Darling Ingredients Inc
NYSE:DAR
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Darling Ingredients Inc
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Good morning, and welcome to the Darling Ingredients Inc. conference call to discuss the company's fourth quarter and 2019 fiscal year results. [Operator Instructions].
I would now like to turn the call over to Mr. Jim Stark. Mr. Stark, please go ahead.
Thanks, Anita. Welcome to the Darling Ingredients earnings call. Participants on the call this morning are: Randall Stuewe, Chairman and Chief Executive Officer; Brad Phillips, the Chief Financial Officer; and John Bullock, our Chief Strategy Officer.
There is a slide presentation available, and you can find that presentation on the investor page on our corporate website. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in yesterday's press release and the comments made during this conference call and in the risk Factors section of our Form 10-K, 10-Q and other reported filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. Now I would like to turn the call over to Randy.
Thanks, Jim. Good morning, everyone. It's a pleasure having you on our call today. We finished 2019 with record earnings and are starting 2020 off in a very strong position with great momentum. As we discussed during our last call, we felt our Fuel segment anchored by DGD would deliver solid results. We achieved $1.25 per gallon EBITDA margin that we predicted all year. Pre blender's tax credit or BTC, and once the BTC was made retro and prospective over the next 3 years, we are solidly positioned to deliver consistent and predictable earnings for the foreseeable future. As you know, Darling is uniquely positioned with its vertically integrated supply chain effects to capitalize on the growing demand for low-carbon fuels. Our supply chain is tethered to our Feed segment, that processes and repurposes waste streams from the global food production industry into fats and proteins.
2019 was a record year for input tonnage, we grew by nearly 2% versus 2018. Fat prices showed late year improvement and are poised to meet the rising demand for low-carbon fuels in 2020 and beyond. Specialty proteins enjoyed a solid quarter and year as pet food demand shows no signs of slowing. The only weakness we see is the mix PC proteins as they fight for feed ration share that has been disrupted by global trade and disease issues.
Our Food segment adjusted EBITDA was 7.6% higher in Q4 of 2019 versus the same period last year. And for all of 2019, adjusted EBITDA for this segment was approximately 31% higher than 2018. The primary component Aof this segment is our Collagen business. We continue to be optimistic on future growth in our Peptan business, and we'll be commissioning 3 new factories during the second half of 2020. The Fuel segment had a strong performance in the fourth quarter, not only because of the reinstatement of the BTC, but the performance of Diamond Green Diesel earning $1.57 per gallon before adding the dollar per gallon BTC.
DGD produced record volumes accompanied by better pricing or the finished product. DGD sold approximately 277 million gallons in 2019, while earning a $2.25 EBITDA per gallon. For 2019, Darling reported record pro forma operating income of $389 million after adjusting for the 2018 retroactive BTC of $86.6 million. Combined adjusted EBITDA for 2019 was $739.7 million, again, taking out the 2018 BTC. We are certainly pleased with the reinstatement of the BTC for 2018 and '19. In fact, the BTC has been in place for all the time that DGD has been producing renewable diesel and will be, in fact, for 2020, 2021 and 2022, which we believe brings certainty to the renewable fuels part of our business, and we appreciate this administration's continued support and encouragement for our renewable green fuels in the transportation sector of this country. We are also encouraged to see the Phase I trade deal signed with China, which should bring more demand for protein products and hopefully lifts protein prices over the year. African swine fever does still present a headwind for our business in China, and that story has been overrun by COVID-19 or coronavirus that is having a global impact on a lot of companies that have operations in China and around the world.
I'd like to address this a little later in the call. With all the challenges we fixed globally, we were able to reduce significant earnings as our employees worldwide continue to execute our strategy of being the best sustainable company on the planet. Our DGD 2 expansion is proceeding on schedule, and when completed in Q4 of 2021, DGD will have the capacity to produce 675 million gallons of renewable diesel, plus 60 million gallons of renewable naphtha. Darling Ingredients and Valero are equal partners in the DGD joint venture. We work together on everything that touches this renewable diesel business, and we both continue to actively discuss the potential for DGD 3 to be co-located with Valero's refinery in Port Arthur, Texas. This project would increase DGD's production capacity to more than 1.1 billion gallons of renewable diesel annually, and give us nearly 100 million gallons of renewable naphtha. We are currently underway in Phase II engineering and are still targeting a final decision on this vestment later this year or early next with commissioning to take place in 2024.
