Earnings Call Transcript - DAR Q3 2023

Operator, Operator

Good morning and welcome to the Darling Ingredients Inc. Conference Call to discuss the company's Third Quarter 2023 Results. After the speaker's prepared remarks, there will be a question-and-answer period and instructions to ask a question will be given at that time. Today's call is being recorded. I would now like to turn the call over to Mr. Suann Guthrie. Please go ahead.

Suann Guthrie, Executive

Good morning. Thank you for joining the Darling Ingredients third quarter 2023 earnings call. Here with me today are Mr. Randall C. Stuewe, Chairman and Chief Executive Officer; Mr. Brad Phillips, Chief Financial Officer; Mr. Bob Day, Chief Strategy Officer; and Mr. Matt Jansen, Chief Operating Officer of North America. Our third quarter 2023 earnings news release and slide presentation are available on the Investor Relations page under Events and Presentations tab on our corporate website and will be joined by a transcript of this call once it is available. During this call, we will be making forward-looking statements which are predictions projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results 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 will hand the call over to Randy.

Randall C. Stuewe, CEO

Thanks, Suann and good morning, everyone, and thanks for joining us for our third quarter earnings call. Darling's global ingredients platform delivered as predicted and DGD faced some headwinds and operational challenges during the quarter. Overall, we feel good about the momentum we are carrying into the fourth quarter and 2024. Turning to the Feed Ingredients segment. Raw material volumes were flat compared to the third quarter 2022. Our gross margins have returned to pre-acquisition levels demonstrating our ability to successfully integrate Valley and FASA. Our work is not done and we expect further improvement. Fat prices were lower year-over-year, but sequentially improved late in Q3. Turning to our Specialty Food Ingredients segment. Raw material volumes increased 18% year-over-year due to the Gelnex acquisition. Our global collagen platform delivered solidly and we continue to shift our product mix into higher-margin products. Hydrolyzed collagen remains an important part of our long-term growth strategy within the Food Ingredients segment. Earlier in the quarter we commissioned a new spray dryer in Epitacio, Brazil, adding much-needed capacity to continue our growth. I'm also excited to share that our research and development efforts in this segment have resulted in our ability to formulate a product that targets specific health concerns such as glucose moderation. We are currently in scientific trials and expect to bring this ingredient to market during 2024. On October 26, we announced that DGD volumes for the third quarter were lower due to a regularly scheduled turnaround at number 2 in St. Charles, Louisiana, that took the unit offline for 27 days. After that turnaround, DGD 2 experienced a minor operational disruption. So in total, DGD 2 was offline for 37 days in the quarter. This resulted in lower gallons produced, higher cost, and lower-than-expected operating profits. Year-to-date, DGD has sold 910 million gallons of renewable diesel at approximately $1.02 per gallon EBITDA. And Darling has received $163.6 million in cash dividends year-to-date. With that, I'd now like to hand the call off to Brad and then I'll come back and discuss the rest of my thoughts for 2023 and 2024.

Brad Phillips, CFO

Okay. Thanks, Randy. Net income for the third quarter 2023 totaled $125 million, or $0.77 per diluted share, compared to net income of $191.1 million, or $1.17 per diluted share for the third quarter of 2022. Net sales were $1.63 billion for the third quarter 2023, as compared to $1.75 billion for the third quarter 2022, representing a 7% decrease in net sales. Although, Darling's third quarter 2023 gross margin increased $10.1 million and was 23.8% as compared to 21.5% for the third quarter of 2022, operating income decreased $90 million, or 33.5% to $178.4 million for the third quarter of 2023, compared to $268.3 million for the third quarter of 2022 primarily due to Darling's share of Diamond Green Diesel earnings decreasing $49 million. Additionally, depreciation and amortization and SG&A increased about $21 million and $32.6 million respectively as compared to the third quarter of fiscal 2022 primarily due to the Gelnex and FASA acquisitions. Now moving to non-operating results. Interest expense increased from $39.8 million in the third quarter of 2022 to about $70.3 million in the third quarter 2023, primarily as a result of increased indebtedness due to the acquisitions. For the three months ended September 30, 2023, the company reported an income tax benefit of $15.4 million and an effective tax rate of negative 13.6%, which differs from the federal statutory rate of 21% due primarily to the relative mix of earnings among jurisdictions with different tax rates and biofuel tax incentives. The company's effective tax rate excluding the biofuel tax incentives and discrete items is 25.9% for the three months ended September 30, 2023. The company paid $40 million of income taxes in the third quarter. For the nine months ended September 30, 2023, the company reported income tax expense of $52.3 million and an effective tax rate of 8.4%. The company's effective tax rate excluding the biofuel tax incentives and discrete items is 28.4% for the nine months ended September 30, 2023. The company also has paid $127.7 million of income taxes year-to-date as of the end of the third quarter. For 2023, we are projecting an effective tax rate of 9% and cash taxes of approximately $30 million for the remainder of the year. The company's total debt outstanding at third quarter 2023 was $4.4 billion as compared to $3.4 billion at year-end 2022. Our bank leverage covenant leverage ratio at the end of the third quarter was 3.25 times. We continue to maintain strong liquidity with $1 billion available on our revolving credit facility as of the quarter end. Capital expenditures totaled $146.2 million for the third quarter 2023 and $380.6 million for the first nine months. With that, I'll turn it back over to you, Randy.

