Darling Ingredients Heats Up as Market Conditions Improve

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Darling Ingredients (DAR 3.47%) announced second-quarter 2016 results Thursday after the market close. With the help of improvements in its feed segment and a recovery in its Diamond Green Diesel joint venture with Valero, shares of the rendering and biodiesel specialist are up around 3% in Friday's early trading as of this writing. So let's take a deeper look at how Darling put a cap on the first half of the year.

Darling Ingredients results: The raw numbers

Data source: Darling Ingredients. YOY = year over year. 

What happened with Darling Ingredients this quarter?

• Revenue growth was drive driven by higher finished product pricing for global fats in Feed Ingredients, and continued strength in global raw material volumes.
• Darling doesn't typically provide specific quarterly financial guidance. But for perspective -- and while we don't pay close attention to Wall Street's short-term demands -- net income slightly exceeded analysts' consensus estimates, which called for earnings of $0.18 per share.
• Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) grew 17.5% year over year, to $124 million, driven by driven by higher margins in the non-formula portion of Feed Ingredients, higher earnings from the Fuel segment, and lower sales, general, and administrative (SG&A) expenses.
• Feed ingredients segment net sales grew 2.6% year over year, to just under $543 million, while segment operating income increased 16.9%, to $41.4 million.
• Higher earnings were driven by lower SG&A expenses, higher finished product prices in fats and used cooking oil, and greater production volume given higher raw material supply.
• At food ingredients, net sales fell 4% year over year, to $272.1 million, while segment operating rose 26.7% over the same period, to $19.7 million.
• Operating income growth was driven by lower SG&A expenses due to significant gains in currency hedges
• Broad improvement in the casing business due to the reopening of the Chinese border, which was temporarily closed last year to the import of meat by-products. 
• European edible fats also improved due to increased sales prices, and gelatin business earnings were roughly flat from the same year-ago period.
• Fuel ingredients net sales grew 33.8% year over year, to $62.3 million, while operating income more than tripled, to $6.6 million -- this excludes contributions Diamond Green Diesel.
• Operating income growth was driven improved performance at Ecoson and Rendac, as well as the fact Darling's Canadian biodiesel plant was operating for the full period this quarter, while production at the plant in last year's second quarter was limited due to operating breakdown issues.
• Diamond Green Diesel returned to full production during the quarter following 18 days of scheduled downtime for plant maintenance in Q1, and a force majeure last quarter due to flooding within Kansas City Southern railroad's system.
• Darling's share of adjusted EBITDA came to $18.3 million, up from $7.9 million in last year's Q2.
• The joint venture also received a $156 million tax credit during the quarter.
• Darling and Valero each received a dividend of $25 million in April.
• DGD's previously announced major expansion, which will increase annual production by more than 70%, to 275 million gallons, is in its final engineering phase and should be complete by the fourth quarter of 2017.
• Paid down $49.9 million in debt during the quarter.

What management had to say 

According to Darling CEO Randall Stuewe:

The results show how we can capture notable gains when market conditions improve.  Our business model continues to work and our team did a nice job of executing in highly volatile markets. [...] We've lowered our cost structure, continued to pay down debt and created a robust global business model that is diversified and increasingly focused on premium, value-add products. In the second quarter, the optionality within several of our businesses enabled us to take full advantage of a stronger market.

Looking forward

To be fair, Stuewe did point out a late-Q1 rebound in protein and fat prices three months ago, even going so far as to predict Darling's feed segment would realize the benefits in Q2. Nonetheless, both Darling Ingredients and its investors should be pleased that momentum was sustained through the second quarter and that the company has effectively positioned itself to capitalize on any improvements in its markets. So even with shares up a healthy 21% over the past year, I think shareholders should be more than content with where Darling stands today.