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Darling Materials Corporation (NYSE: DAR) Third Quarter 2021 Earnings Conference Call, November 10, 2021, 9:00 AM Eastern Time
Good morning, and welcome to the Darling Ingredients Inc. conference call to discuss the company's 2021 third quarter results. [Operator Instructions] Today's call is being recorded. I now want to hand over the meeting to Mr. Jim Stark. please continue.
James E. Stark - Vice President of Investor Relations
Thanks, Grant. Welcome to Darling's third quarter earnings conference call this morning. The participants in the conference call were our Chairman and CEO Randall C. Stuewe; Mr. Brad Phillips, Chief Financial Officer; Mr. John Bullock, Chief Strategy Officer; and Ms. Sandra Dudley, Executive Vice President of Renewable Energy and U.S. Specialty Business . A slide presentation is available, and you can find the presentation on the "Investors" page under the "Events and Presentations" link of our company website. During this conference call, we will make forward-looking statements, that is, predictions, forecasts and other statements about future events.
These statements are based on current expectations and assumptions and are subject to risks and uncertainties. Due to factors discussed in yesterday’s press release and comments during this conference call, as well as the risk factors section of our 10-K and 10-Q forms and other reporting documents submitted to the US Securities and Exchange Commission, actual results may differ materially . We do not undertake any obligation to update any forward-looking statements.
Now I want to transfer the call to Randy.
Randall C. Stuewe - Chief Executive Officer
Thanks, Jim. Good morning everyone and thanks for joining us this morning. Our core business continues to perform well. In the third quarter, we reported consolidated adjusted EBITDA of approximately US$290 million, of which US$230 million came directly from our global ingredients business. Like many companies around the world, we continue to face challenges that other companies face in terms of labor, transportation, and higher operating costs. Our team continues to execute our business strategy and operate our facilities with high efficiency, and at the same time, starting from the second quarter of this year, we have increased our gross profit margin year-on-year and continuously.
I want to thank all our employees for their continued commitment to the challenges we face in our daily duties. As we all know, Hurricane Ida severely affected DGD's performance in the third quarter. In more than eight years of operation, DGD closed for the first time to protect employees and facility assets from the impact of this major storm. The good news is that the facility was almost undamaged, and it was hit directly by Ada. During the shutdown and restart, we lost approximately 17 days of renewable diesel production. In addition, in terms of good news, DGD Norco's expansion is running well and is about to reach its production capacity, making DGD expected to sell 365 gallons or more in 2021.
We also believe that as the engineering team continues to fine-tune the performance of this expansion, DGD can sell more than 700 million gallons of renewable diesel in 2022. The achievement of Diamond Green Diesel was made possible because of the hard work of the factory’s employees, contractors and service providers. Although many of these outstanding people have suffered damage to their personal property and their daily lives have been disrupted by the hurricane, their ability to return to work, resume operations, and complete the construction of DGD II is very important and special.
We are very grateful for their perseverance in completing their work. In addition, during the quarter, Darling repurchased approximately $22 million in common stock. So far this year, we have purchased approximately US$98 million worth of stock. Year-to-date, our global ingredients business has earned approximately US$628 million in EBITDA, making our annualized operating rate in 2021 approximately US$850 million. With this, now I want to give it to Brad to take us to understand the financial situation, and then I will come back to discuss some of our prospects and some-how things will end in 2021. Brad?
Brad Phillips-Executive Vice President, Chief Financial Officer
OK. Thanks, Randy. Net income in the third quarter of 2021 totaled US$146.8 million or US$0.88 in diluted earnings per share, while net income in the third quarter of 2020 was US$101.1 million or US$0.61 in diluted earnings per share. Compared with the US$850.6 million in the third quarter of 2020, net sales in the third quarter of 2021 increased by 39.4% to US$1.2 billion. Operating income in the third quarter of 2021 increased by 61.4% to US$205.7 million, compared to US$127.5 million in the third quarter of 2020. The increase in operating income was mainly due to an increase in gross profit margin of US$114.1 million, an increase in gross profit margin over the same period in 2020 53.8%. Our operating income improvement was affected by the lower contribution of our 50% Diamond share. Green Diesel's net income was US$54 million in the third quarter of 2021, compared to US$91.1 million in the same period in 2020.
As Randy mentioned earlier, Hurricane Ida affected gallon sales in the third quarter, resulting in lower DGD earnings in the quarter. Our gross profit margin continued to improve year-on-year and quarter-on-quarter. The gross profit margin in the third quarter of 2021 was 27.5%, which is our best performance in the past 10 years. In the first nine months of this year, our gross profit margin was 26.8%, compared with 24.9% in the same period last year, an increase of 7.6% year-on-year. As you can see on pages 4 and 5 of our IR platform, since the management team of our entire business has been committed to improving the profitability of its operations, the gross profit margin has continued to show a positive trend in the past four years. Compared with the third quarter of 2020, the depreciation and amortization of the third quarter of 2021 decreased by USD 7.9 million.
SG&A in this quarter increased by 7.3 million US dollars compared with the same period last year, and decreased by 1.9 million US dollars from the previous quarter. Compared with a year ago, the main reasons for the increase in costs this quarter are related to labor, travel, and others. Compared with the third quarter of 2020, interest expenses in the third quarter of 2021 decreased by US$3.4 million. Turning now to income tax, the company recorded $42.6 million in income tax expenses for the three months ending October 2, 2021. Our effective tax rate is 22.3%, which is different from the federal statutory tax rate of 21%, mainly due to biofuel tax incentives, the relative combination of income between jurisdictions with different tax rates, and certain taxable income items based on foreign income in the United States. In the nine months ending October 2, 2021, the company recorded income tax expenses of $126.3 million, and the effective tax rate was 20.2%.
As of the end of the third quarter, the company had also paid $36.9 million in income tax year-to-date. For 2021, we expect the effective tax rate for the remainder of this year to be 22% and the cash tax to be approximately US$10 million. Our balance sheet remains strong. As of October 2, our total outstanding debt was US$1.38 billion, and the bank's contractual leverage ratio was 1.6 times at the end of the third quarter. Capital expenditures for the third quarter of 2021 are US$65.6 million, and total expenditures for the first nine months of 2021 are US$191.7 million. As a reminder, this capital expenditure does not include our share of capital expenditure in Diamond Green Diesel, which continues to provide substantial funds in DGD from internal resources.