Randall C. Stuewe, CEO

Hey, thanks, Brad. As previously announced a few weeks ago, we revised company guidance to $1.6 billion to $1.7 billion of combined adjusted EBITDA for the full fiscal year 2023. For Q4, we are carrying good momentum in from the third quarter around the world. Raw material volumes have slightly softened, but our diversified geographic footprint makes the impact negligible. Clearly, global fats and oils have softened as a direct reflection of an ample supply of global fats and oils and delayed start-ups and inconsistent operations of renewable diesel plants. While we've seen a lot of press and noise about significant gallons of new renewable diesel coming to the market, the numbers appear to tell a very different story. If more capacity outside of Diamond Green Diesel was operating, fat prices undoubtedly would be higher. DGD is performing well and we do not have any planned turnarounds in Q4. Margin structures are adjusting and we are very encouraged with the conversations we are having with a variety of interested parties regarding sustainable aviation fuel and our ability to deliver the margins in line with what we have communicated. Looking forward to 2024, while the heavy lift of our integration work has been completed, there are still a few opportunities that can add some margin improvement in our Feed segment and our Food segment should continue to reflect our product mix shift. From an earnings perspective, we see 2024 shaping up nicely and expect to deliver and delever with an improved performance globally. The table is set with an improved outlook for the LCFS, growing demand for SAF, strong demand for our low CI feedstocks and favorable tax structures. Given the environment we see for 2024, we anticipate combined adjusted EBITDA to be in the range of $1.7 billion to $1.8 billion. In 2024, we plan to lower capital expenditures, focus on improving our working capital usage and anticipate regular dividends from Diamond Green Diesel. This will all help us accomplish our leverage targets by year-end. Given the anticipated dividends from DGD and the strength of our Global Ingredients business, we should be well on our way to achieving our target leverage ratio of about 2.5x by year-end 2024. With that, let's go ahead and open it up to questions and I'll come back with some closing comments.

Operator, Operator

We will now begin a question-and-answer session. Our first question will come from Manav Gupta of UBS. Please go ahead.

Manav Gupta, Analyst

Good morning, team. My question first is on a little bit on the macro side. How do you view the recent staff proposal by CARB which increases compliance by 50% by 2030 also has the AAR mechanism which pulls forward the program in case of overgeneration of LCFS? Do you believe this will be supportive of RD economics once it kicks in 2025?

Matt Jansen, COO

Hi, good morning, Manav. This is Matt. First of all, the answer is yes. We believe this is supportive of the RD business. The LCFS is a crucial element in building margins in the RD sector. Considering the SARIA released a couple of months ago and the expected upcoming legislation, there are several factors that we believe will benefit both the RD and SAF businesses. Volume is clearly a key aspect, and there's potential for an SAF in California of around 150 million gallons, which aligns well with our SAF project. Timing is also a factor; there might be an opportunity for earlier implementation. Currently, it's planned for 2025, but there's a possibility of it happening in Q3 or Q4. Overall, we are quite optimistic and pleased with the LCFS.

Manav Gupta, Analyst

Okay. I'm assuming you're basically referring to the fact that the AAR will pull-forward the program into 2024. So the program could actually start in the third quarter 2024?

Matt Jansen, COO

That's the potential, yes.

Manav Gupta, Analyst

Okay. Thank you. Very quick follow-up is on slide 11. You indicate lower fat sales volume were $32 million year-over-year headwind and lower protein sales volume were a $13 million year-over-year headwind. Given that integration is going well for both Valley and FASA, should we assume this was just a temporary blip and the volumes will come back as we go ahead?

