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

Explicit Guidance:

• Full-Year 2026 Combined Adjusted EBITDA: Reaffirmed range of $2.2 billion to $2.3 billion.
• Q4 2026 Guidance: Implied guidance for combined EBITDA of approximately $320 million to $340 million, derived from core ingredients (~$122.5M +/- $10M) and DGD margins ($1.50–$2.00 per gallon on ~1.2 billion gallons).
• Debt Reduction Targets: Net debt expected to be $3 billion or below by year-end 2026; target of ~$2.5 billion by Q1 2027.
• Cash Tax (2026): Expected cash taxes of approximately $35 million for the remainder of the year (effective tax rate ~25%).
• DGD Production Volume: Fourth quarter production expected at ~325 million gallons.

Business-Segment Outlook:

• Feed Segment: Protein prices and demand expected to remain strong into 2027 due to sustained high fish meal prices and US poultry sector growth; fat prices anticipated to strengthen in Q4 2026 and continue rising as RVO requires biofuel producers to run full capacity all of next year.
• Food Segment: Next TIDA portfolio momentum continues with the recent launch of NexCognia (mental clarity collagen); joint venture with Descenderlo targeting a close in Q1 2027 pending regulatory approval; demand for water-soluble collagen (beef hide) expected to grow at near double-digit rates despite short-term tariff headwinds.
• Fuel Segment (Diamond Green Diesel): Q4 2026 margins expected to normalize closer to spot market conditions as Q3 timing/hedging headwinds reverse; structural competitive advantages (lowest cost per gallon, scale) remain intact; SAF sales shifting toward the US market (higher net back margins) with volumes expected to slightly grow toward capacity limits; no plans for total capacity expansion, though SAF capability additions to existing capacity are possible.

Market and Competitive Outlook:

• Pricing & Supply: Vegetable oil/fat values projected to stabilize at $0.65–$0.70 per pound for 2026–2027; European fats expected to strengthen due to significant processor downtime; global protein prices likely to remain structurally elevated into 2027.
• Competitive Dynamics: DGD margins driven by replacement margins and diesel cracks rather than RIN values; RIN values currently considered appropriately valued given wide replacement margins and favorable bean oil/heating oil spreads.

Macro / Industry Outlook:

• Policy (RVO/SREs): EPA expected to complete the Set 2 supplemental ruling and SRE reallocations by mid-2026, transitioning into Set 3 processing thereafter, with Set 3 implementation likely targeting mid-2027; Set 3 rules expected to be 2–3 years in duration (leaning toward 3) to provide market certainty.
• Tariffs: 50% tariffs in Canada and 37.5% tariffs in Brazil creating short-term logistical challenges and forcing supply chain adjustments; management does not anticipate significant long-term impact on total RVO demand-supply balance.
• LCFS Programs: Low Carbon Fuel Standards viewed as a "safety net" against potential Set 3 underperformance; premiums are expected to layer on top of RVO margins but not replicate 2021–2022 volatility.

Strategic Initiatives:

• Capital Allocation: Post-de-levering (net debt < $3B), focus shifts to organic growth, portfolio optimization, and capital returns; dividend or expanded buyback programs under active boardroom consideration for 2027; current priority is debt reduction to $2.5B before increasing shareholder distributions.
• M&A/Partnerships: Regulatory process for Descenderlo JV progressing toward closure in Q1 2027; no new major capacity investments planned for DGD; future cash flow reinvestment targeted at growing core ingredients (rendering, collagen) segments.
• Debt Management: On track to reduce net debt by ~$420M in Q3 2026 and achieve target leverage ratios (<1.7x currently, targeting <1.0x range eventually) by year-end.

Risks and Headwinds to Outlook:

• Accounting Volatility: Core ingredients EBITDA impacted by timing of deferred profit recognition (50% of DGD margin) and "lower of cost or market" inventory adjustments, which may reverse in Q4 but create quarterly variability.
• Geopolitical & Regulatory: Canadian and Brazilian tariffs complicating shipments; potential changes in Canadian protectionist rules affecting LCFS volumes; uncertainty in EPA Set 3 finalization timeline.
• Operational Risks: Short-term hydrogen outages (e.g., Norco) and weather events (Fort Arthur) can cause temporary volume/margin disconnects; hedging losses realized in current quarter but recouped upon fuel conversion.
• Market Volatility: Potential upside/downside from fat price fluctuations and RIN market dynamics.

Management Tone on the Future:

• Confidence Level: Highly confident in Q4 2026 performance and 2027 momentum; describes the company as a "transformed, cash-generation machine."
• Hedges: Management acknowledges the market's lack of understanding regarding non-mark-to-market accounting impacts on quarterly volatility but asserts no concern over long-term risk management capabilities.
• Guidance Changes: Shifted from guiding solely on core ingredients to providing combined guidance for Q4 to avoid confusion caused by DGD-driven accounting volatility (deferred profit/LCM adjustments) affecting the core segment report.
• Valuation Sentiment: CEO notes current stock valuation (<6x EV/EBITDA) is significantly below historical averages (~9.2x) and the company's intrinsic value, viewing this as a "high-class problem" once debt targets are met.

Miscellaneous:

• Q&A Topics: Management clarified that long-term incentive accruals resulting from strong YTD performance are permanent costs and will not flow back in Q4, unlike the $15M deferred profit and LCM adjustments which are timing-driven.
• Capacity Utilization: DGD is approaching maximum production capacity; future volume growth in SAF is expected to be modest.