Darling Ingredients Inc. (DAR) Q2 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary and Q&A indicate strong financial performance with debt repayment, share repurchases, and a positive outlook for renewable fuels. Product development in Nextida shows potential growth, and guidance remains stable. The Q&A reveals management's confidence in overcoming challenges and capitalizing on synergies. Though some uncertainties exist, the overall sentiment is positive, supported by strategic financial moves and optimistic guidance.

Key Financial Performance

Combined Adjusted EBITDA $249.5 million in Q2 2025, down from $273.6 million in Q2 2024, reflecting a challenging renewable fuel environment.

Adjusted EBITDA (excluding DGD) $207 million in Q2 2025, up from $197 million in Q2 2024, showing operational improvements.

Year-to-date Combined Adjusted EBITDA $445.3 million in 2025, down from $553.7 million in 2024, due to pressures in the renewable fuel segment.

Total Net Sales $1.48 billion in Q2 2025, up from $1.46 billion in Q2 2024, driven by steady raw material volumes.

Gross Margins 23.3% in Q2 2025, up from 22.5% in Q2 2024, due to operational efficiency and improved pricing.

Feed Segment Net Sales $936.5 million in Q2 2025, up from $934.1 million in Q2 2024, supported by higher fat prices.

Feed Segment Gross Margins 22.9% in Q2 2025, up from 21.0% in Q2 2024, reflecting better pricing and operational efficiency.

Food Segment Net Sales $386.1 million in Q2 2025, up from $378.8 million in Q2 2024, driven by increased global demand.

Food Segment Gross Margins 26.9% in Q2 2025, unchanged from Q2 2024, but year-to-date margins improved to 28.1% from 25.3% in 2024.

Fuel Segment Net Sales $158.8 million in Q2 2025, up from $142.3 million in Q2 2024, despite challenges in the renewable fuel market.

Fuel Segment Combined Adjusted EBITDA $61.3 million in Q2 2025, down from $96.8 million in Q2 2024, reflecting margin pressures in renewable fuels.

Net Income $12.7 million in Q2 2025, down from $78.9 million in Q2 2024, due to lower renewable fuel margins and other factors.

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Operating Highlights

Nextida Joint Venture: Announced intention to form Nextida, a joint venture in the health and wellness space, aligning with the strategy to diversify and grow in high-margin, high-growth markets.

Nextida GC Product: Advancing scientific validation for the glucose control product, with early results showing strong potential and repeat orders beginning to materialize.

Feed Segment Market Dynamics: Rising fat prices supported by public policy favoring domestic sources are creating a favorable pricing environment. Tariff volatility and increased domestic oilseed crush are pressuring protein prices, especially in Asia.

Food Segment Demand: Global demand for collagen and gelatin is strengthening, driven by health, wellness, and functional nutritional needs.

Operational Efficiency in Feed Segment: Margin expansion achieved quarter-over-quarter and year-over-year due to focused execution, operational efficiency, and improved premium ingredient pricing.

Financial Flexibility: Refinanced and upsized Eurobond to EUR 750 million at a fixed rate of 4.5% for 7 years, and replaced revolving credit and term loans with $2.9 billion in new credit facilities, ensuring financial stability for 5-7 years.

Renewable Fuel Strategy: DGD-1 remains offline due to margin pressures, while DGD-3 is scheduled for a turnaround in Q3 2025, positioning for full utilization in 2026 as policy rules are clarified.

Public Policy and Market Positioning: Changes in California's CARB regulations and proposed RVO framework are expected to strengthen LCFS premiums and support margin recovery in the renewables market.

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Risk or Challenges

Renewable Fuel Environment: The renewables environment remains difficult due to overhang on small refinery exemptions and delayed 2024 RIN compliance enforcement, which is preventing mandates from reflecting real demand and putting pressure on renewable fuel margins.

Feedstock Supply Chain: The feedstock supply chain is rebalancing due to tariffs and regulatory and tax changes, which could create challenges in maintaining consistent supply and pricing.

DGD Operations: DGD-1 will remain offline until margins improve, and DGD-3 is scheduled for a turnaround in Q3 2025, which will result in lower volumes in the short term.

