Darling Ingredients Inc. (DAR) September 2026 Conference Transcript

Good afternoon, everyone. Thank you so much for joining us. My name is Teresa Chen. I'm the midstream and refining analyst here at Barclays. It is my pleasure to introduce our next presenting company, Darling Ingredients. Joining me from Darling is Randy Stewie, Chairman and CEO, and Bob Day, CFO. Welcome. thank you thank you very much for being here this has been an interesting year for darling to say the least would love to maybe start on the fuel side of things and ask about your near-term and medium-term margin outlook for the DGD assets so given high RVOs out to 2027 limited renewable diesel imports and elevated petroleum fuel prices as a base case how sustainable do you think the currently supportive margin backdrop is yeah thanks Teresa I think it it is

sustainable in the near term you know we have we have a strong RVO a strong mandate that that really provides a backdrop for for solid margins we see it today with the replacement margins in the industry as you said that RVO extends through 2027 there are still some details that need to be clarified but as we go forward we get more and more you know recently we learned about small refinery exemptions for 2025 there's been you know sort of comments and suggestions about reallocations of those but either way the the the S&D balance for RINs is is constructive and we think the margin outlook is quite

positive yeah when you when you look at it just for those were year 13 in the business largest in the world um the the the construction investment decision was made off of 79 cents a gallon first five years ran a dollar six dollar seven second five years 226 and then we had the biden electric vehicle confusion and not a big enough rvo and now we're back to more historical numbers that are in those ranges. And it's just, we've got everything we need to continue, the location of the assets, the feedstock origination, the sales, the pathways. It's a sophisticated group of assets that's number one in the world.

Got it. And maybe if we just, you know, double-click on the RVO and the SRE reallocation and all the different moving political pieces, to say the least. So what are your expectations as far as timeline goes for the reallocation? And do you expect this to be kind of kicked past midterm elections? And is there much knife fighting to be happening between now until then? How do you see this process evolving?

I think, and Bob can help me here. I mean, he's closer to it, so I get to give you the 30,000 foot view. What I can say is, is we've worked diligently with our trade associations, both on the ag and the clean fuel side, to be where we're at today. And what I can tell you is Lee Zeldin, Andrew Sabo, they have done exactly what they said they would do. The program works. They expanded the RVO. You know, end of the day, we've cleaned up some of the SREs. And ultimately, we feel that everything that they have said in the past, they've done. So there's no reason to discount what they're doing right now. Now, we'll give you two scenarios. Scenario one is, let's say, no reallocation. It's very constructive. Loosens up the S&D just a little bit. And if they fully reallocate, it tightens it up a little more. And so our expectation is that they will issue the rule here in October. Remember, it's a proposed rule. Then we've got to go have comments. Then we've got to respond. The agency has to respond back to the comments. And I think during the RVO, it was 30-something thousand comments that came in. And then they have to go to OMB, get White House to sign off on it. So by the end of the year, what's even more fascinating, though, is we talk about the 26 rule. as long as it's not embedded into the farm bill, it's going to be harder to show economic hardship. So 27 could even get tighter.

Yes, I would just add, I think, to Randy's point, we believe that the reallocations will occur or at least a significant percentage will occur. If they don't, it's really more harmful for the farmer and for the oilseed crusher than it is for the renewable diesel producer. And the reason is if we were to not get a reallocation, you could see a scenario where the lesser competitive biofuel producers don't make as much fuel. But then ultimately, with a lack of production, you're going to tighten up the RIN S&D again, and we get back to the margins that we have today in order to incentivize sufficient production in order to meet that ultimate mandate. So we hope that doesn't happen. We'd like to see, you know, continued demand for the benefit of the agricultural economy, but we don't think it will have a large impact either way on diamond green diesel.

Fair enough. And it sounds like just given the multi-step process in codifying this into some sort of formal regulation, the reallocation piece can parlay, you know, straight into rulemaking for set three.

Yeah, I think that will be fairly straightforward. You know, it's been litigated in the past and lost every time, so there's no reason not to expect that. That won't be a surprise when it goes out on one of the medias. You know, what's more important to Bob and I right now is that we engage in a discussion now about 28 forward and getting the narrative and getting those programs under discussion. You know, as I said, between, you know, the EPA, and they have a goal to get that out for discussion here or proposed in November. We'll see. It will be the first time that it's happened if they do that. So I'm probably going to take a side bet on that one. But, you know, I suspect that that's what they're wanting to do. I mean, you think of the E15 program. What have we done? We've helped the price of corn, right? We've tightened up the S&D. The price of soybean oil is up at 70 cents. It's allowed the crusher to make a nice margin and pay more for beans. The programs are working. There's just no reason Politico is going to take a different spin on it today. You know, admittedly, you can't take the narrative away from the large oil companies that, you know, will make all kinds of claims, but they're having record earnings years. So I think it's probably a narrative that probably is not really, it falls on deaf ears a little bit right now.