Now with that, I'd like to turn the call over to Brad for a little financial highlights. Brad?
Okay. Thanks, Randy. Net income for the fourth quarter of 2019 totaled $242.6 million or $1.44 per diluted share compared to a net income of $40.6 million or $0.24 per diluted share for the 2018 fourth quarter. Excluding the 2018 retroactive portion of the blenders tax credit from the 2019 fourth quarter, net income was $156 million or $0.92 per diluted share.
Net income for the fiscal year 2019 totaled $312.6 million or $1.86 per diluted share compared to a $101.5 million or $0.60 per diluted share for the fiscal year 2018. Again, excluding the 2018 retroactive portion of the BTC, from net income for the fiscal year 2019, net income was $226 million or $1.34 per diluted share. The 2019 fourth quarter and fiscal year results included $86.6 million retroactive BTC for 2018 and $147.8 million of BTC for 2019.
Slide 7 in the investor presentation depicts the last 3 years of DGD EBITDA, applying the BTC when earned rather than recorded. DGD's production gallons increased significantly in 2019, running at its stated capacity of 275 million gallons. Interest expense for 2019 was down nearly $8 million as we had lower interest rates on our 2 outstanding notes.
Now looking at taxes. As previously mentioned, the biofuel tax incentive was reenacted retroactively for calendar years 2018 and 2019, and extended for calendars 2020 through 2022. Accordingly, the company's 2019 effective tax rate of 15.6% is lower than the federal statutory rate of 21%. Tax expense and cash tax payments for 2019 were $59.5 million and $29.8 million, respectively.
For 2020, we are projecting the effective tax rate to be 20% and cash taxes of approximately $40 million. Capital expenditures of $359.5 million were made during the fiscal year of 2019. CapEx was higher as we completed several expansion projects in 2019, and we anticipate growing CapEx for 2020 to be in the range of $300 million to $310 million as we complete construction of the 3 collagen units in our Food segment in the middle part of 2020. The CapEx range includes approximately $230 million of normal maintenance and compliance CapEx. Our liquidity remains strong with unrestricted cash of $73 million and $911 million available under our revolving credit facility. We did pay off the remaining balance of our term Loan A in the fourth quarter of 2019. Also in the fourth quarter, we repurchased another 407,076 common shares of the company as part of our share repurchase program, bringing the total shares repurchased in fiscal '19 to 1,043,710 shares at total spend of approximately $19.2 million. With the BTC reenacted, we currently estimated distribution from Diamond Green Diesel exceeding $200 million by early July of 2020, under our distribution policy, and we should receive approximately $20 million in tax credits for growing our diesel sold in 2018 and '19. We currently intend to reduce our debt with the significant cash inflows. We project that our bank leverage ratio will decline below 3 to 1 following this debt reduction.
With that, I'll turn it back over to you, Randy.
Thanks, Brad. COVID-19 or coronavirus as the media calls it continues to dominate headlines across the world. For Darling, we have 9 facilities in China and several have been impacted. We are starting to re-open our plants that were impacted, but the ramp-up of production may be hampered by our ability to get the necessary chemicals and raw materials delivered as transportation restrictions related to the disease continues to be a bottleneck in China. As of today, we remain confident that our China operations will not have a material impact on our 2020 earnings.
Our Fuel segment was certainly the star performer in 2019, and we expect it will continue to be a strong earner going forward. We believe that DGD can earn $2.50 EBITDA per gallon in 2020, with a 275 million gallon production capacity. Darling's share of that EBITDA would be approximately $345 million. We have confidence in this projected performance as DGD has a first-mover advantage over others, who have announced making investments in renewable diesel, and DGD is going on nearly 7 years of supply chain, production and distribution management experience compared to other possible new entrants in the renewable diesel space. We feel strongly that we have worked out the kinks of this business.
We do understand that the margin environment may attract new comers, but our ability at DGD to use intuitive low carbon intensity or low CI scoring feedstocks gives us advantage over producers who choose to use pure vegetable oil feedstocks. We are also confident that our announcement yesterday regarding DGD's terminal agreement with IMTT, gives DGD a significant advantage in the logistics of supplying feedstocks to our location and enhances DGD's ability to ship renewable diesel through multiple modes to customers anywhere in the world. The demand for low-carbon fuels is growing and will continue to expand, and we are positioned well to capture a greater share of this expanded growing market. I'd like to remind everyone that Darling is the largest and has the significant experience in the collection, processing and delivery of feedstocks around the world.
