Darling Ingredients Inc. (DAR) Earnings Call Transcript

Good morning, and welcome to the Darling Ingredients conference call to discuss the Third Quarter 2026 Financial Results. [Operator Instructions]. Today's call is being recorded. I would now like to turn the call over to Ms. Suann Guthrie, Senior Vice President of Investor Relations. Please go ahead.

Thank you for joining the Darling Ingredients Third Quarter 2026 Earnings Call. Here with me today are Mr. Randall Stuewe, Chairman and Chief Executive Officer; and Mr. Bob Day, Chief Financial Officer. Our third quarter 2026 earnings news release and slide presentation are available on the Investor page of our corporate website, and it will be joined by a transcript of this call once it is available. You can also find reconciliations and disclosures with respect to non-GAAP financial measures in our earnings news release and slide presentation. During this call, we will be making forward-looking statements, which are predictions, projections and 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 today'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 will hand the call over to Randy.

Thanks, Suann. Good morning, everyone, and thanks for joining us today. Our third quarter results showcase the capability, performance and resilience of our Global Ingredients business. Sequentially, our performance was slightly impacted by timing of sales accounting treatment of North American fat sales to Diamond Green Diesel and global compensation expense. Otherwise, it was another robust quarter. This financial strength bolstered by substantial cash from Diamond Green Diesel has allowed us to continue to make significant progress toward achieving our debt targets and significantly strengthening our balance sheet. -- by reducing net debt by approximately $420 million in the quarter. Additionally, we continue to return capital to our shareholders via stock buybacks. For the quarter, combined adjusted EBITDA was approximately $514 million, including about $310 million from our Global Ingredients business and $204 million from Diamond Green Diesel. Now turning to our Feed segment. We delivered a stable and solid margins during the quarter. This performance underscores the value of the operational improvements we have made and our team's focus on commercial execution. Protein prices and demand remains strong, and we expect fat prices to strengthen in the fourth quarter. Canadian and Brazilian tariffs remain challenging, but we are working hard to develop alternative markets. While our results this quarter reflect the timing of some accounting and inventory adjustments that Bob will detail a little later, the underlying commercial momentum of this segment remains strong into the fourth quarter and next year. In our Food segment, Brazilian tariffs continue to complicate some of our South American shipments. However, strong China collagen sales partially offset this temporary headwind. Our Nextida portfolio continues to gain momentum via repeat and new orders, and we've expanded it now with the recent launch of NxCogni, a targeted collagen designed to support mental clarity and cognitive resilience. Additionally, our joint venture with Tecendrelo continues to progress through the regulatory process, and we are targeting a close, hopefully, in the first quarter of 2027. Now turning to our fuel segment. Diamond Green Diesel faced a series of temporary operational and logistical headwinds this quarter. We had a short-term third-party hydrogen outage in the Gulf that impacted our volumes alongside a delayed SAF shipment and imported feedstock timing and hedging impacts. Once again, Bob will walk you through some more details in a moment. However, even in a slightly noisy quarter, DGD remains a massive cash engine. During the quarter, we received $171 million in cash distributions from Diamond Green Diesel from both dividends and PTC sales. For the fourth quarter, we expect DGD to produce approximately 325 million gallons. While we remain conservative in our full year modeling assumptions, the reality is that Q3 timing and hedging headwinds have reversed, and we are currently realizing DGD margins that are moving much closer to today's stronger spot market conditions. Now with that, I'd like to turn the call over to Bob to take us through the financials, then I'll come back and discuss my thoughts on the fourth quarter and our full year outlook. Bob?

