start-up. It's just a snapshot as we've always done on what we see right now. As I said in February, our hope is to beat last year, but we're going to need some help from fat prices. And ultimately, if you do and I'm probably going to answer a few questions here and have Brad help me; but you can go straight to the Feed segment and do the kind of the year-over-year, quarter-over-quarter type of analysis, and you see 100% of that is related to fat prices being down from Q4 to Q1 by 20% and year-over-year by 35% to 40%. And so ultimately, fat prices will drive whether that number is 1.3, 1.4, 1.5, 1.6, 1.7, 1.8 as we come back here. We also remain and as we'll talk through the Q&A optimistic that we'll get some LCFS bump towards the end of the year. And clearly, DGD has worked through the higher-priced feedstock with the longer supply chain, and it continues to outperform anyone on the street out there in the business today. So the $1.3 billion, $1.4 billion as Suann thought maybe conservative. And hopefully, we'll give you some upside here.

Dushyant Ailani, Analyst

Awesome. And then just a quick question on, I guess, your leverage ratio of 3.7. Any kind of updates on targets or what your goal is for the year-end?

Randall Stuewe, CEO

Yes. And I'll let Brad help you. Remember, the leverage ratio is a point in time of total debt divided by the core ingredients plus dividends. And so clearly, as we've been building out SAF and we had the Q3 and Q4 lower earnings of last year in DGD, dividends didn't arrive here. So that's just a function of that. As Brad and I and Matt would tell you, cash is building rapidly in DGD and we remain optimistic on dividends, which will then pull that ratio down. It's a rolling 12-month calculation. By no means has anything changed other than the delay of the dividend out of DGD. Brad?

Brad Phillips, CFO

That's right. Just the timing and when these dividends get started, which we anticipate, as Randy just mentioned, cash is building at DGD now and the SAF projects winding down.

Matthew Jansen, COO

This is Matt, and I would just add that on the dividend out of DGD is a - it's not a subjective policy here. It's formulaic. It's calculated every month. And so there's not a discretionary push and pull on that.

Operator, Operator

The next question comes from Tom Palmer from Citi.

Thomas Palmer, Analyst

In the past, you've given a bit of a breakdown in terms of EBITDA between the base business and DGD. I know at least from your comments to the prior question that maybe there's a bit more variability on the feed side, but I was hoping maybe you could give us kind of a rough split of how you're thinking about the year.

Randall Stuewe, CEO

Tom, you're referencing really the guidance and splitting that out. Is that - that's kind of where you're going?

Thomas Palmer, Analyst

Yes, that's right, kind of base business versus DGD for '24?

Randall Stuewe, CEO

Yes. Tom, if we had to throw that out there today, 900 out of the base business is what we see today and basically a billion out of DGD, and that's $0.75 times a little over 1.3 billion gallons. Remember, just a point in time.

Thomas Palmer, Analyst

Great. And then - just wanted to follow-up on kind of some of the moving pieces within feed. I mean, you noted the expectation for fat and potentially protein prices to strengthen a bit here. I guess could we walk through what the major catalysts are? I mean, obviously, there is some disconnect right now between some of the products you sell and what we're seeing with safe soybean or palm oil. What kind of bridges that gap? And how quickly might that take hold?

Matthew Jansen, COO

So this is Matt. I'll take the first cut at that. And so first of all, for the last little over a year, we've been hindered by the Ward plant that we've been rebuilding. And we're actually very proud of the fact that we've got that plant now up and running. We did a total rebuild of that plant in 481 days. And frankly, it could have even done a little bit quicker, if we could have gotten the equipment there even earlier. So now what that does going forward, that allows us to leverage our footprint in the space, especially in the eastern half of the U.S., where we've been over the last year, like I mentioned, incurring some cost, and it's frankly been inefficient for the - just because of that plant being down. So that's back up and running now. And that's something that will give us now the ability to leverage our footprint in the space.