We are currently projecting our core EBITDA should show growth over 2019 and be in the range of $450 million to $475 million in 2020. This growth is expected to come from both the Feed segment and the Food segment as capital investments we have made in these over the last couple of years will start to bear fruit. The math is straightforward as DGD is debt-free, and we continue to delever Darling with a meaningful distribution from DGD in July and this should result in a combined pro forma EBITDA of approximately $800 million, with debt being reduced to around the $1.4 billion range. Our focus to drive improved results through operational execution is key to delivering long-term shareholder value. We believe that we have momentum into the coming year, and we'll continue to refine how we can achieve even better results. We continue our commitment to sustainability as we feel strongly about repurposing waste streams into usable products around the globe. You will hear more from us about our efforts around ESG as 2020 progresses.
With that, that wraps up our comments here. Let's go ahead and open it up to Q&A.
[Operator Instructions]. The first question comes from Craig Irwin with Roth Capital Partners.
So Randy, 77.9 million gallons produced in the fourth quarter is a really hefty utilization number, well over 100%, even north of 110%, and then $1.57 a gallon, it was quite a lot stronger than the $1.40 that we've been talking about, just a number of weeks back, several weeks back, but close to the beginning of the quarter. Can you talk to us about what's really going right at Diamond Green operationally that's allowing you to seat your targets? Are these things one-time in nature, or can they potentially recur? Is there maybe a little bit of seasonality with the benefit of a cooler environment, allowing you to maybe outperform, get more out of the plant that we should look at as maybe more of a seasonal factor of emerging for Diamond Green over the next couple of years?
Craig, this is John Bullock. Actually, no, Diamond is performing exactly as we anticipate Diamond to perform. Operations were excellent in the fourth quarter. We actually run a little bit better when we get summer time specs on renewable diesel than we do. So we're in a period of time where running conditions maybe weren't quite as favorable as they might be coming up over the next several months, once we get into the summertime specification. So there's nothing one-time about operational performance at Diamond Green Diesel.
We just have excellent, excellent operators at that facility. They're doing a phenomenal job, and we would anticipate that facility would continue to run at that type of rate. Now, from time to time, we do have to take a turnaround at those facilities. However, other than that, we are able to operate at 100% uptime, almost all the time, in part because we have excellent operators, and in part because we have a very sophisticated supply chain for the feedstock going to Diamond Green Diesel, and the ability to move the product out to the various markets we moved to. So we don't have to slow our facility down because we have an inefficient supply chain. And I think when you see all that come together, what you see is really, really good operational performance. It's what we expect now from Diamond Green Diesel, which is kind of fun to have a facility that runs out well that you have the expectation that it's going to run that well. As far as margins go, the margin environment is excellent. We continue to see it be excellent as we move forward for the next several months. It's good time for Diamond Green Diesel all the way around right now.
Great. And since you did mention turnarounds, are there any turnarounds on the schedule, maybe in the first half of the year that we should know about?
There is no -- there -- we never really know exactly when we're going to have a turnaround at Diamond Green Diesel. Just whenever the catalyst starts to fade on us a little bit. So I think we have a turnaround in the plan. We should be able to make 275 million gallons and have a turnaround this year. Exactly when that turnaround will be, I don't know that we've announced that for sure because we're never quite sure when that's going to occur.
But I think it's safe to say it will not be in the first half of the year.
Shouldn't be.
Good, good. So my second question is about SG&A. There's been quite a lot of conversation about this back and forth last night and this morning with clients. So the absolute increase year-on-year, $33 million. Now you broke it out for each of your segments. You have been very clear that when wheat season is instated, there will be a catch-up on some of the incentive compensation for the company, given that really have been focused around sort of squeezing all that mass drop out of the spunge over the last few years. But I kind of suspect that accounting for incentive comp is quite significantly impacted by the market, finally ascribing a more appropriate value for Diamond Green and the very strong stock performance you've had over the last few months. Can you maybe break out for us what the increases are in SG&A? How much of this accrual was onetime in nature? And the impact of the stock price on incentive comp, was that a material part of the increase that we saw? And I guess, we all like that. So that's obviously something maybe you could talk about if it's sustained.