Now I will turn the call back to you, Randy.
Randall C. Stuewe - Chief Executive Officer
Thanks, Brad. As our global ingredients business and Diamond Green Diesel continue to perform well, as we pointed out in our press release yesterday, we will maintain our 2021 consolidated adjusted EBITDA guidance of US$1.275 billion. Our global platform is gaining momentum because we have completed the best year in our history and hope to build on the 2022. I want to spend a few minutes discussing capital allocation. In the past few years, we have discussed the best use of our cash in Darling through five points, and these have not actually changed. These five points are: investing in DGD, developing our core business, achieving investment-grade debt ratings, meaningful stock repurchases, and possibly formulating dividend policies for our shareholders.
We believe that most people participating in this conference call know that our future cash generation will be sufficient to solve all these problems in our capital allocation plan. As our free cash flow continues to grow, we will continue to work on implementing this plan. I don't need to point out that we did make an earlier decision to speed up the construction of DGD in Port Arthur, Texas, which will invest a lot of capital for DGD in 2022. This does promote the potential distribution scale of the joint venture in 2022, but it increases the potential in 2023. I also want to add that our M&A opportunities have increased our global low-CI raw material footprint and improved our green bioenergy production capacity. This may adjust the priorities in our capital allocation plan, but it will not limit our ability to implement all the points I have already mentioned.
So, Grant, let us continue the question and answer.
[Operator Instructions] Our first question today comes from Adam Samuelson of Goldman Sachs. please continue.
Adam Samuelson-Goldman Sachs-Analyst
Yes, Thanks. Good morning.
Randall C. Stuewe - Chief Executive Officer
Sandra Dudley-Executive Vice President of Renewable Energy and U.S. Specialty Business
Adam Samuelson-Goldman Sachs-Analyst
So I think my first question is about policy, just considering some new incentives-the "Rebuild Better Act" is being passed in Congress, especially the sustainable aviation fuel tax credit, and then the clean fuel production credit. After 2026 and beyond. Randy, I just want to hear what you think about DGG's opportunities around these two areas and what are the long-term potential contributions of these opportunities to DGD?
Randall C. Stuewe - Chief Executive Officer
OK. Adam, I will let Sandy try it for us.
Sandra Dudley-Executive Vice President of Renewable Energy and U.S. Specialty Business
First of all, I think we think it is very supportive of the biofuel industry. It does show a long-term commitment, which shows that biofuels are an important way to reduce emissions. We have known this for a long time, but sometimes we don’t seem to be recognized. In terms of BTC expansion, I think there are actually two things that are positive for Darling. First, there are BTC extensions and SAF credits. First of all, about BTC expansion. This is a four-year extension of $1 per gallon. It is handled in the same way as it is today, which is very positive. After-from 2023 to 2026. After that, you have clean fuel production credits from 2027 to 2031, and the way we read it may be until 2034. What we see is that it then becomes production credit.
This is $1 per gallon, adjusted for inflation each year, and then adjusted for CI before the credit value drops. The decline in credit value depends on whether certain emission reductions have occurred or we have reached 2031. So, my goodness, in terms of what we are doing today and our expectations, this is just huge support to move forward. As far as SAF is concerned, you can also earn four years of credits there. This is the price we read from US$1.25 per gallon to US$0.50 per gallon, depending on the CI.
In this case, according to the determination of IKO or similar methods, you must shorten the life cycle by at least 50% after 2026, and then you will receive a clean fuel production credit, and it will take effect again from 2027 to 2031. Once again, maybe By 2034, it depends on whether it will step down. Similarly, it becomes a production credit, and then the credit changes from $1.25 to $1.75. Again, this will be adjusted annually for inflation and then accept CI adjusters and downgrades. All of these are very supportive of reducing emissions and supporting the development direction of Darling and DGD.
Randall C. Stuewe - Chief Executive Officer
Yes. Adam, I think—this is Randy. I mean I think Sandy has done a very detailed explanation. I mean, in general, if you will, the legislation in the social spending plan that I think is likely to move forward may be the most optimistic thing we have seen in many projects this year, which allows us to have Be sure to participate in climate change discussions. I think Sandy is very subtle, I hope you can understand, but I will make sure you understand. She was talking about the word producer or production credit. So this is a very critical principle, which gives great favor to American assets.
Adam Samuelson-Goldman Sachs-Analyst
Sandy and Randy, these are really helpful colors. I think as a follow-up action, just as you saw DGD when Norco's expansion is about to complete, Port Arthur will arrive in about 18 months. How do you consider the scope or opportunity to lower the CI score? self-produce? Then gradually, only consider SAF and what is needed to actually start making this fuel?
Sandra Dudley-Executive Vice President of Renewable Energy and U.S. Specialty Business
Yes. So I think we have been working hard to lower our CI scores. We can do this in many ways. I think we can also start with our raw materials. Therefore, we are looking for ways to use our ingredients to help reduce CI scores. But internally, we have been paying attention to this and trying to adjust our processes so that we can do this. So we-it's just something that keeps happening in our minds. As far as the SAF we are moving forward, I think we have been saying that we are very excited about SAF, but we need the right economics. To this end, we reviewed the capital required. We studied the yield curve. We have talked with the logical market.
We have completed the preliminary project and evaluated the economics. What I want to say is that, as you said before, the Rebuild Better Act seems to be very serious in trying to develop the SAF industry. We are really happy to see this. Unfortunately, the legislation has not yet been finalized. So we have to see it before we can make any decision. Assuming ultimate economic support, we look forward to expanding our role in low-carbon solutions. And I think what you have seen from Diamond in the past is that when we made the announcement, it was well thought out, and we took it very seriously. It's not just an announcement that we want to publish something in the media or have an ESG story, it's because we plan to do so. So at the end of the day, we have completed our homework. Once things are done, we should be able to let you know how things are going relatively quickly. I hope that will be in the first quarter of next year. In other words, I hope we can become part of the Singapore Armed Forces movement as soon as possible.
