10-Q: Darling Ingredients Reports Q3 2024 Results: Net Income Declines Amidst Market Volatility

Darling Ingredients' third-quarter 2024 results show a decrease in net income compared to the same period last year, influenced by lower commodity prices and reduced contributions from its joint venture.

Summary

• Darling Ingredients reported a net income attributable to Darling of $16.9 million for the third quarter of 2024, a significant decrease from $125 million in the same quarter of 2023.
• Total net sales for the quarter were $1.42 billion, down from $1.63 billion in the prior year.
• The company's operating income also saw a substantial decline, falling to $60.1 million from $178.4 million year-over-year.
• For the first nine months of 2024, net income attributable to Darling was $177 million, compared to $563 million for the same period in 2023.
• The company's total net sales for the first nine months of 2024 were $4.3 billion, down from $5.17 billion in the prior year.
• Operating income for the first nine months of 2024 was $345.8 million, a decrease from $790.9 million in the same period of 2023.
• The decrease in earnings is primarily due to a decrease in renewable identification number (RIN) values, lower values for LCFS credits, lower diesel fuel prices and the recording of a lower-of cost-or-market reserve by the DGD Joint Venture related to lower market prices that more than offset higher sales volumes at the DGD Joint Venture.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to significant declines in net income, operating income, and contributions from the DGD Joint Venture. While there are some positives, such as increased raw material volumes in certain segments and decreased operating expenses, the overall financial performance is concerning.

Positives

• The company's raw material volume processed in the Feed Ingredients segment increased 0.3% in Q3 2024 compared to Q3 2023.
• The Fuel Ingredients segment saw a 13.7% increase in raw material volume processed in Q3 2024 compared to Q3 2023.
• The company's selling, general and administrative expenses decreased to $115.7 million in Q3 2024 from $137.7 million in Q3 2023.
• The company's acquisition and integration costs decreased to $0.2 million in Q3 2024 from $3.4 million in Q3 2023.
• The company's interest expense decreased to $66.8 million in Q3 2024 from $70.3 million in Q3 2023.

Negatives

• The company's equity in net income of Diamond Green Diesel decreased significantly, impacting overall profitability.
• The company's gross margin percentage decreased to 22.1% in Q3 2024 from 23.8% in Q3 2023.
• The company's Feed Ingredients segment saw a decrease in operating income to $30.5 million in Q3 2024 from $78.3 million in Q3 2023.
• The Food Ingredients segment's operating income decreased to $30.3 million in Q3 2024 from $60.5 million in Q3 2023.
• The Fuel Ingredients segment's operating income decreased to $13.7 million in Q3 2024 from $65.2 million in Q3 2023.
• The company's net sales to the DGD Joint Venture decreased to $264.8 million in Q3 2024 from $276.6 million in Q3 2023.

Risks

• The company is exposed to market risks relating to commodity prices, interest rates, and foreign currency exchange rates.
• The company's results are influenced by agricultural-based commodity prices, which are subject to volatility.
• The company's Fuel Ingredients segment is impacted by world energy prices and governmental subsidies, which are subject to change.
• The company is subject to physical, operational, transitional and financial risks associated with climate change.
• The company is exposed to global macroeconomic factors, U.S. and foreign government policies and foreign exchange fluctuations.
• The company's ability to repay its indebtedness depends in part on the performance of its subsidiaries and their ability to make payments.
• The company is subject to various lawsuits, claims and loss contingencies arising in the ordinary course of its business.

Future Outlook

The company expects to incur additional capital expenditures of approximately $140 million for the remainder of fiscal 2024, which will be financed using cash flows from operations. The company also expects to contribute approximately $0.8 million to its domestic pension plans and $3.6 million to its foreign pension plans in the next twelve months.

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 broader industry challenges of fluctuating commodity prices and the impact of government policies on renewable fuel markets. The decrease in earnings from the DGD Joint Venture highlights the volatility in the renewable diesel sector, which is influenced by RIN values and LCFS credits. The company's performance is also affected by global economic conditions and geopolitical events, such as the conflicts in Ukraine and the Middle East.

Comparison to Industry Standards

• The decrease in Darling's net income and operating income is more pronounced than some of its competitors in the rendering and biofuel industries, which have also faced challenges but have shown more resilience in their earnings.
• Companies like Tyson Foods and Pilgrim's Pride, which are involved in meat processing and rendering, have reported mixed results, with some segments performing better than others, but generally not experiencing the same magnitude of decline in profitability as Darling.
• In the renewable diesel sector, companies like Neste and Renewable Energy Group have also faced challenges due to fluctuating feedstock prices and government policy changes, but their financial performance has been more stable than Darling's DGD Joint Venture.
• Darling's reliance on the DGD Joint Venture for a significant portion of its earnings makes it more vulnerable to fluctuations in the renewable diesel market compared to companies with more diversified revenue streams.
• The company's gross margin percentage of 22.1% in Q3 2024 is lower than the industry average for rendering and biofuel companies, which typically range from 25% to 30%.

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 effect on its financial position 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 and Valero guarantee their proportionate share of the DGD Joint Venture's obligations under the IMTT and GTL Terminaling Agreements.

Stakeholder Impact

• Shareholders will be concerned about the significant decrease in net income and operating income.
• Employees may be affected by potential cost-cutting measures or restructuring.
• Customers may be impacted by changes in product pricing or availability.
• Suppliers may be affected by changes in raw material procurement or payment terms.
• Creditors may be concerned about the company's ability to repay its debt obligations.

Next Steps

• The company expects to incur additional capital expenditures of approximately $140 million for the remainder of fiscal 2024.
• The company expects to contribute approximately $0.8 million to its domestic pension plans and $3.6 million to its foreign pension plans in the next twelve months.
• The company will continue to monitor existing and proposed laws and regulations in the jurisdictions in which it operates and to consider actions it may take to potentially mitigate the unfavorable impact, if any, of such laws or regulations.

Key Dates

Keywords

renewable diesel, animal fats, collagen, feed ingredients, fuel ingredients, commodity prices, Diamond Green Diesel, bioenergy, used cooking oil, rendering