Randall Stuewe, CEO

Yes. And that's a good point. And globally, I'd step back, Tom, and give you 3 analyses: one, there's an absolute fact here that anybody that says their pretreating waste fats in North America for renewable diesel isn't doing a very good job of it or we wouldn't be a discount to where we were 10 years ago to vegetable oil, whether it's palm or soy or canola, that's #1. That impact we're seeing globally. I mean you had European fats moving here for the first time in my career, even with a plus EUR 106, EUR 110. Brazil was moving up here. Now Brazil is over U.S. But at the end of the day, the fat pricing drives this thing. And when you look at what's going on in the segments, you've got 3 pieces. You've got animal fats, you've got premium proteins. We saw a massive destocking the premium pet foods. People were trading down. It seems to have come back a little bit now. We've got great orders in that business again. China was - it kind of disappeared for a little while with Chinese New Year, but once again buying the premium chicken products for the aquaculture business, and then the other piece that obviously exists in the feed segment because of shared assets is the UCO business and that business has come down sharply, and that's a very profitable business for us. And so at the end of the day, the outlook for the Feed segment is improved protein demand and then a rebound in fat prices at some point in time here as we go forward. Bob, anything I'm forgetting here?

Robert Day, CSO

I think you highlighted it really well, and it's the spread between vegetable oil and animal fats. And as time goes on, we should see that spread tighten versus where we are. Otherwise, yes, I hope that helps, Tom.

Operator, Operator

The next question comes from Ben Bienvenu from Stephens.

Ben Bienvenu, Analyst

You mentioned the pull forward of SAF production commissioning making good progress there. Can you talk a little bit about the development of getting that volume contracted and the potential contribution that you think that could bring to 2025 or even 2024, Randy, as you mentioned, maybe there's some stub contribution?

Matthew Jansen, COO

This is Matt. I'll again take the first cut at this. But - so the - as we mentioned, the plant now, we will commission in Q4 of this year, which is a solid quarter ahead of the - the original plan. That plan is also on budget at $315 million at the entity level. So we're tracking there. And so that's something that we're very optimistic about. I would say, from a contracting standpoint, we continue to see a lot of interest in our product. We are taking what I think is the best approach towards this. And I would - I'm confident that we'll be able to, let's say, contract the volume that we are - we'll be producing out of that plant is going to be oiler plated at 250 million gallons on an annual basis. We don't have anything in our - in our '24 numbers related to the project in terms of EBITDA. But I'm confident, given the state of the discussions where we are right now that we'll be able to, a, meet the volume and certainly, b, meet the return expectations from that project.

Randall Stuewe, CEO

Yes, I think that's fair enough. And I don't think there's been a lot of chatter out there, Ben, it's building. The 17,000 barrels a day is not going to be hard to disappear. We have plenty of interest there. It's down to the final negotiations on spread and pricing here, in both the voluntary and the mandated markets. And clearly, that's going to drive it here. But we have no fear of any challenges there other than hurry up and get it online.

Ben Bienvenu, Analyst

Okay. That's great. As we think about kind of nearing the end of that CapEx project, you've built out DGD, you've kind of moved through the M&A activity you've had over the last couple of years. As you think about cash spend priorities from here, I recognize you want to get leverage down and then distributions will be in the wake of that. How should we think about your appetite for continued opportunistic M&A and/or incremental growth CapEx projects?

