Darling Ingredients Inc. (DAR) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the Darling Ingredients Inc. conference call to discuss the second quarter 2026 financial results. [Operator Instructions] I will now hand the conference over to Ms. Suann Guthrie, Senior Vice President of Investor Relations. Please go ahead.

Thank you for joining the Darling Ingredients Second Quarter 2026 Earnings Call. Here with me today are Mr. Randall C. Stuewe, Chairman and Chief Executive Officer; and Mr. Bob Day, Chief Financial Officer. Our second 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'll be making forward-looking statements, which are predictions, projections or 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 statements. Now I will hand the call over to Randy.

Thanks, Suann. Good morning, everyone, and thank you for joining us today. Before we get started, I want to thank everyone who participated in our Investor Day in May. During that event, we highlighted the global foundation we have built, the transformation of our business and the opportunities we see to accelerate returns to our shareholders. We also outlined how our business is positioned to create consistent cash generation regardless of market conditions and public policy environments. When we provided our outlook for the second quarter in April, we based that guidance on our March performance. As the second quarter progressed, finished product markets strengthened considerably, fat and protein prices rallied and several trade-related developments created a more favorable operating environment than we anticipated at that time. That, combined with our strong operational excellence and margin management programs, ultimately drove our results. During the quarter, we received $280 million in cash distributions from Diamond Green Diesel. We used that cash to decrease our debt by $223 million, close on the purchase of the Patense plants in Brazil and repurchased $73 million of stock. Darling's Core Ingredients business really delivered this quarter with improved global operations, margin expansion and focused commercial execution. Combined adjusted EBITDA for the second quarter was approximately $742 million, including about $353 million from our Global Ingredients business and $389 million from Diamond Green Diesel. Our Feed Ingredients segment delivered improved results as fat prices rallied and sustained momentum in the quarter, fueled by robust demand from the biofuel sector. We saw protein value strengthen due to tightening global fish [ meal ] supplies and increased poultry production in the United States. We continued our focus on operational efficiency, commercial optimization, price risk management and contract management, which contributed to improved gross margins. Also in the quarter, we closed on the acquisition of 3 rendering facilities from the Patense Group in Brazil. These are great assets in great locations, which we believe will be immediately accretive. Now turning to the Food segment. Collagen sales have improved year-over-year, reflecting not only increased customer demand, but also new applications for Collagen across food, nutrition and the health space. As prices of whey continue to increase, companies are turning to collagen as a protein with benefits to complement their whey products. We remain very excited about our Nextida glucose control product, which continues to have repeat sales and also is now being sold in Asia. Turning to the Fuel segment. Diamond Green Diesel delivered outstanding operational and financial performance during the quarter, reinforcing its position as the leading renewable diesel producer in the world. During the second quarter, we produced over 1.3 million metric tons of renewable fuel, maintaining DGD's position as the largest producer of advanced biofuels globally. Also in the quarter, we sold approximately 350 million gallons at $2.23 EBITDA per gallon, delivering $389.2 million of EBITDA to Darling. This includes a favorable IEPA tariff recovery of approximately $51 million at the entity level. Our non-DGD Green Energy businesses also performed very well due to the increased energy prices in Europe. Now with that, I'd like to turn the call over to Bob Day to take us through some financials. Then I'll come back and talk about the third quarter and what we see coming forward. Bob?