Adam Samuelson-Goldman Sachs-Analyst
I admire all the colors. I will pass it on.
Thank you. Our next question comes from Prashant Rao from Citigroup. please continue.
Prashant Rao - Citigroup - Analyst
Good morning. Thank you for your question. I want to hear what you said there about ESG narratives, Sandy. Then what kind of legislative environment is there, what is the driving force of this government and the world? Darling has a very compelling ESG and sustainability story. Randy, you talked about it before-2022 may be the year when messaging becomes clearer so that the market can understand this. I want to know if you can help us when we consider decarbonization, other land use, water use, other factors, and the highlights of the dear story, you think it may be time to really emphasize these. I want to know if you can help us think about how you think about passing information and taking advantage of all the equivalents?
John Bullock-Executive Vice President and Chief Strategy Officer of Specialty Materials
Yes, this is John. This is an interesting point. For a long time, we have regarded ourselves as an ESG company because, frankly, almost everything Darling does is a carbon capture story, which is a good thing in a world that needs to reduce carbon emissions. However, I think there is something more interesting than this, not just the fact that in history, we happen to be in the right place at the right time, because I think no other company has actually acted so aggressively. To help the world reduce carbon emissions like Darling, not only through our Diamond Green Diesel, but also through the actions we take internally to help reduce water consumption.
The fact is that we recaptured a lot of water associated with the rendering operation. We have a very extensive ESG story. We have, as this story develops, part of it is that ESG is a developing concept, and there are many moving articles about how people perceive and judge. We are working hard internally to try to clarify our information around this issue, because at the end of the day, once you open all the curtains, the reality is that no company has done more with ESG stories, and compared to Darling, ESG The movement has been going on for several years and is ready for it. So I think it's a matter of conveying information, because this story is definitely a rock star. Randy?
Randall C. Stuewe - Chief Executive Officer
No, absolutely, John. Prashant, as we did at your meeting, I mean, it is clear that in 2022 we will spend more time discussing the measures we have taken to reduce water resources and intensity around the world. We are studying different technologies in the gelatin business, which is a huge water consumer, water recovery for crop production, energy intensity. Obviously, when energy is cheap, no one really spends a lot of time thinking about these things. Suddenly, in the last year, we saw energy growth in different parts of the world by 40% to 100%. So again, it will get more and more attention. Then it is clear that in the world of labor, we must be smarter there because the world is in a state of full employment. So I think this is a good time for us. I am grateful for you to take it out. I will tell you to stay focused and we will bring you more in 22 years.
Prashant Rao - Citigroup - Analyst
Appreciate this, John and Randy. Only one quick follow-up is required. I just want to talk about the capital allocation for next year. Randy, you—it's nice to hear your reconfirmation of your views on these things. I just want to see when you think about 22 years, especially considering the acceleration of Port Arthur and the possibility of distribution to partners-we have to wait until we see DGD3. How much-when you think about inorganic growth in 2022, I just want to see where your appetite is, and if you need to go there to find funding for potential inorganic growth in terms of debt, what space might be fast on your balance sheet Growth or something similar? I will leave it there.
Randall C. Stuewe - Chief Executive Officer
Wow, this is a good question. There are many stairs in my room here. No, the interesting part is that we obviously-when we tried to decode and telegraph, we saw more cross-continent M&A opportunities than in the past three to four years. Can't really solve them yet. I can't tell you whether their prices are reasonable, and whether we will take them home. Obviously, just like the business we think of today, we hope to continue to build a moat around the machine, and the machine is this huge ESG story. How do we do this by sourcing and securing additional low-carbon raw materials all over the world. So we are trying to find.
Obviously, the acceleration of DGD3 is not only a blessing, but not a curse to some extent, because it means it will be launched in early 23rd, we hope. Once again, one source-it will be fully funded and deleveraging, and it will provide Darling with unlimited cash generation capacity at the time, which is an advanced issue. From now to then, there is sufficient availability in our credit agreement, and some modifications may be made to it if we need it. Obviously, as Brad said, our leverage time ratio has dropped to 1.6, if it hasn't gone down this year. So we have enough space to do what we want to do in 22 years, and then as we said here in 23 years, this is a very advanced issue.
Prashant Rao - Citigroup - Analyst
Thanks, Randy. Cherish your time guys.
Our next question comes from Tom Palmer from JPMorgan Chase. please continue.
Tom Palmer - JPMorgan Chase - Analyst
Good morning, thanks for your question. We have seen the price of animal fat go up a bit. Used edible oil, corn oil did not really follow to the same extent. Curious what do you think about this? Do you expect the price gap between UCO and corn oil to converge with tallow over time? Or are there any restrictions that need to be considered when it comes to the pricing of these other raw materials?
John Bullock-Executive Vice President and Chief Strategy Officer of Specialty Materials
Yes, this is John. Yes, I think in general, when we try to reduce carbon emissions in our fuel supply, what you are seeing is the trend that waste fat is a valuable fat. So you usually see them go higher. I will not pay too much attention to any type of short-term loss of UCO and relative prices of corn oil and animal fat. They all have slightly different carbon intensity scores. But in essence, they are much better than vegetable oils in terms of their value in the low-carbon-intensity fuel cycle. So I think this market is a big market, and it is a constantly evolving market. I am not too excited about the short-term difference in fat prices. The general concept that waste fat is valued in the low-carbon fuel market is now a basic fact, and it will be a basic fact for a long time in the future. The oil field where Darling is located is essentially a source of low-carbon fuel-low-carbon fuel.
Randall C. Stuewe - Chief Executive Officer
Yes. I would say, Tom, this is Randy. I think John said very, very well. As Sandy pointed out, SAF will give preferential treatment to low-carbon raw materials. Once again, that's us. When you look at the low-carbon raw material warehouses in North America and around the world, our current trading volume is much higher than the calorific value of corn, which has always been the baseline for where it can go. So at the end of the day, DGD II, we keep telling you, remember, today it buys 40% of North America's raw materials. So this is obviously a strong price for us, but it is also-there are a lot of raw materials for us to complete the tasks we want to complete in the second and third place.
