Darling Ingredients (DAR) is probably the only company that primarily creates feedstock and fuel from waste animal and oils, explains Brendan Coffey, a specialist in ESG investing and editor of Cabot SX Greentech Advisor.

It’s not exactly an appealing business to think about, but it’s a unique and fascinating enterprise to take what would simply be trashed and turn it into a variety of profitable products.

Darling has a long history starting in the 19th century as a business creating products out of animal waste. It owns 135 plants, including processing and rendering facilities and it also has a network that collects used cooking oil. Ownership of the rendering plants puts it in a position to control more of its raw materials, creating a barrier to entry for others who may now see value in waste-to-fuels.

The biggest part of Darling’s business today is creating feed ingredients. Feed accounts for two-thirds of 2021’s $4.74 billion net sales. The feed is primarily pet food, livestock feed and aquaculture ingredients. The company also makes food products. That involves using different parts of slaughter animals for things such as sausage casings, food-grade lard for cooking and collagens used in the food and the pharmaceutical industries.

Darling and refining giant Valero (VLO) jointly own Diamond Green Diesel, a JV they formed in 2013. The business makes renewable diesel in a Louisiana refinery adjacent to a Valero refinery.

When a third expansion of the plant (currently in process) is up and running next year, the facility will produce 1.3 billion gallons of renewable diesel annually. Once the expanded plant is up and running, the company sees it contributing another $1 billion in free cash flow, which it will use to reduce debt, buy back shares and boost the dividend.

Darling got some notice recently for signing a deal with the privately held fast food chain Chick-fil-A to collect used cooking oil from its locations in North America — some 2,700 restaurants. Yet the company already had a large cooking oil offtake business, with 120,000 locations it collects from.

It’s a bit of a manual labor business now — a driver has to go collect canisters of old oil from kitchens — but Darling is creating automatic collection systems to make it quicker and easier for restaurants to discard the oil and drivers to collect.

Securing supply, such as with Chick-fil-A, means Darling is set up well to enjoy the tailwinds facing its businesses. Those include rising fossil fuel prices which in turn make renewable fuels more profitable, and the rising prices of food commodities that both raise what Darling can charge and are more likely to raise costs for competitors (such as other green diesel refiners who will need to buy crops as feedstock).

We previously have invested in Darling — during the “Peak Oil” price scare of the mid-to-late 2000s — and consider the management team professional, capable and transparent.

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