Thank you, Randy. Good morning, everyone. As Randy said, again, this quarter, we generated significant earnings and cash, and we substantially strengthened the balance sheet. Net income was $267 million or $1.67 per GAAP diluted share compared to $19 million or $0.12 per GAAP diluted share in the third quarter last year. For the first 9 months of 2026 net income was $789 million or $4.91 per GAAP diluted share compared to $6 million or $0.04 per GAAP diluted share a year ago. Net sales in the third quarter were $1.8 billion compared to $1.6 billion for the third quarter of 2025 and $5.1 billion for the first 9 months of 2026 versus $4.4 billion for the same period a year ago. Third quarter combined adjusted EBITDA was $514 million compared to $245 million in third quarter 2025 for the first 9 months of 2026. Combined adjusted EBITDA exceeded $1.6 billion versus $690 million a year ago, reflecting strong contributions from both our core ingredients business and Diamond Green Diesel. Meanwhile, the core ingredients EBITDA experienced a sequential decrease from the second to third quarter, which was primarily driven by 2 items. The first was an increase in long-term incentive accruals and indirect outcome of strong year-to-date results from both core ingredients and DGD and the second was driven by inventory adjustments that we expect to reverse in the fourth quarter. To give more detail on the inventory items specific to the sequential decline in the Feed segment, approximately $15 million was associated with the accounting treatment of 2 items. The first was the deferral of half of the profit on Darling feedstock sold to Diamond Green Diesel because Darling owns 50% of the DGD JV, GAAP accounting rules require that we defer 50% of the margin earned on products sold until that product is processed and sold at DGD. This is purely a timing issue. Once DGD processes and sells this fuel in the fourth quarter, this deferred profit will flow back to our bottom line. Additionally, late in the quarter, a lower of cost or market adjustment or LCM and in our Feed segment turned negative from what had been positive and finished much lower than expected. This was caused by an unusually high volume of product in transit at quarter end, the margins on which cannot be recognized until title has transferred. Altogether, these items totaled approximately $30 million, which explains the difference in the core ingredients EBITDA reported versus what had been expected. Notwithstanding those items, core Ingredients EBITDA finished at the high end of last quarter's guidance at around $340 million. Moving to Diamond Green Diesel. By historical measures, DGD delivered a very strong quarter. Darling's share of DGD EBITDA was $204 million on 315 million gallons sold, an average margin of around $1.30 per gallon and a massive turnaround compared to negative $2.9 million in the third quarter of 2025. Meanwhile, replacement margins during the quarter were higher than $1.30 per gallon, so I'd like to provide some color to help bridge the difference. Two items in particular hedging losses and production tax credit capture are expected to come back positively in the fourth quarter. Specifically for feedstock hedged in the third quarter that was not yet converted into fuel and sold during the third quarter, would have experienced a hedge loss that will either come back in the form of a higher RD or SAP sales price and margin or if futures prices drop, the hedge will return cash. Either way, those hedge losses come back once the associated feedstocks are converted into fuel. Regarding production tax credit capture, late in the quarter, Ford Arthur experienced challenging weather forcing it to use a disproportionately high amount of foreign feedstocks, earning less production tax credit value than a normal feedstock mix. This had a double impact for Darling because while it lowered the average RD and SAP margin, it also caused DGD to hold a higher percentage of Darling domestic feedstocks than normal, contributing to the increased deferred profit accrual mentioned earlier. In both cases, hedge losses and production tax credit value. Those will come back through the P&L in the fourth quarter. Other items that are more market-based were lowering RIN value during the quarter, starting at around 2.45 and dropping to below $2, contributed to a lower than replacement margin capture. And the last item I want to mention is the short-term hydrogen outage that we experienced in Norco, which explains the difference between guided versus actual volumes. As we look to the fourth quarter, however, the setup is more stable with very strong replacement margins, a much lower RIN as part of that price structure, which means lower margin risk and higher diesel futures prices decreasing the likelihood of large hedge losses at quarter end. All that said, the real story here is the incredible cash generation, debt paid and shares bought during the quarter. Darling received approximately $170 million in cash from DGD, roughly $33 million as dividends and $138 million from production tax credit sales and the core business generated over $300 million in cash. Coming from current earnings, the sale of the majority of our non-grease trap assets and the sale of our European casings business. In total, we reduced net debt by around $420 million and bought back around $76 million in shares. As a result, our leverage ratio improved significantly to approximately 1.7x at quarter end compared to 2.9x at the end of last year. And finally, the company recorded $76.8 million of income tax expense for the third quarter, yielding an effective tax rate of 22.3%. The effective tax rate, excluding the impact of the production tax credit and discrete items was 24.2%. The company also paid $22.7 million of income taxes in the third quarter and $71.7 million year-to-date. For 2026, we expect the effective tax rate to be about 25% and cash taxes of approximately $35 million for the remainder of the year. With that, I will turn the call back over to Randy.