Randall C. Stuewe, CEO

Yeah. Manav this is Randy. I mean, what we're seeing in my script I commented on it that's directly related to lower cattle slaughter numbers predominantly in North America. And clearly the cattle economics have changed in the US, the herd is low but being replenished and that's just directly related to year-over-year comparisons. If you think of it this way, the red meat has the most fat, the most protein, and then pork and then chicken. And so that's what that is. The volumes in South America are relatively flat right now. Europe is in good shape but that's all pretty much North America. Canada is in good shape.

Operator, Operator

The next question comes from Adam Samuelson of Goldman Sachs. Please go ahead.

Adam Samuelson, Analyst

Yes, thank you. Good morning, everyone. So I guess first question. Randy if you think about the updated outlook for the balance of this year and you gave a framework for 2024, can you first quantify in the quarter, the resolution in the pre-announcement to a hedge loss at Diamond Green. Can you quantify that? And as we think about Diamond Green for the fourth quarter if there's no scheduled turnarounds, should we be thinking about production a lot closer to where you were in the second quarter, which if true and even at third quarter margin levels would imply a pretty tough to get to the low end of the way you framed the full year. So can you just help us reconcile that?

Randall C. Stuewe, CEO

I wouldn't describe it the way you just did. There is always a timing issue with how fat prices in our core business are reflected. Additionally, it's important to note that a significant portion of our North American portfolio is sold to Diamond Green Diesel. We had a situation where prices began to rise again in the third quarter, but we had already sold to Diamond Green, meaning those sales are now being recognized in Q4 for our core ingredient business. On the other hand, we also saw a spike in heating oil, which resulted in some hedge losses. You can see those figures in the financials and the derivative sections of the Valero release, and they were significant. Meanwhile, we experienced higher fat prices while heating oil was decreasing. Overall, this explains my comment about margins adjusting. When the D4 RIN declined, it indicated that fat prices needed to decrease to restore some margin back into the business. The margins at DGD are recovering nicely in Q4 and should finish the year strong, providing us with momentum heading into next year. As we've mentioned, we can't guarantee there won't be volatility in DGD due to many factors, but currently, we have 910 million gallons at $1.02 year-to-date. We previously indicated we'd be around $1 to $1.10, and we're projecting $1.10 for next year. We expect to finish the year within our guided range, dependent on how everything flows. Right now, we are on track.

Adam Samuelson, Analyst

That's helpful. In the Feed segment, can you clarify the quarter-on-quarter EBITDA decline? EBITDA was down about $26 million compared to the second quarter. Can you break down how much of that is due to seasonality, how much is related to commodity prices, and possibly some weakness in pet ingredients? As we look toward the fourth quarter and where commodity prices might settle, can you help us understand the key factors affecting EBITDA in Feed moving forward?

Randall C. Stuewe, CEO

I think you've addressed most of your question. Typically, we see seasonality affecting this business, particularly in North America and Europe, during the third quarter in the Feed segment. The quality of raw materials during the summer is more challenging to process, which means it's harder to extract fat from the product while preserving protein. As a result, we generally have lower quality fat and less overall fat, which has been consistent for 142 years. Regarding the Pet Food business, it's currently a bit more unpredictable. Pricing remains favorable, and although demand was weak, it is starting to recover. There is a trend where consumers are opting for less expensive options in Pet Food. However, looking ahead to 2024 compared to 2023, it seems stable. Protein prices for most products are in good condition, although there are some trade disruptions globally affecting protein movement. Matt, do you want to add anything else?

Matt Jansen, COO

I would say Q3 was typical of a very hot summer, and our businesses felt that as expected. However, we are seeing a quick return to growth and recovery, especially now in Q4.

Randall C. Stuewe, CEO

Yeah. Keep in mind Adam, a year ago today, not sequentially, but a year ago here we still have Ward, South Carolina operating in North America. Ward, South Carolina is going to be key to 2024 for us as it comes back online here. The plant is completely rebuilt. We are still landfilling a significant amount of product right now that we can't process in our system. So as we guide higher next year, if you say what you always have to assume fats and oils prices and protein prices in there and energy. But most importantly for us, it's being able to bring back our system to full strength on the Eastern seaboard.

Operator, Operator

The next question comes from Derrick Whitfield of Stifel. Please go ahead.