Tom Palmer - JPMorgan Chase - Analyst
Last quarter, you set your EBITDA outlook for 2022 at 1.6 to 1.7. I think the raw materials business is US$850 million and the DGD is US$800 million. I think this is still your prospect of increasing production, do I think it has at least increased a little in DGD? Will this affect the current prospects or still the previous prospects?
Randall C. Stuewe - Chief Executive Officer
No, I think we still-there is a lot of volatility, and it is clear that with the interruption of Ida, the profit margin has fluctuated. RIN moves up, LCFS moves, heating oil moves. I mean, we will still-we enter this year to tell you that we will run at around $2.25 per gallon, maybe a little more DGD. Obviously, being offline for 17 days did not help us. But when we look forward to next year, I think we have now reached what we said. So what I see now feels good, if you think, as we said, this year's basic business should complete about 850 million U.S. dollars, floating there by a few dollars. Then you sit there and say, okay, 750 million dollars and then come out, or 700 million dollars out of DGD next year, which will be 2 dollars per gallon, 700 million dollars. I mean this is the simple mathematical operation we are going to do today. I did not see any real changes in the forecast at the time.
Tom Palmer - JPMorgan Chase - Analyst
Our next question comes from Manav Gupta from Credit Suisse. please continue.
Manav Gupta - Credit Suisse - Analyst
Hello everyone. I want to ask basic policy questions. You did talk to many people in CARB, and you also talked to senior people in CARB. Once again, some estimates indicate that there are many projects in progress. We believe that not all projects are in progress, but there is a bear market argument that the price of LCFS may drop to 80. This is not good for the entire plan of LCFS and investment will be cut. . In your opinions and discussions with CARB, do you think they will support a decent carbon price? I'm not talking about high or low, but will they try and at least set the expectations of people who invest in these low-carbon projects? Some good returns. Will they try to support carbon prices? This is what I want to ask.
Randall C. Stuewe - Chief Executive Officer
Sandra Dudley-Executive Vice President of Renewable Energy and U.S. Specialty Business
Yes. Manav, this is Sandy. So I realized that now everyone is very concerned about the LCFS credit price, moving in the direction they have recently taken. I think in the second quarter, we saw LCFS credit exceeding the deficit. In the past few months, we have seen a general decline in LCFS prices. In the market, we have seen what is happening. We have seen California’s gasoline and diesel demand weaker than historical levels. We have seen the same thing in Europe, which may be more obvious. I believe that this has caused more renewable diesel to shift from the European market to the California market, and we see an increase in imports rather than a further impact on the market. We have also recently seen an increase in credit generation in many categories, and we have heard of some planned projects. But keep in mind that over time, we have also seen credit exceeding the deficit intermittently, and credit banks have generally declined since 2017 and 2018.
We have also recently seen Governor Newsom's call for CARB and CUPC to achieve carbon neutrality by 2035, which is a full 10 years ahead of the original plan. This is a daunting task that requires a significant reduction in carbon emissions. We have always heard that CARB is considering increasing its carbon emission reduction targets to answer your questions, and we have recently seen that the average credit officer intensity in 2020 exceeds the baseline. Unless something changes during the comment period, this will be added to the regulated party's obligations in 2022. We also saw—don’t forget, some projects were postponed or cancelled. We have already seen Washington State pass the LCFS. Despite the approval, there is still some work to be done in implementing the transportation plan. We also know that Canada will implement CFS in the near future.
And we know that other states are considering implementing LCFS-type programs, such as New York and New Mexico. Finally, we have seen Europe put forward some important authorizations suitable for 55 sets of plans. All these carbon reduction plans will compete for low-carbon credits in the future. So sometimes I think that when we observe events or trends in a short period of time, we will focus on those temporary trends. John talked about this earlier. So we may not always be able to see a broader picture. I am not entirely sure that we see the turning point of LCFS here, because I think there are many things in the future that should be optimistic about credit prices. But we, like everyone else, will continue to monitor.
John Bullock-Executive Vice President and Chief Strategy Officer of Specialty Materials
If I can add on this basis, Manav. We are actually very happy to see that the LCF in the credit market has not challenged the highest ceiling pricing. I think what we have established now will really help the long-term low-carbon fuel plans of other jurisdictions move forward and help California increase its mandate because these things are successful. The market has brought new low-carbon alternatives to the market, and we have a large number of other government entities that are considering implementing low-carbon fuel standards. Frankly speaking, the success of California and the fact that the market responds with low-carbon alternatives (not only renewable diesel but other alternatives) are very beneficial to the expansion of these programs.
The expansion of these projects provides Diamond Green Diesel and Darling as a low-carbon raw material supplier with a more stable foundation and long-term viability foundation. So we really like how this works, and we think this is good news. I know everyone is fascinated by the bad news and the impact of every gallon of gasoline this quarter and all the good news. The fact is, this is indisputable. The model shown here is very positive about what we have in Diamond and Darling.
Manav Gupta - Credit Suisse - Analyst
Perfect, sir. I will stick to a little policy again. I know that Reuters has released some figures, and people subconsciously believe that the Biden administration may oppose biofuels. But when we dig deeper, it is clear that they may not fully support the ethanol aspect. But when we look at advanced biofuels, renewable diesel, and biodiesel, they propose an increase of nearly 2 billion gallons. So I know this is a leaked document, but hope your opinion is that when you interact with Biden EPA, you usually feel that they may only talk about electric at the top, but at the bottom, do you think Biden supports biofuels internally? administrative?
Randall C. Stuewe - Chief Executive Officer
Sandra Dudley-Executive Vice President of Renewable Energy and U.S. Specialty Business
Yes. I do think that there is support for biofuels or within the Biden administration. I think you will see that in the SAF credit that we saw yesterday, a new report was released, the 2021 Aviation Climate Action Plan, which is very supportive of SAF's progress. It is a large number of programs that support SAF. In addition to this, I think you have seen it recently because you have seen the potential long-term expansion of BTC. So I do think this is also very helpful for us. So I do-I think...
John Bullock-Executive Vice President and Chief Strategy Officer of Specialty Materials
Let me add, this is John. Regarding RVO, the truth is that you cannot just look at what the Biden administration has done to RVO. I think your point, Manav, is correct. Obviously, they will strengthen the requirements for the biomass-based diesel component and advanced categories of the plan. This is very positive for us. I think the other thing you have to consider here is not RVO. This is how they deal with SRE. As we have seen, they are just uniting an SRE. I think the general opinion we hear is that SRE will not be granted freely, which is very important for RIN's S&D. Finally, there is this historical issue.
