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Darling Ingredients Inc (DAR) Q1 2019 Earnings Call Transcript

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Darling Ingredients Inc (NYSE: DAR)
Q1 2019 Earnings Call
May. 9, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone and welcome to the Darling Ingredients Inc. Conference Call to discuss the company's First Quarter 2019 Financial Results. On the call today are Mr. Randall C. Stuewe, Chairman and Chief Executive Officer; Mr. Brad Phillips, Executive Vice President and Chief Financial Officer; Mr. John Bullock, Executive Vice President and Chief Strategy Officer; and Ms. Melissa Gaither, Vice President of Investor Relations and Global Communications. After the speakers' opening remarks, there will be a question-and-answer period and instructions to ask a question will be given at that time. Today's call is being recorded.

I would now like to turn the call over to Melissa Gaither, Vice President of Investor Relations and Global Communications for Darling Ingredients. Ms. Gaither, please go ahead.

Melissa Gaither

Thank you, Denise. Good morning, everyone and thank you for joining us to discuss Darling Ingredients' earning results for the first quarter ended March 30, 2019. To augment management's formal presentation, please refer to the presentations section of our IR website for the earnings slide deck.

Randy Stuewe, our Chairman and CEO, will begin today's call with an overview of our first quarter operational and financial results, focusing on year-over-year comparisons, followed by a discussion about some of the trends impacting our business. Brad Phillips, Executive Vice President and Chief Financial Officer, will then provide additional details about our financial results. Finally, Randy will conclude the prepared portion of the call with some general remarks after which we'll be happy to answer your questions. Please see the disclosures on our non-U.S. GAAP measures in both our earnings release and earnings slide presentation.

Now for the Safe Harbor statement. This conference call will contain forward-looking statements regarding Darling Ingredients business opportunities and anticipated results of operations. Please bear in mind that forward-looking information is subject to many risks and uncertainties, and actual results may differ materially from what is projected. Many of these risks and uncertainties are described in Darling's Annual Report on the Form 10-K for the year-ended December 30, 2018 and our recent press release announced yesterday, and our filings with the SEC. Forward-looking statements in this conference call are based on our current expectations and beliefs, and we do not undertake any duty to update any of the forward-looking statements made in this conference call or otherwise.

Now, I'll turn the call over to Randy.

Randall C. Stuewe -- Chief Executive Officer

Thanks Melissa. Good morning everyone. Thanks for joining us. Let me begin by providing some brief macro comments about our global performance. We had a solid start to 2019 with a very challenging global environment.

Overall adjusted EBITDA of $103.4 million improved versus last year when adjusting the prior year for the $12.6 million blenders tax credit benefit recorded in the quarter and a much stronger U.S. dollar. Sequentially the feed segment was flat and the food segment was up sharply. The fuel segment reflected difficult biodiesel economics. Tough winter conditions in North America, flooding in the Midwest, and the growing disruption of African Swine Fever provided headwinds and was reflected in the sequential performance. The shining star in the quarter was our food segment that is beginning to reflect the investments we've made to diversify our product mix in Rousselot. In the feed segment earnings were impacted by higher winter energy costs, lower pet grade protein margins, a destroyed Pet Food Blending facility in the Midwest, and stagnant fat and protein pricing.

Global raw material volumes remain strong growing by 2.7% year-over-year to a new record. In the fuel segment adjusting for the lack of the BTC we had a consistent performance as our green energy operations returned to normal capacity in Europe.

Diamond Green Diesel met our expectations for the quarter and delivered $59.7 million in EBITDA or $0.85 a gallon on 71.1 million gallons of renewable diesel sales. On an operating basis with no hedge loss we're into $1.22 per gallon. Since our latest expansion to 275 million gallons DGD is tracking well against our guidance of a $1.25 per gallon when averaging fourth quarter 2018 and first quarter 2019 EBITDA for a net run rate of a $1.25 per gallon. For full year 2019 we believe we remain on-track to achieve full production at 275 million gallons and an average EBITDA contribution of a $1.25 to a $1.40 a gallon during the full year of 2019. Our phase three Super Diamond expansion project is under way to increase production to 675 million gallons of renewable diesel plus 60 million gallons of renewable gasoline. We are on-schedule and on-budget and look for completion by the end of 2021.

With this significant expansion we will be well-positioned to supply the growing global mandates for low carbon bio-fuels which are reaching far beyond California and the U.S. and we are very excited about this game changer for Darling's future.