Randall Stuewe, CEO

Yes. I mean it's one that I'll comment on. #1, we are on an aggressive CapEx reduction program this year, told Brad, we're going to scale it back. We were $93.7 million in Q1. I think that's a pretty close run rate. Q1 is always a little lower because of winter weather and construction, but that also had the final bills of building out, rebuilding ward, as Matt mentioned. And so target there is 400 for the year, plus or minus a little bit there. Ultimately, we've got some pretty substantial inventories, while we had a pretty big working capital reduction in Q1. There's still more work to do there. So cash generation is key and then the dividends out of DGD, we want to get the debt down below $4 billion. And then it puts us in a different position going forward. We will not walk away from a well-priced bolt-on, but we're going to be very, very cautious this year because our priorities are operating, cost management, working capital improvement, and really just getting DGD lined out and living through the lower-priced inventory. I mean, we're trying - as you step back macroly, what are we trying to do? We're trying to work towards a share base of owners of this company that both understand that there's going to be some volatility in commodities. We've got a very well-managed business model globally. And then ultimately, this thing, once we're in position in '25 here, we'll have chances for all kinds of share repurchases to ultimately considering a dividend. And that's where we're headed. And then ultimately, as we go into '25, we've got some debt maturing or going current, as they say. And we've got to figure out the long-term capital structure. But right now, for us, it's really just - as we've said, it's just a real focus on margin management, spread management around the world, which I got to give credit to the team. They've done a nice job. And that's what's evident. If you look between Q4 and Q1, with a massive price decline again of 20%. But yet, other than the inventory adjustment, you were 3 something in Q4 and 3 low in their 3 low in Q1 with a 20% fat price decline. And so that's attributable to people making the changes in the spread management ratios around the world.

Unknown Executive, Unknown

I would just say that we get asked regularly about what about an SAF 2 on top of our subsequent to the SAF 1. And we've got the engineering for that and that's something that, as the year progresses, I would say, given the fact that we get up and running with Q4, and we are able to contract at the margins and the returns that we are expecting, then an SAF 2 is something that we've got in the holster for some time in potentially '25.

Operator, Operator

The next question comes from Adam Samuelson from Goldman Sachs.

Adam Samuelson, Analyst

I wanted to revisit the outlook on DGD margins as Randy mentioned around $0.75 a gallon, give or take. You essentially reached that figure in the first quarter, not counting the LCM adjustments. I'm trying to consider the margin capture at DGD, especially with waste fats still being offered at a substantial discount compared to vegetable oils, which suggests a decline in margins for the Feed segment. How do you view the adequacy of DGD's margin capture in light of the pressure on the feed business? Or do you believe the issue lies with the LCFS, needing to exceed 60 to elevate those values, thereby enhancing both the margin realization at DGD and the demand for waste fats in the feed business?

Randall Stuewe, CEO

Yes. And I'll tag this with Matt here. #1, Adam, I'm just going to step forward and just say, I've learned my lesson here a little bit. We're coming out conservative. Clearly, the LCFS has not reacted to what I think is a very positive future look here. I think the RINs SMB is going to tighten up here because this renewable diesel capacity is real or we wouldn't be at discount and soybean wouldn't be a discount to palm oil. So ultimately, this is just a projection in time that we believe, as we approach '25 that, that margin structure can improve quite a bit, but that's what we see right now. Matt, Bob?

Matthew Jansen, COO

I would just mention that there is a timing discrepancy in our Feed business; the fat prices are reflected more responsibly in the results compared to the price movements in DGD, primarily due to the supply chain management needed to maintain a 1.2 billion to 1.3 billion gallon business. It has a longer timeline, and we've noticed this trend over the past few months. While prices have decreased, the feedstock prices at DGD haven't dropped as quickly. Thus, there is a timing mismatch. However, in the broader context, I would say it's performing exactly as we anticipated.

Randall Stuewe, CEO

Yes. I think from Adam, from not to get too deep in the sausage grinding, but if we would have rewind the movie 1.5 years ago, DGD3 when it came online between the system would use 2/3 of North America's waste fat supply. So we made a strategic decision to qualify feedstock suppliers from around the world, including our own plants in Europe and South America. And that's the length of the supply chain. That's the good news. We qualified other people and found other sources. The bad news was that in a deflationary environment, that supply chain was much longer and that had to play out in Q4 and Q1. And then you top on that is that there is all these expectations between the some of the Gulf Coast guys we're going to pretreat, the West Coast guys, we're going to pretreat and we've never found a consumer yet for Darling's waste fats in North America. So we woke up in Q1 here or Q4 and Q1 really with DGD as the only capable technology of pretreating our fat. Bob, anything you want to add?

