Darling Ingredients (DAR +2.28%) announced first-quarter 2018 results on Wednesday after the market closed. The rendering and biodiesel leader detailed strong performances from its food and fuel businesses, progress in the planned expansion of its Diamond Green Diesel (DGD) joint venture with Valero, and as expected, the positive impact of the recently reinstated blenders tax credit.
Darling's shares closed up 6% on Thursday in response. Let's get our hands dirty to better understand what drove Darling Ingredients this quarter and what investors should be watching in the months ahead.
IMAGE SOURCE: GETTY IMAGES.
Darling Ingredients results: The raw numbers
| Metric |
Q1 2018 |
Q1 2017 |
Year-Over-Year Growth |
|---|---|---|---|
|
Net sales |
$875.4 million |
$878.5 million |
(0.4%) |
|
Net income attributable to Darling |
$97.3 million |
$5.8 million |
1,577.6% |
|
Net income per diluted share |
$0.58 |
$0.04 |
1,350% |
DATA SOURCE: DARLING INGREDIENTS.
What happened with Darling Ingredients this quarter?
- Revenue was reduced by $46.2 million this quarter as a result of Darling's adoption of new ASC 606 accounting standards at the start of the year, which require that freight revenue be presented net in cost of sales. Otherwise, revenue would have climbed to $921.6 million.
- As management stated last quarter, this quarter includes $12.6 million in revenue related to the blenders tax credit, which was retroactively reinstated for 2017 in February 2018.
- Adjusted EBITDA increased 6.5% year over year, to $110.4 million.
- By segment:
- Feed ingredients net sales fell 12.1%, to $485.8 million, hurt by harsh winter weather in North America and sharply lower global fat prices, given high supplies and biofuel market seasonality. Global volumes increased 3.2% year over year. Feed ingredients segment operating income declined by nearly a third, to $21.7 million.
- Food ingredients net sales increased 14.8%, to $305.5 million, driven by a combination of higher sales in the gelatin and casings businesses and foreign-currency exchange. Food ingredients segment operating income declined 17%, to $11.8 million, driven by less stable export sales in the gelatin business in Europe, given lower exchange rates.
- Fuel ingredients net sales -- which excludes DGD -- grew 40.9%, to $84.1 million, driven primarily by the reinstated fiscal 2017 blenders tax credits. Fuel segment operating income jumped to $17.2 million compared to $3.6 million in last year's first quarter.
- At Diamond Green Diesel:
- Entity-level EBITDA was $1.19 per gallon on 33.4 million gallons sold. Note this does not include a vessel carrying 130,000 barrels that was loaded on the last day of March and will be recognized in the second quarter.
- Darling's share of DGD EBITDA was $19.9 million during the quarter.
- DGD expects 45 days of downtime starting in mid-June for its planned 275 million-gallon expansion, which will increase its current capacity by 70%. Operations should recommence around August 1, 2018.
- "Substantial progress" has been made on the cost analysis for DGD's future Phase III expansion to 600 million gallons per year, with plans expected to be finalized later this summer.
What management had to say
Darling Ingredients chairman and CEO Randall Stuewe stated:
Our operating results for the quarter were mixed, with lower Feed segment earnings offset by modestly improved Food and Fuel earnings. Harsh winter weather impacted many of our North American operations while global slaughter remained robust. The excess supply ultimately pressured prices in the Feed segment as raw material price adjustments lagged and inventories built. Steady and improving earnings in our Food and Fuel segments reflect the stability of those markets. Our Diamond Green Diesel JV benefited from the lower fat prices and continues to provide a hedge to our core Feed segment earnings.
Stuewe added that Darling also recently held a private offering of 515 million euros (approximately $614.2 million) of unsecured 3.625% senior notes due 2026, while simultaneously conducting a cash tender offer of all the company's outstanding 4.75% senior notes due 2022.
"This gives us financial flexibility by extending maturity and improving our cost of borrowing," said Stuewe. "[...] We will continue to focus on maintaining the strength of our balance sheet as we capitalize on our world of growth opportunities, and we're off to a good start in 2018."
Looking forward
Darling doesn't provide specific quarterly financial guidance. But this quarter shows exactly why the business is so robust: Even as Darling's feed segment endures temporary weather headwinds, its DGD joint venture and food and fuel segments help pick up the slack. As Darling strives to continue creating shareholder value and driving sustained, long-term growth, particularly with the massive planned expansion of DGD, it's no wonder the stock is climbing higher today.
