Darling Ingredients Inc. (NYSE:DAR) Q1 2024 Earnings Call Transcript

Darling Ingredients Inc. (NYSE:DAR) Q1 2024 Earnings Call Transcript April 25, 2024

Darling Ingredients Inc. beats earnings expectations. Reported EPS is $0.5, expectations were $0.4. Darling Ingredients Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Darling Ingredients Incorporated Conference Call to discuss the company's First Quarter 2024 Financial Results. After the speaker’s prepared remarks, there will be a question-and-answer period, and instructions to ask a question will be given at that time. Today's call is being recorded. I would like to turn the call over to Ms. Suann Guthrie. Please go ahead.

Suann Guthrie: Thank you. Thank you for joining the Darling Ingredients First Quarter 2024 Earnings Call. Here with me today are Mr. Randall C. Stuewe, Chairman and Chief Executive Officer; Mr. Brad Phillips, Chief Financial Officer; Mr. Bob Day, Chief Strategy Officer; and Mr. Matt Jansen, Chief Operating Officer of North America. Our first quarter 2024 earnings news release and slide presentation are available on the Investor page under Events and Presentations tab on our corporate website and will be joined by a transcript of this call once it is available. During this call, we will be making forward-looking statements, which are predictions, projections and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties.

Actual results could materially differ because of factors discussed in yesterday's press release and the comments made during this conference call and the risk factors section of our Form 10-K, 10-Q and other reported filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. Now, I will hand the call over to Randy.

Randall Stuewe: Thanks Suann. Good morning, everyone. Thanks for joining us for our first quarter 2024 earnings call. As I mentioned to you during our last earnings call in February, the global ingredients markets are facing challenges due to replenish global oilseed and grain stocks, slower global consumer demand for premium ingredients and most importantly delayed or canceled renewable diesel start-ups. For the quarter our combined adjusted EBITDA was $280.1 million but it included a $25 million out-of-period inventory adjustment within the Food segment. As you can see on the slide this is the third quarter in a row we have dealt with a deflationary pricing, but we now feel strongly we are seeing winds begin to change in a positive direction.

Now turning to the Feed Ingredients segment. Global raw material volumes remain strong and we are seeing fats prices slowly improve. Home and soy oil continues to hold a strong premium over waste fats and imported fats are now a premium to North America. This shows me that we are still waiting for renewable diesel capacity and pretreatment to ramp up. Global fat prices illustrate that these announced renewable diesel producers are not yet taking advantage of the economics and lower carbon intensity of waste fats and feedstocks. Also during the quarter, we completed the Miropasz acquisition on January 30, adding three poultry rendering plants to our portfolio. The plants are performing quite well and I expect them to be accretive this year. And after 481 days offline, our Ward South Carolina rendering plant is operational, providing us much needed capacity in the Eastern United States.

Now turning to our Food segment. Our Rousselot sales volumes remain robust. Segment revenue was lower quarter over last year Q1 over last year due to a decline in selling price in collagen, gelatin and our edible fats business. Adjusting for the $25 million out-of-period adjustment related to the Gelnex inventory, gross margins in the Food segment actually widened to around 30%. This is a testament to our laser focus on spread management and a declining price environment. Now we announced earlier this month that we have identified a portfolio of collagen peptide profiles that are believed to provide targeted health and wellness benefits. During scientific trials these active collagen peptide profiles have demonstrated that collagen can be beneficial in reducing the post-meal blood sugar spike in a very natural way.

This is a game changing discovery that opens the door for many new product launches worldwide. Our first active peptide will be available this fall in 2024. Turning to our fuel segment. Feedstock prices tended to trend lower and improved DGD earnings compared to Q4 2023. However, weak RINs and LCFS prices and a lower of cost of market adjustment impacted DGD earnings. The margin outlook remains favorable due to lower fat prices and our competitive advantage plus an optimistic view we have on the LCFS. Our sustainable aviation unit construction is running ahead of schedule and on budget and is planned to start up in the fourth quarter of 2024. We continue to work with a number of interested parties on SAF purchases and remain confident in our outlook for SAF.

Now, I'd like to hand the call over to Brad to go through the financials, and I'll come back and give you my views on 2024.

Brad Phillips: Okay. Thanks, Randy. Net income for the first quarter of 2024 totaled $81.2 million or $0.50 per diluted share compared to net income of $185.8 million or $1.14 per diluted share for the first quarter of 2023. Net sales were $1.42 billion for the first quarter of 2024 as compared to $1.79 billion for the first quarter of 2023. Operating income decreased $118.7 million to $137.2 million for the first quarter of 2024 compared to $255.8 million for the first quarter of 2023, primarily due to $120.6 million decrease in the gross margin, which as Randy previously referenced, included a $25 million out-of-period adjustment of overstated Gelnex inventories. Also, our share of the equity in Diamond Green Diesel's earnings, were $15.9 million lower than the first quarter of 2023.

Depreciation and amortization was $11.5 million higher, primarily due to the addition of Gelnex. We did recognize $25.2 million of income from the change in fair value of consideration related to lowering and earn-out liability. Non-operating expenses increased $14.9 million, primarily due to interest expense increasing $12.6 million attributable primarily to additional debt related to acquiring Gelnex April 1, 2023. The company reported income tax expense of $3.9 million for the three months ended March 30, 2024, yielding an effective tax rate of 4.6%, which differs from the federal statutory rate of 21% due primarily to biofuel tax incentives and the relative mix of earnings among jurisdictions with different tax rates. The effective tax rate excluding the impact of the biofuel tax incentives is 25.4% for the three months ended March 30, 2024.

The company also paid $33 million of income taxes in the first quarter. For 2024, we expect the effective tax rate to remain about the same at 5% and cash taxes of approximately $70 million for the remainder of the year. Company's total debt outstanding as of March 30, 2024 was $4.465 billion compared to $4.427 billion at year-end 2023, primarily due to the acquisition of Miropasz on January 31. Our bank covenant projected leverage ratio at Q1 2024 was 3.71 times and we had $811.1 million available to borrow under our revolving credit facility. Working capital noticeably improved in the first quarter 2024. Capital expenditures totaled $93.8 million in the first quarter as compared to $111.3 million in first quarter 2023. No cash dividends were received from Diamond Green Diesel in the first quarter, and there were no share repurchases in the first quarter.

With that, I'll turn it back over to you, Randy.

Randall Stuewe: Thanks Brad. For several years, we've enjoyed tailwinds from a demand-driven global economy and strong global commodity and specialty ingredient prices. We are now adapting to the new reality of abundant global supplies. In my 21 years plus at this company, I've seen this cycle many times and I am confident in the team's ability to make any necessary adjustments in our procurement processes and lowering our operating costs to regain margin leverage. In April, we saw nice progress in our core ingredients business and DGD has finally worked through its higher priced feedstocks. With SAF starting up in Q4, several contracts are underway and we remain optimistic on LCFS and DGD margin outlook remains favorable. Our goal to reduce debt and working our way toward investment grade has not wavered.

Through aggressive CapEx management and a focus on improving working capital, along with improved performance at DGD, I still believe we can attain by the end of the year-end of 2024. Additionally, as we discussed in February, we're doing a comprehensive review of our global portfolio and continue to put a strong emphasis on cost and spread management. For the full year, given what we see today around the globe with solid raw material volumes, improving premium protein and collagen demand, along with slowly improving fat prices and DGD performance, we feel optimistic that momentum will be built during the year and we will be able to deliver $1.3 billion to $1.4 billion combined adjusted EBITDA all while setting the table for a much improved 2025.

So with that, let's go ahead and open it up to Q&A.

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