10-Q: Darling Ingredients Inc. Reports Second Quarter 2024 Results Amidst Market Volatility

Darling Ingredients Inc. experienced a significant decrease in net sales and operating income for the second quarter of 2024 compared to the same period last year, primarily due to lower commodity prices and reduced contributions from its joint venture.

Summary

• Darling Ingredients Inc. reported a net sales decrease to $1.45 billion for the three months ended June 29, 2024, down from $1.76 billion in the same period of 2023.
• The company's operating income also saw a substantial decline, falling to $148.5 million from $356.7 million year-over-year.
• Net income attributable to Darling decreased to $78.9 million, or $0.49 per diluted share, compared to $252.4 million, or $1.55 per diluted share, in the prior year.
• For the six months ended June 29, 2024, net sales were $2.88 billion, down from $3.55 billion in the first half of 2023.
• The company's operating income for the first six months of 2024 was $285.7 million, a decrease from $612.5 million in the same period of 2023.
• Net income attributable to Darling for the first half of 2024 was $160 million, or $0.99 per diluted share, compared to $438.2 million, or $2.69 per diluted share, in the first half of 2023.
• The decrease in performance was primarily attributed to lower commodity prices, reduced contributions from the Diamond Green Diesel (DGD) joint venture, and a planned catalyst turnaround at the Port Arthur plant.
• The company's Feed Ingredients segment saw a decrease in sales and operating income due to lower finished product prices.
• The Food Ingredients segment experienced a decrease in sales due to lower collagen prices, but an increase in gross margin percentage.
• The Fuel Ingredients segment's operating income decreased significantly due to lower sales volumes at DGD, a decrease in renewable identification number (RIN) prices, lower values for LCFS credits, and a planned catalyst turnaround at the Port Arthur plant.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to significant decreases in sales, operating income, and net income. The company is facing challenges in multiple segments, particularly in the Fuel Ingredients segment, and is exposed to various market and regulatory risks. While there are some positives, such as the share repurchase program and compliance with financial covenants, the overall tone is negative.

Positives

• The Food Ingredients segment saw an increase in gross margin percentage to 26.9% for the three months ended June 29, 2024, compared to 22.1% for the same period in 2023.
• The company's working capital was $544.5 million as of June 29, 2024.
• The company had $814.4 million available under its revolving credit facility as of June 29, 2024.
• The company believes it is in compliance with all financial covenants under its Amended Credit Agreement, 6% Notes, 5.25% Notes and 3.625% Notes.

Negatives

• The Feed Ingredients segment experienced a decrease in gross margin percentage to 21.0% for the three months ended June 29, 2024, compared to 23.2% for the same period in 2023.
• The Fuel Ingredients segment's operating income decreased significantly due to lower sales volumes at DGD, a decrease in RIN prices, lower values for LCFS credits, and a planned catalyst turnaround at the Port Arthur plant.
• The company's net sales and operating income decreased significantly year-over-year.
• The company's net income and diluted earnings per share decreased significantly year-over-year.

Risks

• The company is exposed to fluctuations in commodity prices, energy prices, and foreign currency exchange rates.
• The company's performance is impacted by global macroeconomic factors, government policies, and supply chain pressures.
• The company is subject to risks associated with climate change and related regulations.
• The company's ability to repay its indebtedness depends on the performance of its subsidiaries and their ability to make payments.
• The company is exposed to risks associated with the DGD Joint Venture, including operating disruptions and market-based issues.
• The company is subject to risks related to international sales and operations, including tariffs and trade barriers.
• The company is exposed to risks related to tax changes and biofuel policies.
• The company is subject to risks related to cyber-attacks and data security.
• The company is exposed to risks related to multiemployer pension plans and potential withdrawal liabilities.
• The company is exposed to risks related to the Russia-Ukraine war and the Israeli-Palestinian conflict.

Future Outlook

The company expects to incur additional capital expenditures of approximately $208 million for the remainder of fiscal 2024, including compliance and expansion projects and spending related to acquired companies. The company intends to finance these costs using cash flows from operations.

Management Comments

• Management believes that the company's cash flows from operating activities, unrestricted cash, and funds available under the Amended Credit Agreement will be sufficient to meet the company's working capital needs and other obligations through the next twelve months.
• Management uses Adjusted EBITDA as a measure to evaluate performance and for other discretionary purposes.

Industry Context

The results reflect the impact of lower commodity prices and reduced contributions from the DGD joint venture, which are significant factors in the renewable fuels and agricultural commodities industries. The company's performance is also influenced by global economic conditions and government policies related to renewable fuels.

Comparison to Industry Standards

• The decrease in Darling's net sales and operating income is more pronounced than some of its competitors in the renewable fuels and agricultural commodities sectors, which have also faced challenges due to fluctuating commodity prices.
• Companies like Renewable Energy Group (REGI) and Neste have also experienced volatility in their financial results due to similar market conditions, but Darling's reliance on the DGD joint venture makes it particularly sensitive to fluctuations in renewable diesel prices and government incentives.
• Darling's performance in the collagen market is comparable to other major players like Gelita and PB Leiner, but the company's recent acquisition of Gelnex has increased its exposure to this market and its associated risks.
• The company's Feed Ingredients segment faces competition from companies like Tyson Foods and Cargill, which also operate in the animal feed and rendering markets. Darling's performance in this segment is influenced by the prices of competing agricultural-based ingredients like corn and soybean meal.

Legal Proceedings

• The company is a party to various lawsuits, claims, and loss contingencies arising in the ordinary course of its business.
• The company has established loss reserves for insurance, regulatory, governmental, environmental, litigation, and tax contingencies.
• The company is involved in litigation related to the Lower Passaic River area, but believes the likelihood of a material impact is remote.

Related Party Transactions

• The company has a Raw Material Agreement with the DGD Joint Venture, where it supplies animal fats and used cooking oil at market prices.
• The company has a revolving loan agreement with the DGD Joint Venture, where it provides loans at a specified interest rate.
• The company has guarantee agreements with IMTT and GTL related to the DGD Joint Venture's obligations.

Stakeholder Impact

• Shareholders are impacted by the decrease in net income and diluted earnings per share.
• Employees may be affected by potential cost-cutting measures or restructuring.
• Customers may experience changes in pricing or product availability.
• Suppliers may be affected by changes in raw material demand or pricing.
• Creditors are impacted by the company's debt levels and ability to meet its obligations.

Next Steps

• The company expects to incur additional capital expenditures of approximately $208 million for the remainder of fiscal 2024.
• The company will continue to monitor market conditions and adjust its operations accordingly.
• The company will continue to evaluate the impact of new accounting pronouncements.

Key Dates

Keywords

Darling Ingredients, renewable diesel, biofuels, animal feed, collagen, used cooking oil, feed ingredients, food ingredients, fuel ingredients, Diamond Green Diesel, commodity prices, operating income, net sales, EBITDA