Fair enough. And given your global footprint related to this business and this value chain at large, on your last earnings call as it relates to renewable diesel imports, you highlight that imports have been below expectations, due in part to the elimination of PTC eligibility plus tariff-related impacts. What is your updated outlook on imports from here, and how will that impact the domestic margin?

Yeah, so with this new policy, we did wonder whether it would incentivize more imports, but we haven't seen it. And so ultimately what that allows us to conclude is that with the limited access or no access to the production tax credit and the added costs of logistics to bring imported fuel into the U.S., the margins haven't been wide enough or more attractive than other markets to do that. When we look throughout 2027, we consider demand in other foreign markets, downtime that's projected from other foreign producers. We're not really anticipating a significant change in import volumes as we go through this RVO.

I mean, when you see oil at the price it is today, you know, I was telling Bob, I said from history here, Whenever you see oil tick up above $75, $80 a barrel, you magically see a ton of what I call co-processing in the world. You see palm oil disappear back into the biofuel stream in the APAC countries. You're seeing that right now. You're seeing people say, we shouldn't be so reliant on fossils. We need this. So what you're seeing is a really unique situation where the S&D in the world for renewables is very well balanced right now. And so the products are staying in the right market. A year ago, they were incented before the PTC or two years ago to come here to get the BTC or generator in. You know, so a lot of dynamics have changed over this. You know, when Bob and I saw the RVO come out, proposed, and then final in April, we said our one fear was imported biofuels. that somebody, if Chinese Yuko couldn't come into the U.S., it would go somewhere else, be discounted, converted to fuel, and dumped in the U.S. That has not happened. And so we feel far more comfortable. Now, it doesn't mean you can't get it out of whack, but as Bob says, between currencies, tariffs, and the PTC, it's a far more in freight. It's a far more complicated equation today.

Yeah, that tail risk has been mitigated for the time being. And to your earlier point, Randy, about what's to happen with the RVO in 2028 and 2029, that medium-term outlook. So conceptually, can you help us think about what would be an optimal, sustainable outcome for all parties involved once the RIN Bank moves into deficit? What do you think is the most likely process from here, from a rulemaking perspective?

You want to take a shot at that? Yeah, I mean, first of all, I don't think it's a foregone conclusion that the RIN Bank is going to end in deficit. I mean, if we look at June and July's production numbers, markets have a way of responding to opportunities, and so we'll see how all that plays out. That outcome will probably have an influence over the size of the RVO in 28 and 29. I think what we would look for is some incremental growth, but as we sit here today, it wouldn't need to be significant in order to continue to realize attractive margins through 2029?

I mean, clearly the ag lobby, you know, we continue. The productivity of the farm community is incredible, both here and in South America. And we just keep getting better and better. The investment, you've seen the announcements by ADM and Bungie of additional crush capacity. So at the end of the day, you know, there's going to be pressure from the ag community to keep growing this. And, you know, right now this was a big leap of faith between the 24 or 25 and where we're at today. And the industry responded, so there's no argument that the industry can't respond to the capacity required.

Okay, fair enough. Turning to the base business, would you discuss the outlook for fat prices for the remainder of 2026 and into 2027, given elevated demand from RD operators plus limited fat imports. And what do you think are the key risks one way or another on fat prices from here?

You know, and Bob and I can tag on this. I mean, clearly North America is an island right now. And when you wake up, you have a tariff here, a tariff there. While at lunch, we learn there's potential Canadian tariff now that's been put in place. So Canadian fats can't come into the U.S. without a 50% or 60% tariff on it. Don't know if he's going to take a holiday or a pause on that. But, okay, so there's more demand for North America. So North America is solid. You know, two reasons it's solid. One, demand, and two is, for us, it's carbon intensity. And then number three I would say is that some of our competitors have actually learned with their pretreatment systems now to run animal fats. So that shores that up. You know, now there's this massive tariff on South America. So Brazil was part of our strategy coming up. Now it has to find a new home, probably Europe, or biodiesel. The biodiesel mandate continues to go in Brazil. And then Europe is kind of an operating island. It's got to deal with a little bit of downtime in the nest-day system over there for the winter here. But, you know, overall, as we were telling people today in our one-on-ones, we've never seen a time, you know, it was kind of it was an all boats rise or whatever, whatever that phrase is. We're seeing the U.S. here, Brazil basically being currency freight and tariff off, and Europe being freight off right now. So very different dynamic than we've seen in the past. And so we think that will continue for the year, but we don't see any retracement of fat prices. You know, if you're going to tell me that oil prices are, you know, going back to $50 a barrel, then maybe that's a different discussion. But right now I think it looks pretty solid around the world today.

