Darling Ingredients (DAR 2.99%) announced mixed third-quarter 2017 results on Nov. 8 after the market closed. The rendering and biodiesel specialist, whose shares are up 27% this year, demonstrated the merits of diversification in the face of volatile market conditions and highlighted the potential for a second massive expansion of its Diamond Green Diesel (DGD) joint venture with Valero (VLO 0.79%).
Let's dig deeper to see what drove Darling's business as it kicked off the second half.
Image source: Getty Images.
Darling Ingredients results: The raw numbers
| Metric |
Q3 2017 |
Q3 2016 |
Year-Over-Year Growth |
|---|---|---|---|
|
Net sales |
$937.7 million |
$853.9 million |
9.8% |
|
Net income attributable to Darling |
$7.8 million |
$28.7 million |
(72.8%) |
|
Net income per diluted share |
$0.05 |
$0.17 |
(70.6%) |
Data source: Darling Ingredients.
What happened with Darling Ingredients this quarter?
- Darling doesn't offer specific financial guidance, but that doesn't stop Wall Street from trying to model its results. Consensus estimates called for higher earnings of $0.07 per share on revenue of $857 million.
- Net income declines were driven by a combination of higher sales, general, and administrative expenses, depreciation from new Feed Ingredients plant locations, and the yet-to-be-reinstated blenders tax credit for 2017, which was included in last year's third quarter.
- Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) grew 4.1% to $110.5 million.
- By segment:
- Feed Ingredients net sales climbed 8.3% to $575.5 million, driven by strong global raw-material volumes and favorable fat pricing in North America. Feed Ingredients operating income fell 4.8% to $33.6 million, as higher payroll benefits and depreciation from new plants offset favorable volumes and fat pricing.
- Food Ingredients net sales grew 14.6% to $300.3 million, led by a stabilization of the Rousselot gelatin business and strength from CTH Casings. Food segment operating income climbed 89.9% to $15 million, on broad-based performance improvements from gelatin, edible fats, and casings.
- Fuel Ingredients revenue -- which excludes DGD -- rose 2.3% to $61.9 million, led by strength in Rendac disposal rendering operations despite a nine-day fire-related production disruption. Fuel segment operating income was $145,000, down from just under $6 million in last year's third quarter because of the absence of the blenders tax credit.
- DGD delivered EBITDA of $0.49 per gallon, despite the absence of the blenders tax credit.
- DGD is still on track to expand annual production from 160 million to 275 million gallons -- an increase of over 70% -- by the second quarter of 2018.
- DGD partners have announced their intention to further double annual capacity to 550 million gallons by the end of 2021.
What management had to say
Darling Ingredients chairman and CEO Randall Stuewe stated:
The success of our diversified business model continued to deliver consistent earnings even in volatile markets. Our teams delivered solid results across our business segments, supported by strong global rendering volumes and an improved performance in Rousselot and CTH. Despite general seasonality impacting our third quarter and a fire incident at our Rendac facility, we executed well on our key financial metrics. We remain optimistic the EPA will support the earlier announced Renewable Fuel Standard mandates, and we remain confident that the blenders tax credit could soon be reinstated. Additionally, we are excited about our just announced joint intention with our partner, Valero Energy, to explore further expansion of DGD, potentially doubling its capacity to 550 million gallons annually by 2021.
Looking forward
In the end, it's clear that DGD has already proved to be a massive winner for Darling Ingredients as it strives to further diversify its operations. So assuming it completes its current capacity expansion by Q2 of 2018 as planned, it's no surprise the company would be keen to continue scaling up this lucrative source of incremental earnings.
Investors should also be encouraged that Darling remains confident that -- however late -- this year's blenders tax credit will be reinstated and provide a retroactive boost to its future results. In the meantime, Darling's core feed, food, and non-DGD fuel operations each delivered steady performance, with their various parts providing much-needed balance amid global market volatility. I think patient Darling Ingredients shareholders have nothing to fear.
