Darling Ingredients(DAR) - 2025 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The combined adjusted EBITDA for the third quarter was $245 million, compared to $237 million in the third quarter of 2024 and $250 million in the previous quarter [8][10] - Total net sales for the quarter were $1.6 billion, up from $1.4 billion year-over-year, while gross margins improved to 24.7% from 22.1% [8][10] - Overall net income was $19.4 million for the quarter, or $0.12 per diluted share, compared to net income of $16.9 million, or $0.11 per diluted share for the same quarter last year [15] Business Line Data and Key Metrics Changes - In the feed segment, EBITDA improved to $174 million from $132 million a year ago, with total sales reaching $1 billion compared to $928 million [9][10] - The food segment saw total sales of $381 million, higher than $357 million in the third quarter of 2024, with gross margins increasing to 27.5% from 23.9% [9][10] - The fuel segment, specifically Diamond Green Diesel (DGD), reported a negative EBITDA of $3 million for the quarter, down from positive $39 million in the third quarter of 2024 [10][12] Market Data and Key Metrics Changes - Global rendering volumes and margins in the feed segment were up both sequentially and year-over-year, driven by strong demand for fats and proteins [5][6] - Export protein demand is showing signs of recovery, with slightly firmer pricing trends emerging, although tariff implications have impacted value-added poultry protein products [6][9] - The renewables market continues to face headwinds, with higher feedstock costs and lower RINs and LCFS pricing impacting margins [7][10] Company Strategy and Development Direction - The company is focused on its core ingredients business, expecting EBITDA for 2025 to be in the range of $875 to $900 million, excluding DGD [16] - Management believes that the integrated model of Darling Ingredients provides a competitive advantage that is unmatched in the industry [4] - The company is optimistic about the future, anticipating that public policy changes will strengthen American agriculture and energy leadership, which will enhance DGD's earnings potential [7][16] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the core ingredients business despite short-term uncertainties in the renewables market [4][16] - The company is optimistic about the upcoming clarity on regulatory items, including the Renewable Volume Obligation (RVO) [20] - Management noted that the current uncertainty around public policy impacts the fuel segment, but they remain focused on what they can control [16] Other Important Information - Total debt net of cash was $4.01 billion, with a minimal increase from $3.97 billion at the end of 2024 [14] - The company recorded an income tax benefit of $1.2 million for the quarter, yielding an effective tax rate of -6.3% [15] - The company expects to generate around $300 million in production tax credits in 2025, with significant sales anticipated in the fourth quarter [12][13] Q&A Session Summary Question: Timeline for clarity on regulatory items - Management expects clarity on RVO and exemptions by December, amid ongoing government shutdown [20] Question: Feed outlook for the fourth quarter - Management indicated that while waste fat prices have dipped, they expect the food segment to be stronger in Q4, with a narrow range for the business [21][23] Question: Benefits of REMS policy protectionism - Management noted uncertainty around how the EPA will treat foreign feedstocks, which will depend on various factors [26][28] Question: Drivers of DGD margins - Management clarified that DGD results were not as good as hoped, and the capture rate was affected by LCM accounting practices [29][30] Question: Outlook for the feed segment going into 2026 - Management expects continued improvement in feed segment margins, driven by protein price recovery and strong demand [35][37] Question: RIN pricing scenarios - Management indicated that RIN prices need to increase by approximately $0.40 to incentivize production to meet the 2026 mandate [43][44] Question: Debt repayment plans - Management confirmed they are committed to paying down debt and expect their debt coverage ratio to be around three times by year-end [45][46] Question: DGD1 restart conditions - Management stated that DGD1 will only restart when soybean oil margins are profitable enough to justify the catalyst costs [70][72] Question: Food segment outlook - Management expects a stronger Q4 for the food segment, with a rebound in hydrolyzed collagen business and new product launches [73][75]