Darling Ingredients Inc. Reports Second Quarter 2017 Financial Results

IRVING, Texas, Aug. 9, 2017 /PRNewswire/ -- Darling Ingredients Inc. (NYSE: DAR), a global developer and producer of sustainable natural ingredients from edible and inedible bio-nutrients, creating a wide range of ingredients and customized specialty solutions for customers in the pharmaceutical, food, pet food, feed, industrial, fuel, bioenergy, and fertilizer industries, today announced financial results for the 2017 second quarter ended July 1, 2017.

Second Quarter 2017 Overview

• Revenue of $896.3 million, up 2.2%
• Net income of $9.1 million, or $0.05 per GAAP diluted share
• Adjusted EBITDA of $110.1 million
• Strong balance sheet with debt reduction of $45 million
• Global raw material volumes steady, up 1.4%
• Mixed global pricing environment, strength in fats offset by weakness in proteins
• Diamond Green Diesel facility delivered expected performance and expansion continues to progress

For the second quarter of 2017, the Company reported net sales of $896.3 million, as compared with net sales of $877.3 million for the second quarter of 2016.  Net income attributable to Darling for the three months ended July 1, 2017 was $9.1 million, or $0.05 per diluted share, compared to a net income of $32.0 million, or $0.19 per diluted share, for the second quarter of 2016.  The decrease in net income for the second quarter 2017 is primarily due to weakness in our Food Ingredients segment, particularly the gelatin business, and the absence of the blenders tax credit, which was included in the second quarter 2016 but has not yet been reinstated for 2017.

Comments on the Second Quarter 2017

"We are pleased with second quarter performance across most of the segments in light of a mixed global pricing environment and headwinds in South America," said Randall C. Stuewe, Chairman and Chief Executive Officer of Darling Ingredients Inc. "Sequentially, the Feed segment delivered a very nice performance while the Food segment results were disappointing due to margin compression from rising raw material prices in our global gelatin business and ongoing macro-economic issues in Argentina. The Fuel segment excelled operationally in the midst of the stalled decision on the blenders tax credit. We remain optimistic that the political environment surrounding the biofuel industry today continues to support the Renewable Fuel Standard (RFS2) and the reinstatement of the blenders tax credit," Mr. Stuewe commented.

"Additionally, our Board has approved the extension for an additional 24 months of our previously announced share repurchase program for up to $100 million to be exercised depending on market conditions," added Mr. Stuewe.  "The repurchases may be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market.  Repurchases may occur over the next 24 months, unless extended or shortened by the Board of Directors," concluded Mr. Stuewe.            

Operational Update by Segment

• Feed Ingredients – Margins held and the segment performed well supported by solid global raw material volumes, especially in Europe. North American protein markets were mixed with strong pet food demand offset by lagging meat and bone meal pricing. Global fat markets remained firm with demand trending lower late in the quarter in concert with lower palm oil complex prices.
• Food Ingredients – While Rousselot gelatin business showed steady performance in Europe, South American gelatin business continued to face headwinds with margin compression from rising raw material prices and ongoing macroeconomic issues. CTH casings business delivered improved results as the short hog supply in China drove strong demand for hog casings. Sonac edible fats held margins and contributed as expected despite a weakening global palm oil market.
• Fuel Ingredients – Consistent performance led by Rendac and Ecoson with segment decline due to the absence of the blenders tax credit impacting North American biodiesel facilities. Ecoson bio-phosphate plant provided normalized results with slightly lower supply volumes while Rendac, our disposal rendering operations, leveraged strong volumes.
• Diamond Green Diesel Joint Venture (DGD) – DGD executed well operationally, delivering on its financial profile and posted $0.61 EBITDA per gallon despite the lack of the blenders tax credit in 2017 versus 2016. Solid cash position and capacity expansion to 275 million gallons of annual production is tracking as planned for Q2 2018 completion.

Financial Update by Segment

• Feed Ingredients operating income for the three months ended July 1, 2017 was $39.0 million, a decrease of $2.4 million or (5.8)% as compared to the three months ended July 2, 2016. Segment operating income was down in the three months ended July 1, 2017 as compared to the same period in fiscal 2016 due to higher depreciation from new plant locations that were not operating in the three months ended July 2, 2016.
• Feed Ingredients operating income during the six months ended July 1, 2017 was $69.9 million, an increase of $14.6 million or 26.4% as compared to the six months ended July 2, 2016. Earnings for the Feed Ingredients segment were higher due to an overall increase in finished product prices, sales volumes and raw material volumes as compared to the same period in fiscal 2016.