Yes. Craig, this is Brad. So ballpark of the $49 million increase, approximately half of that, a good half of that, let's call it, in incentive comp and stock award expense and a portion of that stock award expense is driven certainly by the stock price and a portion of that incentive stock comp expense was for '18. So there that will not be recurring in '20. However, stock comp in '20, I'll get to kind of a range here in a second for next year will be up some. But this $49 million, a good half of that was a stock and the incentive comp combined. We also -- as you always have an SG&A, just a laundry list of other things and they are never equal year-over-year, there was -- in '18, we had some business interruptions that were credits against SG&A, and that's where those land. So there was a decent-sized piece of the difference as well as a couple of legal settlements. So those -- you get those behind you, those hit in SG&A as well as, let's call it, the make hole over in the Benelux countries for our Rendac waste disposal businesses with the governments tough. Those might -- will come through SG&A, and there was more of that in '18 than '19. So that was unfavorable, that moves up and down based on timing of those contracts. So for '20, we're kind of in a range, looking at a range in SG&A of $0.82 to $0.85 per quarter.
That's lower than what I modeled. So I like that.
Next question comes from Heather Jones with Heather Jones Research.
So a quick question on the Feed business. So recently, we've seen meat and bone meal pricing, honestly starting to move fairly rapidly. And was wondering if you could give us a sense of what's driving that?
Yes. I think, Kevin, this is Randy. Let me comment about the kind of the global commodity world. And it kind of varies from continent to continent right now. I'll start in Europe. We saw in Q4 and then already in Q1 here, fat prices moving up rapidly. And so we're out of the blocks strong from fat pricing in Europe today, and we would call protein prices stable in Europe today. You go up to Canada were still fat prices and protein prices have hit a bottom-up there and seem to be slightly moving up now, fat prices a little more than protein.
And then you come back into North America here or into the U.S. And while we've seen fat prices move up off the lows in Q4, and keep in mind that December dipped kind of hard here and then came back here in Q1, and fat prices have moved up nicely here in the U.S., protein prices by specie are what are kind of moving around. And so we've seen the chicken complex proteins seem to work through the excess inventories and move up a little bit. The pure beef products, pet food demand, as we said, very strong. And then the mixed specie meat bone meal. We finally worked through the excess inventories we had out there by getting them sold and exported. And so we've seen that move back up. But you're still back in range now of where we were $100 a ton underneath soybean meal. We're now $50 under, which is still historically kind of low side of where that is.
So we would say, for 2020, we think fat prices will continue to move up. One of the fallouts of coronavirus or COVID-19 is China, was a supplier of used cooking oil to the European and whether it's biodiesel or renewable diesel and into that type of market. And those exports have completely slowed. So we've seen UCO markets in Europe and in U.S., start to move up rather rapidly because of the tightening of supply there. Protein, it's still the production and feeding animals, animal production around the world remains very, very strong.
It's really fascinating that in our November call with everybody, all we can talk about was ASF, a little bit of demand destruction, but we couldn't figure out how China was going to feed themselves. Now we're dominating the world with a virus here that we're not sure how that is going to cause additional demand destruction. But overall, we continue to see very, very strong slaughter. Our factories are full around the world, and the customers are taking both the fat and the protein. The fats being driven by strong biofuel markets around the world and the protein by animal and pet food.
But on the meal and bone meal side specifically, so I know it's still weak relative to history. But am I right in remembering that you have a decent-sized piece of your business in North America that is exposed, pretty exposed on the pricing side. So any positive move in that pricing should be good for you?
Yes. And there's a yes and a no there. The -- what I was trying to refer to is, as you continue to see, as you follow the poultry industry, you're seeing more and more haul all diets, which are requiring PC specific non-mixed ruminant type products. And so that's the weak market, the falling stock market or the dead stock business in the Midwest. We've made significant adjustments in how we margin that business and manage it. It had a really good fourth quarter for us. But yes, I mean, the answer is, yes. We've seen meat and bone meal move up. And yes, if all proteins move up, it will rise with the rest of the boats here.
Okay. And then moving on to fats. Just like you pointed out, as far as China, I read something like they might get one load out of there for all of February, that's just given where the restaurant eating out their UCO supply is so tight. So UCO prices have been hitting highs there. When we think about the U.S. and all, what are you thinking as far as the price ceiling that we'll see on yellow grease and UCO poultry fat or whatever? I mean, a strong demand from you guys and all, but is there a price ceiling relative to the feed or relative to more conventional biodiesel that we should be thinking about for fats in North America?