Robert Day, CSO

I will provide some insights from a broader supply and demand perspective on renewable diesel. There is a notable difference between 2024 and 2025. In 2024, we were aware that the RIN supply and demand would be somewhat imbalanced. We expect to produce between 8 billion and 8.5 billion D4 and D5 RINs this year, while the renewable volume obligation (RVO) stands at 5.55, with a possible shortfall of 1 billion in D6. This results in approximately a 2 billion RIN oversupply. However, in 2025, the RVO will rise to 5.95. Additionally, the transition to the producer's tax credit will significantly reduce support for imported biofuels and domestically produced biodiesel, accounting for almost 4 billion of the total 8 billion to 8.5 billion RINs. Therefore, we expect a significant shift. Currently, the biodiesel margin is around $0.20 per gallon without the blenders tax credit, but it would drop to minus $0.80. This means that for biodiesel to break even, RINs must perform well. Consequently, we are optimistic about RINs as we approach 2025. Additionally, looking at the regulatory impact assessment, CARB estimates that we could see LCFS credit values reaching around $1.30 per gallon, which is their goal. When we consider all these factors, it strongly indicates that renewable diesel margins will improve in the future. As we near the end of 2024, we believe the market will recognize this reality and begin to respond accordingly.

Adam Samuelson, Analyst

Okay. If I could follow up on that last point, I want to address the question of flat price for vegetable oils. In that scenario, there will be considerable demand for vegetable oil and waste fat, but finding a market for waste fat in biodiesel may become difficult. While it's possible that the discount for waste fat compared to vegetable oil could decrease or disappear, this may create downward pressure on the broader vegetable oil market. Are you worried about that at all?

Randall Stuewe, CEO

Our perspective remains clear. A stronger Low Carbon Fuel Standard in California will enhance overall demand. However, it does favor renewable diesel over biodiesel. While biodiesel is mainly made from vegetable oil, much of the renewable diesel, apart from Diamond Green Diesel, is also derived from vegetable oil. Moving forward, we anticipate an increase in the use of animal fats. This trend indicates a growing demand for used cooking oil and animal fats, while the demand for vegetable oil may decrease, leading to a convergence of price spreads. Nonetheless, the overall demand for fats and oils is likely to remain stable; it's primarily about the price differentials between the various products.

Matthew Jansen, COO

The only thing that I'd add is it would come down to ultimate crush capacity and whether or not crush, given the new crush plants out there, do they start to scale back. That always takes longer than you think it does, but that's the kind of the wild card that's out there.

Randall Stuewe, CEO

That's a really good point, Matt. Crush margins for soy are currently not favorable and are not expected to improve significantly in the next couple of years. One way the vegetable oil industry can manage supply is by reducing crush. With crush margins at $25 a ton, it's not far from the possibility of slowing down production.

Matthew Jansen, COO

What surprise me to see imports drop off as well as I think that freestanding biodiesel refineries will be disadvantaged.

Operator, Operator

The next question comes from Manav Gupta from UBS.

Manav Gupta, Analyst

Guys, you said you were constructive on the LCFS prices. Recent CARB workshop for the first time introduced the concept of a 7% step down or 9% step down for 2025 versus the proposed 5% step down. Do you think CARB is finally recognizing that the prices are too low and there is a strong possibility that now when the revised numbers come out, you could see a 7% step down or a 9% step down, which actually hits the credit bank pretty hard?

Unknown Executive, Unknown

Yes, we are projected to be at 13.75%, which means a step down of 5%, 7%, or 9% would all represent a significant increase from our current position. We understand that the regulatory impact assessment has set goals regarding the trading of LCFS credits. We believe they will implement a step down that aligns the market with the prices they deem appropriate. Following a recent workshop, there has been extensive constructive dialogue. Regardless of the scenario, any step down will be from our current levels, which contrasts with earlier discussions. It's difficult to predict the exact outcome, but we are confident it will be informed by solid data and analysis when the decision is made.

