Executive Summary / Key Takeaways

• Darling Ingredients (NYSE: DAR) is uniquely positioned at the nexus of sustainable ingredients and renewable energy, transforming global food waste and animal by-products into valuable products across its Feed, Food, and Fuel segments.
• The company's differentiated technologies, including advanced rendering processes, specialized collagen peptide innovation (NexTyta.GC), and integrated renewable fuel production (Diamond Green Diesel), provide operational efficiencies and market differentiation.
• While Q1 2025 results reflected challenges, particularly lower earnings at the Diamond Green Diesel (DGD) joint venture due to the transition from the Blenders Tax Credit (BTC) to the Clean Fuels Production Credit (45Z) and operational downtime, management anticipates significant recovery and momentum build throughout 2025.
• Management guidance targets combined adjusted EBITDA of $1.25 billion to $1.3 billion for fiscal year 2025, supported by an expected core business EBITDA run rate of $950 million to $1 billion and improving conditions in the renewable fuels market driven by regulatory clarity and supply/demand dynamics.
• A primary strategic focus is deleveraging the balance sheet, targeting a 2.5 times bank leverage ratio, with expected debt reduction of $350 million to $500 million in 2025, significantly aided by anticipated cash generation from the core business and direct monetization of 45Z tax credits from DGD.

A Global Engine for Sustainability: Repurposing Waste into Value

Darling Ingredients Inc. stands as a global leader in the circular economy, built over a history spanning 142 years. The company has evolved from traditional rendering into a sophisticated developer and producer of sustainable natural ingredients, repurposing over 15% of the world's meat production and food waste. This transformation was fundamentally accelerated by the formation of the Diamond Green Diesel (DGD) Joint Venture with Valero Energy (VLO) in 2011, marking a strategic pivot into the burgeoning renewable fuels market. Subsequent acquisitions, such as Gelnex in collagen and Miropasz in rendering, have further diversified and strengthened its portfolio across three core segments: Feed Ingredients, Food Ingredients, and Fuel Ingredients.

At the heart of Darling's operations lies a suite of differentiated technologies that provide a competitive edge. Its advanced rendering processes are designed for high efficiency in converting animal by-products and food waste into fats, proteins, and other materials. In the Fuel segment, the DGD joint venture leverages the Ecofining Process and proprietary pretreatment technology to convert diverse feedstocks, including Darling's own low-carbon intensity waste fats and oils, into renewable diesel and sustainable aviation fuel (SAF). This integrated model, from feedstock collection through processing and fuel production, enhances supply chain efficiency and sustainability verification. In the Food segment, Darling is pushing the boundaries of ingredient science with innovations like the NexTyta.GC collagen peptide. Clinical trials have demonstrated a significant benefit, showing an average reduction of 42% in post-meal glucose spikes in the blood, positioning this product as a potentially revolutionary solution in glucose moderation and a key driver for higher-margin growth in the future. The company is also exploring opportunities in renewable natural gas (RNG), converting biomethane from wastewater streams, which not only creates a new revenue stream but also reduces Scope 1 emissions.

This technological foundation and integrated operational model are critical in a competitive landscape populated by large agricultural processors like Archer Daniels Midland (ADM), major meat producers like Tyson Foods (TSN) and JBS S.A. (JBS), and energy refiners like Valero Energy. While companies like ADM, TSN, and JBS possess greater scale and broader commodity exposure, Darling's specialized expertise in bio-nutrient recycling and waste-to-value conversion provides distinct advantages. Its rendering processes are estimated to be more energy-efficient and achieve higher fat extraction rates compared to more traditional methods used by some competitors. Despite lacking proprietary, quantifiable technology differentiators, the company's integrated model and technological capabilities are seen as key differentiators allowing it to capitalize on these market dynamics. In the renewable fuels space, the DGD joint venture, often described by management as "best-in-class," benefits from Darling's integrated feedstock supply and processing capabilities, positioning it favorably against competitors who may struggle to efficiently utilize low-carbon intensity waste feedstocks or face higher production costs. However, Darling's smaller scale relative to these giants can sometimes translate to lower overall revenue growth rates and expose it to greater volatility in niche markets or during periods of intense competition, such as the recent overcapacity and pricing pressure seen in the global collagen market due to new entrants.

