Darling Ingredients, the unassuming giant of the rendering world, might be sitting on a gold mine that Wall Street is overlooking. While analysts are preoccupied with short-term fat price volatility and the shift to sustainable aviation fuel, a deeper dive into Darling's recent earnings call transcripts reveals a potentially explosive narrative: the industry's overestimated renewable diesel capacity and its implications for the future of waste fats.

Darling CEO, Randy Stuewe, dropped a bombshell during the Q4 2023 earnings call, casually mentioning "phantom or delayed start-ups of renewable diesel plants." This offhand remark, seemingly dismissed by the market, holds immense significance. It points to a reality where the much-hyped surge in renewable diesel capacity is simply not materializing at the projected pace.

Stuewe doubled down on this observation during the Q1 2024 call, highlighting that, "if these plants get built and become more reliable and more renewable diesel comes on the market, we should see fat prices move higher." He explicitly expressed skepticism about the industry's actual operational capacity, naming specific plants like REG, Chevron, and P66, along with Martinez and Vertex, all of which have faced operational challenges and/or relied on refined soybean oil instead of waste fats.

This disconnect between projected and actual renewable diesel capacity creates a bottleneck in the waste fat market. As Stuewe pointed out, "if the industry was truly operating at the rates that everybody anticipates out there and puts in their spreadsheets, fat prices would not be where they're at today, whether it's soybean oil or waste fats."

Here's where the potential gold mine comes in. Darling, through its joint venture, Diamond Green Diesel (DGD), is arguably the most efficient and reliable player in the renewable diesel space. DGD sold a whopping 1.25 billion gallons of renewable diesel in 2023, exceeding all global competitors, and boasts a capacity utilization rate that is second to none.

Stuewe emphasized this point, stating that DGD "has proven they have the operational capacity to capitalize on margin improvement in the industry." This means that as the "phantom plants" struggle to come online and the true demand for waste fats becomes apparent, DGD is positioned to not only secure cheaper feedstock but also command higher margins, creating a powerful double-win scenario for Darling.

DGD Estimated EBITDA per Gallon

The following chart showcases the potential upside in DGD's EBITDA per gallon based on management's comments and market dynamics.

Furthermore, the shift to the producer's tax credit in 2025 further bolsters DGD's advantage. As Bob Day, Darling's Chief Strategy Officer, explained, this credit structure, unlike the blenders tax credit, favors lower CI score feedstocks like those used by DGD and excludes imported biofuels. This legislative shift further solidifies DGD's competitive edge and its ability to capture greater market share.

Let's look at some numbers. Stuewe mentioned that a penny movement in fat price translates to approximately $12 million in annual EBITDA for Darling's core ingredients business. Between Q4 2023 and Q1 2024, fat prices plummeted by $0.20 per pound, suggesting a potential EBITDA reduction of $240 million in the core ingredients business. However, DGD's capacity to absorb this lower-priced feedstock, coupled with a potential LCFS credit boost and the exclusion of imported biofuels under the new tax credit regime, suggests a significant upside potential for DGD margins.

Hypothetically, if DGD can achieve an average EBITDA per gallon of $1, up from the Q1 2024 estimate of $0.75, on an annual production of 1.35 billion gallons, we're looking at an EBITDA contribution of $1.35 billion from DGD alone. Adding this to the $900 million baseline for Darling's core businesses (after accounting for the fat price decline) gives us a potential combined adjusted EBITDA of $2.25 billion for 2024, a figure significantly higher than the market's current expectations.

This potential "fat frenzy" is further amplified by the anticipated growth in the sustainable aviation fuel (SAF) market. DGD's entry into this high-margin sector, with an estimated production capacity of 250 million gallons, could add another $250 million to $500 million in EBITDA.

The pieces are falling into place for a powerful narrative shift in Darling's favor. While Wall Street grapples with short-term volatility, the underlying story of underestimated renewable diesel capacity, coupled with DGD's operational prowess and the legislative tailwinds of the producer's tax credit and SAF, paints a compelling picture of significant upside potential. The question remains: will the market recognize this hidden gold mine before it's too late?

"Fun Fact: Rendering, Darling's core business, is one of the oldest forms of recycling! For centuries, people have been transforming animal byproducts into useful materials like soap, candles, and fertilizer."