Derrick Whitfield, Analyst

Good morning all and thanks for the 2024 commentary this morning. For my first question I wanted to lean in on DGD and focus on the sustainable margins of your business, which really should drive the value of that business beyond 2024. When we analyze your system margins by assessing the value of your feedstock streams relative to a marginal unit of production, there appears to be a very meaningful positive spread with what you own differentially versus the industry. As you optimize the economics of DGD, is it reasonable to assume that that sustainable margin you've talked about in the past at $1.10 per gallon still stands even with the press E4 RIN prices given your ability to increment tallow at DGD?

Randall C. Stuewe, CEO

Fundamentally, Derrick, that's our belief. Clearly, the volatility in Q3 and the 37-day offline turnaround disrupted our logistics both inbound and outbound, which shifted some boats to Q4 that should have loaded. The D4 RIN plays an important role in the value of that business. We were not hedging D4 RINs and got caught in the volatility with higher fat prices and a lower green premium, which was evident. However, our overall thesis remains unchanged. As Suann pointed out, even in any scenario, our investment case was $0.79 ten years ago based on a $3.23 per gallon bill, and we still hold that belief, which we think has improved now with our CI advantages and logistics benefits. It's important to note that fat prices are a bit lower in North America because Diamond Green is now the largest importer of fats due to its logistical capability to convert and pretreat those fats. As for Phase 2, we're working hard with interested parties, though we won't disclose who they are. We're close on that front. The demand for SAF is real, and the margin opportunities we've discussed are very much attainable. Looking ahead to 2024, Matt suggested there could be a chance for the LCFS implementation to come sooner. Even if it doesn't appear until late in the year, the fact that CARB will publish the playbook is a positive sign that should lead to improvement. Additionally, our SAF plant is progressing well, having successfully navigated hurricane season. We're optimistic about completing the mechanical work this winter and into next summer, leading to a normal start-up. Looking two to three years ahead, we anticipate producing 250 million gallons of SAF by 2025. SAF, too, is in the planning stages, and we will not finalize decisions until we have solid proof of concept regarding technology and margin structures. Overall, as we look at 2024, 2025, and 2026, we expect our portfolio to feature substantial SAF alongside RD, positioning us to capitalize on the arbitrage moving forward. We don't foresee any downside to our case, though there may be a temporary lull the market seems to be pricing in. Matt, do you have anything else to add?

Matt Jansen, COO

I just want to emphasize that as this sustainable aviation fuel becomes operational, the feedstock will be renewable diesel. Our plan is set for 250 million gallons, and when we launch that plant, it will take 250 million gallons of renewable diesel out of the renewable diesel market and into the sustainable aviation fuel market. This is another positive factor for the outlook of renewable diesel.

Derrick Whitfield, Analyst

That's great. Maybe staying on DGD, I wanted to see if you could offer some additional color on the apparent delay, you're seeing in RD capacity expansions, weather delays or simply just difficulty in running at nameplate, which is more challenging than I think we all appreciate. We see the same, but I'd like your views on that as well.

Randall C. Stuewe, CEO

Yes. I'll connect this with the team here. Clearly, as we look at the situation, we are both buyers and sellers of fats and oils globally. When I mention buyers, I refer to the DGD side, and when I say sellers, I mean Darling. At this point, we are not witnessing the expected demand from the renewable companies in North America. In fact, we are actually purchasing materials back from them. I think our curiosity and slight frustration stem from the fact that when firms like Bloomberg release supply and demand reports on D4 RINs, they overlook several key aspects. For instance, they tend to assume that if Phillips 66 announces a plan, it will be operational from January 1 and run at full capacity. If Vertex or PVF, or even HollyFrontier, finally reaches 52% capacity, that's great. However, consistently reading such analyses suggests that this doesn't produce the level of RINs being projected. Additionally, the general public doesn't grasp that when we export materials—significant for Diamond Green due to its Gulf Coast location—those RINs are retired within 60 days, introducing a delay. Ultimately, it's necessary to reassess these projections against reality. Therefore, we are buying back material instead of selling it, which indicates they do not have the pretreatment units they claim or else they would be purchasing the cheapest fats available. Matt, do you have anything else to add?

Matt Jansen, COO

Operating this business is not necessarily straightforward. Whether it's the CI component or the quality of the raw material and the pretreatment component, it demands significant capital expenditures. Those who attempt to cut corners and reduce capital expenses often discover that certain products cannot be processed or do not meet the desired capacities. This is a complex business, and some individuals are beginning to realize that.

