Randy Stuewe: Yes, I’ll take a little bit of this. I mean, essentially, you’ve got U.S., Canada, Europe, and Brazil in the Feed segment there. Each one has a different process of margin management. In North America or in the U.S., specifically, it’s clearly about 70% of our raw material in the U.S. is procured under a fixed margin with a sharing of upside. And so when the prices come down, there’s us to share, but there’s a fixed margin that ensures cash flow and profitability. Similar in Canada, but more exposure to commodity up there, Europe probably weigh less in the sense of commodity exposure as they are able to [indiscernible] raw material procurement values or prices down as they need to here to keep their margins. They’d rather have, [ $1,000 or $1,200 of ton fat then $800 a ton fat, but we’ve seen fat there recently traded in the $900s again.
And you kind of got to do the math, that’s in the mid-40s. That’s where the U.S. has now moved back to. In Brazil, we’ve got our challenges there in the sense that we bought a private company that didn’t have the same ambition that Darling has towards margin management. So culturally teaching the procurement team down there to go back to the slaughterhouses. We’re in process there. That will add value over the year. As we look back at 2023, we had a great first half of the year in Brazil, and then we had a challenge as prices came down around the globe to get the procurement team to react and realize that it’s okay to do that. So I know that’s a long-winded answer, Ben. At the end of the day, it really comes down to reaction time and then the lag that it flows through.
So fourth quarter, higher price sales, lower procurement costs, now we’ve got lower sales in Q1 and lower procurement cost. Anything else you guys want to add? Okay. We’ll stick with that.
Ben Bienvenu: That’s great. Very helpful. Maybe shifting gears a little bit and thinking about the Food Ingredients business, a really strong year. Really, it’s been as strong as far back as you can look, it’s an exceptionally strong. As we look forward, can you help us think about the growth runway ahead, what kind of growth CAGR in terms of dollar sales that you expect to deliver in that business and CapEx projects ahead?
Randy Stuewe: Yes. So really, at the end of the day there, in Suann’s slide deck, I still think one of the greatest stories is that quarterly run rate of the Food segment. And of course, then obviously, you get to see the split of 85%, basically being the Collagen Gelatin business and a little bit of it BMCTH the Edible Fats business that we have in Europe there. As we look at that business going forward, clearly, we get a full year of Gelnex. Clearly, I made comments that the consumer demand in the world is lighter at this moment, maybe a little delayed recessionary, but it’s improving. January was a good January, really at the run rate. So long term, as Brad and I have always said, we thought we’d hit around 3.25 this year.
I think [indiscernible] weaker last year, when we had 3.21, all right. So we’re pretty darn close, calling that one within 1% as we did. We still believe that business, over the trajectory over the next three years will break $400 million. That’s the launch of additional of the new peptides and growth of hydrolyzed collagen, shutdown of a tired asset in Massachusetts, finishing up some CapEx. We’ve got our [ fifth spray dryer online ] in Epitacio, Brazil now. So lots of good things happening there. I know when the guys presented the peptide plan for just the glucose moderation peptide, they have a 5-year plan there of getting that to be over a $100 million brand. And that’s just one of what I would say probably 6 to 10 peptides that can be launched out there with very limited capital to convert the factories that we already spent the money on.
Operator: The next question comes from Jason Gabelman from Cowen.
Jason Gabelman: I wanted to ask first on the Feed segment. It looks like gross margin was 24% of sales for the full year, but there was obviously some noise in there with the South Carolina plant down and then with the Valley Protein reimbursement. I was wondering if you could either give some sort of where gross margin percentage would have been in 2023, excluding that noise or where you expect it to go in 2024?
Randy Stuewe: This is Randy and Brad can help me here. Clearly, we took a reimbursement of some expenses that were incurred during the whole year, but 24%, we’ve always said somewhere between 23% and 25% is where that set should operate given really any type of pricing environment just being done by the lag of when the procurement formula has changed.
Brad Phillips: Yes. The other thing there, Jason. So yes, we can’t get into that number, but a little bit of lift there in Q4, but a little bit back to Randy and Matt’s comment earlier in that segment, we still have Ward that’s going to come along. We had the margin management improvement that’s definitely going on at FASA, at Valley Protein has been and is continuing. So that’s where we feel extreme confidence to be in that mid-20s range at least kind of right there as move forward.
Jason Gabelman: Got it. Great. And then on the DGD business, you mentioned that it looks like biodiesel economics are now potentially underwater. Have you seen any capacity reductions from biodiesel plants based on whatever real-time data you have? It’s a bit harder for us to see from the outside and would be a good indication that maybe margins are bottoming if you start to see some rationalization in biodiesel production?
Randy Stuewe: Yes. I think I’ll tag this with Bob. I mean clearly, what we do as a team every day is as we run an analysis industry-wide or whether it’s waste fats, whether it’s renewable diesel, whether it’s biodiesel, it’s refined soybean oil, crude soybean oil. And [ we were in all the fats and look at them. And clearly, what we’ve seen is if you’re in the biodiesel business and you’re running soybean oil today, you’re negative. Now if you remember, a lot of the biodiesel capacity is still with the integrated crusher that’s out there. And they have three choices. They can put it in the [indiscernible] to be exported. They can run it through their biodiesel plant. They can run it through their vegetable oil refinery. And at the end of the day, all they care about is what’s the sense for bushel or dollars per bushel that they make it a crush margin and they don’t care which asset it runs through.
The freestanding guys are clearly the ones that are vulnerable right now. And I’ll let Bob comment about that.