Randall Stuewe, CEO

Yes. Keep in mind, Manav, the kickoff has always been aimed for 2025. Perhaps everyone was a bit overly optimistic in thinking that CARB would progress more quickly. It's still a structured and methodical process. I believe they will publish something soon and it will be presented at a Board meeting in July. After that, we will understand the timeline for execution.

Manav Gupta, Analyst

Perfect. My quick follow-up here is on the DJD margin for the quarter. I mean it was a big improvement from $0.41 to $0.76. But as you highlighted, there was this still a feedstock lag effect working against you. Like so if we adjust for that, the price decline in the feedstocks, would it be fair to say that if the feedstock prices had not moved at all, this $0.76 could easily be like $1 for the quarter? I'm just trying to quantify the impact of the feedstock price lag for the quarter.

Unknown Executive, Unknown

Well, I don't see the exact calculation, but I would say that generally speaking or directionally, that seems correct.

Operator, Operator

The next question comes from Paul Cheng from Scotiabank.

Paul Cheng, Analyst

Randy, I don't know if you can comment. DGD, the first quarter sales seems really high comparing to the production level. So I assume that we are drawing down inventory. So at this point, how much is the inventory that will remain? In other words, for the rest of the year, should we assume that sales, it will be pretty closely aligned with the production volume or that is still going to be in excess of the production volumes.

Matthew Jansen, COO

This is Matt. I'll answer that. First of all, DGD does not really have a program to store a lot of finished products. The operational intention and expectation is to ship what gets produced. From time to time, as we transition between months and quarters, some invoices may not be processed in one month and could carry over to the next. This can lead to a shift in what you're seeing. That's likely what you're referring to here.

Randall Stuewe, CEO

Yes. For the year, I believe we are still aiming for a total production and shipment in the range of 1.3 to 1.350. It really depends on the timing of vessels, barges, and railcars. As we transition into Q4 and take 250 million gallons of R&D offline, most of the SPK and SAF will likely be moved by rail or barge. There may be some timing considerations, but our focus is on production and the timing of sales will fall into place.

Paul Cheng, Analyst

I understand. The second question is regarding the feed volume from an unclear source. With the recent small acquisition, you will have three additional plants and also what is returning. Randy, could you provide some insight into how the volume is expected to change sequentially?

Suann Guthrie, IR Manager

Can you repeat that, Paul?

Paul Cheng, Analyst

If we are looking at the feed ingredient segment from the first to the second quarter, what should we expect in terms of volumes considering you just completed a small acquisition that adds three plants and you also have the rebuilding that is currently in progress? I understand that it may not be a direct correlation, but will we see any incremental benefit in volume for the feed ingredient as we transition from the first to the second quarter?

Randall Stuewe, CEO

Yes. When I look at North America, Matt can provide more details, but globally, we've made procurement changes in our spreads in Europe and are still actively pursuing them in South America. We have a large volume of raw materials due to cattle slaughter and shipping from the U.S. to South America. North America is already benefiting from the recent addition of Ward, which is a significant advantage as we were previously operating at full capacity and working through Saturdays, relieving some pressure from the system. Additionally, we've seen modest pricing improvements on the fat side in North America, with slightly better results in Europe that reflect palm oil values as an alternative. For Q2, the core ingredients business appears to be stronger at this time. We don't have April numbers yet, but the operating team feels more positive compared to Q1. Matt, do you have anything to add?

Matthew Jansen, COO

I think you covered it, okay.

Operator, Operator

The next question comes from Andrew Strelzik from BMO.

Andrew Strelzik, Analyst

My first one is a 2-parter on the guidance. I think a month or so ago, you maybe were at a conference, and I recognize it wasn't formal guidance or anything like that. But you kind of insinuated that the market environment kind of suggested a $1.55 billion, $1.6 billion type of EBITDA number and - so I guess I was just hoping that maybe you could bridge from your comments at that time. So now the formal guidance of $1.3 billion to $1.4 billion. And then secondarily, you kind of alluded a little bit to this in the last question, but you talked about a back half kind of loaded year. Is that just a reflection of the first quarter? Or is Q2 also a little bit limited and then kind of we see the full acceleration in the back part of the year?