Okay. Yeah, the policy-driven regional dislocations definitely favor the U.S. And I hear you on, you know, there's some sort of global implosion on demand, sending oil prices lower would be having a very different conversation and wouldn't just be a precursor to changes in fat prices. Maybe turning to your food segment, could you discuss the overall strategy surrounding the next data line and the strategic rationale behind breaking into higher margin health and wellness markets and how that's going?

Yeah, you know, this one I love. I'm at an energy conference talking about collagen, so that's a beautiful thing for me. For those that know the story, don't know the story, we acquired a gelatin company in 2014, about 90,000 tons. We're today about 150,000 tons, and about 10 years ago, we introduced a water-soluble pure protein that's known as collagen or hydrolyzed collagen. You guys would know the brand that's sponsoring the U.S. Open right now called Vital Proteins. We were shipment number one. We helped build that brand. We don't own the brand or invest in the brand. Nestle does, but we helped build that. And that was 1.0 of the collagen revolution. Collagen's been identified as a great source of protein for health, wellness, nutrition, as everybody has that source for working out and everything. And then, you know, about, I don't know, six, seven years ago, we started down the road of saying, what's in that molecule that's in the blue jar? And there's, I don't know, 20-something aminos in there that could be converted to peptides. And that's now what's known as Nextida. And we've learned to isolate, concentrate for a specific health wellness nutrition application. And the first product we rolled out was Nextida GC. We see there's a ton of products. As Sue Ann told me, she said, just go on to Amazon, put in Next Tida, and you'll see how many products are really using that ingredient today for glucose control. We had to learn as a company how to do clinical trials. Our first study, I think I was informed today, had like 13 victims or whatever you call them. And the CPG companies want a whole lot more. We've had to reinvest in more and more clinicals. We're there, 50-something customers now. These are incubator, accelerator companies that are trying to create products, and then hopefully I suspect their exit is to be swallowed up by one of the big, giant CPG companies over time. And then you'll see here later this winter, you'll see a brain health. And that one's really exciting. and that's been through multiple years of clinicals showing improved cognitive function. Then the library has women's health, hair, nails, skin. You know, there's at least another five or ten. Now, for the business, why is it impactful? Well, you know, today if gelatin is a 1X sale, hydrolyzed collagen is two to three times better margin, and health wellness nutrition is seven to 11 times better. And so building mass is just going to take time in that segment. But, you know, the supplement, as we tell people, you walk into that, whether it's Sprouts, Whole Foods, GNC, whatever, very confusing. And it's an unregulated world where you can make any claim you want to make. But we know what the CPG companies want now. They want something. You know, Nestle announced here a week or so ago, They're trying to develop a product line for GLP-1 users. You know, this is one of those things that comes into play here. It just takes a little while to develop. What else do you want to add to that?

Yeah, just I'd say specifically as far as the strategy goes, you know, our plan is to sell this as an ingredient inside and back it with science. So, you know, as Randy said, we started out, We did a peer review to prove the effectiveness of secreting GLP-1 into the bloodstream. The second peer review has reinforced that with a larger group. We're doing studies now on body mass index and the impact on people over periods of time, and we're getting really positive results. And so as time goes on and we're able to stand behind our product as an ingredient inside these products and back with the science, then that is really what should drive sales. and then the category becomes a lot less complicated and noisy over time when the really effective ingredients win at the end of the day. So we're seeing strong momentum with sales, and as these studies come out and we're able to back it with science, we expect more.

I mean, a year ago, two years ago, you could have been at a restaurant, a bar, whatever. There might be two people in there that know the word collagen. I guarantee you today a high majority does. And as we look at it, we're now being contacted by, you know, athletic institutions, college, you know, instead of having the creatine and the whey bar, they want to add collagen to the smoothie bar. And so it's really exciting. And, you know, for us as kind of the pioneer frontrunner, we got it right.

It's exciting times for sure. and the ubiquity of that blue jar, Randy, I understand it as well. So much to unpack here. Just zoning in on this path to potential multiple expansion. So if we were to lay out the building blocks of how this would happen, clinical trials, some sort of feasible product to mass produce and embed in the CPG companies, and then widespread consumer adoption thereafter, what am I missing? What needs to happen for Darling to really realize this multiple expansion within this segment?

Look, I think first we need to increase the volume sold with these products. As Randy said, if the margin in gelatin is a factor of one and these products are a margin factor of seven to 11, as we continue to increase the volume sold and margins increase, EBITDA, total profitability increases, then we'll see how the market responds to that. Today it's still relatively small, but I think pretty quickly here it's going to start to have a meaningful impact on our results, and then we'll see how the market decides to value Darling as a sum of the parts exercise. And if we're getting fair value, then great. We'll just continue down that path. And if we're not, then we're going to have to consider what's in the best interest of shareholders. Yep, correct.