Thank you, Randy. Good morning, everyone. As Randy said, we significantly increased earnings, cash generation and balance sheet strength this quarter. Net income was $387 million or $2.41 per GAAP diluted share compared to $13 million or $0.08 per GAAP diluted share in the second quarter last year. For the first 6 months of 2026, net income was $521.6 million or $3.24 per GAAP diluted share compared to a net loss of $13.5 million or negative $0.09 per GAAP diluted share a year ago. Net sales in the second quarter were $1.7 billion compared to $1.5 billion for the second quarter last year and $3.3 billion for the first 6 months of 2026 versus $2.9 billion for the same period a year ago. Second quarter combined adjusted EBITDA was $742 million compared to $250 million in second quarter 2025. For the first 6 months of 2026, combined adjusted EBITDA exceeded $1.1 billion versus slightly under $450 million a year ago, reflecting strong contributions from both our Global Ingredients business and Diamond Green Diesel. The earnings power of our global model demonstrated the value added from some of our more recent acquisitions, such as Valley Proteins, Gelnex and FASA. Overall, Core Ingredients EBITDA increased to $353 million in the quarter, up significantly from the prior year at $207 million and last quarter, $256 million. During Investor Day last May, we highlighted two important advantages about the Core Ingredients business that have gained meaningful traction this year. The first is measured by the operational metric implied return on replacement value included as Page 15 in this quarter's slide deck. This framework illustrates how we create value by increasing cash generated from our existing asset base, most recently through negotiation of contract terms that allow us to keep pace with construction cost inflation, commercial optimization across our global network and a more targeted approach to managing price risk. Together, these actions support the opportunity we previously outlined to generate an additional $150 million to $300 million in adjusted EBITDA over the following 3 years. More importantly, this framework shows how Darling can increase earnings and cash generation from its core business consistently over time. Our results so far in 2026 demonstrate real progress toward that objective. The second advantage is our ability to increase EBITDA and our operating metric implied net cash from Rousselot's existing fixed asset infrastructure. As this business represents the majority of our Food segment, Rousselot provides significant opportunity to enhance earnings and cash flow through product mix optimization, as illustrated on Page 16 of this quarter's slide deck. As we continue to increase our mix of Collagen and Collagen with targeted health benefits like Nextida, we're using the same factories and infrastructure to produce products with meaningfully higher margins. In today's market environment, Collagen generates roughly 2.5x to 3x the margin of Gelatin and targeted ingredients can generate 7x to 11x. This gives us a powerful built-in earnings lever, positioning the business to consistently grow EBITDA and net cash generation on an as-is basis, even before factoring in future growth initiatives. Diamond Green Diesel delivered an outstanding quarter, both operationally and financially. Darling's share of DGD EBITDA for the quarter was $389 million compared to $43 million in the second quarter 2025, supported by strong production of 356 million gallons, favorable market conditions and the benefit of $51 million in IEPA tariff recoveries at the entity level. More importantly, DGD generated substantial cash. During the quarter, Darling received approximately $280 million in cash from DGD, roughly $211 million as dividends and $69 million from 2025 production tax credit sales. This allowed us to reduce net debt by over $220 million during the quarter. And as a result, our leverage ratio improved to approximately 2.3x at quarter end compared to 2.9x at the end of last year. This debt reduction, however, doesn't illustrate the true impact of second quarter's performance and how it sets up our balance sheet as we move through 2026. Specifically, we had some cash advantages over the second quarter that prevented us from paying down more debt, but we expect most or all of that will be offset in the second half of 2026. Examples are the acquisition of the Patense rendering assets in Brazil for around $122 million and $73 million in stock buybacks and DGD's current assets minus current liabilities have increased substantially from the beginning of the year, mainly resulting from a strategic build of feedstock inventories to support high run rates and operational and commercial flexibility. With that context, lowering net debt by over $220 million in the second quarter was a great achievement. Meanwhile, we expect to offset most of the acquisition and stock buyback costs with sales of our [ Trap and Castings businesses ]. Subsequent to quarter end, on July 22, we closed on the sale of the majority of our Trapp business for approximately $90 million. We also signed an agreement to sell our European [ Castings ] business, which we expect will close by the end of 2026. Regarding DGD working capital, we anticipate a significant portion of this will flow through as cash by the end of '26 as inventories naturally draw down during that time. We also expect the majority of this year's production tax credits will be sold and paid for over the last half of 2026. And we believe the Core Ingredients business will continue to perform at a high level and generate meaningful cash. With all that, we believe our net debt will be very close to or below $3 billion by the end of 2026 and our leverage ratio well below 2x. We recorded an effective tax rate of approximately 22% during the quarter. Excluding the impact of production tax credits and certain discrete items, our tax rate was approximately 27%. For the full year, we continue to expect an effective tax rate of roughly 25%. With that, I will turn the call back over to Randy.

