Darling Ingredients, Inc. Is Gaining Momentum

Darling Ingredients (DAR 3.47%) announced first-quarter 2016 results Thursday after the market close. And in contrast to last quarter's jaw-dropping 30% post-earnings pop, shares of the rendering and biodiesel specialist initially fell as much as 5.7% early Friday before recovering to close down a modest 1.6%, as earnings technically fell short of expectations. But before we get there, let's take a closer look at what Darling achieved in its most recent quarter, ended April 2.

Darling Ingredients results: The raw numbers

Data source: Darling Ingredients.

What happened with Darling Ingredients this quarter?

• Year-over-year revenue declines were driven by weaker selling prices for fats and protein within feed Ingredients, as well as the continued negative impact of foreign currency exchange.
• Keeping in mind that Darling didn't provide specific financial guidance, net income technically fell short of Wall Street's estimates for $0.11 per share.
• Adjusted earnings before interest, taxes, depreciation, and amortization climbed 0.7% year over year, to $98.9 million, driven by increased earnings from food and fuel Ingredients, and higher raw-material volumes in feed Ingredients, which were only partially offset by lower finished product prices and foreign exchange.
• Feed ingredients net sales fell 13% year over year, to $476.2 million, while operating income declined 60.8%, to $13.9 million.
• Declines were once again driven by lower finished-product prices for proteins, fats, and used cooking oil, this time given record-setting global grain production and higher volumes from the slaughter industry, which together drove supply above demand.
• Fat and protein prices have increased since then and should benefit earnings for the feed ingredients segment in Q2.
• At food ingredients, net sales declined 8.2%, to $247.9 million, while operating income more than doubled, to $21.9 million.
• Operating income growth was once again driven by improved performance in the gelatin business and normalized margins within European edible fats.
• Fuel ingredients net sales fell 2.6%, to $55.6 million, while operating income rose $3.6 million to $6.1 million, excluding contributions from Darling's Diamond Green Diesel joint venture with Valero Energy.
• Operating income growth was driven by higher sales volumes and improved operating performances at Ecoson and Rendac, including improved margins at the Canadian biodiesel facility from the reinstatement of the blenders tax credit for this year.
• Diamond Green Diesel produced 159 million gallons of renewable diesel in all of fiscal 2015.
• EBITDA came to $19.3 million, bringing Darling's share to $9.6 million.
• Earnings were pressured by higher fat prices, volatile heating-oil prices, and stagnant renewable identification numbers.
• The results also include 18 days of downtime for scheduled plant maintenance and a force majeure the Kansas City Southern railroad declared because of flooding that curtailed production rate by 4 million gallons.
• Darling and Valero each received a dividend of $25 million in April.
• A major expansion was announced and will be completed in Q4 of 2017, which will increase output more than 70%, to 275 million gallons annually.
• A total of $54.7 million in debt was paid down subsequent to the end of the quarter, bringing total current debt for the joint venture to $89.9 million.

What management had to say 

Darling CEO Randall Stuewe stated:

Sequentially, our segments showed nice consistency in light of very volatile markets around the globe. Most notably, our food segment delivered solidly, with Rousselot and Sonac [Darling's gelatin and sustainable-ingredients brands] delivering consistent earnings. In the feed segment, we saw our global rendering businesses once again adjust to falling protein prices during the quarter, but volume increases and strengthening fat prices partially offset the headwinds. Our fuel segment, when normalized for the blender's tax credit, showed a very consistent performance. Looking forward, we have seen both protein and fat prices significantly strengthen late in the quarter and we should see our feed segment realize the benefit in the second quarter. Our model is clearly working, and we are picking up momentum once again.

(Emphasis mine.)

Looking forward

Those optimistic comments follow what management described three months ago as a previous sharp rebound in prices for fats, proteins, and pet-food ingredients. Of course, it's difficult to predict how long that rebound will last, given volatility in Darling Ingredients' core markets. But as it stands, it appears Darling remains perfectly positioned to make the most of these markets when they inevitably return to normal. 

In the end, with Darling stock still trading only slightly higher than where it stood this time one year ago (and this even after last quarter's bounce), I think investors should be happy with the company's performance and direction today.