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

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

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 learned 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. I 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. North America is solid. Two reasons that solid, one, demand and two for us is 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. 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 Neste system over there for the winter here. But overall, as we were telling people today in our one-on-ones, we've never seen a time -- it was kind of -- it was an all boats rise or whatever that phrase is. We're seeing the U.S. here, Brazil basically being currency, freight and tariff and Europe being freight off right now. So a 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. If you're going to tell me that oil prices are 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. Yes, the policy-driven regional dislocations definitely favor the U.S. And I hear you on there's some sort of global inclusion on demand, sending oil prices lower. We would be having a very different conversation and wouldn't just be a precursor of changes in fat prices. Maybe turning to your Food segment. Could you discuss the overall strategy surrounding the Nexitida line and the strategic rationale behind breaking into higher-margin health and wellness markets and how that's going.

Yes, this one I love. I meant at 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 branded sponsor in the U.S. Open right now called Vital Proteins we were shipment #1. We helped build that brand. We don't own the brand and invest in the brand, Nestle does, but we help build that. And that was 1.0 of the collagen revolution. Collagen has been identified as a great source of protein for health, wellness, nutrition. As everybody has that source for working out everything. And then I don't know, 6, 7 years ago, we started down the road of seeing 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 GC. And we've learned to isolate concentrate the peptide for a specific health wellness nutrition application. And the first product we rolled out was Nextida GC. There's a ton of products as [indiscernible] told me, she said, "Just go on to Amazon put in Nextida and you'll see how many products are really using that ingredient today for glucose control. We have 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 in it. And the CPG companies want a whole lot more. So we've had this 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 is really exciting. That's been through multiple years of clinical showing improved cognitive function. Then the library has women's health, hair and nail skin, there's at least another 5 or 10. Now for the business, why is it impactful? We today, if gelatin is a 1x sale, hydrolyzed collagens 2x to 3x better margin and health wellness nutrition 7x to 11x better. And so building mass is just going to take time in that segment. But the supplement as we tell people that you walk into that, whether it's Sprouts, Whole Foods, GNC, whatever very confusing. And when it's an unregulated world where you can make any claim you want to make. And so -- but we know what the CPG companies want now. They want something Nestle announced here a week or so ago. They're trying to develop a product line for GLP-1 users. This is one of those things that comes into play here. It just takes a little while to develop. What else you want to add to that?

Yes. Just I'd say specifically as far as the strategy goes, our plan is to sell this as an ingredient inside and back it with science. So -- as Randy said, we started out, we did a peer review to prove the effectiveness of securing 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. And 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, 2 years ago, you could have been in a restaurant, a bar or whatever. There might be 2 people in there that know the word collagen and I guarantee you today a high majority does. And as we look at it, we're now being contacted by athletic institutions of college, instead of having the creatine and the whey bar or they want to add collagen to the smoothie bar. And so it's really exciting. And for us, is kind of the pioneer front runner, it's we got it right.

It's exciting times for sure, and the ubiquity of that blue jar, I understand it. Well, still 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 the 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 7 to 11 as we continue to increase the volumes 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.

Okay. As far as structure goes.

Yes. Correct.

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

Yes. It's I'll rewind the movie a little bit. The blue jar was a big box sale, right? And then the here comes that thing called COVID. And so Vital had to reaim the market into really an online sale of a B2C type of sale. 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 it's going to -- I'll just tell you, it's going to be exciting people. When I look back 5 years ago, the word collagen did not exist in Asia today. It was fish collagen, and we were making it out of Angelo, 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 selfishly or funny wise, they want to pop a pill and with forever. And collagen seems to be in a fair way form on that on many multiple applications because it is natural in a sense of the extracted 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 3 or 4 years. Now Europe is ramping up.

That's very exciting with 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?

Yes. I'll take the first half and give him the back half. We're 2 years behind where we wanted to be. And it was really driven as we've constructed the global platform with the 270 factories in 23 countries or whatever with the 3 DGD assets, 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 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 we're bringing debt down from those about 2 years later from where we wanted to be. But now we're in the tailwind of the perfect storm of we've got all the assets integrated. They're running well. And oh, by the way, DGD has got some really good margins.

Yes. 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 2 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 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.

Yes. I mean as we look forward and we discussed in our Investor Day, we anticipate generating between $4 billion 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 screw 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. For us, personally, and for some companies, the 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 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 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, interest payment of the company, $450 million 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 hit 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, gives us the R&D 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.