Understood. And when we think about the addressable markets for glucose moderation, brain health, all these things, I mean, if you can develop a magical ingredient that is the fountain of youth, cognitive health, and thinness, amongst other things, that would be very interesting. The early progress that you've seen, any color to share on that?

Yeah, I'll rewind the movie a little bit. You know, the blue jar was a big box sale, right? And then here comes that thing called COVID. And so, you know, Vidal had to re-aim the market into really an online sale, a B2C type of sale. You know, so trying to get these products to market to the consumer has been really an evolution. As we go forward with these other products, it's just going to take a little bit of time to get them there. And I'll just tell you, it's going to be exciting. People, when I look back five years ago, the word collagen did not exist in Asia today. It was fish collagen, and we were making it out of Angola and France and shipping it because it's kind of like the Louis Vuitton of products to go to China. Now it's all over China. And people, you know, selfishly or funny-wise, they want to pop a pill and live forever. And collagen seems to be in the fairway for them on that, on many multiple applications, because, you know, it is natural in a sense of it's a naturally extracted, you know, animal protein. Now, it won't work for everybody in the world, but that's where it's at today. The rapid acceptance is unbelievable. Europe trailed for almost three or four years. Now Europe's ramping up.

That's very exciting, the potential for these products. The near-term outlook, looking at the balance sheet in particular, clearly you've made notable progress on reducing leverage and now expecting to exit 2026 with net debt at or below 3 billion and bank leverage below 2x. Can you talk about the path forward from here? A, your confidence in hitting that target with a few months left in the year, and where do we go afterwards?

Yeah, I'll take a first half and give him the back half. You know, we're two years behind where we wanted to be, and it was really driven, you know, as we've constructed the global platform with the 270 factories in 23 countries or whatever with the three DGD assets, That's, you know, DGD was built to add value to our fats. We didn't necessarily say we want to be in the energy business. That's what it was built for. It has been a massive cash generator for 13 years, but we've reinvested a very high percentage back in the growth of that business. Well, we hit a downtrend in margins after, you know, Bob blames me after I did $4 billion worth of acquisitions, and I asked Bob one question, can the balance sheet handle it? And he said, sure. and I said, now we're going to prove it. So we did, and, you know, we're bringing debt down from those about two years later from where we wanted to be, but now we're in the tailwind of the perfect storm. We've got all the assets integrated. They're running well, and, oh, by the way, DGD's got some really good margins.

Yeah, so our commitment and what we've said publicly is that we aim to get our debt down to below $3 billion. We think we'll be close to doing that by the end of the year. At the same time, though, we do have the ability to buy back shares if we feel like the market gives us an opportunity to do that, and that's in the best interest of shareholders. So we will approach those two things in combination, but with a real focus on bringing down debt to below $3 billion, that will get our leverage down to well below $2.0. And once we achieve that, then we're in a position to be, you know, come forward with a little more formal capital planning and announce that to the market. But there's a lot of things that we're looking at. This is all possible because of what Randy said. We've made these acquisitions in the past. We've built these global networks. We've tied them together and integrated them. We've also made the lion's share of the investment that we need to make in Diamond Green Diesel. And so the business is expected to generate a significant amount of cash as we go forward. And so with that, we can entertain things like a potential dividend program or a share buyback program that's a little more prescriptive.

Yeah, I mean, as we look forward and we discussed in our investor day, you know, we anticipate generating between $4 and $6 billion of free cash between now and 2030. I mean, clearly the analysts have us at a $2.2 billion run rate this year. I think that's achievable unless the White House screws something up here, but I think we'll stay with that as a fair play. It puts the company at an inflection point. And so, as Bob said, we have different opportunities for dividend or whatever. You know, for us personally, and for some companies, a dividend is an admission that you're done growing. And I want to be clear with everybody. We're not done growing. We're done with large M&A because we own it in the world. We built the platform we want to do. But we are in no way, shape, form, not done growing. It just, you know, we've got to add more gelatin collagen capacity around the world on every continent. We've got 20-plus rendering plants on the drawing board to continue to meet production in the world. We've got biogas plants on the drawing board in Europe today. So, you know, ultimately what we've set up now is what we want people to understand is the core business is built out now to the point where it can sustain the maintenance capital, the interest payment of the company, 450 maintenance capital a year, and then put some growth money. And then we still have money to buy back shares, put a dividend underneath it. And if DGD hits the ball out of the park any given year, we can do more. And so it's kind of we've got the governors, the DGD over there, because we don't have to. Ultimately, we could expand our SAF business. We're kind of on a pause right now. That business has kind of just, it's been a great business. It meets our investment case, and we love everything about it. It gives us the RD SAF arbitrage, but there's no reason to put more capital in it today until we see the consumer demand that happens there. But it is truly a fun time for Darling as we go forward.

Very clear message. Thank you both so much.