Now we continue to be optimistic that the blender's tax credit will be implemented and made retroactive for 2018 and prospective for 2019. At this moment we are being told the vehicle Congress may use to attach its standards is a bipartisan supported by Retirement Security Act. We are hopeful this advances in both houses within the next 45 days. With the tax credit there is potential for an additional $157.4 million entity EBITDA for 2018 and another $275 million for 2019. And finally as reported in the media this week DGD is in very preliminary discussions with Preem, the largest petroleum refinery in Sweden to tantalize the construction and operation of a 265 million gallon renewable diesel unit. Preem is a valuable partner and customer of Darling's feed stocks in Europe. We plan to make a final investment decision once engineering is completed in late 2020.

With that let let's have Brad take us through a few financial highlights. Brad?

Brad Phillips -- Chief Executive Officer

Okay, thanks Randy. Before we review our financial highlights for the quarter I'd like to point out that effective December 30, 2018 we adopted the new lease accounting rules of ASU number 2016-02 commonly referred to as Topic 842 for leases utilizing the modified retrospective method of transition. Our balance sheet now includes both operating lease assets and operating lease liabilities. Previous consolidated financial statements were not restated under the modified retrospective method. The key takeaway is that ASC842 is an accounting change with no impact to our business or total cash flows.

Now onto the financial highlights; for the first quarter 2019 we reported consolidated net sales of $835.1 million compared to $875.4 million for the comparable period in 2018. Several factors impacted the year-over-year sales shortfall including the 2017 retroactive BTC of $12.6 million recorded in Q1 2018; lower pet grade protein pricing, a stronger U.S. dollar, the closure of the company's Argentina College and Facility, and the sale of our Terra Renewal Services subsidiary in the second quarter of 2018. We posted first quarter net income of $18 million or $0.11 per diluted share compared to net income of $97.3 million or $0.58 per diluted share for the first quarter of 2018. The decline in net income was primarily driven by the inclusion of the 2017 retrospective blender's tax credit in the prior year period results. The credit has not yet been reinstated for 2018 or 2019. Additionally, lower protein product pricing, higher energy cost, FX variance, and cost due to Midwest flooding negatively impacted earnings for the quarter.

SG&A was $85 million for the first quarter of 2019 compared to $86.9 million for the 2018 first quarter. The decrease was primarily due to the decline in several areas that more than offset an increase in performance based compensation expense. Interest expense was $19.9 million for the period compared to $23.1 million in the first quarter of 2018. The decrease was primarily due to refinancing the $515 million euro senior notes in May 2018 from four and three quarters to three and five eighths.

I want to briefly mention taxes; the company reported income tax expense of $5.3 million for the three months ended March 30, 2019. The effective tax rate is 21.2% which differs slightly from the statutory rate of 21% due primarily to the relative mix of earnings among jurisdictions with different tax rates and discrete items including the favorable settlement of an audit. The company also paid $2.9 million of income taxes in the first quarter. As you know there has been little movement with respect to the biofuel tax incentive. With that said we are hopeful that the biofuel tax incentive which has bipartisan support will ultimately be reenacted during the year. For 2019 we are projecting an effective tax rate of 30% excluding the biofuel tax incentive. If the biofuel tax incentive is reenacted retroactively for 2018 and 2019 the effective tax rate is projected to be 15%.

Finally, we are projecting cash taxes of approximately $30 million for fiscal 2019. The company reported equity and net income of unconsolidated subsidiaries of $23.8 million for the 2019 first quarter compared to $97.2 million for the same period in 2018. The variance is related to Diamond Green Diesel and the lack of the blender's tax credit made retroactive for 2017 recorded in Q1 last year.

Now turning to the balance sheet; working capital was $325 million for the first quarter of 2019 compared to $357.9 million in 2018. CapEx for the first quarter of 2019 totaled $84.3 million compared to $56.6 million for the first quarter of 2018. Our liquidity remains strong with unrestricted cash of $95.7 million and funds available under the revolving credit facility of $901.5 million. Our covenant leverage ratio was 3.25 at the end of the first quarter. We launched and priced a refinance of our five and three eights $500 million U.S. senior notes to a new eight-year term at five and a quarter rate and closed on the transaction here in early Q2. In April we received a $17.7 million cash dividend from Diamond Green Diesel JV and forecast additional cash dividends as we move through the remainder of 2019.

With that I'll turn it back over to you Randy.

Randall C. Stuewe -- Chief Executive Officer

Thanks, Brad. We're off to a good start given the global headwinds. We're pleased with our progress and we see tremendous opportunities to leverage our unique global position to capitalize on the feed, food, and low carbon renewable fuel markets. Our capital growth projects and strategic acquisitions are scaling our global reach even further setting us up to feed and fuel the world.