Some people are obligated parties for RIN compliance. What actions will the administrative department and the court take on these issues? So there are many balls bouncing. We have not seen anything telling us that the Biden administration is fully active and committed to reducing carbon emissions and fuel. The answer to reducing carbon emissions and fuels today is biofuels, especially biomass-based diesel as its main driving force. So we believe that support is absolutely there. We know that when these RVOs appear, there will be some confusion, because when you think about it, the EPA has to solve the problem of the drastic reduction in gasoline consumption during COVID, and the standards are developed on the basis of what was established before COVID.
When they propose new rules, they must figure out how to adjust S&D, which will cause some controversy. It will produce some sparks. But we believe that our position in biomass diesel is very stable, and we should see strong support for RIN.
Manav Gupta - Credit Suisse - Analyst
I just said that you have been severely hit by Ida, but you have maintained your annual guidance, which is very commendable. Thank you for answering my question.
Our next question comes from Ben Bienvenu and Stephens. please continue.
Ben Bienvenu-Stephens-Analyst
Hey, thanks, and good morning everyone. I want to follow up Adam's question about SAF. And I don’t want to put the cart in front of the horse, because I know we are still adding DGD II. We have DGD III. Sandy, you talked about the policy that you want to more clearly support the economics of SAF production, but you pointed out the advantages of fuel and reduction of greenhouse gas emissions. John, I think you talked about having all the ingredients needed to improve the availability of DGD II and DGD III. In addition to production economics, how does the raw material composition of the equation affect your decision on how to deal with potential participation in SAF?
Randall C. Stuewe - Chief Executive Officer
John Bullock-Executive Vice President and Chief Strategy Officer of Specialty Materials
Yes. You are asking-I'm not sure what you are asking. Then you ask...
Ben Bienvenu-Stephens-Analyst
Are there enough raw materials available for the production of SAF and renewable diesel, because it seems that only renewable diesel will absorb most of the fatty oils that can be used to make low-carbon fuels?
John Bullock-Executive Vice President and Chief Strategy Officer of Specialty Materials
Yes. So we have two paths to go down. One is that we can convert the renewable diesel capacity of roads that we currently or are expanding or constructing. If we want, we can make some SAF. Therefore, if we want to do this, we can choose to transfer some road areas to SAF. This is obviously possible. We may also build Diamond Green Diesel IV at some point in the future and produce a part of this product as SAF. Both roads are open to us in the future. I think that if we want to quickly enter the SAF market, it is very possible, and I may be a bit early. But we may want to use some of our existing capabilities and create optionality around SAF. We can get there faster than using new units, but we will see what this leads to.
We do not have to prejudge any of these conclusions. The most important thing is that we finished our homework, right? Therefore, once we see how these policies are finalized, they have not yet been finalized. There are many very important details in these tax credit bills, and you must consider whether they are-whether they are valuable in terms of your production economics. We will see how they are finalized. We have basically completed the rest of the homework, and then we will sit down with our partners to discuss what we want to do. But if we want to get there soon, the fastest way is to transfer some of our current renewable diesel production to SAF. Regarding the decision of Diamond Green Diesel IV, we only need to evaluate it as we move forward.
Ben Bienvenu-Stephens-Analyst
Yes. OK. Understand and appreciate these ideas. Adjust a little and consider the food ingredients business, and you continue to expand your profit margins there. The business has always been-food ingredients have always been unsung heroes. I think that in the past year, given the focus on DGD, it is understandable that the enthusiasm for DGD is guaranteed. Where are we on the curve that continues to expand the profit margin? Any thoughts on your food ingredients business would be helpful?
Randall C. Stuewe - Chief Executive Officer
Yes. Ben, this is Randy. I mean it is obvious that there is a parallel strategy, although it seems that 80% of calls are DGD, so we have been quietly transforming Rousselot's business from basically a gelatin supplier to a collagen company. This is a two-pronged or three-pronged strategy. Peptan is a collagen peptide. It is currently on shelves around the world, mainly in North America. It is currently launched in Europe and Asia. It has extremely high growth potential. The growth potential of data is mainly driven by its solubility and solutions, which are suitable for different product applications. So we worked for a long time and worked very hard. We always talk a little bit, and I have to give a little opinion. Darling is an innovative company.
We have been studying collagen peptides, I don't know, for nearly nine years, we did it right. We are building ours-we have made our four factories are considering another factory. That was the first stage, the second stage, you heard that we started a discussion about biomedicine, and that is our X-Pure. Then we also began to study the regeneration of different tissues and organ development outside of the biomedical field. To make a long story short, as we move forward, we are in a three- to five-year window of profit margin expansion and growth in this business unit. With the shutdown of the world and chaos in the supply chain, we have encountered some resistance in COVID's collagen peptide business.
And now we-and we are struggling a little bit. To tell the truth, in South America today, the different raw materials for the production of products are very tight. The price of raw materials has risen by 200%, 300% due to the decline in the number of cattle processed in South America. There has been a decline compared to the previous year, due to availability and labor, as well as COVID and all of the above factors. To make a long story short, it has a good trajectory. Stay tuned for the next three years. We keep throwing bread crumbs there. It should accelerate again next year. I think this is why Jim Stark has been comfortable talking about growth next year as the business expands.
Ben Bienvenu-Stephens-Analyst
Okay, thank you all. I wish you good luck for the rest of the year.
Thank you. Our next question comes from Sam Margolin of Wolfe Research. please continue.
Sam Margolin - Wolfe Research - Analyst
Hi, good morning. I just want to follow up on this issue of component mergers and acquisitions. I realize that there are some competitive factors at work, and you may not be able to reveal too many details. But in the past, you have talked about the valuation of the private sector in this industry is a bit prohibitive compared to where Darling is trading, and it is undervalued, so you are waiting for it to be bridged. I just want to ask, how did the decline in asking prices and private acquisition targets proceed because they did not capitalize today's prices? Or are there new synergies and value creation tools that Darling must pull to release more value? As for what is opening this window of mergers and acquisitions, which are new compared to the past, call it three to five years?
