Darling Ingredients (DAR 3.99%) released third-quarter 2018 results on Tuesday after the market closed, detailing the negative impacts of trade tensions with China and downtime at its recently expanded Diamond Green Diesel (DGD) joint venture with Valero (VLO 7.48%). But the rendering and biodiesel specialist also highlighted a new acquisition, strong global raw-material volumes, an even more ambitious expansion plan for DGD, and a doubling of its share repurchase authorization.
With Darling stock up 5% on Wednesday as of this writing, let's dig in to better understand what drove the company this quarter.
Image source: Getty Images.
Darling Ingredients results: The raw numbers
| Metric |
Q3 2018 |
Q3 2017 |
Year-Over-Year Growth (Decline) |
|---|---|---|---|
|
Net sales |
$812.6 million |
$936.3 million |
(13.2%) |
|
Net income (loss) attributable to Darling |
($6.0 million) |
$7.8 million |
N/A |
|
Net income per diluted share |
($0.04) |
$0.05 |
N/A |
Data source: Darling Ingredients.
What happened with Darling Ingredients this quarter?
- Darling's revenue decline this quarter was driven by a combination of lower finished-product pricing and extended downtime at Diamond Green Diesel, the recent strategic sale of its majority stake in its Best Hides subsidiary, the divestiture of its industrial residuals business in May, and the reclassification of billed freight under new accounting standards adopted at the start of this year.
- Darling's net loss includes $7.2 million in inventory writedowns related to an African Swine Fever outbreak in China.
- Adjusted EBITDA declined 13.1% year over year to $97 million.
- Darling paid down $12 million of debt this quarter.
- By segment:
- Net sales of feed ingredients declined 16.1% to $482.7 million, driven by declining fat and protein markets amid trade disruptions with China, as well as accounting changes in billed freight. Operating income for feed ingredients declined 65% to $11.9 million, driven largely by the inventory writedown in China.
- Net sales of food ingredients fell 11.3% to $265.2 million, stemming from billed-freight changes and lower volume from its CTH sausage-casings business. Worldwide demand for gelatin was "robust." Food segment operating income declined 13.9% to $13 million, as lower gelatin earnings offset improvements in China, South America, and North America.
- Net sales of fuel ingredients (excluding DGD) grew 4.5% to $64.6 million. This was driven by strong volumes at Ecoson from new biogas digester production in Belgium, and volume gains in Belgium and the Netherlands for the Rendac disposal rendering business. Fuel operating income was $4.5 million, up from $200,000 in the same year-ago period, driven primarily by a business-interruption insurance gain at Rendac, and higher volumes at Ecoson.
- At Diamond Green Diesel:
- EBITDA was $0.04 per gallon on 23.1 million gallons of renewable diesel sold, held back primarily by extended turnaround downtime.
- DGD completed its previously planned ramp-up to annual production of 275 million gallons (from 160 million) in early October.
- The joint venture also approved a new Super Diamond Phase III expansion to 675 million gallons annually, plus additional renewable naphtha (green gasoline) gallons. The total project cost should be roughly $1.1 billion (funded from cash generated by DGD's operations) with an expected completion in the fourth quarter of 2021.
- Darling closed on its acquisition of Arkansas-based Triple-T Foods early last month, including cold storage and a wet pet-food operation.
- Early this morning, Darling also announced it has acquired PPH Conto Ltd., a processor of food-grade animal fats that is based in Poland.
- Darling's board approved doubling its current share repurchase program to $200 million, and extended the program for another year through Aug. 13, 2020.
What management had to say
CEO Randall Stuewe stated:
We clearly delivered lower-than-expected results in [the] third quarter. Extended downtime at DGD largely influenced our financial results, and reshuffling our supply chain for fats and used cooking oil impacted our feed segment results. Additionally, trade disputes with China, record global grain stocks, and a stronger U.S. dollar weighed on our finished product pricing. The silver lining is we had record raw material volumes globally, and now DGD is fully operational, and we expect to produce 65 [million] to 70 million gallons of renewable diesel in the fourth quarter with spot margins in excess of $1.25 per gallon.
Regarding the PPH Conto purchase, Stuewe added:
Poland is one of the fastest-growing meat production areas in Europe. The acquisition of Conto provides us the opportunity to strengthen our current position in this important growth area and enlarge our production portfolio with high-end food-grade fats. This will enable us to expand our service portfolio not only in Poland but across Europe for both our customers as well as to our suppliers.
Looking forward
The company does not provide specific financial guidance. But for a quarter that was as admittedly noisy and disappointing as this one was, Darling's operational and industry headwinds were simply out of its control. And it's clear the underlying global demand for Darling's products and services is as strong as ever. As the company continues to expand its reach and to position itself for sustained, profitable growth, it's no surprise to see shares trading higher today.