Randall Stuewe, CEO

Yes. #1, Andrew, my crystal ball had fog in it when I gave that prediction before. But it was hinged on a couple of things. 1, it was hinged on some optimism that the LCFS market would come back upon realizing what was going to happen to do that with the change of CARB. And #2, just believing that waste fats couldn't stay down below world veg oil prices very long. And first off, I was wrong on both of those. It's a timing thing. We're saying Q2 is going to be stronger than Q1 from the core ingredient side. And then obviously, we got a turnaround in DGD coming on here. For DGD 3, and I think that plant ran 15 or 18 months before we turn it around, which is an absolute amazing deal, and that's to do the tie-ins also for SAF 1. So it's really - when I talk about back half of the year, we're going to pick up momentum. You get the LCFS announcement out there and people then realize that it's real. People realize that these RD plants aren't running at the rate or going to run at the rate that should help things as you move into - as you get closer to next year, you realize that the RVO is going to have less imports, 800 million, 900 million gallons. That has to have a positive effect on both RINs and domestic feedstock values and ultimately, what else am I forgetting guys? I mean what else is going to drive this?

Unknown Executive, Unknown

I think that I would just - historically speaking, I would say Q3 is naturally a challenge for us to keep in mind as we plan for this. Principally due to just to the summer heat and all, but we're ready for it. So...

Andrew Strelzik, Analyst

Okay, great. That was helpful. And then my other question is just on the adjustments you're making to the procurement process and the operating costs, which you've been talking about for the last several months, so that's not entirely new. But I'm just curious are you finding new opportunities within those buckets? And you referenced some of the evidence that some of that is already playing out. But I guess, how would you frame the extent to which you've realized those benefits versus kind of incrementally what might be to come in future quarters?

Randall Stuewe, CEO

No, it's a very fair question. I mean, number one, typically, a lot of the procurement formulas in North America were CPI based, and they had to be relooked at that one enough. In a lot of cases, we've given a lot of labor increases post-COVID and so as these contracts matured and changed, we've had to step out. And then 7% interest rate on these assets is a different calculation in diesel fuel and $4.50 a gallon. So it's just been a comprehensive look all around, and the team has been very open to it. As I said, we've had a tailwind since fourth quarter 2019 and then the wins changed and deflation hit and you have to go look at this stuff, and we've done it. I mean the Brazilian acquisition has really been a good acquisition. It's meeting business case, but it's one where we're having to be when you transition from a private owner to a public company, I've always said and the guys have heard me say private owners run for tax avoidance, public company runs for earnings. And that requires us to make changes in the raw material procurement from the slaughterhouses down there more often than has been historically done. So I think there's nothing really tangibly too new of what we're doing here, other than we've given the team - #1, you've seen us take CapEx down solidly $100 million for the year. #2, we've kind of just told that we've had to work with the teams to just say, 'Hey, until we see fat prices come up, you've got to be really cognizant of cost management.' And so that's kind of where we're at. And you guys - anything you want to add to that?

Unknown Executive, Unknown

I'd just say, look, I appreciate the question. It's a pretty prevalent theme around here. Our suppliers, they've got several options. They can go to another rendering plant. And meanwhile, we're kind of at capacity across the continent. They can go to landfill and landfill is less acceptable and more expensive every day or they can build a new rendering plant. And that's a whole lot more expensive than it was a few years ago. And so all that is taken into consideration when we're repricing agreements. We don't realize an immediate impact in a 1-month period from restructuring these agreements. And a lot of these, they come up at their 3-year agreements. But over time, we're in a really healthy position given the book value of our assets relative to replacement value.

Operator, Operator

The next question comes from Derrick Whitfield from Stifel.