Thanks, Bob. To wrap up, the third quarter demonstrated the resilience and earnings power of our core business, even with the challenging geopolitical environment, all while Diamond Green Diesel once again provided significant cash. Looking ahead to the fourth quarter, I want to leave you with 3 clear messages. First, our Global Ingredients business has strong momentum. Raw material volumes are stable, demand for proteins remains strong and global fat prices will most likely rebound as the RVO will require biofuel producers to run full in the fourth quarter and all next year. All said, our global footprint continues to deliver a predictable, high-margin cash flow. Second, Diamond Green Diesel is a cash generation machine. While there was noise this quarter around capture, feedstock timing and hedging, DGD structural competitive advantages have not changed. We operate at the lowest cost per gallon in the industry backed by world-class scale logistics unmatched low CI feedstock from Darling. The timing and hedging disconnects from Q3 are behind us, and we are entering Q4 realizing margins much closer to spot conditions. Third, our cash flow out and balance sheet discipline are obvious. We are reaffirming our full year 2026 combined adjusted EBITDA guidance of $2.2 billion to $2.3 billion. With significant cash flow coming through the door in Q4, including ongoing PTC monetization we remain firmly on track to achieve our target of bringing net debt down to or below $3 billion by year-end. Our capital allocation priority is disciplined and focused. We are focused on driving organic growth, optimizing our portfolio and delivering long-term value to our shareholders. We have built a resilient and highly cash-generative business, and we are confident in our ability to execute our strategy and carry this strong momentum into and through 2027. With that, I'll turn it over to the operator for Q&A.

[Operator Instructions] Your first question comes from the line of Derrick Whitfield with Texas Capital Bank.

Thanks for your time. Wanted to start with margin capture for DGD. Bob, certainly greatly appreciate your commentary on just margin capture for the quarter. When you guys think about the health of your balance sheet and the volatility of hoo spreads that are increasingly driven by diesel cracks more than bean oil, how are you thinking about managing hedge risk for the next couple of quarters when you're forced to hedge hitting on backwardation and the Iran conflict to continually will persist into 2027 -- are there any other hedges that you guys could employ that would mitigate your exposures?

Thanks, Derrick. This is Bob. We have lots of options as it relates to hedging, but I think when margins and replacement margins are as wide as they are typically hedging feedstock purchases with diesel or ULSD futures is an attractive opportunity. I think the thing that the market misses sometimes is there's so much that can move, especially with the business, the size of DGD, there's so much that can move from 1 quarter to another. And it's important to look at the results over a longer period of time. We do not use mark-to-market accounting. And I think we see some of the comments out there, and it's interesting. I don't think that perspective as well understood. And so -- in a typical ag business and some energy businesses, you're going to value your inventories up to market and you represent that. So quarter-to-quarter, you can see kind of how hedges are performing. But in a business like this, if we're hedging a product for 1 period, so let's say, in this case, the third quarter, that doesn't get converted into its final product until the next quarter. that hedge loss is realized in the immediate quarter. And then it comes back as a gain in the next quarter. In a business our size, when we have something like a slowdown because of a hydrogen outage and there's expensive feed that's just going to have a lag effect that's bigger than what most other companies experience. And so we're not concerned at all with the hedging and our ability to limit risk we just think that there's a lack of understanding as to how these things can flow from one quarter to another.

Great. And appreciate it and understood. For my follow-up, I wanted to shift to policy. From a policy perspective, the Trump administration has been supportive of the former with nearly every decision during the second term with the view that some obligated parties will be challenged to meet the RVO this year. How do you think the EPA will handle deficit carryforwards? And what are you hearing on how the administration is viewing set through policy?

Yes. Look, I think if anything, the EPA has been proven correct, and its estimation about what the industry is capable of. when we look at our S&D -- our RIN S&D for 2026, from our perspective, it looks balanced. And as we go through the end of '27, it's tight. But it's not ridiculously underbalanced. And so I think -- the EPA has made it clear what it wants to do with SREs, what it wants to do with reallocations, whether those reallocations happen in 2026 or 2027, we don't think that has a significant impact overall on the RIN S&D and prices and not sure how they're going to handle that. But like I said, we don't think that makes a big difference. They need to handle this supplemental ruling before they can get into SET3 and start talking about 2028 to 2030. But -- what we're really encouraged about is we understood what their goals were when they came in to Set 2, and they've largely achieved those goals. I think they're pretty happy with the outcome of the policy. And so we're very optimistic about what '28 beyond is going to look like.