Performance Amidst Transition and Volatility

The first quarter of fiscal year 2025 highlighted both the resilience of Darling's core business and the impact of significant shifts in the renewable fuels market. Total net sales for the quarter were $1.38 billion, a slight decrease from $1.42 billion in the prior year period. Consolidated operating income saw a substantial decline, falling to $28.4 million from $137.2 million in Q1 2024, primarily driven by a sharp reduction in earnings from the DGD joint venture.

The Feed Ingredients segment demonstrated underlying strength, with net sales increasing slightly to $896.3 million from $889.8 million, despite relatively unchanged raw material volumes processed (approximately 3.09 million metric tons). While the gross margin percentage saw a minor decrease to 20.3% from 20.7%, partly attributed to one-time inventory adjustments, management noted improving fat prices throughout the quarter. Segment operating income, however, decreased to $21.0 million from $44.5 million, primarily impacted by an increase in a contingent consideration liability that offset operational improvements and lower selling, general and administrative expenses.

The Food Ingredients segment experienced a decrease in net sales to $349.2 million from $391.3 million, mainly due to lower collagen sales volumes and prices influenced by market destocking and new capacity additions globally. Despite this, the segment's gross margin percentage improved significantly to 29.3% from 23.8%, largely due to the impact of a $25.1 million out-of-period inventory expense adjustment to the prior year's cost of sales. This adjustment also contributed to an increase in segment operating income to $41.4 million from $32.8 million. Management indicated that demand for collagen peptides regained strength later in the quarter, and momentum is building for innovative products like NexTyta.

The most significant impact on consolidated results came from the Fuel Ingredients segment, where the operating result, inclusive of equity in DGD, swung to income of $20.9 million from $87.8 million in the prior year. This dramatic decrease was primarily attributed to the DGD joint venture's performance, where Darling's share of DGD Adjusted EBITDA plummeted to approximately $6 million in Q1 2025 from $115 million in Q1 2024. This decline was driven by several factors: the complex transition from the Blenders Tax Credit (BTC) to the Clean Fuels Production Credit (45Z), which initially resulted in lower value per gallon and delayed RIN reaction; the complexity and delayed guidance around 45Z impacting sales and feedstock eligibility; tariffs on imported feedstocks; and operational downtime from catalyst turnarounds at DGD1 and DGD2. DGD's reported production tax credits and blenders tax credits were $50.9 million in Q1 2025, a sharp drop from $331.1 million in Q1 2024.

On a consolidated basis, selling, general and administrative expenses decreased by $11.5 million, primarily due to lower incentive compensation. Interest expense also decreased by $4.9 million, reflecting lower outstanding revolver balances. The effective tax rate remained stable at 4.6% in Q1 2025, significantly influenced by biofuel tax incentives.

Financially, Darling demonstrated solid liquidity management despite the challenging quarter. Working capital improved to $419.0 million with a ratio of 1.40 at quarter-end, compared to $395.9 million and 1.38 at the end of 2024. Unrestricted cash increased to $81.5 million, and revolving credit facility availability stood at a robust $1.27 billion. Net cash provided by operating activities was $249.0 million in Q1 2025. The company continued its focus on strengthening the balance sheet, paying down approximately $146.2 million in debt, which lowered the bank covenant preliminary leverage ratio to 3.33 times from 3.93 times at year-end 2024. Capital expenditures were managed at $63.0 million, down from $93.8 million in the prior year, reflecting a disciplined approach to capital deployment. The company also opportunistically repurchased approximately 1 million shares for $35 million under its refreshed $500 million program.

Outlook and the Path to Record Earnings

Management expressed strong optimism for the remainder of 2025, anticipating a significant build in momentum throughout the year. The guidance provided targets combined adjusted EBITDA of $1.25 billion to $1.3 billion for fiscal year 2025. This outlook is underpinned by the expectation that the core ingredients business will continue to perform well, projecting an annual EBITDA run rate between $950 million and $1 billion. This confidence stems from anticipated benefits from rising global fat prices, supported by tariffs and the favorable impact of 45Z on domestic feedstock value, coupled with ongoing operational improvements and margin management initiatives.

