DARLING INGREDIENTS INC. Q3 FY2026 earnings call

• Financial Strength and Balance Sheet: The company reduced net debt by approximately $420 million during the quarter, bringing the leverage ratio down to approximately 1.7 times. Combined adjusted EBITDA reached approximately $514 million, bolstered by substantial cash generation from DGD.
• Global Ingredients Resilience: The feed segment maintained solid margins despite geopolitical challenges, including tariffs in Canada and Brazil. Management anticipates fat prices to strengthen in Q4 due to RVO requirements. The food segment saw strong collagen sales in China offsetting tariff-related shipment complications, while the NextTida portfolio expanded with the launch of NextCognia.
• DGD Operational Performance: DGD faced temporary headwinds including a hydrogen outage in the Gulf, delayed SAF shipments, and hedging impacts. However, it remains a 'massive cash engine,' generating $171 million in cash distributions from dividends and Production Tax Credit (PTC) sales. Structural advantages, such as low cost per gallon and unmatched low carbon intensity feedstock, remain intact.
• Strategic Execution: Management highlighted the successful progress toward debt reduction targets and continued capital returns via stock buybacks. The joint venture with Ticenderlo is progressing through regulatory processes with a target close in Q1 2027.

• Global Ingredients Business: Generated approximately $310 million in combined adjusted EBITDA. The segment delivered stable margins with strong commercial momentum, despite temporary headwinds from Canadian and Brazilian tariffs affecting South American shipments and protein/fat logistics.
• Diamond Green Diesel (DGD): Contributed approximately $204 million to combined adjusted EBITDA on sales of 315 million gallons, representing an average margin of around $1.30 per gallon. This marks a significant turnaround from negative $2.9 million in the third quarter of 2025, driven by strong replacement margins and operational stability.

• Full Year 2026 Combined Adjusted EBITDA: Reaffirmed guidance of $2.2 billion to $2.3 billion.
• Q4 2026 Volume Expectations: Diamond Green Diesel is expected to produce approximately 325 million gallons.
• Debt Reduction Target: Firmly on track to bring net debt down to or below $3 billion by year-end 2026, with potential movement closer to $2.5 billion by Q1 2027.
• Effective Tax Rate: Expected to be approximately 25% for full year 2026, with cash taxes of approximately $35 million for the remainder of the year.
• Core Ingredients Outlook: Management indicated that core ingredients EBITDA is expected to remain consistent, operating in the range of $1.225 billion to $1.250 billion for Q4, assuming favorable fat price dynamics and stable raw material volumes.

• Geopolitical Tariffs: Canadian and Brazilian tariffs continue to complicate supply chains, particularly affecting South American shipments of fats and collagen products.
• Operational Disruptions: Short-term third-party hydrogen outages in the Gulf Coast region impacted production volumes and timing.
• Hedging Volatility: Fluctuations in diesel cracks, heating oil spreads, and RIN values create quarterly volatility in hedge accounting, though these are expected to reverse over longer periods.
• Regulatory Uncertainty: Dependence on EPA policies, specifically the Renewable Fuel Standard (RVO) and upcoming Set 3 rules, poses risks to long-term planning and margin structures.

Q: Analyst asked how management plans to manage hedge risk given volatile hugo spreads and Iran conflict impacts into 2027, and if other hedges could mitigate exposures. / A: CFO explained that wide replacement margins make hedging feedstock purchases with diesel futures attractive. He emphasized that DGD does not use mark-to-market accounting; thus, hedge losses realized in one quarter often reverse as gains in the next when feedstocks are converted. The company is not concerned about risk limitation, noting that market participants misunderstand the lag effect of large-scale operations where inventory conversion spans quarters.

Q: Analyst asked at what leverage point Darling would consider initiating a dividend versus continuing buybacks, noting the current 1.5x leverage looks conservative. / A: CEO stated that once net debt reaches approximately $2.5 billion (expected by Q1 2027), the company will have options to distribute cash via dividends or accelerated buybacks. This decision is currently under boardroom discussion. The company aims to reach this level after paying down an additional $420 million in Q4, transforming from a debt-focused entity to one with flexible capital allocation options.

Q: Analyst questioned why management guided total combined EBITDA rather than just the core ingredients business, which was previously preferred, and sought clarity on the Q4 outlook. / A: CFO clarified that guiding only the core business was misleading because DGD events (like deferred profits and LCM adjustments) significantly impacted the core's reported EBITDA due to accounting rules. Consequently, management found it more accurate to guide the consolidated corporation. The $2.2-$2.3 billion guidance assumes core EBITDA of ~$1.25 billion and DGD capture of $1.50-$2.00 per gallon on 1.2 billion gallons.

Q: Analyst asked about the medium-term profit allocation between feed and fuel segments amidst growing LCFS demand (approx. 500M gallons/year growth). / A: CFO noted that while the RVO currently drives more volume than LCFS programs, LCFS acts as a safety net against disappointing RVO outcomes. If RVO were smaller, LCFS premiums would likely rise, supporting margins. While DGD capacity investments are largely complete, future cash flow reinvestment will prioritize growing the core ingredients business (rendering and collagen), which is expected to represent a larger percentage of total EBITDA over time.

Q: Analyst inquired about the sustainability of elevated protein prices driven by El Nino and whether conditions will normalize in 2027. / A: CEO explained that El Nino displaced fish stocks deeper offshore, causing high fish meal prices which support protein pricing. Unlike soybean meal, there is no immediate solution for fish meal supply. Additionally, structural growth in the US poultry sector increases soybean meal demand. Management expects protein prices to remain structurally higher in 2027, as neither fish meal supplies nor poultry demand are expected to revert to previous norms.