Your next question comes from the line of Manav Gupta with UBS.

Randy and Bob, a question maybe more for Bob, but whoever wants to take it. The leverage is dropping. Your target was 2. Now it probably looks like 1.5%, honestly, 1.5% looks conservative. -- given you said you're realizing margins closer to spot. So I'm just trying to understand how much cash would you like to hold on the balance sheet, after which you could say, look, Darling probably could do better on the valuation side if it had a dividend. So I'm just trying to understand at what point can Darling actually look at some kind of a dividend, maybe it's '27, but if you could talk about those dynamics?

Yes. It's a great question, Manav. This is Randy. I mean, clearly, we said at Investor Day that we will be coming out and articulating the kind of the go-forward financial policy. I think the thing that's relevant in this quarter, a couple of things. One, we did have some headwinds out there and some volatility. But yet, we still paid down $420 million of debt, bringing our us down to, I think, net debt to [ 3,371 ] or something like that real close. And clearly, the PTC monetizations and really the strength that we see in fourth quarter here will put us $3 billion or below as we go into 2027. By Q1, we should be pretty close to $2.5 billion. And we've kind of magically have always said around the Board table, the $2.5 billion is kind of where we want to be. And then that cash from there would then either be distributed via buybacks or a potential dividend. And that's clearly in the discussion at the board room right now. And we feel confident about what's going forward. We look back, we're about 1 year, 1.5 years behind where we wanted to be. And that came off of the consternation and the delay of the RVO of delevering from our -- the 3 big acquisitions that we did. And so really, as we move forward, the message Bob and I are trying to deliver is -- this is -- we have transformed the company. It's a cash generation machine globally now. It's balanced. And ultimately, we have options in '27 that we've not had in prior years.

Randy, I'll turn it over.

Your next question comes from the line of Tom Palmer with JPMorgan.

In recent quarters, Randy, you've provided a view of what you think base business EBITDA might look like for the following quarter. It was helpful to get the full year EBITDA outlook, but I wondered if kind of a view of how that base ingredients business might look like in 4Q?

Yes. Tom, it's Ryan. And we thought, obviously, this quarter was challenging in the sense, not of the operating side, but with Valero releasing on the 22nd, and that's not being able to match them given our accounting cutoffs. And so ultimately, we decided that instead of -- we have visibility to the end of the year. And we knew that once the $418 or $408 number went out on DGD that people are going to question what is the true run rate for the balance of the year. And so we decided to put it out in the 2.2% to 2.3%. And I think consensus might have been 2.2%, 3.7% or whatever it was or whatever the number is out there. We're confident in being able to deliver that. And that's a combination of the core business that really around $1 to $2.50 plus or minus 10 there. And then really DGD operating in that range of capture between $1.50 and $2 a gallon on 1.2 billion gallons. And that's how we did the math. And we traditionally and don't like to try to guide DGD from the standpoint of everything Bob just said that there's so many moving parts, but we do have visibility to the end of the year now. And it's consistent with what we've said all year and really in Bob's modeling during Investor Day. So that's where the numbers are coming from. Certainly, we hope it's conservative. It feels like it's conservative at this time. But we've got midterms and all kinds of stuff that's still out there right now.

Yes. And I just want to add a little color to that as well because I think it's important we got a lot of feedback over the last several quarters and request to only guide the core ingredients business. And so we did that. when we got to this quarter, however, what we found is that the core ingredients business EBITDA was impacted by things that largely were happening at DGD. And so didn't serve the purpose that it normally would. Specifically, I think when we talk about long-term incentives, DGD is a big part of that. DGD is having an extremely positive year. That's certainly going to have an impact on those things and those accruals come out of what we report in the core ingredients business. And then the other things that I talked about in the opening, DGD deferred profit, lower cost to market accrual in the Feed segment in the core business. Those are things that really backed up into Darling because of events that occurred at DGD. And so -- we like to -- we got the feedback. We guided about the core. But when the core is influenced by DGD, then it makes it more difficult. And I think we got to the end of the year, and Randy looked at me and said, I think we've got better line of sight into how the corporate -- corporation is going to perform overall than what just the core because of the accounting volatility that can happen at the end of the year, and so that's where that conservative guide comes from.

