Darling Ingredients (NYSE:DAR) just served up third-quarter results, and it looks like the market might have lost its appetite.
Shares of the rendering and sustainable ingredients specialist fell almost 4% after it said quarterly sales more than doubled year over year, to $955.8 million -- mostly thanks to its massive acquisition of Vion Ingredients earlier this year. Meanwhile, Darling's net income came in at $14.3 million, or $0.09 per diluted share. Adjusted for roughly $1.4 million in acquisition-related costs, net earnings would have been $0.10 per share. In either case, however, it still would have fallen short of analysts' expectations, which called for earnings of $0.19 per share on sales of $988.5 million.
Management pointed to several reasons for the shortfall, including softness in demand for its gelatin business in China, and increased raw material pricing in South America. Darling also noted significantly lower fat prices worldwide, but specifically mentioned declines in Europe were driven by a global biofuel slowdown. Darling is currently working to adjust raw material volumes to normalize margins.
Perhaps most significant, however, was the decline in fat and used cooking oil product prices driven by lower feed ingredient prices and the "business interruption" at Darling's Diamond Green Diesel joint venture with Valero. Remember, last quarter, Darling detailed an Aug. 3, 2014 fire incident at Diamond Green Diesel, the downtime from which Darling CEO Randal Stuewe says "forced us to sell our finished fats into the spot feed market, which was already being negatively affected by the record grain production and the effect was to lower fat values even further."
Relatedly, Darling's North American results continued to be hurt by uncertainty surrounding both U.S. mandated renewable fuel volume obligations, as well as the possible extension of the blenders tax credit. That credit expired on December 21, 2013, and was listed as the primary culprit for a $10.9 million year-over-year decline in net income for Darling's Fuel Ingredients segment. Darling wouldn't mind getting that one back.
It wasn't all bad
That's not to say there wasn't anything to like about the report. Darling continued to generate plenty of cash, with $138.3 million in net cash from operations during the quarter. And Canada, for its part, was credited by management with a "solid performance" in Q3.
Further, Stuewe says, the company was able to roll deferred DGD sales from August and September forward to October and November at their July values. In addition, and as Darling previously suggested, it was able to take advantage of the shutdown by proceeding with a planned expansion to increase DGD's feedstock capacity to a whopping 11,000 barrels per day. Still, Diamond Green Diesel finally resumed its new-and-improved operations on Sept. 18, 2014 -- which means it only operated for 47 days during the quarter.
Darling hasn't made a habit of providing guidance with its quarterly results. But during its subsequent conference calls, management typically offers a few general comments about the direction of the business, as well as insight into any notable items that might impact operating results in the coming quarters. Keep your ears open, then, for any such comments during tomorrow's call.
Otherwise, it looks like patient, long-term investors will need to hurry up and wait for Darling's current business headwinds to abate.