• Food Ingredients operating income was $11.0 million for the three months ended July 1, 2017, a decrease of $8.7 million or (44.2)% as compared to the three months ended July 2, 2016. The earnings in the gelatin business were down as compared to the prior year primarily due to the performance in the Company's South American and North American markets. The Company's South American gelatin business was the primary driver on the lower earnings and was impacted by margin compression influenced by rising raw material prices and continued macroeconomic factors. The Company's North American gelatin business was influenced by higher raw material prices. The casings business delivered improved performance due to high demand in China that slightly offset lower earnings in the gelatin business. Additionally, selling, general and administrative expense in the Food Ingredients segment increased approximately $4.8 million primarily due to currency hedge losses in the three months ended July 1, 2017 as compared to currency hedge gains in the same period in fiscal 2016.
• Food Ingredients operating income was $25.2 million for the six months ended July 1, 2017, a decrease of $16.3 million or (39.3)% as compared to the six months ended July 2, 2016. The earnings in the gelatin business were down as compared to the prior year primarily due to the performance in the Company's South American market. Lower earnings in the Company's South American gelatin business was due to margin compression influenced by rising raw material prices and macroeconomic factors. The casings business delivered improved performance due to high demand in China that slightly offset lower earnings in the gelatin business. Additionally, selling, general and administrative expense in the Food Ingredients segment increased approximately $6.3 million primarily due to a reduction of currency hedge gains in the six months ended July 1, 2017 as compared to the same period in fiscal 2016.

• Exclusive of the DGD Joint Venture, the Company's Fuel Ingredients segment income for the three months ended July 1, 2017 was $2.1 million, a decrease of $4.5 million or (68.2)% as compared to the same period in fiscal 2016. For the three months ended July 1, 2017 the North American region results do not include the blenders tax credit, while fiscal 2016 included the blenders tax credit. Earnings in Rendac and Ecoson for the three months ended July 1, 2017 were unchanged as compared to the same period in the prior year.
• Exclusive of the DGD Joint Venture, the Company's Fuel Ingredients segment income for the six months ended July 1, 2017 was $5.6 million, a decrease of $7.1 million or (55.9)% as compared to the same period in fiscal 2016. For the six months ended July 1, 2017, the North American region results do not include the blenders tax credit, while fiscal 2016 included the blenders tax credit.

Selected financial information for the Company's Diamond Green Diesel Joint Venture is as follows:

Darling Ingredients Inc. reports Adjusted EBITDA results, which is a Non-GAAP financial measure, as a complement to results provided in accordance with generally accepted accounting principles (GAAP) (for additional information, see "Use of Non-GAAP Financial Measures" included later in this media release). The Company believes that Adjusted EBITDA provides additional useful information to investors. Adjusted EBITDA, as the Company uses the term, is calculated below:

About Darling

Darling Ingredients Inc. is the world's largest publicly-traded developer and producer of sustainable natural ingredients from edible and inedible bio-nutrients, creating a wide range of ingredients and specialty products for customers in the pharmaceutical, food, pet food, feed, technical, fuel, bioenergy, and fertilizer industries.  With operations on five continents, the Company collects and transforms all aspects of animal by-product streams into broadly used and specialty ingredients, such as gelatin, edible fats, feed-grade fats, animal proteins and meals, plasma, pet food ingredients, organic fertilizers, yellow grease, fuel feedstocks, green energy, natural casings and hides.  The Company also recovers and converts used cooking oil and commercial bakery residuals into valuable feed and fuel ingredients.  In addition, the Company provides grease trap services to food service establishments, environmental services to food processors and sells restaurant cooking oil delivery and collection equipment. For additional information, visit the Company's website at http://www.darlingii.com.

Darling Ingredients Inc. will host a conference call to discuss the Company's second quarter 2017 financial results at 8:30 am Eastern Time (7:30 am Central Time) on Thursday, August 10, 2017.  To listen to the conference call, participants calling from within North America should dial 844-868-8847; international participants should dial 412-317-6593.  Please refer to access code 10109759.  Please call approximately ten minutes before the start of the call to ensure that you are connected.

The call will also be available as a live audio webcast that can be accessed on the Company website at http://ir.darlingii.com. Beginning one hour after its completion, a replay of the call can be accessed through October 17, 2017, by dialing 877-344-7529 (U.S. callers), 855-669-9658 (Canada) and 412-317-0088 (international callers).  The access code for the replay is 10109759.  The conference call will also be archived on the Company's website.

Use of Non-GAAP Financial Measures:

Adjusted EBITDA is not a recognized accounting measurement under GAAP; it should not be considered as an alternative to net income, as a measure of operating results, or as an alternative to cash flow as a measure of liquidity, and is not intended to be a presentation in accordance with GAAP.  Adjusted EBITDA is presented here not as an alternative to net income, but rather as a measure of the Company's operating performance. Since EBITDA (generally, net income plus interest expenses, taxes, depreciation and amortization) is not calculated identically by all companies, this presentation may not be comparable to EBITDA or Adjusted EBITDA presentations disclosed by other companies. Adjusted EBITDA is calculated in this presentation and represents, for any relevant period, net income/(loss) plus depreciation and amortization, goodwill and long-lived asset impairment, interest expense, (income)/loss from discontinued operations, net of tax, income tax provision, other income/(expense) and equity in net loss of unconsolidated subsidiary. Management believes that Adjusted EBITDA is useful in evaluating the Company's operating performance compared to that of other companies in its industry because the calculation of Adjusted EBITDA generally eliminates the effects of financing, income taxes and certain non-cash and other items that may vary for different companies for reasons unrelated to overall operating performance.