Okay. One more, I guess, just on the guide. Randy, you noted in the prepared remarks the view that fat prices will move higher and noted some of the supply-demand aspects around the RVO as justification I wanted to kind of clarify. One, is that embedded in the outlook if we see kind of fat prices start to move higher or more think about that as a potential upside driver? And then just hand-in-hand with that, because you do, I think, maybe you have insights into the supply-demand dynamics that may not always be evident right away in pricing. Are you starting to see any firming in kind of that demand pull?

Yes. No, that's a good question, Tom. And no, it's not really embedded in the outlook. I think we're going to pick up momentum as we go through November and December, getting some downtime that's over. You got some seasonality in the business. The tariffs are making life a bit challenging around the world as we tried to outline in our in our earlier comments. And so ultimately, it's going to make U.S. fats move on up. We're seeing European fats starting to strengthen. There's some pretty significant downtime in the processors there in Europe. And then ultimately, that should carry forward with a bigger RVO than in 2028. And -- so we're seeing -- as I looked at the veg oil market, you're off a little bit this morning again. But $0.65 to $0.70 seems to be a really fair value for fast going forward. And that's for this year and then next year.

Your next question comes from the line of Conor Fitzpatrick with Bank of America.

Appreciate all the color earlier on accounting treatment of all different segments. I wanted to turn attention to kind of next -- medium term, next few years demand impact of low carbon fuel standards, all across North America. It looks like if you add them up between the U.S. states and the Canadian clean fuel regulation, you get about 0.5 billion gallons per year of demand growth each year through 2030 on average. Maybe a bit less if Canada implements some of its protection is to rule change that is considering. So I was wondering, obviously, bullish for renewable diesel, bullish for feedstocks. I was wondering how you think profit would be allocated and settle out between the feed and the fuel side from growing LCFS demand over the medium term?

Yes. Thanks, Conor. I think 2 things I would want to say to that. So today, we're at a point where the RVO is slightly bigger than the cumulative some of the LCFS programs in the United States. So the RVO is really carrying the day. But I think you bring up a really a really good point for, let's say, Darling shareholders to understand, and that is LCFS programs and their growth over time, it provides a safety net against let's say, a disappointing Set 3. We don't think SETI is going to be disappointing, but it provides that safety net. If the RVO were to be smaller than what would likely happen is LCFS premiums would be large and then that stacks on the margin and the margin would be secured as a result of that. So -- what we expect is going to happen is we will have a robust RVO Set 3, LCFS premiums will layer on top of that, but they'll be supportive, but they won't necessarily make the margin kind of like it did back in 2021 and 2022. But it is a safety net out there, and we're very optimistic as far as how that looks. As far as how that sort of relates to Darling segments, and we talked about now through 2030, we've said before we've largely made the investment in DGD we need to make. We're not intending to add to total capacity. There could be a time when we add more SaaS capabilities to the existing capacity. But by far and large, the cash investment in DGD has largely been made. And so we expect DGD to continue to perform at a high level. But as we take cash generated and invest it back in the core ingredients business, we anticipate rendering collagen, those businesses will get bigger, we'll generate more EBITDA, and they will represent over time, a bigger percentage of Darling's EBITDA then the DGD renewable deal sustainable aviation fuel wall.

Your next question comes from the line of Heather Jones from Heather Jones Research LLC.

Good morning. Thanks for the question. I wanted to ask about legacy DAR into Q4 again. Randy, your comment about 1.225 that would apply roughly to 3 to 3.10 for the legacy piece for the quarter. And I assume you'll get the $30 million that you all referenced for Q3 back in Q4. So it implies a larger-than-normal sequential deterioration there. And so just wondering, is that conservatism? Or how would you frame that for us?

So let me clarify that. 1.250, that assumes a $320 million to $340 million Q4.

Yes. And I just want to clarify the flow-through. So the accrual for long-term incentive -- that won't come back. That's just a fact of great performance in the business and that there is an additional cost item. We don't think that's going to flow back. The other $15 million DGD deferred profit, lower customer market, that could flow back depending on where market prices end at the end of the year.