Darling Ingredients Keeps Deleveraging as Market Headwinds Persist

Darling Ingredients (DAR 3.47%) announced third-quarter 2016 results Thursday after the market close, and shares are little changed as of this writing as the market digests what the rendering and biodiesel company had to say. Let's take a closer look, then, at what drove Darling's business as it kicked off the second half of its year.

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Darling Ingredients results: The raw numbers

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

What happened with Darling Ingredients this quarter?

• Revenue growth was held back by record grain harvests, which resulted in lower finished product pricing for global fats and a glut in protein supply.
• The improvement in net income was driven by higher earnings from Darling's Diamond Green Diesel (DGD) joint venture with Valero (more details on DGD's performance below).
• Darling doesn't provide quarterly financial guidance. But for perspective -- and though we don't usually pay much attention to Wall Street's short-term expectations -- analysts' consensus estimates predicted slightly higher revenue of $858.9 million and lower net income of $0.16 per share.
• Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose slightly from last year's third quarter, to $106.2 million.
• Feed ingredients segment net sales increased 1.2% year over year, to $531.4 million, and feed segment operating income dropped 1%, to $35.3 million.
• Earnings declines were the result of higher depreciation and amortization from new plants in the United States, as well as lower finished product prices that offset higher production volumes.
• Food ingredients net sales slumped 2.7% year over year, to $262 million, and food segment operating income fell 31.3%, to $7.9 million.
• Operating income declines here were driven by a $3.5 million inventory value adjustment in China amid falling demand for low bloom gelatin, lower production in three of Darling's gelatin facilities, and a decline in performance from European edible fats.
• The casings business continued to improve following to the reopening of the Chinese border, which was temporarily closed last year to the import of meat by-products.
• Fuel ingredients net sales -- which exclude contributions from DGD -- climbed 1.9% year over year, to $60.4 million. Fuel ingredients operating income jumped to just under $6 million, compared to roughly $246,000 in the same year-ago period.
• Similar to last quarter, operating income growth can be credited to improved performance at Ecoson and Rendac, and a full quarter of operation from Darling's Canadian biodiesel plant -- production at the plant in last year's third quarter was limited.
• Diamond Green Diesel achieved its strongest earnings to date, with Darling's share of adjusted EBITDA arriving at $22.5 million, compared to an $8.3 million adjusted EBITDA loss in last year's third quarter. The increase in earnings was primarily driven by the inclusion of the blenders' tax credit -- which wasn't available at this time last year -- as well as an income tax benefit and higher Renewable Identification Number (RIN) values.
• Final engineering for DGD's previously announced expansion is complete. When at full capacity, this expansion will increase annual production by more than 70%, to 275 million gallons.
• Construction is scheduled to be complete early in the second quarter of 2018.
• Generated cash flow from operations of $280.6 million, compared to $296.7 million in the same year-ago period.
• Paid down $60 million in debt this quarter, on top of $49.9 million last quarter, and $54.7 million paid down earlier in the year.

What management had to say 

As Darling CEO Randall Stuewe stated:

We continue to execute against our strategic plan to de-lever and grow while managing through considerable volatility in many of our markets. [...] Our diversified portfolio and strong risk management have positioned us to navigate through the variability of our markets. We continue to develop a pipeline of opportunities for long-term growth while streamlining our cost structure, aggressively reducing debt and maintaining solid financial footing. We intend to manage the volatile markets through the fourth quarter and carry good momentum into 2017.

Looking forward

These tough markets are a stark contrast to last quarter, when Stuewe rightly pointed out that Darling's strong performance showed how the company can "capture notable gains when market conditions improve." Nonetheless, the one thing that's sure is that the industries in which Darling operates will continue to ebb and flow. And in the end, I think Darling's ability to still aggressively pay down debt while navigating these challenges should leave long-term investors impressed with its resilience.