Operator, Operator

The next question comes from Dushyant Ailani of Jefferies. Please go ahead.

Dushyant Ailani, Analyst

Good morning, guys. Thank you for taking my questions. The first one I had was on the guidance that you've given for 2024 the $1.7 billion to $1.8 billion. Could you talk a little bit more about what margins do you expect for the Food and Feed segment?

Randall C. Stuewe, CEO

I'm not quite ready to provide that information yet, Dushyant. When we consider our guidance, we believe that for Diamond Green Diesel, we will operate above our nameplate capacity and anticipate earning $1 to $1.10 per gallon next year, excluding any early SAF gallons. It's too early for us to make a definitive projection. We can estimate that the total will likely be between $1 billion and $1.1 billion in our core business, depending on how fat prices improve. As we've mentioned, if renewable diesel capacity is available with enhanced pre-treatability, or even without it, fat and oil prices cannot remain at their current levels. Currently, soybean oil supply and demand is at a multi-year low, and RBD margins that most of our competitors are experiencing are about $1,100 over, which is $0.11 higher than our operations. That's our outlook moving forward. Matt, Bobby, do you have anything to add?

Matt Jansen, COO

I think that's correct. We're currently facing a generally tight supply and demand situation, and a lot will depend on crop production in South America. This will significantly impact protein levels and ultimately oil levels as well.

Dushyant Ailani, Analyst

Thank you. That's helpful. And then one question I had was just kind of your thoughts on buybacks given where the stock prices today? Or maybe just in general I know that the goal is to kind of get to that 2.5 leverage but any thoughts on entertaining higher buybacks, given where the stock is trading?

Randall C. Stuewe, CEO

It is a discussion point with the Board. We have adequate capacity to do that. Clearly, our focus today is as we said is to repatriate cash and get the total debt down and get to at least a discussion point of investment grade as we have some maturities coming in, in 2026 and 2027. So it's not off the table. Clearly, every year we will buy back any executive compensation or dilution for sure. And after that then it's opportunistic. And as the year goes along and as Brad says I have a little extra cash we've been giving the authority to make those decisions. So nothing is off the table here.

Operator, Operator

The next question comes from Paul Cheng of Scotiabank. Please go ahead.

Paul Cheng, Analyst

All right. Thank you. Good morning, guys. Two questions, please.

Randall C. Stuewe, CEO

Good morning.

Paul Cheng, Analyst

Good morning. Randy trying to understand sequentially from the second to third quarter the Feed ingredient revenue is down. The sales volumes are actually flat. And all the market indicators, whether it's used oil tallow, is actually up. We're trying to understand that what's causing the sequential revenue drop from the second to third quarter in the Feed business? That's the first question.

Brad Phillips, CFO

Yeah. Paul, this is Brad. When examining the sequential data, we experience lead and lag effects in many of our contracts. There are timing differences that can arise, especially with the rapid changes in prices that Randy mentioned earlier between the second and third quarters. This interplay of contract dynamics and the lead and lag can create some discrepancies in our results, which I would describe as a bit of distortion.

Paul Cheng, Analyst

So Brad, based on that, should we anticipate seeing more upside in your revenue during the fourth quarter compared to the market indicator, or will the lag effect take longer than that?

Randall C. Stuewe, CEO

Yes. Typically, what you're going to see is that we currently have a significant amount of our internally produced fats and oils, whether from Europe, Brazil, or North America, being directed to Diamond Green Diesel. As for what we produced in August, it has been sold, but it won't be processed until October. The timeframe for some of this is shifting to November and December, and from what we mentioned earlier, there was an increase in fat prices in the third quarter that have already been sold and purchased. These will flow through and are expected to contribute positively to the fourth quarter in the Feed Ingredients segment.

Operator, Operator

The next question comes from Andrew Strelzik of BMO. Please go ahead.

Andrew Strelzik, Analyst

H, good morning. Thanks for taking the questions. My first one is on Diamond Green Diesel. And I think Randy kind of last time you talked about $0.90 or $1 being the cost advantage or the minimum kind of margin to think about for DGD versus the marginal producer? And you kind of talked around this I think a little bit earlier, but I was hoping if you could be a little bit more specific. But do you think that that number has changed at all, with new capacity that's come on etc? Or is that still the right way to think over time about the baseline DGD margin?

Randall C. Stuewe, CEO

Yes. I don't really see anything changing that competitive advantage out there right now. I mean I'm looking around the table and I don't know.