A key driver for the expected recovery and growth in 2025 is the anticipated improvement in the Fuel segment. While Q1 was challenging, management believes the worst is behind DGD. They expect margins for renewable diesel and SAF to improve and normalize as the market adjusts to the new regulatory environment. A critical assumption is the successful optimization of the 45Z tax credit, with the expectation of booking 100% of the producer's tax credit for eligible feedstocks starting in the second quarter of 2025. The sharp decline in imported biofuels, which are not eligible for 45Z, coupled with rationalization of domestic production capacity, is expected to create a more balanced supply/demand environment and support RIN values. The SAF market is seen as a significant opportunity, with strong interest and premiums supporting the outlook.

Strategically, Darling remains focused on deleveraging its balance sheet. The target is to reach a 2.5 times bank leverage ratio, a goal management believes is achievable by the end of 2025 or early 2026. Expected debt reduction for 2025 is projected to be between $350 million and $500 million, financed by cash flow from operations and direct monetization of the 45Z credits, which fundamentally changes the cash flow dynamics compared to the prior BTC regime. Capital expenditures for the remainder of 2025 are expected to be approximately $337 million, focused on compliance, replacement, and expansion projects, intended to be financed through operating cash flows.

Management is particularly bullish on the potential for 2025 to be a record earnings year for the company, citing numerous tailwinds. These include the favorable regulatory landscape (45Z, potential clarity on CA LCFS), the increasing demand for low-carbon intensity feedstocks which benefits Darling's core business, the expected recovery and growth in the Food segment driven by innovation like NexTyta, and the anticipated improved performance and cash generation from DGD. The company's integrated model and technological capabilities are seen as key differentiators allowing it to capitalize on these market dynamics.

Risks and Challenges

Despite the optimistic outlook, Darling faces several pertinent risks and challenges. Global macroeconomic volatility, exacerbated by geopolitical conflicts, could continue to impact commodity prices, inflation, supply chains, and financial markets. While tariffs have been immaterial to date, future trade restrictions could negatively affect results. Changes in government policies related to renewable fuels and GHG emissions, including potential legal challenges or modifications to programs like RFS, LCFS, and 45Z, remain a significant risk that could impact demand, pricing, and margins.

The company's business is inherently exposed to fluctuations in agricultural-based commodity prices, energy costs, weather conditions, and global demand for protein, which can lead to volatility in raw material availability and finished product prices, impacting margins. The longer processing times in the Food segment make it susceptible to price movements between raw material procurement and sale.

Darling carries a substantial amount of indebtedness, which could limit its financial flexibility, require significant cash flow for debt service, and increase its vulnerability to adverse economic conditions or rising interest rates. The ability to repay debt depends in part on cash flows from subsidiaries, which could be limited by local laws or regulatory actions like foreign exchange controls.

While management is confident in the outlook for DGD and the benefits of 45Z, execution risks remain, including successfully optimizing feedstock eligibility, navigating the complexities of credit monetization, and ensuring consistent operational performance at the plants. Competition in all segments, from large diversified players to niche specialists, could intensify, impacting pricing and market share. The company is also exposed to environmental risks and potential liabilities, such as the ongoing Lower Passaic River matter, although management currently believes the likelihood of a material impact is remote. Unexpected increases in pension funding requirements, particularly for multiemployer plans, also pose a potential risk to liquidity.

Conclusion

Darling Ingredients is at a pivotal juncture, leveraging its long history and integrated global operations to capitalize on the growing demand for sustainable ingredients and renewable fuels. While the first quarter of 2025 presented challenges, particularly within the critical Diamond Green Diesel segment due to regulatory and operational transitions, the underlying narrative points towards a strong recovery and potential for record performance in 2025.

The core investment thesis rests on Darling's unique ability to extract value from waste streams through its differentiated technologies and integrated supply chain. The expected benefits from the 45Z Clean Fuels Production Credit, coupled with improving market dynamics for renewable fuels and continued strength in the core ingredients business, are anticipated to drive significant earnings growth and cash generation. This financial strength is strategically directed towards aggressively deleveraging the balance sheet, a key priority that enhances the company's financial resilience. As the company continues to innovate in high-margin areas like collagen peptides and explores new opportunities in renewable natural gas, it is well-positioned to benefit from long-term sustainability trends. Investors should closely monitor the execution of the DGD recovery plan, the realization of 45Z benefits, and the trajectory of global commodity prices and regulatory developments, which will be critical in determining whether Darling can indeed achieve its ambitious targets and unlock the full value of its unique platform.