For Q2 we carry solid momentum. The world remains challenged with trade tariffs and barriers along with the growing outfall from African Swine Fever. However the diversity of our model will once again prove itself. Diamond Green Diesel is rolling this quarter and operating margins continue to support our guidance. I'm proud of the business we've built and continue to build as Darling continues to have a positive impact on the world and provide long-term value to all of our shareholders. Denise with that let's go ahead and open it up to Q&A.

Question and Answers

Operator -- Chief Executive Officer

Thank you, sir. (Operator Instructions). And the first question will come from Heather Jones of Vertical Group. Please go ahead.

Heather Jones -- Chief Executive Officer

Good morning. So just quick detailed question, you say for Q2 that you're carrying solid momentum into the quarter and we have started to see that pricing pick up. So I was wondering should -- but there obviously are still some headwinds so are you expecting the core Darling business to be able to exceed year ago levels or could you frame it for us?

Randall C. Stuewe -- Chief Executive Officer

Yes, I can frame it and I think the first thing you've got to start out with is to kind of -- I'll give you a little more color on the on the first quarter. I mean within -- I tried to do that at the macro level but logistically we've had a real challenge up in the Midwest with all the flooding. So you've collection costs of the trucking operations, bridges out, roads out. In the USA, you had an extreme winter up there with lots of ice and snow. We had a levee break on one of our protein blending facilities in Nishnabotna, Missouri, and put the facility 16 feet under water. That facility supports five or six locations. So when I said we're going to carry solid momentum it meant operationally we're going to see energy costs that they have come down, all of our formulaic pricing in North America has recovery for both natural gas and electricity. So you'll see that uptick. You're seeing some pretty solid back demand out there as the weather warms up here a little bit. Protein demand if you look at a year ago the pet grade, feed grade premium on protein, chicken proteins was out at about 100 but it narrowed by about 100 bucks. It's widened back out by about 25 to 30 bucks. And so we'll see that flow through the USA operations.

The European operations as we look around the world are continuing. They're very -- they've seen a recovery in their fat prices here for Q2 after a pretty weak Q1. Protein demand is stable over there. Same with Canada as we've seen a little bit of an uptick there and then when you move to our food segment the gelatin business had a record quarter underneath the food segment there that includes edible fats and casings in there. Excellent demand out of China even after the Chinese New Year, solid demand out of South America through the quarter where we're seeing -- we've installed our new technology into making a new product mix, a product we call Peptan and we're starting to see the payback from those projects. And we think we'll carry a pretty solid performance there into Q2.

You know, I'm always -- I sit in the chair of optimism but I'm also realistic about it. We talk about African Swine Fever Heather. You know I think collectively as a management team in our 30 and 40 years of global AG experience in our room here we've never seen anything like that. We're starting to see a little bit of raw material trickle away and be frozen to be sent to China. That would be true if you're going to talk hog's head in Canada, some low cut grade material here in the USA and in Europe and then you're seeing the scale back of slaughtering in China right now which is causing if you will pigskin prices to move up pretty rapidly here in Europe and in China today and that's one of our gelatin product lines is based on that. That would cause some margin pressure but I don't see anything there in the near term that can't be recovered. As I said it's a diverse model, it is spread managed, it's got a little bit of lag in timing but right now from our seat in Q2 we see pretty solid momentum and don't see any anything wheels off right now that's going to take us one way or another.

Heather Jones -- Chief Executive Officer

So you think it could be higher than the last year?

Randall C. Stuewe -- Chief Executive Officer

But -- I didn't think you were going to make me answer that question.

Heather Jones -- Chief Executive Officer

I wish you talked a lot and I think you hoped that you would lose me.

Randall C. Stuewe -- Chief Executive Officer

I think we're probably today if you looked at we're going to -- I think we're going to do better than we did in Q1. And I see Q2 and I think we're in the range. I don't -- I can't predict this same kind of $4 million or $5 million EBITDA.

Heather Jones -- Chief Executive Officer

Okay. And actually I was going to ask about the gelatin side so, I mean to your point so you're losing just for round numbers a third of the herd in China that's a ton of pig skins that are gone and from what I understand pig skins are the predominant feedstock for gelatin. So I was hoping you could help us understand how quickly you can pass through those higher pricing?

Randall C. Stuewe -- Chief Executive Officer

Well, first off you have to look at the 10 ton plant system that we only have one pigskin plant in China. We've dealt with this before so that to me doesn't worry me much. We're seeing -- what you do see is then what the unintended consequence of a shrinking herd is that there are a portion of the population in China that eat premium proteins chicken and high-end pork cuts and then there's the other portion of the population that just eat meat if you will. And meat can include pigskin. So they're coming back to Europe now to buy pig skin to as you would think in North America your chickrones (ph) or fried pork rinds and in a sense. But at the end of the day we're watching pigskin move up rapidly in Spain and Poland. I think we're covered for Q2. The pricing pressure would come in Q3 and you just got to be careful in that business not to go out and take long term positions where you don't own the raw material and I think we're doing a pretty good job there. So really at the end of the day you've got a plant in China, a couple of plants in Europe, and then one plant in the U.S. on pig skin that's going to have to make some margin.