John Bullock-Executive Vice President and Chief Strategy Officer of Specialty Materials
Yes. This is John. I'm not sure there are many new things out there. I mean, I think what we have said in the past is that when the valuation is too high, we always have the opportunity to build. We have done a lot in Diamond and our core business. I mean, the fact is that in the past four or five years, under normal circumstances, we have four to six factories each year for large-scale expansion, or to develop our non-diamond green diesel business on a global scale. So we always have this choice.
Having said that, I think we are an active participant in acquisitions, and you will see that we are active in this round of sales of companies. I think we will-we always maintain price discipline. We sometimes see companies whose prices are rising are just ridiculous and unsustainable futures. We will not do that, but at the same point in time, I expect you to see us become an active participant in this round of acquisitions. I don't think you can exclude us from these transactions.
Randall C. Stuewe - Chief Executive Officer
Do not. I think that's a good point, John. I think the thing-when we have the opportunity to see many different companies around the world, remember that, except for last December, there have been some very strong headwinds in these companies around the world. So their performance this year is better. This year, we have had a wonderful year. The family makes a decision at a certain time, especially when the business changes, it may be time to sell. We have seen a little bit all over the world. In addition, you have seen the platform mentioned by John, we have the ability to bring many product streams from the slaughterhouse and slaughtered animal by-products business to the highest and best use.
I know this is a bit cliché. But whether we make organic fertilizer, pet food, or heparin, there are all kinds of things now. As we build a platform, we can lock these companies and turn them into something with them. There is almost no difference. So our proposal is slightly different from our proposal. But as John said, price is price. When the situation here reached double digits four or five years ago, we stayed on the sidelines and we will maintain this discipline as we move forward.
Sam Margolin - Wolfe Research - Analyst
OK. I appreciate it. Then just further follow-up on ingredients and profit margins, I will reply to the question that investors asked me, that is, as the refined fat may go higher, because in your opinion, CI has become an input factor of its value to a greater extent On, this shows up. Your supplier has some problems-the slaughterhouse will notice this, so profit expansion may encounter some friction. I just want to know what is your opinion on this, if you think this is a risk, in other words, your profits will not participate in the next stage of pricing?
Randall C. Stuewe - Chief Executive Officer
Do not. I think we already know clearly that our bulk purchases of raw materials are based on shared commodities. Therefore, they benefit from higher CI and these values. So, in the final analysis, this has been passed, and the place where we get the profit margin expansion is actually the many different professional products that we make and can transform there. This is the capital we have invested in the past five years or more. So I really didn't see any pressure there. I mean from time to time, if you say what is your pressure around the world? The world-this is the price of energy, this is the price of labor.
The selling price of our products today has basically nothing to do with the inflation problem that is happening all over the world. These are the margin challenges we face here are whether we can expand our processing fees, our collection fees, and our service model to recover these higher operating costs. So-but in terms of CI or the price of raw materials or protein, remember that meat companies, in most cases, they also make a lot of money, part of which comes from us is that we can collect and provide them with more money.
Sam Margolin - Wolfe Research - Analyst
thank you very much. Have a nice day.
Our next question comes from Craig Irwin and ROTH Capital Partners. please continue.
Craig Irwin - ROTH Capital Partners - Analyst
Good morning, thank you for asking my question. Randy, it’s a good thing that the feed segment's profit margins increase by $95 million, right? It seems that about 2/3 comes from fat and used cooking oil. You used DGD II to promote part of it, yes, you took 40% of the raw materials from the market. But can you talk to us-what do you think are the main drivers of profit margin expansion? Did the commissioning of DGD II have a full impact on the grease market? I know there are-biodiesel companies benefited from Ida backup in the supply chain last quarter. But how does it play a role in operations in the fourth quarter?
Randall C. Stuewe - Chief Executive Officer
Yes. I will mark this team with John. After all, from a macro perspective, fat prices in North America and the world are high. This means strong demand for low-CI raw materials. Obviously, we learned once again how fragile this business was due to Hurricane Ida. When it basically became a single-client business, it meant that Diamond Green Diesel was suddenly offline for 17 days. When we are offline, we need to understand that being offline means that we can run. We just don't have electricity. If there is no electricity, the railcar cannot be unloaded. Then you will get this messed up logistics pipeline. So we have to postpone the work in the fourth quarter. We had to pay people not to ship and all of the above. So-but they still have to bring the product to the market.
So-so you are a biodiesel person. So I think my short answer is that as the supply chain re-enters Diamond Green, you have seen prices rebound and we are really starting to operate at these new levels. The protein aspect is indeed one aspect. Specialty proteins are still very powerful. Strong demand for pet food. The real challenge is the logistics around the world, which you have not seen on the daily container freight news channel. It's not even about pricing, but availability. Therefore, the challenge we see in Europe and European protein is that the challenge of bringing it from the main market to the consumer has indeed been affected.
Therefore, you have to sell it to others, how you do it, this is the word commodity, and you have to price it back for others to use. So when we reach 22 years, we will see that today's fat prices are firm, protein prices should be fairly stable, and may be improved. This will depend on the soybean crushing situation around the world. But as we have seen, we have robust crops all over the world. So-but remember, today's meat demand and meat production are really stable. So judging from our business model, the amount of raw materials next year should be stable. The price of fat is good. Protein prices are stable.
Craig Irwin - ROTH Capital Partners - Analyst
excellent. My follow-up question is, about 12 renewable diesel power plants want to go online, maybe we can get half of the actual work and production, right? But many of these companies are approaching raw material suppliers, whether they are soybean crushers or other suppliers, to obtain long-term commitments of raw materials, and even dialogue about processing agreements, because they don’t want to spend capital expenditures for their own facilities. Processing. Can you talk about whether you are having a conversation with any of them, let us call them, specification plants. Is it possible for us to see long-term offtakes by any of these third parties?
Randall C. Stuewe - Chief Executive Officer
I don't know, John, do you want it?