Yes. Heather, this is John Bullock. We would anticipate that we will see strong UCO pricing throughout the balance of this year, certainly, for the next couple of quarters. I don't know that we're necessarily in a position to give you a number, while we think UCO is going to be going too. But UCO is clearly desired by the biofuel community. It's a great feedstock for our renewable diesel and biodiesel. And as supply tightens up here, that's going to have an impact on pricing you would anticipate.
Next question comes from Ben Kallo with Baird.
I just wanted to ask about kind of the go or no-go decision with the Port Arthur facility. And if it's a market-based from the demand side, or is it a -- you look at the supply side and whether the logistics are there to feed that new facility?
Yes. Ben, this is Randy. I think we're -- the engineering process we're following is the same as we've done on DGD 1 and DGD 2, it's a gated process. We're in the Phase II where we kind of lay out the facility, make sure it fits in there. $20 million-plus dollars of engineering to get an early estimate. And then we -- once we see it fits and logistics do work, then we go to Phase III engineering and then a decision is made. If you were -- as I always joke with people, the spreadsheet says, make the investment now and start it up tomorrow. But we have a very rigid process that we go through in order to do this. So you'll see us continue, I think, if you had to handicap it, we're very confident of the global demand for the product. As we've talked about, DGD 1 and 2 are very well committed into 2022 now. And we continue to see a global market developing from really just transportation fuels today, but we're also part of the engineering and DGD bree and then the consideration of a sister plant DGD 4.
We'll look at aviation and then cold weather fuels as we see a continued growing market around the world for these. And you'll hear more about that in the spring as we start to open our kimono a little bit more on where we see global demand. But right now, we can't make enough of the stuff. I think it also allows us then to comment a little bit, while there might be lots of pre-announcements out there of people studying the business. And my comments were very much that clearly the margin environment encourages you to make an investment, unless you've got the supply chain locked up and know-how to originate, it's a very, very complicated business to get in. I mean the cracking of the molecule is one thing, the origination of the fat is another thing. And so the advantage we have is very, very significant. And we feel very good about it for the next 3-plus years going forward. And I feel pretty confident that the Valero and ourselves will come to the final decision on DGD 3 in a positive way, driven by global demand. And once we get our engineering estimate firmed up, we'll come with forward -- with the announcement of Board approvals.
Great. Thanks for that color. And then just on capital allocation, maybe if you could just kind of outline as you start spitting out about that cash flow from JV, is a debt pay down first? Or how should we think about that?
Yes. I mean, we've got the published out there a dividend policy that says we retain $50 million-plus whatever capital is needed for the coming quarter for the expansion. We set free down there. There's -- it's generating significant cash. As Brad alluded, we have, I don't know, $451 million or $457 million of blenders tax credit coming in. It's been filed. It will probably be received sometime in April, I would guess. But given our dividend policy, we do it at the end of the quarter, and that would be at the end of the quarter than would be the first of July. And then, Brad, net of whatever we have down there that's needed.
I think our capital expenditures left on DGD 2 down there are $800 million, $850 million, plus or minus a little bit. And so $420 million this year, $430 million next year, and you can kind of run the math. And that's the reason we were kind of giving you the $2.75 a gallon. Brad pulls a $200 million, $220 million dividend here in July. And then we're not saying that we won't pull another dividend this year. It's just going to depend on the cash outflows and the timing of the construction and as we go forward here. And that's -- a lot of that always becomes weather-driven. By July, we'll have to deal up. Concretes port right now, footings are done and concrete will start to go up, and that's when cash starts going out the door pretty quick.
Next question comes from Adam Samuelson with Goldman Sachs.
So Randy, John, I was hoping to maybe dig in a little bit on the $2.50 a gallon kind of margin outlook at Diamond Green. Maybe first, just thinking about the LCFS kind of value embedded in there. Are we -- have we reached kind of the peak in terms of LCS value capture relative to the opportunity? Or is there still incremental opportunity, whether it's year-on-year '20 versus '19? Or just on a go-forward basis to capture more of that value that's created by the renewable diesel?
Yes. This is John. So with that reticent comment about what percentage of the LCFS we retain, we consider that to be information which is confidental with us and our customers. Obviously, as you can tell from our results, it's been a greater and greater percentage of the LCFS, and I think we've seen a lot of that. And I don't know that we're totally at the point where we won't see some more of it. So the answer is, we probably will see a little bit more because the demand is just excellent, excellent, excellent for Diamond Green Diesel's product at this point in time. It's not going to be on the rapid increase that we've seen over the past year or 1.5 years. But I don't know that we reached the peak of the mountain in terms of pricing out of the LCFS markets.