The other side of the trade-off is if pigskin gelatin prices move up then that should help pull up the other prices of both the hide and the bone gelatin plants around the world and so there's a little bit of an offset there. Overall what we've done and I think the more important thing in the food segment is as this has been the capital investments we've done into our new technologies to produce Peptan. We had a second, one of these units come on line down in Amparo Brazil at the end of March. So we're diversifying away from commodity gelatin more into the specialty side and we're starting to see the benefits of that. And as we've said we've got another plant coming online in Angouleme, France and then another one in Belgium and then another one down in Brazil over the next year and a half that will once again help us move away and manage those margins and put up some better returns.

Heather Jones -- Chief Executive Officer

Okay, thank you so much.

Operator -- Chief Executive Officer

The next question will be from Ben Kallo of Baird. Please go ahead.

Benjamin Kallo -- Chief Executive Officer

Thanks all, good morning. So I just wanted to touch on and congratulations on the potential opportunity in Europe. I want to touch on the funding for the next expansion of Diamond Green Diesel and you're worried to change slightly might be just timing but how you were going to fund the plant. So could you just talk through that and is the change because of the opportunity in Europe or what's driving the change and how will you fund it outside of cash? Thank you.

Randall C. Stuewe -- Chief Executive Officer

Ben, this is Randy and I will let John Bullock help me here if I don't answer it right. What we're looking at there is number one our goal is to get the Super Diamond online as quick as we can. You know the land has been cleared, it's been filled, it's been whacked (ph), we're driving piles here and here and about the next month and long lead time equipment's been ordered. And so at the end of the day we're trying to do the best we can to accelerate and bring that plant to market. As any big project of this scale if you remember back that we built the Diamond Green One in about 28 months from conception to commissioning. This one's got a little longer lead time on it right now in the original construction plan.

So all said, when we added a word substantially to that I was very much aware of that and I'm proud that you pick that up. For us it's just the timing issue and at the end of the day right now Washington D.C. is a mess. The last two conference calls I've used the word optimistic on the blenders tax credit. I've kept that word, I still am. So at the end of the day it's just we're just trying to be very open with people that we don't know if the BTC is coming in when or where it can be attached now or it could be attached on an appropriations bill. And it's just the timing deal. At the end of the day if you look at it we're going to run 275 million gallons this year and next year and then in 2021. We're telling you five year historical margin at a $1.26 a gallon down there we don't see any; we're not wavering off of that and then 1.1 billion on the construction. So you can kind of run your own model and say given timing, given outflows there may have to be a small funding that happens sometime in 2020 or 2021 and it's just the timing and we can either loan into it or put equity into it and then immediately in 2022 it would be pulled back out. So that's answer one to you.

The European opportunity I think we have to a degree telegraphed to people that we're looking for a solution for our fats that we produce in Europe today both cap 1, cat 2, cat 3 and we obviously -- Preem is one of our large and very valuable customers today. We worked with them for years. We're just in the early, early, early stages of discovering whether that makes sense and what it's going to cost in construction timeframes. And I think what it does to the marketplace in general is once again it signals our confidence that the low carbon fuel demand in the world is real and it's just not a California and Oregon or Washington or British Columbia or Ontario market. It is a global market. We're going to start to consider shareholder capital in those markets to value add the fats that we have in Europe today.

All said things take longer in Europe to construct and at the end of the day that final investment decision there would be made in 2020, sometime mid to late there. And so by then you know the capital spend and the funding out of Diamond Green Diesel to fund that it would probably coincide. If we do this project like I said very preliminary with the start-up and the commissioning of the bigger unit.

Benjamin Kallo -- Chief Executive Officer

Got it. And then just two more. Just as far as the dividend goes from the JV, is that really the decision with the partner I assume because you could keep that cash there and fund expansion with the cash flows and dividends up? And then on a separate note just a step up in the food margin is that really driven up -- driven by Peptan and then can you talk about how sustainable that is going forward? Thanks.

Randall C. Stuewe -- Chief Executive Officer

Yes. Brad, you want to talk about the dividend?

Brad Phillips -- Chief Executive Officer

Yes, Ben on the dividend, the partners have a formula for that OK. So that is kind of an automated thing now as we start into the construction on Super Diamond. So that's why we say we do expect some further dividends through the remainder of this year.