Derrick Whitfield, Analyst

Randy, focusing on guidance and kind of pulling you back closer to your previous crystal ball projection. I can certainly appreciate the conservative EBITDA guidance as your stock doesn't reflect meaningful value for DGD, and you've now taken out the bare case with the guidance. Having said that, if we assume fat prices remain depressed and annualized Q1, you could easily be above the top end of your guidance based on DGD spot margins north of the dollar per gallon with no contribution from SAF. And kind of thinking about the interplay between your businesses, assuming static RIN and LCFS prices, lower fat prices are a net positive for Darling as the impact for downstream is far greater than the impact for upstream. Is that fair?

Brad Phillips, CFO

I missed that last part.

Unknown Executive, Unknown

Lower fat prices are a net benefit to Darling in the future.

Brad Phillips, CFO

Yes. I mean, I think that's right. Given the relative size of DGD today and its capacity, it's a very good hedge for the base business of Darling.

Unknown Executive, Unknown

Yes, the leverage is there. But I also remind people wearing my selfish Darling hat that I keep 100% of any fat price increase on this side of the table. What we're really looking for at DGD is an LCFS health and then it really has a chance to be a double win for us.

Derrick Whitfield, Analyst

Completely agree. I think everything comes when LCFS prices go higher. Regarding the progress that you guys have made with your collagen peptide research and products, how should we think about the build-out of that business line or those business lines? And what the run rate potential could be?

Unknown Executive, Unknown

Yes. I mean, look, let me just back up a second. I think what really excites us about that is not just the progress we've made in developing peptide profiles. But the infrastructure that we have globally to deliver on a portfolio of value-added products. So with the acquisition of Gelnex, we essentially have access to low-cost collagen production around the world. And we have the capacity needed to develop this portfolio. So without a significant amount of additional investment, we're in a position to do this. As the announcement said recently that we're coming out with a product that will secrete GLP-1 into the body and have health benefits that way. We have several other products that are in the pipeline right now. It's hard to predict exactly when those - when we can complete that process and when we're going to be launching. But I think we're very confident that we're going to have several over the next couple of years that we're going to be able to bring to market.

Operator, Operator

The next question comes from Ryan Todd from Piper Sandler.

Ryan Todd, Analyst

Maybe just a couple of follow-ups from earlier questions. I mean as we think about fat prices and how you think about the trajectory over the course of the year, I mean, the supply side, in particular, is hard for us to wrap our heads around because of the wide range of sources on a global basis. But is the biggest single thing that we should be looking at in terms of that price recovery over the course of the year? Is it really the ability of the North American renewable diesel industry to ramp up consumption of waste fat to the pretreatment units between now and year-end? Is that kind of the single biggest driver on the demand side? Or are there other big things on the demand or supply side that we should be thinking about in terms of fat market recovery?

Randall Stuewe, CEO

I'll begin, and then Matt and Bob can contribute. From my perspective on the global side, we have a significant amount of crops available worldwide. While there are some areas experiencing minor dryness, global stocks of oilseeds remain very robust. We're witnessing a substantial shift in the processing of these oilseeds, which is still unfolding. Additionally, oil prices have reached around $80 a barrel. Historically, this typically leads to a decrease in palm oil availability in Asian markets. Recently, Malaysia and Indonesia have increased their biodiesel mandates to 35%, while South America has raised theirs from 6% to 20%. This indicates that movements are beginning to occur, and even small adjustments can significantly impact the supply and demand of fats and oils globally. On the North American front, our calculations suggest that the U.S. will need to import 4 billion pounds of fat to support production capacities. This raises questions about China's purchasing decisions—whether they will opt for finished products, seeds, or more palm oil. Bob, do you have any comments to add?