Thanks, Bob. As we shared at Investor Day, our global scale enables us to generate cash across down, mid and even up cycle environments. We have built an essential business with a global footprint that is difficult to replicate, creating advantages that continue to strengthen. As Bob said, our debt and net leverage continues to improve, and we're on target to be below $3 billion in debt by year-end with a leverage ratio of well below 2x. This is a true inflection point for our company and will create multiple opportunities for the future. We remain focused on operational excellence, disciplined capital allocation and returning capital to shareholders. As we look ahead, we continue to see strong momentum in the third quarter and remain confident in the outlook for the balance of 2026 and even 2027. While the current market conditions are supportive, the fundamentals underpinning our business give us confidence beyond this year. Importantly, we do not view the progress we have seen in this quarter as a onetime event. The opportunities we outlined at Investor Day remain well ahead of us. In Feed, we continue to see opportunities through contract management, commercial optimization and price risk management. In Food, we continue to improve our product mix towards higher-value collagen and targeted health ingredient applications. Combined with our ongoing portfolio optimization and balance sheet improvement, we believe the business is positioned to continue increasing earnings and cash generation over the next several years. The strategic actions we have taken to strengthen the business, improve margins and simplify the portfolio position us to create value well beyond the current cycle. For the third quarter, we expect Core Ingredients EBITDA to be between $325 million and $340 million. Included in the second quarter results were approximately $18 million in the net recovery of IEPA tariffs for the Rousselot business. Excluding that benefit, our third quarter outlook implies underlying performance that is generally consistent with the strong earnings level we delivered in the second quarter. We continue to see support from growing global poultry production, strong global demand for our proteins and specialty products and robust demand for our low-carbon fuels. On the DGD front, margins remain attractive, and we intend to produce approximately 335 million gallons in the third quarter. With that, let's go ahead and open it up to questions.

[Operator Instructions your first question comes from the line of Heather Jones with Heather Jones Research.

Congratulations on the quarter. I guess I wanted to start with protein meals. Randy, I think you mentioned something about exports, but I just noticed a rally throughout the quarter and particularly in the latter part of the quarter, just strengthened pretty dramatically. So just wondering if you could flesh out those comments about what specific changes? Was it related all to the tariffs? And have you seen that strength continue into Q3?

Yes. Heather, this is Randy and Bob and Carlos can comment if they want to. But really, you're seeing a very strong protein market globally. And it's ultimately driven, at least on the chicken side by the tightness in the fish meal off of the super El Nino or whatever you want to call it. We're just seeing very, very strong demand on all continents for proteins. And we just see that continuing through the balance of the year. I don't see anything interrupting it.

Okay. Perfect. And then I wanted to pivot to Diamond Green and just we've seen a lot of nervousness in the RIN market over the last few days. And it seems to be related to a lot of concerns related to 2025 SREs. And just was wondering what are you all expectations as to timing on when we get that resolved? And like what are your thoughts as to whether we get a number that's higher than what's outlined in the finalized RVO?

Yes. Thanks, Heather. This is Bob. We're not expecting any meaningful change in SREs and SRE volumes that would impact the overall RIN [ S&D ]. I think our view is the worst thing that the administration could do right now is negatively impact supply. This policy, which was only implemented April 1, has essentially achieved or it's achieving the objectives of the EPA and the administration as a whole. It's leading to higher prices at the farm gate, which is what they wanted. And the industry responded within the third month of its implementation by making enough product that shows it can meet the mandate. So we're just -- we're not expecting a significant change that would overall impact this picture. And we think RIN tightness is going to continue, and that's what's required in order to maintain the kind of production that we saw in June and what we need to meet the mandate.

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

Exceptionally strong quarter. I want to congratulate everybody on it. My first question is on the overall renewable diesel macro. I think world is short [ on diesel ]. You have seen a strong support from the government on RVO. The way we think about renewable diesel margins and mid-cycle margins, should we think of a higher mid-cycle given all the dynamics that are playing on, including global distillate inventory depletion? And would that mean higher sustained earnings from your Renewable Diesel business for a longer period of time? If you could talk a little bit about that.