Randall C. Stuewe -- Chief Executive Officer

And then on the Peptan, yes Ben I mean our hope is that is a very sustainable margin as we diversify our product mix away from some of the low end commodity gelatins that we were selling out there. So like I said we've got the second finishing units spray dryer (ph) done and Amparo Brazil came up end of March and we start bringing on capacity over the next six months. And the margins continue to be attractive into the health, nutrition, and biomedical markets that we're serving with those products.

Benjamin Kallo -- Chief Executive Officer

Thanks, guys.

Operator -- Chief Executive Officer

And the next question will be from Ken Zaslow of Bank of Montreal. Please go ahead.

Kenneth Zaslow -- Chief Executive Officer

Good morning everyone. Just one quick one first, how much did you guys incur in weather cost in the quarter, and I'm assuming you don't expect that to happen again; so how much was that?

Randall C. Stuewe -- Chief Executive Officer

I'm going to take a shot, Ken. I don't know that we can calculate that. I know that the flooding of the Nishnabotna plant. We had 3000 to 4000 tons of really expensive protein sitting on the ground there that went underwater. This is covered by both liability and product insurance and then also business interruption but to the income statement we booked about $1 million in Q1 on that. The excess trucking costs we had to drive around bridges and they're hard to calculate but raw materials because we were picking up extra raw material that had perished during the flooding up there. And then the energy costs were probably somewhere in North America somewhere between 500 and another million dollars and that gets all recovered in Q2 as we adjust the formula. So $1 million to $1.5 million in Q1 related direct cash costs that flew through the P&L. It is kind of the best we can guess at this time.

Kenneth Zaslow -- Chief Executive Officer

Okay. Then going back to the food business, I think it is your highest margin since 2016, can you talk about were there capital projects, was it just the Peptan business, can you go a little bit more in detail of what the drivers were to make that margin, is that the margin we should expect going forward, just how do I think about that a little bit more clearly?

Randall C. Stuewe -- Chief Executive Officer

You know, I think number one you've got -- we've been adjusting our product mix here for about the last hundred days and we shut down our hurling ham Argentina facility that I believe what Q1 or Q2 of last year moved some of that capacity around, moved out some low price sales, moved some higher price sales up that the expansion of our Peptan product line coming on are fish Peptan, our hide Peptan products and really at the end of the day we're rebalancing our portfolio. It allowed us also in China to rebalance. We've also seen a rebound of our bone gelatin business from really the doldrums back to the black margins and really it's the rebalancing of the business around the world. We've always said to you that the cheapest gelatin in the world is a South American gelatin that's driven off of animal hides and by us diverting a significant portion of that production now into our Peptan product line we've taken some pressure off the market. So a long way of answering, margins are clearly going to improve. I always I always hate to say I can maintain a record pace after a record quarter so I'm going to temper that a little bit but yes they are improved going forward.

Kenneth Zaslow -- Chief Executive Officer

Right. And then can you talk about if the U.S. China -- again obviously it is clearly not known but if U.S. and China do actually have a resolution which part of your business and how do we frame that for thinking about how it would change the outlook for your business and I'll leave it there?

Randall C. Stuewe -- Chief Executive Officer

Wow! I think the overall discussion I've read a lot of comments of our different companies out there from a (inaudible) the different folks out there, the Smithfield or W.H. Group. We've never experienced anything like we're seeing right now. The initial impacts to Darling were twofold as ASF broke out and really at the end of the day about a year ago today was when we realized that ASF potentially could be bigger than most people could get their minds around because of our five blood drying plants in China. Our volumes were large as they rapidly slaughtered animals before they died and then at the end of the day then the Chinese government came out with their ASF programs to and declared that you couldn't feed plasma back to baby pigs. And so we took the write down in Q2 or Q3 last year of our plasma back to basically hemoglobin. If that maintains today we're selling all the hemoglobin that you want to sell to aquaculture but we lost a couple thousand remembi per ton of value into the plasma business. The second thing that hit was China was a big importer of chicken meal or low ash chicken products for aquaculture. And what the Trump tariffs, those trades have ceased right now. And so that backs up some of that product back into the U.S. which kind of that narrowed the spread if you will of the premiums over the pet grade or over the feed grade. So those are two direct impacts. Obviously we can rationalize some of the impact of not exporting soybeans, the crushing industry was running crush margins in the U.S. a $1.30, $1.50 last year. Now running at $1 which is still pretty awesome but it's the backdrop of the related to not exporting out of here. So that overall impacts the protein values that we get. There's ample protein in this country and there should be different products moving to China that aren't.