Robert Day, CSO

I think you highlighted what's most crucial, and that's really global demand. In the fuel sector, as you mentioned, Palm can fit into conventional fuels, but what's really important for us to focus on is the biofuel policy. We need to consider how that is developing as we approach 2025, 2026 and beyond. The high prices we've experienced have led to an increase in the supply of waste oils entering the market. This presents a significant opportunity for more regulations and policies that will support biofuel production. Ultimately, demand needs to emerge from this to effectively absorb the additional supply we've noticed in the market.

Ryan Todd, Analyst

Great. Regarding your earlier comments on SAF, it appears that discussions suggest the expectation on the commercial side is that renewable diesel will be priced at about $1 to $2 a gallon above SAF economics. Is that a reasonable estimate, or is it too early to determine? I understand there are factors related to cost and yield. If that is the case, what kind of margin improvement can we expect from SAF production compared to RD production?

Matthew Jansen, COO

This is Matt. I would say that from a SAF margin standpoint, where we have - in the discussions that we're having right now and they are going to be well within our expectations of our investment thesis and both from a volume as well as a margin standpoint. So we - the plant has yet to turn on, and we're taking the right steps in order to get this in a place where we think it needs to be. And so I would just say stay tuned.

Operator, Operator

The next question comes from Ben Kallo from Baird.

Ben Kallo, Analyst

Can you discuss how you've incorporated the SAF tie-in into your guidance and the extent of its impact? It would be helpful to consider this when we look ahead to next year.

Unknown Executive, Unknown

So there is no SAF in the '24 guidance. And the tie-in DGD 3 is going to do a catalyst change in Q2 and be ready for the tie-in. So we won't have to be shutting down our RD facility as the SAF plant is up in. So we're staggering that to have the DGD 3 line ready to go for a full run as we tie in the SAF line. And as mentioned, we'll be operational in Q4 on the SAF side.

Ben Kallo, Analyst

Okay. On the Food segment, the one-timer should we look as a one-timer expiration or whatever? Or is that going to carry into Q2? Or how should we think about Q2?

Randall Stuewe, CEO

Yes. I mean I think KPMG always gets mad at me when I call it a one-timer, so I can't use that word Ben Kallo. But - at the end of the day, you got to add back that 25, and that's really the solid run rate of what we would say for the Food segment this year. And then next year, as Bob was alluding then hopefully, we start to build a portfolio of sales on the new peptides here.

Operator, Operator

The next question comes from Heather Jones from Heather Jones Research.

Heather Jones, Analyst

First, I want to mention that the ARB for Chinese UCO and Brazilian tallow has closed, and for Chinese UCO, it was purchased at a significantly wider margin. Considering that you've noted the RD plants have not been ramping up as expected, with this closure in DGD, U.S. fats are now cheaper. If DGD continues to operate at its usual capacity, wouldn't that lead to a considerable enhancement in domestic fats in the U.S.?

Randall Stuewe, CEO

I think Matt, Bob, and I are on the same page regarding our strategic decisions. Collectively, as the JV owner of DGD, we determined that owning the global arbitrage was essential, and we are investing in Port Arthur to facilitate direct unloading there. This is crucial for our long-term margin management. We've consistently highlighted that the primary asset for DGD is the real estate it owns and operates on the Gulf Coast, serving both inbound and outbound needs. Therefore, it’s common for one region in the world to command a premium over another. Currently, we are observing that the U.S. and Canada are less expensive compared to imports, which should benefit us moving forward. As we develop our portfolio of suppliers and inputs for the DGD system, we have various markets worldwide that require different or qualified fats based on their carbon intensity. This ongoing management of arbitrage is what has provided DGD with superior profitability relative to competitors. While market dynamics will shift periodically, I don’t foresee a complete transition to domestic sourcing followed by importing, as that isn’t feasible given our scale. I’m not sure if Matt has any additional insights.

Matthew Jansen, COO

I want to clarify that the main factor driving our decisions in DGD is margin. We aim to purchase the least expensive available feedstock, taking into account all relevant factors, including the carbon intensity score. In response to your question about the lower domestic price, that is precisely where DGD is currently concentrating its sourcing efforts.

Operator, Operator

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