Brad Phillips, CFO

I agree. We view that as a competitive advantage and plan to continue leveraging it to stay ahead. The SAF project will further distinguish us from our competitors.

Bob Day, C-Suite

If I could just add. I think one thing to keep in mind is part of that advantage is DGD's ability to blend all different kinds of feedstocks. And the price relationship amongst those feedstocks changes a lot, from time to time. So the relative advantage is not something that you can pinpoint and be as static. But generally speaking, I think that the advantage that we had before continues to be the case today.

Randall C. Stuewe, CEO

Yes. The DGD mixology has become more complex due to various factors, including the sources of fat from different regions and the timing of their arrivals. We don't operate with a fixed feedstock meeting; instead, we create a mix that satisfies our customers' needs while maximizing yield and extending catalyst life. This process is quite complicated. However, our competitive advantage over RBD soybean oil is currently $0.88 per gallon, without even considering the CI differential. Throughout the year, we have remained aware that Port Arthur is still pending its pathway, which we expect to finalize soon. This means that Port Arthur has not yet realized its full economic potential, but we anticipate that it will next year, pre-SAF. Overall, the advantage we have is sustainable and will likely grow over time. While I acknowledge that there may be some volatility due to timing, I believe the margins are very achievable.

Brad Phillips, CFO

And on top of that advantage there's the value of our integration with our Feed business. And we're producing even the local fat supplies in the US and Canada that a large percentage of that ends up in DGD. And then again, one of the other things back to DGD is the producer's tax credit going forward. We think that DGD is again one more time more advantaged than the others. And when that calculation comes into place. So again we like our position.

Andrew Strelzik, Analyst

Okay. That was really helpful color. I appreciate that. And my second question, following up on some of your commentary around some integration benefits that remain opportunities that remain. We know I think that there's some Valley contracts that go into effect Jan 1. Is that really what you're talking about? And is there any way to quantify that? Or more broadly, are you seeing given kind of the bigger asset footprint with all the acquisitions etc that there's even more opportunity broadly beyond Valley to continue to optimize. Thanks.

Randall C. Stuewe, CEO

Yes. And I think those comments were in the script. I mean clearly, the US operations and procurement teams have made great strides at Valley and then our international team down in Brazil. Taking a private company public is no small task on either continent here and then if you will making them Darling, and we tend to be conservative. We tend to risk manage and we have a margin expectation in our core ingredient business that's very well known and our return standards are etched and metal there for us. And so at the end of the day we've made the success of the Valley integration, as we said has been the ability to improve the raw material procurement contracts and all the little terms and conditions in there. And then ultimately, as I said earlier, we're still short massive capacity on the Eastern seaboard that's ready to come online but as we've shared with others, we're waiting on motor control gear that's due to be delivered here this winter. Otherwise, we'd have that plant back up. But the supply chain we're still moving stuff inefficiently to plants just to support our supply base out there that once the world comes up next winter or next spring, I mean in the Q1 we should be back in good shape there. And then we've got capacity expansions going on down in Brazil right now that are just in the commissioning stages that should be accretive to us next year. So I mean the world looks pretty darn good next year. It doesn't look like we'll have 3% to 5% growth of raw material tonnage as we've seen over the last several years, there's a little bit of contraction of animal numbers out there, whether it's disease or whether it was just margin and feeding people. But at the end of the day you're setting up pretty nice for next year.

Operator, Operator

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

Sam Margolin, Analyst

Thank you. Good morning. I appreciate the opportunity to ask a question. My first question is about the current market environment. You've mentioned the connection to the vegetable oil market. Is there a possibility that fat prices next year could move independently from vegetable oils? My thinking is that if the pressure in the market is due to an oversupply of RINs, reducing biodiesel production could disproportionately influence the supply and demand dynamics of soybean oil compared to fats. Additionally, if there is a surge in LCFS that benefits tallow and yellow grease prices relative to vegetable oils, do you think that scenario could unfold?

Randall C. Stuewe, CEO

I really don't think so. Number one, I think as we've said all along, clearly the Gen one technology of classic biodiesel would be the one that would become challenged. But the reason it would become challenged would be because there will be RD capacity that then would take that supply. You just kind of have to do the numbers. If Martin is really going to run 730 million gallons, that's three million tons of raw material. If P66 can do half of what they think they can, that's another 1.5 million, two million. And then you still got the PBF and you got the Vertexes, you got RAG, Geismar, all these guys that seem to be new demand out there I mean you can see the scenario quickly change. Now the question is what is D4 RIN’s do? Bob, do you want to take a shot at that?