So if the tariffs go away I think there'll be a reopening of a lot of those products. I suspect it will take a little bit of time. At some point in time you have to get your mind around and I don't mean to be on my soapbox here of how long it takes China to replenish the hog herd, whether they've lost 10%, 20%, 30% who the hell knows. At the end of the day it's essentially equivalent to the entire U.S. hog herd that they have to breed and bring back and that'll just take some time but it'll create some incredible demand. It will also shift meat production I believe personally in different places around the world back to the USA, back to Canada, back to Europe, back to Brazil, Argentina to feed that population. And so you're going to see different demand drivers along with some short-term demand destruction in China but you're going to see demand creation that hasn't been in other parts of the world as you grow more animals quicker and put more weight on them which ultimately should be pretty positive for our business. But right now it's a little disruptive. Clearly the direct impact into the feed segment, into the P&L is the loss of value of the plasma business in China. And then kind of the narrowing of the pet grade spread. And then in the food segment underneath the Rousselot business you have the edible fat business. We're now watching slaughterhouses in Europe instead of sending us edible fat to mill. They're sending it in frozen containers if you will to China which is one of those part of the Chinese tariff issues that exist today is we can't export if you will packaged edible fat to China, it can go as raw material. So it's kind of an unfair situation but that's what's happening today. So overall I think if we get the tariffs down we'll see a pretty nice little rebound back into the global -- for all of our products as we go forward.

Kenneth Zaslow -- Chief Executive Officer

Right, I appreciate it. Thank you.

Operator -- Chief Executive Officer

And the next question will be from (inaudible). Please go ahead.

Unidentified Participant -- Chief Executive Officer

Hi, thanks for taking the question. Can you just spend a little bit more time talking about the opportunity with Preem, how did that come about, why does it make sense I guess on paper to do a project like this and why are they the right person to partner with?

John Bullock -- Chief Executive Officer

Yes, this is John Bullock. First of all we've known the Preem guys for a very long period of time. Wonderful, wonderful people, fabulous to do business with. They are the largest refinery in Sweden, have a lot of distribution in this region. And not only Sweden but also Norway. Those are excellent countries because they have extremely strong low CI mandates which are exactly the type of markets that we're seeking to be able to move our low carbon intensity product to. So they're an excellent partner from that standpoint. They have been looking at the renewable diesel now for some period of time. Obviously we had a relationship with them that went back several years and it was logical for us to get together and talk with them about the potential opportunity given the strength of the low carbon mandates that occur in the Nordic countries.

As far as why does that make sense for us in Europe, well in Europe we have an oilfield just like we do in the United States. We have a lot of fat raw material that we produce in Europe; we are one of the largest European rendering operations. So it's really we think it's just a natural, natural type of a fit. Having said all of that I think as Randy emphasized this is an early discussion that we are having with them to evaluate this opportunity and to make sure that it's the right opportunity for us. So we very much appreciate the opportunity to work with Preem on this through our Diamond Green Diesel joint venture. And we are in the process of analysis on it. A lot of macro considerations here make a ton of sense but we are still working through whether this is the right investment decision for Darling.

Unidentified Participant -- Chief Executive Officer

Okay. And just so I understand the wording, it will be the JV with the Diamond Green so it will be a JV in the JV, so hypothetically the economics would be a 25% ownership was what Darling would have, is that the right way to think about it?

Brad Phillips -- Chief Executive Officer

That's the right way to think about it.

Unidentified Participant -- Chief Executive Officer

Okay, that's helpful. And then just can you give us an update on the legislative area in Sweden as it relates to renewable fuels, renewable bio diesel, and is there any protections either from imports in anything that would protect that type of investment from palm oil derived production?

John Bullock -- Chief Executive Officer

Yes, this is John again. Again, the Swedish and Norwegian mandates for low carbon fields are as aggressive as any place in the world. They are in the process now of modifying their pathways and what's allowed as far as a low carbon feel into those marketplaces. And while it's unlikely that they will totally eliminate palm oil or palm fatty acid. It's certainly the direction of the both those countries is that whereas that was primarily the renewable diesel feedstock that was used in those countries. We think there'll probably be less of that going forward which is going to create an opportunity for us we believe to help supply that market with the type of renewable diesel that we produce out of our facilities.

Unidentified Participant -- Chief Executive Officer

Okay. And then shifting to the food side, very impressive results there to see the margins come up after a number of years of lower levels. But when you talk about the opportunity and what's happening on the collagens I think you call out collagen and Peptan. Can you just give us more color on the demand drivers and in what is really helping us get that tailwind if that's in fact what's occurring and just help us understand some of the investments that have been made and what the return thresholds were for those investments and how they're performing versus those targets?