Yes. Thanks, Manav. This is Bob. So I just want to be clear, there is a page in our deck where we talk about our business as a whole, down cycle, mid-cycle and up-cycle environments. And the mid-cycle makes reference to $0.92 a gallon, and that's really just an approximate average of what the price per gallon was from 2021 to 2025. It's not a suggestion about what a future mid-cycle margin would be. I think to answer your question, first, I would just point out that the [ BOHO ] spread is tighter than we've seen in a long time, which suggests that, as you point out, conventional fuel prices, conventional diesel prices globally are really allowing renewables to be more competitive from a cost standpoint than we've seen in a long time. And if you look at spot margins today and the RVO and the mandate what we have through 2027, it certainly suggests an attractive margin environment for the foreseeable future, and that's what we expect.

Perfect. Bob, probably the next one also for you. Congrats on lowering bringing the leverage down, I think, from 3.2x to like 2.3x in a single quarter. At the Analyst Day in April, you had said you want to be below 2x. Most likely, you will be below 2x by the end of the third quarter and probably you could continue to lower it. My thought process here is, what level would you be comfortable getting to and probably building a buffer where in addition to the share repurchase, which you did this quarter, you could also possibly contemplate a dividend just to reward your shareholders?

Yes. Thanks, Manav. So yes, you're right. We -- our objective is to get down below $3 billion of debt. I think given the EBITDA run rate that we're on right now, that would comfortably put us below 2x leverage. I think what we're more focused on is total debt level because we want to be in a comfortable leverage position even in a mid-cycle environment. And so that's what we're striving for. We did highlight at Investor Day that once we achieve our goals in terms of total debt level, then we can evaluate a different type of capital strategy that potentially could include shareholder value initiatives that we really haven't considered as much in the past, but we now are able to do since we've built out the global network that we have, and we have more stable earnings than what we've had in the past.

Your next question comes from the line of Derrick Whitfield with Texas Capital.

Congrats on a banner quarter. I wanted to start with DGD. Given the strength of really U.S., Canada and international markets, how are you guys thinking about the allocation of RD and SAF volumes across those markets to optimize margins?

Yes. Thanks, Derek. This is Bob. I think what you're alluding to is margin attractiveness in RD relative to SAF that's better than what we had seen previously. That really depends on which market you're selling into. I think RD is more attractive relative to SAF, more so in Europe than what we have in the United States for our existing sales book. As everyone knows, Europe is a mandated market. The United States is a voluntary market. In the mandated market, those prices can move up and down depending on supply and demand, and we're not seeing a huge advantage in SAF in that market. But in the U.S., in our voluntary market, certainly with sales on our books, those SAF sales command a premium over RD and continue to earn a more attractive margin than RD. So we're certainly going to take advantage of that. And we expect to produce SAF at a similar rate to what we've been doing over the past 12 to 18 months.

Great. And then on my follow-up, just with the capital increase for 2026. So you guys did initially message that during 1Q earnings. But maybe could you speak to some of the investments and the expected uplift in business results associated with the investments?

Yes. So I'm not sure I totally understood the question, Derek. So are you talking about investments from '22 and '23 or more recently?

More recently. So with the increase in 2026 capital, you guys initially message that in 1Q. Could you maybe speak to some of the investments that you guys are undertaking and then expected the business results?

Yes. Okay. So yes, and I think when we started the year, we estimated that maintenance CapEx would be around $400 million. We revised that slightly higher to $450 million. That's really just a function of increased cash flow into the business and identifying opportunities to just increase -- debottleneck in certain locations, slightly increase capacity, improve efficiencies -- it's -- I wouldn't say it's a material change to our CapEx plan for the year. But in a year like this, we're certainly going to take advantage of the opportunity to do a little bit more and just increase efficiencies.

I mean, Derrick, this is Randy. Clearly, in '24 and 2025, we had to pull back the reins on the capital spend. And you never want to put these factories into a run-to-fail mode. And so a little bit of makeup capital in here. And then ultimately, we're -- the poultry expansion in the Southeast in the United States, we're running the valley system wide open full now, and we've been able to expand it and optimize it and we're getting the earnings out of it, and that's the inflection point that's very different than last year.