Bob Day, C-Suite

I agree with you, Randy. The only situation that could lead to a decoupling is if renewable diesel production were to significantly drop due to operational challenges. However, if that were to occur, RIN values would likely increase, benefiting our overall network. We don't anticipate that happening. Instead, we expect renewable diesel production to face some difficulties but still maintain strong demand, which will keep the relative prices of fats and oils aligned.

Sam Margolin, Analyst

Got it. Okay. And then just a follow-up on the fats outlook with the LCFS proposal. A lot of people are examining this through the lens of RD margins, but it seems like it could also impact the fat market over time, as carbon intensity would become more important to the values and intrinsic worth of different feedstocks. However, it's very region-specific, only affecting California. So I was wondering what your thoughts are on whether the LCFS proposal might actually be a bigger deal for tallows than for underlying RD margins.

Randall C. Stuewe, CEO

I think we would believe that, we would think it clearly favors low CI as does SAF. I mean clearly, I think if we done the whole conversation today down to one thing, it's about timing. RD is a good business. It's got growing demand globally. SAF is going to be a great business. It's got an incredible growing demand. We got maritime fuels. And by the way, they all favor low CI feedstocks. And we're stuck in this route of saying well, what are margins going to be? Where is D4? Where is LCFS? And at the long-term, as we've always said the competitive advantage of the Gulf Coast real estate whether you're shipping SAF by pipeline both to Europe or to California, it's just going to really work out pretty nice. Matt, I don't know…

Matt Jansen, COO

The only other thing to keep in mind is that obviously the LCFS is specific to California. But as we're doing business in other markets, the LCFS is a reference in our valuation when we're using to determine whether a product is sold to another market or to California. So one way or another that LCFS valuation is built into all of the RD sales regardless of whether it goes to California or not. So that's an important component not to overlook.

Operator, Operator

The next question comes from Ben Bienvenu of Stephens. Please go ahead.

Ben Bienvenu, Analyst

Hi, good morning. I want to discuss 2024. Randy, you mentioned $1.7 billion to $1.8 billion in EBITDA. How do you see that impacting free cash flow? Additionally, what are your priorities for free cash flow as we anticipate a reduction in CapEx budgets at DGD, aside from the SAF expansion you plan to pursue?

Randall C. Stuewe, CEO

Yes. We discussed this with our Board. When considering the company's valuation, we can mention combined adjusted EBITDA, but it's really about the dividend plus the core ingredient business, how much capital expenditure we plan to make, and what is in the merger and acquisition pipeline. For DGD, if we estimate above nameplate at $1.10 a gallon, that could easily translate to $500 million in dividends. In our core ingredient business, if we reach $1 billion to $1.1 billion, that's where we see that $500 million in capital expenditure coming from. This includes approximately $100 million for growth projects related to the new plants we've mentioned. Additionally, there's an interest expense of around $230 million and cash taxes of $160 million, along with some limited buybacks that could increase depending on performance. This would help us reduce debt to about the $4 billion to $3.9 billion range.

Brad Phillips, CFO

We do have one pending transaction that's out there and on Miropasz in Poland which is €110 million that is expected to close likely in Q1. But outside of that I would say, 2024 is an M&A light year on new acquisitions.

Randall C. Stuewe, CEO

I call it an M&A holiday.

Ben Bienvenu, Analyst

You earned it. Very good very helpful and makes sense. On the third quarter, in the Feed business, I want to ask about in the UCO segment. The pricing seems to be much weaker year-over-year than broader UCO quotes would suggest. Is there something discrete or specific that's happening in that third quarter that we should be mindful of as we think about the relationship between pricing in that segment and the pricing of used cooking oil out in the marketplace?

Randall C. Stuewe, CEO

This is Randy. Year-over-year I think prices were down 65% to 55%. So about 20%-ish. Remember Q3 a year ago Diamond Green Diesel III was not operational yet. And so we were still trading a bunch of material around the world. So as Brad said earlier, you got some leads and lags, you've got some quality premiums, you got some training that was going on there. But I don't know anything else you want to add, Brad?

Brad Phillips, CFO

That's it. Oftentimes when we're exporting in the past, there can be some premiums built in there with that exporting. So that will all flush out now that we have all three units on and are going forward.

