Darling Ingredients Inc. Third Quarter 2026 Earnings Conference Call - DARLING INGREDIENTS INC

Financial Performance:

• Third Quarter 2026 Net Income: $267 million ($1.67 per diluted share), compared to $19 million ($0.12 per share) in Q3 2025.
• Nine-month 2026 Net Income: $789 million ($4.91 per share), up from $6 million ($0.04 per share) in the prior year period.
• Combined Adjusted EBITDA (Q3): $514 million, a significant increase from $245 million in Q3 2025; driven by $310 million from Global Ingredients and $204 million from Diamond Green Diesel (DGD).
• Nine-month 2026 Combined Adjusted EBITDA: Exceeded $1.6 billion, up from $690 million in the prior year.
• Revenue: Q3 Net Sales $1.8 billion (up from $1.6 billion in Q3 2025); First nine months 2026 sales $5.1 billion (up from $4.4 billion).
• Cash Flow & Balance Sheet: Received $171 million in cash distributions from DGD; Core business generated over $300 million in cash. Net debt reduced by ~$420 million to ~$3.37 billion; Leverage ratio improved to 1.7x from 2.9x year-end 2025.
• Shareholder Returns: Completed $76 million in stock buybacks during the quarter; $33 million in dividends received from DGD.
• Tax Rate: Effective tax rate of 22.3% for Q3; full-year 2026 expectation is ~25%.

Guidance and Future Outlook:

• Full-Year 2026 Combined Adjusted EBITDA Guidance: Reaffirmed range of $2.2 billion to $2.3 billion.
• Q4 2026 Earnings Outlook: Implied guidance centers on $320 million to $340 million, with a base expectation of ~$325 million for core ingredients and $1.50-$2.00 per gallon margin capture for DGD.
• Debt Targets: On track to reduce net debt to or below $3.0 billion by year-end 2026; likely to reach ~$2.5 billion by Q1 2027.
• DGD Production: Expected to produce ~325 million gallons in Q4 2026.
• Capital Allocation Strategy: Board evaluating shift to dividends or more aggressive buybacks once net debt targets are met; currently prioritizing debt reduction.
• Long-Term Growth: Confident in carrying strong momentum into 2027; core ingredients business expected to grow in EBITDA contribution relative to DGD over time.

Business Segments and Product Lines:

• Feed Segment: Delivered stable margins with strong protein demand; facing challenges from Canadian and Brazilian tariffs but developing alternative markets; fat prices expected to strengthen in Q4 due to RVO requirements.
• Food Segment: South American shipments hindered by Brazilian tariffs; strong China collagen sales offset headwinds; NexCognia (cognitive resilience collagen) recently launched; Descenderlo joint venture expected to close in Q1 2027 after regulatory review.
• Fuel Segment (Diamond Green Diesel): Q3 impacted by hydrogen outage, hedging losses, and PTC capture timing, but remains a major cash engine; DGD holds lowest cost per gallon in the industry; structural advantages intact despite temporary noise.
• Product Mix: DGD SAF sales shifting towards the U.S. market; SAF yields higher net-back margins than Renewable Diesel (RD).

Market and Competitive Landscape:

• Policy Environment: RVO mandate viewed as balanced for 2026; EPA expected to finalize Supplemental Rule for Set 2 by mid-Q1 2027, with Set 3 rulemaking targeting mid-2028.
• LCFS & RINs: Low Carbon Fuel Standard (LCFS) programs provide a safety net and margin layer on top of RVO; D4 RIN prices adjusted lower due to attractive replacement margins without needing high RIN values.
• Feedstock Markets: Vegetable oil prices stabilizing around 65-70 cents; fat prices expected to rebound; protein prices (soybean meal, fish meal) remain elevated due to El Niño effects on aquaculture and poultry sector growth in the U.S.
• Capacity: DGD operating near max production capacity; no plans for significant new capacity addition, though potential SAF capability expansion exists.

Risks and Challenges:

• Geopolitical/Tariff Risks: Canadian and Brazilian tariffs complicate supply chains, particularly for food segment collagen and feed fats; long lead times exacerbate short-term impacts.
• Operational Risks: Short-term third-party hydrogen outage in the Gulf impacted Q3 volumes; reliance on imported hydrogen or feedstock mix creates potential volatility.
• Accounting Volatility: Intercompany transactions between Darling and DGD (deferred profit recognition) and lower-of-cost-or-market (LCM) inventory adjustments cause quarterly EBITDA swings that do not reflect underlying operational performance.
• Hedge & Market Risks: Hedging losses and gains can lag due to the conversion cycle of feedstock to fuel; RIN value fluctuations impact reported margins.

Management Commentary and Tone:

• Tone: Highly confident and optimistic; emphasized resilience, "cash generation machine" status, and strategic discipline.
• Strategic Narrative: Management asserts the company has transformed from a cyclical operator to a stable, low-leverage cash generator.
• Valuation: CEO noted the stock appears "way, way too low" relative to trailing 12-month EBITDA, citing a lack of marketplace visibility to future growth.
• Forward Look: Expressed certainty that Q3 accounting noise is reversed, with Q4 expected to reflect stronger spot market conditions.

Analyst Questions and Answers:

• DGD Hedging & Volatility: Clarified that hedge losses/gains flow through over time (lag effect) and are not reflective of long-term risk; DGD is not concerned about volatility given wide replacement margins.
• Dividend vs. Buyback: Confirmed that after debt targets are met (~$2.5B net debt), the Board will decide between dividends and buybacks; current focus remains on buybacks and debt paydown.
• Q4 Core Ingredients Guidance: Explained that the conservative core guidance was chosen to account for DGD-driven accounting impacts on the core business (e.g., LTIP accruals, deferred profits) which are difficult to isolate quarterly.
• Protein Price Outlook: Projected structurally higher protein prices for 2027 due to persistent El Niño impacts on fish meal and sustained U.S. poultry demand.
• RVO Timeline: Expected EPA Supplemental Rule for Set 2 by mid-Q1 2027, with Set 3 rulemaking to follow, targeting a 2-3 year duration for certainty.

Other Key Points:

• Accounting Nuance: 50% of margin on feedstock sold to DGD is deferred until DGD sells the fuel, causing timing differences in Q3 recognition.
• LCF & RIN Dynamics: Replacement margins are wide and attractive; high diesel and favorable feedstock spreads reduce the necessity for high RIN prices to meet mandates.
• Portfolio Optimization: Sale of non-Greek trap assets and European casings business contributed to cash generation.
• Safety Net: LCFS premiums expected to layer on top of RVO margins, providing stability even if Set 3 is lower than anticipated.