Protein Prices: Tariff volatility and increased domestic oilseed crush have put pressure on protein prices, especially for sales into Asia, creating a headwind for the Feed Segment.

Regulatory Environment: The regulatory environment has been a headwind in recent quarters, though there are signs of clarity and constructive changes. However, ongoing small refinery exemption issues and delayed policy enforcement continue to create uncertainty.

Debt and Financial Flexibility: The company has refinanced and upsized its Eurobond and replaced other credit facilities, but the higher fixed rate of 4.5% on the new Eurobond compared to 3.8% previously could increase financial costs.

Economic Performance: Net income for Q2 2025 was significantly lower at $12.7 million compared to $78.9 million in Q2 2024, and year-to-date 2025 shows a net loss of $13.5 million, indicating financial challenges.

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Guidance & Outlook

Feed Segment Outlook: Rising fat prices are expected to continue and expand, supporting the Feed Segment. Premium proteins remain a modest headwind, but signs of stabilization are emerging.

DGD Operations: DGD-1 will remain offline until margins improve. DGD-3 is scheduled for a turnaround in Q3 2025, positioning for full utilization in 2026 when a stronger margin environment is anticipated.

Renewable Fuel Market: The proposed RVO framework and changes by CARB to increase mandated greenhouse gas reductions are expected to strengthen LCFS premiums and support margin recovery over time.

Nextida Joint Venture: The company expects to finalize the agreement for the Nextida joint venture in Q3 2025, aiming to grow in the health and wellness market. Early results for the glucose control product show strong potential.

Full-Year EBITDA Guidance: The company projects full-year combined adjusted EBITDA in the range of $1.05 billion to $1.1 billion.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:Can you talk about some of the policy benefits, which want more domestic renewable diesel made for more domestic feedstock and how that really benefits Darling Ingredients?

A:Management highlighted that the evolving market is becoming more domestic-oriented, with a drop in imported raw material benefiting U.S. fat pricing. They emphasized the focus on reliability and maximizing U.S. fat production to supply the renewable diesel (RD) market. They also noted that the 50% RIN policy dynamic supports U.S. fat values and renewable diesel margins, despite some loss of flexibility in accessing foreign feedstocks.

Q:Do you still expect that we could get to like $70 a ton by year-end for LCFS prices, and maybe even $80 in 2026?

A:Management stated that the LCFS bank is decreasing, which is a positive sign. However, they found it hard to estimate the exact price per ton of LCFS credits, as it depends on the urgency of obligated parties in California. They agreed that the trend is positive and likely to head higher.

Q:Can you explain the $13 million year-on-year hit from lower UCO pricing and when we should expect to see the current pricing come through?

A:Management explained that the dynamics of the UCO market are fluid, with timing differences between pricing with suppliers and selling products. In a rising market, this timing can work against them. They expect margins to improve as prices flatten at higher levels. The lag effect in a rising raw material procurement market was also noted as a factor.

Q:Is there anything unusual in this quarter's results that would affect comparability for Q3 and later quarters?

A:Management noted that the fat price lag affected all fats in the segment, making it not a 'clean' quarter. They expect Q3 to be more reflective of the current higher-level environment. Deferred profit losses from related party sales will come back in Q3. The contingent valuation adjustment related to a Brazilian acquisition was also mentioned.

Q:Could you talk to the opportunities for Darling or for DGD outside of California?

A:Management stated that while California is a big market for RD, they also sell in other U.S. states and export significantly to the U.K. and Europe. The mix may shift due to tariffs and other factors, but demand for RD and SAF is growing globally, with improving margins.

Q:What are your expectations for what the EPA could do with SREs?

A:Management stated that the SRE announcement is expected within the next 60 days, but they do not have a clear view on the number or how they will be treated. They have modeled different scenarios and believe the RVO is big enough to adapt to any outcome.

Q:How does the $1 per gallon cap on SAF under 45Z impact margins relative to RD?

A:Management explained that the $1 per gallon cap reduces the PTC by about $0.35-$0.40, which means they will need to achieve the same margin through SAF premiums. They emphasized that SAF margins will depend on supply and demand, and they have the flexibility to switch between RD and SAF production.