John Bullock-Executive Vice President and Chief Strategy Officer of Specialty Materials
Sorry, you are asking if Darling will sign a contract with a renewable diesel power plant that is being built to compete with our timed release. So if this is a question I can answer in one word, no. Of course we would not do that. I think the answer is this, yes, there are many conversations. Frankly speaking, there are a lot of people running around trying to figure out how to reproduce what we have at Diamond Green Diesel. In fact, we have positioned Diamond Green Diesel in the right place time and time again, with the right capabilities and the right logistics in order to be able to enter the right market. This means that Diamond will always be the best place for fat in the North American market.
Now people can talk about cutting deals and doing other things as they please, but basic economics is basic economics. And I think another thing to consider here is very important. This issue was mentioned earlier. In the final analysis, our fat supplier will receive a portion of the profit from the renewable diesel business. The fact is that they are doing this because the renewable diesel business is creating higher prices per fat. However, I don't have any business in the world to invest capital, and then I turn around and donate its margin to people who have not invested any capital. There seems to be a lot of conversation around this particular concept. This has not worked in American capitalism for 200 years.
I suspect it will operate this way in the next 10 years. So in the final analysis, this is a good thing for fat suppliers. We are in a good position. We will buy fat because we are in the right position and have the right abilities. This is how economics will move forward. People can have all kinds of conversations about all kinds of things. But in the final analysis, economics is economics.
Randall C. Stuewe - Chief Executive Officer
Remember, Craig, I mean we are strongly focused on the final real estate game, location, location, location. Diamond Green Diesel's ability to source raw materials from all over the world is unheard of. No one else has the ability to unload directly at their terminal, whether it is Port Arthur or Norco, Brazilian fat, Chinese fat, Australian fat, European fat, no matter where it is. So when we saw this deal, some oil companies were dealing with soybean crushers, good luck. I mean at the end of the day, CI is terrible, b, the economics here rule, it will provide us with very strong future profits.
Craig Irwin - ROTH Capital Partners - Analyst
This is a strong answer, and I like it. thank you all.
Our next question comes from Matthew Blair with Tudor, Pickering, Holt. please continue.
Matthew Blair-Tudor, Pickering, Holt. - Analyst
Good morning, congratulations on the good results. Randy, you have some comments on accelerated spending in 2022. I just want to clarify how much DGD will spend next year? At one point, we were thinking about $350 million, but it might sound more. Then, can you list any figures for Darling's independent capital expenditure in 2022?
Sandra Dudley-Executive Vice President of Renewable Energy and U.S. Specialty Business
OK. So I think that is for me.
Randall C. Stuewe - Chief Executive Officer
No, I will let you answer this, Sandra.
Sandra Dudley-Executive Vice President of Renewable Energy and U.S. Specialty Business
But to be honest, I am struggling-all of us here are struggling to hear that. So I apologize. Can you help me go deeper?
Randall C. Stuewe - Chief Executive Officer
What is the capital expenditure of DGD in 2023?
Sandra Dudley-Executive Vice President of Renewable Energy and U.S. Specialty Business
Therefore, the capital expenditure of DGD in 23 years should be approximately US$800 million. Sorry, 2022. This is what I mean.
Brad Phillips-Executive Vice President, Chief Financial Officer
Sandra Dudley-Executive Vice President of Renewable Energy and U.S. Specialty Business
Randall C. Stuewe - Chief Executive Officer
Then there is our basic business, Brad, $275 million...
Brad Phillips-Executive Vice President, Chief Financial Officer
Matthew Blair-Tudor, Pickering, Holt. - Analyst
Yes. OK. So DGD is 800 million U.S. dollars, and Darling Independent is 275 million to 300 million U.S. dollars. OK. It sounds pretty good. Then, Randy, you reiterated the overall EBITDA guidance for 2021. Do you have any updates to the segment guidance? If we use the previous figures, this means that the feed in the fourth quarter will be much lower than the previous quarter, while the food will rise. Is this the correct conclusion?
James E. Stark - Vice President of Investor Relations
Matthew, this is Jim. I think the best way to think about it is that for us, the advantage of the feed sector is that food is still expected to reach our level of about 200 million US dollars this year. The fuel part ends our position. So actually only higher results will appear in the feed section.
Brad Phillips-Executive Vice President, Chief Financial Officer
Our next question comes from Ken Zaslow of Bank of Montreal. please continue.
Ken Zaslow - Bank of Montreal - Analyst
Randall C. Stuewe - Chief Executive Officer
Ken Zaslow - Bank of Montreal - Analyst
Just a few follow-ups are really easy. What is the decision on share repurchase? What do you think of the future, especially since your stock is a bit regressive now?
Randall C. Stuewe, Darling Ingredients Inc.-Chairman and Chief Executive Officer
Yes. The board has authorized it, and I think the figure is 200 million dollars, right, John?
John Bullock-Executive Vice President and Chief Strategy Officer of Specialty Materials
Randall C. Stuewe - Chief Executive Officer
200 million U.S. dollars, of which 98 million U.S. dollars have been used. Obviously, we have a strategy here to speculate and buy from time to time when we see fit. I think that as we move on, you will see this behavior continue to exist. Obviously, we were under some pressure again this morning. We have reflected on this in the board meetings of the past few days. We have many great shareholders and owners in this company, some of which have a base as low as $14. Therefore, the challenge of inventory here is still that when people exit, the main selling position may put some huge pressure on it. So at the end of the day, the forward-looking is quite bullish. But if you want to move a large piece, it can be a bit challenging. So we are there, yes, if someone wants to push forward opportunistically with too much pressure, I would use the word defend.
Ken Zaslow - Bank of Montreal - Analyst
great. Then you mentioned-you talked a lot about the synopsis on several other issues. Do you fully grasp the full amount of the price increase? Or as the contract continues to be reviewed, is there more to capture? How does this work? I just don't fully understand this? Or is this just a change in profitability based on your increased product supply? I just don't understand all the opportunities there.
James E. Stark - Vice President of Investor Relations
The question is, in the past, we have discussed the work of increasing our fees and services, are we still updating this round?