Operator, Operator

The next question comes from Matthew Blair of TPH. Please go ahead.

Matthew Blair, Analyst

Hey. Good morning. Thanks for taking my questions. I guess the first one is, I think in your recent guidance you talked about that you anticipate DGD margins higher in Q4 versus Q3. And I wanted to see if that's still held. On our modeling it seems like you would receive a pretty nice tailwind from the hedging side of things, but we were worried that there would still be some of that price lag impact from your feedstocks versus the low D4 RINs in Q4 that might weigh on margins. So I wanted to check on that first.

Brad Phillips, CFO

I would say that's the reality of how our book works. We need to manage the pipeline through DGD. There are anticipated purchases, and we're working through that. However, I believe that if you consider the progression through the quarter, December will perform better than October.

Matthew Blair, Analyst

Yeah. We see that too. And so just to be clear the guidance is still that Q4 DGD margins higher than Q3?

Randall C. Stuewe, CEO

We clearly are going to make more gallons. I mean, that's an absolute. And right now if we had to look at it, as Matt said, as each month goes on that margin is widening out spot margins as you can see are much better. We should have a hedge gain coming back provided there's no major rally again in the heating oil market. And that's assuming D4s and LCFS really kind of flat.

Operator, Operator

The next question comes from Jason Gabelman of Cowen. Please go ahead.

Jason Gabelman, Analyst

Yeah. Hey. Thanks for taking my questions. My first one is on the 2023 outlook. And it's a two-parter. The first part of it is you had initially or previously guided to $1.875 billion you reduced that. In hindsight, where do you think you were off from the prior to current guidance? And then as you think about the $100 million EBITDA range for 4Q, how do you think about what's driving the high to low end of that range? And I have a follow-up. Thanks.

Randall C. Stuewe, CEO

I believe there are three main factors that influenced our performance. DGD in Q3 clearly did not meet our expectations, and we are taking a cautious approach for DGD in Q4. Currently, it seems that DGD needs to perform well for us to reach the upper end of our Q4 projections, and we also need the fat prices that weren’t accounted for in Q3 to flow through since they were sold to DGD in Q4. There are timing issues that affect our guidance range. I often ask myself why I continue to manage these forecasts after two decades, but we have a reasonable understanding of the situation. As we moved out of Q2, we indicated that we would see a seasonal decline in Q3, which occurred. A fluctuation of plus or minus 5% isn't bad. However, we did not anticipate the volatility with DGD caused by various factors, including the conflict in the Middle East and the drop in D4 RINs. The fire incident also took us offline for about ten days, leading to a significant disruption. The team managed this situation well, but it required a shutdown and subsequent startup, which took additional time. This accounted for about 20 million gallons offline. Therefore, we are more optimistic about Q4 compared to Q3.

Jason Gabelman, Analyst

All right. Great. And my follow-up is on the 2024 outlook. And it seems like there's a decent amount of crushing capacity for soybeans coming online in the US. And as we sit here soybean oil pricing is still decently above where it was relative I guess to where it was prior to COVID. So it does seem like there's potential for some downside next year and I know you touched on it earlier, but I was just wondering if your outlook factors in all that new crusher capacity coming online in North America and how that can impact vegetable oil prices? Thanks.

Matt Jansen, COO

Yes, this is Matt. I would say that is included in our expectations regarding both oil and protein. These new plants are established projects, and it wouldn't surprise me if some of them face delays for various reasons, similar to what we're observing in the research and development space. Additionally, we haven't discussed much lately about how the increase in interest rates has raised the capital expenditures and the costs associated with building and operating. This is simply the reality of the business. But ultimately, yes, we take that into account in our expectations.

Randall C. Stuewe, CEO

Bob, do you have any comment?

Bob Day, C-Suite

Yes. I think I would just add that near-term imports have had a bigger impact than added crush capacity in the United States for oilseed crush. And the other thing is that we are overall as an industry increasing renewable diesel capacity at a much faster pace than we're adding oil production capacity. Short-term we've got a lot of oil in the system and we've seen pressure on prices. But if you even get out 12 months to 18 months, it's going to be pretty tough for the soybean oil industry to keep up with demand as we see it.

Operator, Operator

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

Randall C. Stuewe, CEO

All right. Thanks everybody for your questions today. As always, if you have additional questions reach out to Suann. Please stay safe, have a great holiday season and we look forward to talking to you in the future.

Operator, Operator

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