Okay. That's helpful. And then as you think about the more durable margin advantage of the facility, I mean $2.50 a gallon expectation this year, $1, that's the blenders tax credit. And you think about your logistics advantages versus others, your feedstock advance, just particularly versus those who could be using vegetable oil process efficiencies in the plant? Any way to help think about and dimensionalize kind of what you see is the durable margin advantage of Diamond Green versus other facilities, which also helps us kind of frame the challenge as others would face on investments in new capacity?
Yes, this is John, again. I don't know that I necessarily want to put a number on that. I think that would be hard to do. However, it is amazing to me, when you think about the sheer complexity of the size and scale of these renewable diesel plants and the sheer volume that thousands of railcars, the thousands of trucks, the hundreds of ships that have to be involved in moving this product around, both inbound and outbound and the complexity of managing all of that, especially trying to be competitive on several different rail lines to receive your product, being having various remotes to move the product out with various rail lines to move it out to the various LCFS markets.
The supply chain complexity of renewable, this facility in many ways, is the most complex aspect of renewable diesel facility. And we always find it relatively humorous here. We see lots of announcements, and nobody seems to realize. The most important part of this business is a piece of the business that at least publicly, nobody talks about. And so we would not be doing this. We would certainly have not built Diamond Green Diesel to, if we did not think that we have the opportunity coming along with IMTT, the announcement we just made yesterday. We spent literally thousands of hours on every renewable diesel investment, on supply chain analysis, both inbound and outbound because we think this is a defining competitive advantage. And it's important for everyone to realize, we're not building Diamond Green Diesel just to run when margins are really high. We're running, building Diamond Green Diesel to be the most competitive renewable diesel facility in the world or facilities in the world in any margin environment. And that competitive advantage from a supply chain is absolutely critical. If you're not designing that in upfront, you're not designing a facility to compete in the long run.
That's some super helpful color. And then if I could squeeze just one more in just on the base business. Randy, I think, in the prepared remarks, you talked to a $450 million to $475 million in our EBITDA expectation for the base business, that growth versus 2019. Any way to bucket that between feed, food, fuel?
I knew you were going to do that. No. But the answer is we think feed will -- obviously, that's the largest segment. We should see a pretty nice improvement. The $57 million, $58 million fourth quarter should not be repeated. As we said, with all the one-timers that flew through at the -- that Brad mentioned in his comments, clearly, a full year of our Amparo, Peptan plant running is going to help us. The -- we had a pretty nice performance in China last year in our food segment, I think we'll be okay there this year.
A little hesitation in this. Comments are that it's very challenging over there but at the end of the day, all 3 of our [indiscerinible] plants are running today in China, and that's a domestic business. And then I commented, we have bringing up in order, we have our Angouleme, Ghent and [indiscerinible] Peptan plant, all coming online starting up in April, May and June, concurrently with production to the market in May, June, July. So the Food segment, as we said, will show some very nice growth, but it will be back half loaded as we go forward, much as John talks about renewable diesel demand, we continue to see very nice and significant growth in the hydrolyzed collagen business around the world and sports, health and nutrition markets. So clearly, it's going to -- as we said, the Feed or Food or Fuel segments always kind of an annuity out there. The difference this year versus last year will be the prospective tax credit.
But as you were asking, and I'm just throwing a few more color comments in here for you. While John was talking about renewable diesel and the demand and margin structure, the margin structure post BTC for the classic biodiesel business is not good. And you -- I want to say that the earnings in the classic biodiesel business that we operate today and fairly competitive plants are somewhere between 0 and $0.10 gallon black right now, even with the dollar again. The RIN market did not react, the feedstocks, as we talked about, moved up the HOBO spread kind of went crazy. So that's really not a very good business. That will weigh a little bit on our Canadian operation. But overall, we should be able to make it up. So long story short, we think the low sides $450, we think we get any type of pricing authority. $475 plus is doable and making sure that those Peptan plants come up online. I think we're positioned even to go higher in 2021.
The next question comes from Tom Palmer with JPMorgan.