Your next question comes from the line of Andrew Strelzik with BMO Capital Markets.

And I apologize, I dropped for a minute accidentally. So I apologize if I ask something that's already been asked. But you talked about your enthusiasm for the balance of the year and '27. And obviously, we saw the base business guidance for 3Q. But with the volatility in market fundamentals recently and coming off the strength in 2Q, can you frame kind of current spot run rate margin structures relative to the high, medium, low framework from the Investor Day? Are we kind of still at the high scenario that you talked about previously? Are we above? How do you see that kind of on a go forward?

Yes. And I've gotten to sit in the seat of quite a while here. And if you live long enough in this business, you see some of these cycles. And ultimately, we don't -- we're very enthusiastic through the end of '26 and even '27. And what we're saying is the Core Ingredient business, the acquisitions we made in the past have been rationalized, optimized. We've done some divestitures. And so the Core Ingredients business is going to roll at that $325 million, $340 million level. That number, it was very, very simple. That for us, that was just basically, once again, the June run rate and multiplied times 13 for the quarter. And we see nothing -- the third quarter typically can be a little challenging because of weather, summer weather is hot here and hot in Europe. But ultimately, the strong protein, strong fat markets continue to go. DGD, we feel very positive about the margin environment that's out there. Yes, heating oil is up one day. Yes, RINs are down one day. The crushing industry and the soy side is running wide open full, but yet soybean stocks come down, so soybean oil. So you can't exactly get bearish on fats and oil. So we feel just really, really good about it. As we said in our Investor Day, where we're at today is where we wanted to be a couple of years ago, taking big money off of the balance sheet such that we have the flexibility to have Darling looked at as a different company. There's -- we have a very, very prestigious place in the world in our business. And I think it's really delivering now. It's set up to continue to grow organically and through debottlenecking as Bob's words, in different places. And I just see it as a really positive outcome as we go into '27. I think our comments that we don't see the risk in the RVO that maybe some in the market want to impute out there. It's doing what it's supposed to do. In second quarter, we produced the gallons that it's needed to fulfill it. And that was the naysayers that were out there. So I think the environment is very solid. Demand in the world is very robust for renewables with the higher oil prices. And so Bob, do you want to add anything before I?

Look, I think the last thing I would say is if you look at those margin environments, if we talk about down mid and up-cycle environments, yes, we're not in a mid-cycle environment right now. No. It's -- if you look at spot margins, it's more towards that up cycle as we sit here today. And as Randy said, we're optimistic about what that's going to continue to look like here over the next few quarters.

Okay. Great. That's helpful. And maybe to your point about the evolution of the balance sheet, it feels like given the results and the outlook, you're going to be to your targets and through your targets sooner rather than later. So can you just -- obviously, we saw the buyback in the quarter. Can you kind of just give us your updated thoughts on capital allocation once you do get to those target levels? And is that kind of a tell on which way you're leaning? Just curious for some updated thoughts around capital allocation.

Yes. It's -- number one, it's above my pay grade, so we'll go there. But it allows discussion in the boardroom to go where we wanted to go. And that is making sure that people view a yield under Darling, not as a commodity company, but one that can deliver a dividend and share repurchases on a consistent basis. Bob laid out the or the low, the mid and the up-cycle environments, and it gives enough cash flow to do what we want to do going forward. So we stayed laser-focused on bringing the debt down to below $3 billion, getting the leverage ratio below 2x, put a capital policy or a max debt policy in at 2.5x, and we're able to do everything at that time. So like I said, this was our dream 2 years ago, and then we hit a pretty solid and difficult cycle. We didn't see the cycle coming on in DGD. It came. We lived through it. We paid down debt while we were there. We maintained the plants and very happy with the acquisitions we made during the time. And so we're in a different setting point now than where we've ever been. And so that's where our enthusiasm is. And it gives me the chance then to have the discussion in the boardroom about how to transform Darling going forward.