Brad Phillips -- Chief Executive Officer

Sure, so if you think about it from just -- and I will talk really macro here that you've got a pharmaceutical demand for gelatin today and you get into hard caps and soft caps. The hard caps are your bone gelatin and then we operate plants in Massachusetts and in France and two of them in China today that predominantly serve the pharmaceutical market. You then move over to the confectionery at which time you will have both pig skin and high gelatin moved to confectionery and food, basically emulsification and gelatinization into the confectionery business. And now you've got an emerging category that is rapidly developing out there in the health and nutrition and joint supplement markets both in drinks and in bars. And that's where as we've worked on this -- this has not been a one year phenomenon. We've been at this for I don't know four or five years developing a product line to meet the health and nutrition demand that we see coming for collagen and collagen peptides and hydraulics (ph) going forward.

So, at the end of the day how we're going to manage that time will tell here. We have committed the putting and finishing units. We've had one unit down in Brazil today; we started up a second unit there. We've got a third unit under construction at another plant in Brazil. We're looking at a unit in China today that's been Board approved. We're looking at a construction of a unit in Ghent, Belgium and then two units in Angouleme, France today to meet the growing demand around the world for health nutrition and beauty aids of the product. So we see a very positive outlook going forward. It's a relatively new market that's rapidly developing. Return standards for this is obviously we think that we don't put capital in play or new capital in play that can earn between 15% and 20% margins on it. And so that's kind of where I'd leave it today, I don't want to educate the world too much on what we're doing but we're very positive on it.

Unidentified Participant -- Chief Executive Officer

Thank you. Possibly I should follow-up and just get a better understanding on it. Thank you for the overview. That's all my question.

Operator -- Chief Executive Officer

And the next question will be from Benjamin Hogan of Inherent Group. Please go ahead.

Benjamin Hogan -- Vice President

Thanks for taking the questions. I've got two on Diamond Green and then one ESG. On DGD can you provide a little bit more color on what exactly is your hedging there, there's obviously a loss in the quarter I think that may have been reversed from last quarter but just some more color there?

John Bullock -- Vice President

Yes, this is John. Obviously we have to buy our fat forward to be able to move it logistically and position the Diamond Green to do so. And as we're buying that fat we sell the base product as we've discussed in the past on our sales of renewable diesel, there's always the diesel fuel price. And so typically we will hedge when we buy fat we'll sell the diesel 9X market and then as we turn around and load the vessels out we will buy those hedges back. So the hedge result is primarily associated with 9X. Occasionally we will also hedge in soybean oil but it's primarily in the 9X heating oil.

Randall C. Stuewe -- Chief Executive Officer

But Ben you're spot on. I mean as we referenced we try not to get out there and tell people hedge gain, hedge loss. I mean you've got to average the $1.67 that was in Q4 with the $0.85 here and then you come through it and it was just a reversal of Q4 here on the pipeline.

Benjamin Hogan -- Vice President

Okay, perfect. And in the previous announcements, obviously exciting, obviously early days there, how much renewable diesel are you guys shipping to Europe today from DGD?

John Bullock -- Vice President

Yes, this is John. We've talked about this in the past. You know we think it's inappropriate for us to talk about specific customers or product flows that we deal with just because of the confidential nature of our relationship with our customers and we feel it would be disrespectful to them to talk about that type of information. So I wish I could tell you that but it's not appropriate for us to do so.

Benjamin Hogan -- Vice President

Okay. But reading in line it sounds like it's not zero. You guys are able to access those markets today?

John Bullock -- Vice President

And I think a different way of framing the answer here is if you go look at the next day (ph) results for last year you know I think it's very positive and it's once again, I'm just reiterating to the family and the shareholders here that you know unless they made around 800 million gallons or whatever the number was and I think about 140 or 150 came in to the U.S. there's a very large low carbon fuel renewable diesel market out there that they ship around 700 million gallons to last year and so we have access to that and we make the decision between ship in California, Canada, it's a global arbitrage decision as demand comes up for us.

Benjamin Hogan -- Vice President

Okay, I mean that's just too logical. Okay, last question, on the last call you brought up your corporate social responsibility disclosures that you were planning to increase. Can you just give some more color on which ones and kind of the timing for that?