I wanted to touch on the economics today at Diamond Green Diesel. You just touched on some of the weakness in traditional biodiesel operations. We have seen diesel roll over a bit before RINs come under pressure kind of in wake of the blenders tax credit approval. You came out with a pretty strong number, historically, right, at $2.50 per gallon for the Diamond Green Diesel business. As we think about the start of the year. So really, the first quarter, is that a reasonable number? Or just given what we've seen with some of the initial dislocation following that blenders tax credit approval, should we be looking more for a ramp in subsequent quarters? So just any color on kind of today's unit economics versus how you see it progressing?
All right. Tom, this is Randy. Good question. Hope you pay attention here. I think the margins will actually be better than $2.50 a gallon in Q1. And at the end of the day, we've continued to lay out there quarter-after-quarter, the margin structure in the business. As John alluded to, we continue to capture more and more of the LCFS premiums around the world, both domestically and export. And the business is running strong. So $2.50 is where we're comfortable staying through the year. So feedstocks, we think, will be higher in the back half of the year. So at the end of the day, we probably have stronger earnings there in Q1, Q2. And if we're right on the Q3, Q4 with fat prices going up, our core business then picks up a little more in the back half of the year.
Great. Thanks for the color there. And then just wanted to ask quickly on the logistics agreement that you announced yesterday. Is this a necessity to make sure you can move product? Or is this incremental in terms of lowering the overall cost structure at DGD when we think about distribution costs?
Yes. I'll give a comment and then I'll let John also comment. I mean, number one, when you grab up a facility on-site with DGD 1 and DGD 2, 675 million, lets round up to 700 million, I'm confident, we can probably make that many gallons eventually, 8.5 pounds a gallon. You're talking 6 billion pounds of fat. You're talking 40% of the U.S., North American supply and trying to bring it all into one location in railcars and trucks, as John alluded, could be done, and we're going to do the best we can, but we have the opportunity to put some tanks across the river, about 5 miles away. And I think we're taking a per announcement, 790,000 barrels of tankage over there that I'll allow us to ship both fat by water, meaning barge, by rail, by truck, by ship and IMTT and offload, and then at the same time, we'll be able to move renewable diesel over there to both improve our outbound logistics. But at the site, our current site, and use, be able to double load as we need to. John, you want to comment a little more?
Yes. It was interesting because when we had originally designed Diamond Diesel, too, we did not have the IMTT channel logistics specifically designed in. We had an alternative where we were going to be able to do things on-site at our facility. The IMTT guys came along, and we had good long discussions. It really evolved into something that, in my mind, is absolutely spectacular. We're going to have pipeline capability, both on the raw material, raw fat, [indiscerinible] IMTT to our facility, but also on renewable diesel going over to IMTT to be able to load out.
When you start talking about the logistics of 675 million, 700 million gallons of renewable diesel, plus another 60 million gallons of naphtha, we now have 2 different locations off of the Valero docks as well as IMTT that we can load finished product. We can bring raw materials in by barge, by vessel. If the international markets start to supply us with some fats into the marketplace. We have already today, KCS capability at the Diamond Green Diesel 1 and they've been spectacular partners with us in supplying Diamond Green Diesel 1. We have CN capability today that we load renewable diesel out of. We will incorporate now CN loading -- unloading capability at both the Valero site and also at IMTT and be able to load out CN renewable diesel out of IMTT. From a logistics and supply standpoint, with the additional 790,000 barrels of capacity that we're bringing on board.
It now means that we have a massively effectively functioning terminal, that supports our ability to be able to make sure that we are always buying the fact when it's cheap and available, and to be able to ship the product out to whatever the market is, that's the best market for us to be able to go to. It also means for anybody that's doing business with us, that if you ship us a railcar, it's going to get unloaded fast. We're turning it fast. If you bring a boat into us, we're going to be able to get it in and deal with it quickly. So in terms of supply chain efficiency, we're making it extremely easy for our supply chain partners to work with us. And when you're at the type of demand and supply that we intend to be in North America, that's a very important element because all of your customers, whether they be suppliers or raw material or finished product guys, they all demand the respect that you've got a facility that can efficiently deal with the product that they're sending to you or taking from you. And that's what IMTT gives us, just phenomenal capability and flexibility.
The next question comes from Ken Zaslow with Bank of Montreal.
Just a couple of quick follow-ups, a lot of it's been covered here. One, is how much of the food EBIT, core EBITDA growth is from the CapEx projects that is associated with that? That's my first question.