Bob Day: Yes. So I think, first, I’d say we haven’t seen a significant reduction yet. I think this industry, as Randy alluded to, it’s largely egg-based and they do a very effective job at hedging and protecting margins for a certain period into the future. So when margins go negative, they don’t necessarily turn it off right away, but it’s something that you expect to see down the road. As Randy said, also the crushers are going to look at fully integrated companies look at it a little differently. They’re going to look at a fully integrated margin and make decisions. We see about 60% of the industry, though, is stand-alone and they’re more vulnerable to just an absolute biodiesel margin. The other thing I would say is crusher margins have come down a lot as well.
And we’re seeing a significant amount of soybean supply on the market due to a large harvest in Brazil and Argentina. And so the crush margin environment today isn’t anything like it was over the last four years. And so really that whole biodiesel industry, it’s just — it’s got more challenges from a margin standpoint than it did, and we’ll see how all that plays out as we go forward.
Operator: The next question comes from Dushyant Ailani from Jefferies.
Dushyant Ailani: I just wanted to quickly talk about just the LCFS market that meeting was supposed to happen, but I think it’s been pushed out. I don’t know, I just wanted to [indiscernible] from you guys, what you guys are hearing on that end?
Matt Jansen: This is Matt. I mean, we see from our contacts and a lot of what we read in the news in terms of what to come. We know that, that is first of all, fundamentally, the LCFS is something that is very supportive for the industry. How this plays out in California is still remains to be seen. Obviously, we know what came out last year. Now what additional changes are forthcoming from that remain to be seen. So we remain optimistic, and we believe that the — what is in print is a good thing but what other changes are still to come is a bit hard to pin down.
Dushyant Ailani: Got it. And then just going to SAF. I know that Andy, you mentioned roughly $1, $2 above renewable diesel. Just want to understand what would you need to see going into 2025 once SAF capacity is online to maybe think about maybe converting more RD to SAF.
Brad Phillips: I think Dushyant is asking what’s the gating decision for FID on expanding SAF.
Matt Jansen: So that’s a question that we are asking or working on right now. We do have that in the engineering phases right now. One of the things that we are looking to as Randy mentioned earlier, is the commercial contracts against the SAF I plant. As you know, that’s 250 million gallons that of ARD that’s going to come up the market. But we really want to see, call it, a proof of concept in that and have a high degree of confidence. The SAF 2 if it is to come to fruition, will be something in a larger scale. It’ll be a little bit larger investment as well. But it’s something that is absolutely on our radar and it would not surprise me in the next coming quarters if we don’t have some good news in that space.
Operator: The next question comes from Matthew Blair from Tudor, Pickering, Holt.
Matthew Blair: Thank you. Randy, how are you thinking about a potential dividend from Darling in 2024, do you need to hit investment grade first, or is that something that’s on the table?
Randy Stuewe: Yes. I mean, clearly, it’s a discussion point at all times in the Board room. Clearly, our focus this year is to get the debt down to make sure that everybody thinks we’ve de-risked the business on commodity cycles. As I said, this is a very different business than we’ve had in the past. It’s a massive cash generator. Remember, we’ve got debt at DGD and then we’ve got to finish up the SAF outflows on that project. So at the end of the day, this year, we’ll be focused on just paying down debt to the end of the year. And what I shared with the Board and what I share with other people is, remember, we have some really favorably priced bonds or nodes out there. The first one that comes due is in [ April of 26] and that’s the European node that’s in what, low 3.3.
Matt Jansen: Yes, 3 and 5.8.
Randy Stuewe: 3 and 5.8, so then another year later, comes the 5 and something, 5 and 3.8 or whatever did order. Now on the U.S. bond. So we’re not in any rush to do anything there. We’re going to build cash once we have cash and the revolvers paid off, we have all kinds of flexibility to do what we want to do. Clearly, we set in motion and done opportunistic buybacks. We will buy back our dilution of our executive compensation programs, and as we see that the dividend start to come in from DGD, and we’re getting to our leverage ratios that we want that the market expects, then it gives us a chance to do some things. I mean, clearly, we paid for Miropasz here about 26 days ago that was $110 million. And so at the end of the day, was trying to run the business, walk through what I’d say is just a [indiscernible] in global businesses like this.
When you have these big super cycles, big mountains are followed by deep valleys. And so end of the day, we’re navigating out of that, making the adjustments we need. But at the end of the day, when we look at ’24, we’ll get $400 million plus out of the debt. And then when you go to ’25 and you got SAF and you don’t have any other projects going on out there. Then all of a sudden, it’s pretty amazing how much cash you’re generating and that’s when the dividend discussion becomes absolute reality or you’re just going to trap too much cash on the balance sheet.
Matthew Blair: Sounds good. And then just regarding the Valley reimbursement. So it sounds like you don’t want to quantify that benefit in Q4. Could I just ask why?
Brad Phillips: Yes. Matthew, this is Brad. So there’s a confidentiality agreement there. So I’ll say we’ve resolved certain outstanding cost and expense items under a post-close escrow arrangement, which we booked in Q4. That goes back to prior to Q4, some costs. So it’s not just cost in Q4 but there was a confidentiality arrangement with the seller there.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Randy Stuewe for closing remarks.
Randy Stuewe: Thanks everybody for all the questions today. As always, if you have additional questions, please reach out to Suann. Stay safe. Have a great day. We’re off to Scotiabank’s Conference, be presenting tomorrow there.
Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
