DARLING INGREDIENTS INC. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Darling navigated challenging markets with global ingredient demand and pricing sluggish, and a difficult renewable diesel market. Core ingredients performance was flat sequentially but generated cash from Diamond Green Diesel, allowing debt reduction of ~$192 million.
• Combined adjusted EBITDA was $236.7 million, reflecting steady finished product pricing and challenges in the renewable diesel market.
• Feed Ingredients: Strong raw material volumes in Brazil, but fat price recovery slower than expected. Slight increase in feed gross margin percentage due to operations team efforts.
• Food: Lower volumes due to market factors, but maintained strong margins. Upcoming trade show to showcase collagen solution.
• Fuel: DGD margins challenged, but received dividend from joint venture. SAF unit progressing, with sales book building.

Segment Performance

• Feed Ingredients: Raw material volumes remained strong, primarily driven by growth in Brazil. Fat prices are slowly recovering but at a slower pace than anticipated. There was a slight increase in feed gross margin percentage sequentially.
• Food: Saw lower volumes due to softer demand in China, new capacity additions in Brazil, and customer destocking. However, margins remained strong. Next week, Darling will showcase Nextida.GC, a natural collagen solution with significant post-meal glucose moderation results.
• Fuel: DGD margins were challenged due to regulatory uncertainties in RINs and LCFS. Received $111.2 million cash dividend from the joint venture. Sustainable aviation fuel unit is mechanically complete and building a sales book.

Guidance

• For 2024, combined adjusted EBITDA is expected to be in the range of $1.15 billion to $1.175 billion.
• 2025 is optimistic with potential for over $1.5 billion EBITDA, driven by tailwinds from regulatory clarity on 45Z and LCFS, fat price improvement, and SAF growth. Expect clarity on these regulations soon, which will benefit DGD and specialty ingredients.

Risks

• Challenging global markets with sluggish ingredient demand and pricing, and a difficult renewable diesel market.
• Regulatory uncertainties surrounding RINs and LCFS, which impact DGD margins.
• Import impacts on fat pricing, with imports of biofuel expected to decrease in 2025 but uncertainties remain for other imports.
• Potential shuttering of capacity if margins do not improve, especially in biodiesel if margins remain negative.

Q: Tom Palmer of Citi asked about the implied outlook for the fourth quarter and drivers of improvement.

A: Randall Stuewe responded that Q3 has operational challenges globally, fat prices improved, collagen business had some timing issues, and DGD in Q4 has a good number with potential SAF shipments supporting the run rate.

Q: Paul Cheng of Scotiabank asked about 2025 CapEx outlook and cost reduction.

A: Brad Phillips mentioned 2025 CapEx outlook around $450 million to $500 million, and Randy Stuewe noted $259M spent through Q3 with working capital improvements and ongoing cost reductions.

Q: Dushyant Ailani of Jefferies asked about SAF sales book and debt targets.

A: Matt Jansen said SAF plant is mechanically complete, in commissioning, with contracts in place and optimistic about sales. Brad Phillips discussed debt targets aiming below 3 times by back half of 2025 and target of 2.5 times long term.

Q: Heather Jones of Heather Jones Research asked about visibility on 45Z and Diamond Green margins.

A: Matthew Jansen and Randall Stuewe expressed optimism for clarity on 45Z soon, and Robert Day discussed margin improvement in DGD as 2025 approaches with positive outlook for renewable diesel companies using low CI score feedstock.

Q: Manav Gupta of UBS asked about RIN prices, RD exports, and Feed segment margins.

A: Randall Stuewe and Robert Day discussed RIN price rebounds, RD export market dynamics, and Feed segment margin improvement potential in 2025 through operations and procurement improvements.