The food EBITDA growth for -- in '18 or '19 or '20?
Ken, I would -- let me -- I'll answer it because I mean, the 100% of the growth in the Food segment is the collagen growth business of the new plants in Amparo that came online year-over-year.
So you're not expecting any underlying improvement in the business, that you saw in CapEx projects. Is it fair?
Well majority of that.
Yes. I mean, yes. The Food segment is made up of our casings business, which is really small. Our edible fats business, which we had a little bit of erosion there because China started buying raw fat, frozen fat out of Europe, and so -- but we've seen the price of raw fat or edible fat in Europe move up nicely. So that offset the margin erosion by the volume decline has been offset and then really, the growth that we see over the next two years is 100% related to the rebalancing of our gelatin collagen business model there around the world.
Okay. And how much of the feed improvement is because of just the lower compensation, right? Is that right? And not the replication of the fourth quarter numbers. Is that a significant portion of that as well?
Not sure I understand your question again.
Right. The feed in the quarter fell short of obviously that expectations, right? Because of the SG&A increase?
Yes.
So when you're looking at year-over-year, an improvement for 2020, I'm assuming probably about half of that is just recovering that part of it, plus then other half is probably the -- implemented in pricing. Is that a way to think about it?
I look at it three ways: one, yes, you won't have a significant flow-through of the true-up of the incentive comp programs and legal settlements that went through that segment; number two, you've got a stronger fat market in Europe, year-over-year right now that's going to flow through in Q1; and then also, we will have our LA, Great Blend and Wahoo assets on whole year now. So we should have some -- always we have plants under construction. You have a little additional extra expenses that seem to flow through those bids happening in Canada today that should help contribute to the growth this year.
Okay. And then in terms of the EBITDA improvement on the core business, when you're -- and it is a minor issue. But when you're thinking about the fuel ingredients, does that include or exclude the BTC?
That excludes DGD. We would just say that, that Fuel segment has always been, what, $50 million to $60 million, Brad, something like that. I don't have the numbers in front of me. That's because that's anchored by our Ecoson and Rendac businesses, that are tariff businesses and very, very straightforward.
And my last is just a strategic question, is, the cash that you're going to receive from the Diamond Green Diesel will go to the debt repayment. Previously, you said that you were thinking about acquisitions. But is that been tabled just because of the strength of DDG and you're looking just to deleverage and give back to the shareholders? Is that how to think about it?
That's how we're looking at it today, Ken. I mean we're -- Brad and I are, obviously, looking at the capital structure, both near-term and long-term on where we're going to put the business. I mean, for the first time in my 17 years, I've been involved in discussions with the word investment-grade now attached to them. So we're going to go ahead and just basically our senior term A has gone now. It will go against the term B. That's the last prepayable debt we have. And then we'll figure out where we're going from there.
The next question is a follow-up from Heather Jones with Heather Jones Research.
So I wanted to go back to the LCFS credit, dollar getting a bigger and bigger piece of that. But I was thinking about the mandates in Europe, the mandates and on the West Coast and then talks of a low-carbon program in the Northeast. And just some capacity is being added, but you all have highlighted really well the difficulties of the supply chain. So I was wondering, do you envision a scenario where given the steepening mandates and the difficulty of bringing supply online that it could get to a point where you actually could receive more than 100% of the LCFS. Is that crazy talk?
Yes. Heather, this is John. I mean we'll see how these markets develop. I would say you highlighted one of the things that we're extremely interested in, which is all of the developing LCFS programs, whether it be Washington State, the Canadian Federal program, New York State, the Northeast, there's even some talk in Midwest or some talk in California about or Colorado about various programs. It seems like the low carbon concept, is just really taking hold out there. And all markets are -- all pricing is based on markets, right? And so to the extent that the demand remains strong, if the market is in such a situation where we are able to command premiums, don't worry, we'll ask for those premiums.
Okay. And my final follow-up is, have you seen any shift going into 2020 in the DGD portfolio as far as what's your pricing on spot versus term contracts?
Yes. Heather, this is John. Most of our product is sold on a on term basis with formulas. We do very little spot sales.
This concludes our question-and-answer session. I would now like to turn the conference back over to Randy Stuewe for any closing remarks.
Thank you. We appreciate everyone's time today and look forward to seeing you as we get out on the road to get to tell our exciting story to the investment community, and we'll see everybody then. Thanks, again.
This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.