Randall C. Stuewe - Chief Executive Officer
Absolutely, Ken. And I think, as we have seen-if you want, there are two to three differences in supply chain raw material business around the world, whether it is Europe, those are contracts from time to time. Every two or three months, you will renegotiate. Due to the relatively sufficient production capacity, we have achieved some very good profit margin expansion there. Canada, we have seen it return to historical levels. Then in the United States, if you want, we will focus on large, non-fully integrated slaughterhouses to expand profits. For us, this is a two-year or three-year process and plan. I mean the challenge we face now is to regain the exponential growth of labor costs and energy as we move forward. So is it fully roasted? Mostly right. I think-but sometimes, we will be able to do better.
Ken Zaslow - Bank of Montreal - Analyst
I appreciate it. thank you all.
Our last question today will come from Ben Kallo and Robert W. Baird. please continue.
Ben Carlo-Robert W. Baird-Analyst
Hey everyone. Good morning, Randy, I want to know how you attribute the guidance to Jim. My first question, carbon intensity, how does this affect pricing and costs? Can you explain it to us? Then you mentioned South America several times, and I think so. We have been asking questions about raw materials. And I think you are already ahead in this regard, and now everyone is trying to catch up. How do you maintain this leading position? I think this is only the third part. You have made a lot of acquisitions with the family business. You already mentioned it. I think you have said in the past that COVID is a little in the way because you can't go to see them and do it. But where are we now? Does this affect the event?
Randall C. Stuewe - Chief Executive Officer
Sandy, do you want to participate in CI?
Sandra Dudley-Executive Vice President of Renewable Energy and U.S. Specialty Business
Yes. So, as far as CI is concerned, I think if you look at the market, you will see that raw materials with lower CI usually have higher prices. But those materials with lower CI will also provide you with the greatest profit. This is what we saw there. I mean, they may spend more on the front end now, but they are returning greater value.
Ben Carlo-Robert W. Baird-Analyst
Sandy, let's talk specifically about the pricing of the finished product. If someone could buy a gallon of renewable diesel made from soybean oil or buy a gallon of renewable diesel from UCO, how would this work?
Sandra Dudley-Executive Vice President of Renewable Energy and U.S. Specialty Business
Yes. Therefore, if I look at UCO or corn oil or animal fats, they usually trade at higher prices, sometimes soy oil instead of RBD soy oil. But because we have pre-processing capabilities, we are able to translate it into higher-margin finished product prices, in terms of renewable diesel, because we can get more value in LCFS credits and the like.
John Bullock-Executive Vice President and Chief Strategy Officer of Specialty Materials
So, to add, in essence, this way of working is that the lower the carbon intensity of the oil field you sell, the more valuable it is because the green premium associated with it is better. The fact is that the waste fat produced by our company has low carbon intensity. Fuels made from these fats have lower carbon intensity storage. Therefore, when they set prices in the market, when we also include the price's compliance factor, that is, the grain premium, part of which is LCFS, it will bring you higher value and thus bring more to the company. Good profit.
Ben Carlo-Robert W. Baird-Analyst
So I know very well that if I use soybeans as a raw material, I might need two gallons instead of one gallon which is very crude.
John Bullock-Executive Vice President and Chief Strategy Officer of Specialty Materials
So let me answer like this. If I buy—if I can, consumers of renewable fuels, I buy a gallon of vegetable oil-based renewable diesel instead of a gallon of renewable diesel made from waste fat, UCO, animal fat, and distilled corn oil No matter what it is, the fact is that the gallons I buy from waste fat are more valuable because of its lower carbon intensity storage. Therefore, for fuel buyers or credit buyers, it is more valuable than alternatives to higher CI fabs.
Randall C. Stuewe - Chief Executive Officer
So John, another way of saying it is that we are selling a gallon of compliance...
John Bullock-Executive Vice President and Chief Strategy Officer of Specialty Materials
Randall C. Stuewe - Chief Executive Officer
If you wish, it is made from waste paper and vegetable oil, which is more valuable to the obligor. Therefore, they are able to fulfill their obligations and are willing to pay more for this.
John Bullock-Executive Vice President and Chief Strategy Officer of Specialty Materials
Ben Carlo-Robert W. Baird-Analyst
Then just in terms of raw material procurement, is there any help?
Randall C. Stuewe - Chief Executive Officer
No help, Ben. I am not going to answer this question. But no, we are working hard all over the world. I think this is the case, and it won’t—the secrets there won’t last long before the government date is announced. But it is clear that DGD is and will become an importer from all over the world. So what I mean is, obviously, we have established a supply chain system because we are doing business on five continents today. This has always been the secret of why we don't worry about raw materials. So it's clear. The rest takes time.
We see a lot of companies selling-if you want, you may sell, in Europe, Asia, South America, the United States, we just see if we can take any of them home. Some are driven by potential changes in tax policy. Some are succession plans. Some are only sold for time, just one out. But what I can always say to everyone is that we have acquired excellent companies with excellent management teams that can or do share our values. So we just-we have unprecedented growth capacity, and we will continue to expand the moat around the machine with reasonable value in due course.
Ben Carlo-Robert W. Baird-Analyst
It sounds pretty good. thank you all.
Ladies and gentlemen, this concludes our Q&A session. I want to turn the meeting back to Randy Stuewe's closing remarks.
Randall C. Stuewe - Chief Executive Officer
Thanks, Grant. I thank you all for your time today and hope that you will continue to stay safe and have a wonderful holiday. Jim Stark has a list of upcoming events on the IR deck, we will post there, and we look forward to speaking with you again soon.
James E. Stark - Vice President of Investor Relations
Randall C. Stuewe - Chief Executive Officer
Brad Phillips-Executive Vice President, Chief Financial Officer
Sandra Dudley-Executive Vice President of Renewable Energy and U.S. Specialty Business
John Bullock-Executive Vice President and Chief Strategy Officer of Specialty Materials
Adam Samuelson-Goldman Sachs-Analyst
Prashant Rao - Citigroup - Analyst
Tom Palmer - JPMorgan Chase - Analyst
Manav Gupta - Credit Suisse - Analyst
Ben Bienvenu-Stephens-Analyst
Sam Margolin - Wolfe Research - Analyst
Craig Irwin - ROTH Capital Partners - Analyst
Matthew Blair-Tudor, Pickering, Holt. - Analyst
Ken Zaslow - Bank of Montreal - Analyst
Ben Carlo-Robert W. Baird-Analyst
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