Q:Could you offer some color on the degree of synergy and growth acceleration you're seeing across the combined company in the Nextida JV?

A:Management highlighted complementary geographic spread, practical capacity access, and hydrolyzed collagen capacity as key synergies. They are excited about the increased revenue opportunities and diversification benefits, especially in the current trading environment.

Q:Can you walk through what's assumed in your updated EBITDA guidance for 2025?

A:Management expects improvement in the core ingredient business due to higher fat prices and stabilized protein demand. They anticipate DGD-3 to be fully operational by September, with potential RIN market normalization. The guidance reflects confidence in the core business and cautious optimism for DGD contributions.

Q:Can you talk about what you've learned so far about SAF operations and the challenges that remain?

A:Management stated that operationally, SAF production has met expectations. However, recent policy changes like the PTC reduction have added challenges. They are satisfied with current demand and operational performance but noted that some conversations about new business have slowed due to policy uncertainties.

Q:Could you talk about the scientific studies and timing for Nextida's impact?

A:Management is completing a second round of trials with larger sample sizes, which are showing positive results. They expect significant volume growth by the end of the year, with a much bigger EBITDA impact in 2026. They are also developing a portfolio of products targeting various health benefits.

Q:What is the outlook for Brazil rendering and its impact on Darling?

A:Management noted that Brazil's rendering business is performing well, with increasing raw material availability due to rising cattle numbers. They expect the domestic biodiesel program to absorb more volume, reducing exports to the U.S. but potentially increasing exports to Europe.

Q:What are you seeing in terms of biofuels industry utilization rates and demand for feedstocks?

A:Management observed lower capacity utilization for biodiesel (about 50%) and slightly increasing utilization for renewable diesel. They believe this reflects market expectations of higher future RIN values. They emphasized that the RVO will require capacity to return online to meet obligations.

Q:How should we think about CapEx for the remainder of this year and into next year?

A:Management is committed to keeping CapEx at $400 million or lower for the year, focusing on paying down debt and achieving a debt coverage ratio below 3.0. They have delayed some growth projects but are not capital-starving any assets.

Q:What is the status of the monetization of 45Z?

A:Management stated that they are close to finalizing the monetization of 45Z but noted that the process is complex and involves many legal considerations.

Q:Review of Unclear Management Responses

A:Management appeared to avoid giving a direct answer to the question about their expectations for what the EPA could do with SREs. They acknowledged that they do not have a clear view on the number or how they will be treated, indicating uncertainty and lack of clarity in their response.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

DAR Transcript

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The earnings call presents a mixed outlook. While there are positive elements such as strong financial metrics, potential growth in the Feed Segment, and a promising joint venture, concerns arise from regulatory uncertainties, unclear guidance, and the hesitancy to provide precise forecasts. The Q&A section highlights these uncertainties, particularly around margins and regulatory impacts. The lack of clarity from management on critical issues tempers the positive aspects, leading to a neutral sentiment. Without a clear market cap, the stock price is expected to remain stable in the short term.

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Darling Ingredients Inc. (DAR) Q1 2025 Earnings Conference Call Transcript

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The earnings call revealed several concerns: declining EBITDA and net sales, a significant net loss, and lower fuel segment performance. Despite improved gross margins and debt reduction, the company's high debt levels and market uncertainties, especially in biofuels, pose risks. The Q&A highlighted management's reluctance to provide specific guidance, adding to uncertainty. Although there are positive aspects like improved margins and shareholder returns, the overall sentiment is negative due to weak financial performance and unclear future guidance.

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The earnings call highlights strong financial performance, with increased gross margins and significant debt reduction. The company is benefiting from regulatory advantages (45Z) and is expanding its SAF capacity, which are positive indicators. Management's cautious guidance may temper optimism slightly, but overall, the strategic focus on growth and operational excellence, along with increased dividends, suggests a positive outlook. The Q&A section supports this sentiment, with analysts showing interest in growth opportunities and regulatory advantages, despite some lack of clarity in specific areas.

DAR Slides

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DAR Report

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