As a result, the Company's management uses Adjusted EBITDA as a measure to evaluate performance and for other discretionary purposes. In addition to the foregoing, management also uses or will use Adjusted EBITDA to measure compliance with certain financial covenants under the Company's Senior Secured Credit Facilities and 5.375% Notes and 4.75% Notes that were outstanding at July 1, 2017. However, the amounts shown in this presentation for Adjusted EBITDA differ from the amounts calculated under similarly titled definitions in the Company's Senior Secured Credit Facilities and 5.375% Notes and 4.75% Notes, as those definitions permit further adjustments to reflect certain other non-recurring costs, non-cash charges and cash dividends from the DGD Joint Venture. Additionally, the Company evaluates the impact of foreign exchange impact on operating cash flow, which is defined as segment operating income (loss) plus depreciation and amortization.

Cautionary Statements Regarding Forward-Looking Information:

{This media release contains "forward-looking" statements regarding the business operations and prospects of Darling Ingredients Inc., including its Diamond Green Diesel joint venture, and industry factors affecting it. These statements are identified by words such as "believe," "anticipate," "expect," "estimate," "intend," "could," "may," "will," "should," "planned," "potential," "continue," "momentum," "assumption," and other words referring to events that may occur in the future.  These statements reflect Darling Ingredient's current view of future events and are based on its assessment of, and are subject to, a variety of risks and uncertainties beyond its control, each of which could cause actual results to differ materially from those indicated in the forward-looking statements.  These factors include, among others, existing and unknown future limitations on the ability of the Company's direct and indirect subsidiaries to make their cash flow available to the Company for payments on the Company's indebtedness or other purposes; global demands for bio-fuels and grain and oilseed commodities, which have exhibited volatility, and can impact the cost of feed for cattle, hogs and poultry, thus affecting available rendering feedstock and selling prices for the Company's products; reductions in raw material volumes available to the Company due to weak margins in the meat production industry as a result of higher feed costs, reduced consumer demand or other factors, reduced volume from food service establishments, or otherwise; reduced demand for animal feed; reduced finished product prices, including a decline in fat and used cooking oil finished product prices; changes to worldwide government policies relating to renewable fuels and greenhouse gas emissions that adversely affect programs like the Renewable Fuel Standards Program (RFS2), low carbon fuel standards (LCFS) and tax credits for biofuels both in the Unites States and abroad; possible product recall resulting from developments relating to the discovery of unauthorized adulterations to food or food additives; the occurrence of Bird Flu including, but not limited to H5N1 flu, bovine spongiform encephalopathy (or "BSE"), porcine epidemic diarrhea ("PED") or other diseases associated with animal origin in the United States or elsewhere; unanticipated costs and/or reductions in raw material volumes related to the Company's compliance with the existing or unforeseen new U.S. or foreign regulations (including, without limitation, China) affecting the industries in which the Company operates or its value added products (including new or modified animal feed, Bird Flu, PED or BSE or similar or unanticipated regulations); risks associated with the renewable diesel plant in Norco, Louisiana owned and operated by a joint venture between Darling Ingredients and Valero Energy Corporation, including possible unanticipated operating disruptions and issues related to the announced expansion project; difficulties or a significant disruption in our information systems or failure to implement new systems and software successfully, including our ongoing enterprise resource  planning project; risks relating to possible third party claims of intellectual property infringement; increased contributions to the Company's pension and benefit plans, including multiemployer and employer-sponsored defined benefit pension plans as required by legislation, regulation or other applicable U.S. or foreign law or resulting from a U.S. mass withdrawal event; bad debt write-offs; loss of or failure to obtain necessary permits and registrations; continued or escalated conflict in the Middle East, North Korea, Ukraine or elsewhere; uncertainty regarding the likely exit of the U.K. from the European Union; and/or unfavorable export or import markets. These factors, coupled with volatile prices for natural gas and diesel fuel, climate conditions, currency exchange fluctuations, general performance of the U.S. and global economies, disturbances in world financial, credit, commodities and stock markets, and any decline in consumer confidence and discretionary spending, including the inability of consumers and companies to obtain credit due to lack of liquidity in the financial markets, among others, could negatively impact the Company's results of operations. Among other things, future profitability may be affected by the Company's ability to grow its business, which faces competition from companies that may have substantially greater resources than the Company. The Company's announced share repurchase program may be suspended or discontinued at any time and purchases of shares under the program are subject to market conditions and other factors, which are likely to change from time to time. Other risks and uncertainties regarding Darling Ingredients Inc., its business and the industries in which it operates are referenced from time to time in the Company's filings with the Securities and Exchange Commission.  Darling Ingredients Inc. is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of new information, future events or otherwise.}

SOURCE Darling Ingredients Inc.