John Bullock -- Vice President

Yes. And we're working you know with your help Ben and we do appreciate that this is something that is evolving very nicely for us as you know with a couple hundred facilities around the world and trying to make sure that while we all speak English sometimes the numbers don't translate back to English. And so we're trying to make sure whatever we put out there is accurate. And so we started down a path with clean air, clean water, safe food, safe feed, and then into the social side down there. We are going to be updating those. I suspect you're going to see that we are going to put out both targets benchmarks and improvements against them we are going to include. Right now we are in the final stages of wrapping up workplace safety such that we can report that and go forward from there. So, it is in the early stages. I am expecting by this summer for some real updated positions by us that would be meaningful, measurable, and something that I think people can get their minds around. Brad, Melissa you want to add anything to that?

Melissa Gaither -- Vice President

No, thank you.

Benjamin Hogan -- Vice President

Super excited, thanks guys. Appreciate it.

Operator -- Vice President

The next question will be follow up from Heather Jones of Vertical Group. Please go ahead.

Heather Jones -- Vice President

Thanks for taking the follow up. So I just had a question on the LCFS so it tipped into net credit generation in Q4. And John I was just hoping you could help us how to think about it this year because you have obviously an accelerating compliance curve but you also have accelerating production. So what is your thinking about 2019 and 2020 this Q4 seemed like a fluke and you would expect other quarters to be deficit generating or how do you think about that?

John Bullock -- Vice President

Yes, I think the way to think about that is first of all in 2018 we worked at a 5% mandate. We're now at a 6.25% or 6.3% mandate. You also have to remember that in 2018 for a substantial period of the year due to the port litigation we had the diesel fuel pool portion of the thing -- of the mandate capped at 3.5%. Filed litigation is subsequently been lifted and I can't remember if that was third quarter or fourth quarter of last year but it's been lifted now. So now the entire pool is at 6.25%. That's going to substantially increase the deficit generation that's occurring in California and we should see a large increase in the amount of deficits that are demanded.

I think what you're seeing though that we view is extremely healthy on how the LCFS is developing is that as the market demand for the credits increases we see the amount of credits increasing into the marketplace. Obviously the market at $185 to $186 a ton today, that's excellent from our perspective. The one thing we do not want to see is we do not want to see the LCFS credits spike well above the $200 number. As you know -- talked about more hardening of that cap at the $200 a ton number which is really not $200 a ton because it's $200 a ton plus inflation which now puts it at $210 or $212 a ton. And over time that will go off by mid of 2025 to $225 a ton. But the fact that this market is developing in such a healthy fashion and the fact that it continues to demand more and more product renewable diesel which is the primary product going in to satisfy those LCFS credits we really like the way that that marketplace is developing and it is developing in extremely healthy fashion. As you know those mandates go all the way up to 20% by 2030 so they continue to move higher each and every year requiring more credits be produce. And obviously California is a key market for us as we ramp up production of Super. So it's very, very positive is how we stood.

Heather Jones -- Vice President

Awesome, thank you. And my final question is just wondering why did China lift the ban on speeding blood plasma. I had read -- I think it was in your Q but I also read it somewhere else but they lifted that ban and they determined that when it is dried it is no longer harmful?

John Bullock -- Vice President

Exactly, you've answered your own question. You know we worked hard ourselves and a couple other APC to show the science behind the kill step of the pathogen within the spray drying units over there and that they deem the products safe to be fed. Now that all said we're not selling one kilo of plasma to the pig industry yet. So it's kind of -- they know that they have a herd replenishment issue coming on. You know you can take your mind around this thing and say remember from a demand destruction side it really are in a lot of the commercial feeding units that have biosecurity, it was the backyard family farms that lost all the pigs. Those aren't the guys that are feeding soybean meal or plasma. So they're just trying to get ready positioned with the right regulation in order to replenish or herd here over the next one to five years.

Heather Jones -- Vice President

Okay, thank you so much.

Operator -- Vice President

And ladies and gentlemen, that will conclude our question-and-answer session. I would like to hand the conference back to Randall Stuewe for his closing remarks.

Randall C. Stuewe -- Chief Executive Officer

Thanks, Denise. Appreciate everybody's questions today. As you know we'll be presenting at the Citibank Conference aside from Valero on Tuesday at about 8 or 8.30 in the morning and then we'll be at the Ken Zaslow's conference on Wednesday coming up this week once again to tell the story and then drive value for you. So with that we will talk to you again here in August. Thanks so much.

Operator -- Chief Executive Officer

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, we ask that you disconnect your lines.

Questions and Answers:

Duration: 50 minutes

Call participants:

Melissa Gaither

Randall C. Stuewe -- Chief Executive Officer

Brad Phillips

John Bullock

Heather Jones -- vertical Grace

Benjamin Kallo -- Robert W. Baird

Kenneth Zaslow -- Bank of Montreal

Unidentified Participant

Benjamin Hogan -- Inherent Group -- Vice President


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