Darling Ingredients Inc. Reports Third Quarter 2018 Financial Results

IRVING, Texas, Nov. 6, 2018 /PRNewswire/ -- Darling Ingredients Inc. 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 2018 third quarter ended September 29, 2018.

Third Quarter 2018 Overview

• Revenue of $812.6 million
• Net loss of $(6.0) million, or $(0.04) per GAAP diluted share
• Adjusted EBITDA of $97.0 million
• Debt paydown of $12.0 million
• Diamond Green Diesel (DGD) extended downtime strongly influenced results with higher costs and lower volumes
• Record slaughter volumes creating ample supplies of fats and proteins
• DGD extended downtime pressured fat selling prices
• Trade dispute with China pressuring global trade flows of animal proteins
• Food segment stabilized, Fuel segment delivered improved results without Blenders Tax Credit (BTC)
• DGD expansion on line early October and at name plate capacity of 275 million gallons annually
• DGD JV approved Super Diamond Phase III Expansion to 675 million total gallons annually plus additional renewable Naphtha gallons

For the third quarter of 2018, the Company reported net sales of $812.6 million, as compared with net sales of $936.3 million for the third quarter of 2017. The $123.7 million reduction in net sales resulted mainly from lower finished product pricing and extended DGD downtime, the deconsolidation of the Company's Best Hides subsidiary in 2018, billed freight recorded in cost of sales in 2018 as compared to net sales in 2017 and the divestiture of the Company's industrial residuals business in May 2018.   Net loss attributable to Darling for the three months ended September 29, 2018 was $(6.0) million, or $(0.04) per diluted share, compared to a net income of $7.8 million, or $0.05 per diluted share, for the third quarter of 2017.  The net loss for the third quarter 2018 reflects lower finished product selling prices and an increase in cost of sales from inventory write downs of approximately $7.2 million in China relating to lower market values due to the African Swine Fever (ASF) outbreak.

The Darling Ingredients Board also approved an increase in the Company's previously announced share repurchase program from $100 million to $200 million and extended the term of the program for an additional year to August 13, 2020, to be exercised depending on market conditions. 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 authorized period unless extended or shortened by the Board of Directors.

Comments on the Third Quarter 2018

"We clearly delivered lower than expected results in third quarter. Extended downtime at DGD largely influenced our financial results and reshuffling our supply chain for fats and used cooking oil impacted our feed segment results.  Additionally, trade disputes with China, record global grain stocks and a stronger U.S. dollar weighed on our finished product pricing," said Randall C. Stuewe, Chairman and Chief Executive Officer of Darling Ingredients Inc. "The silver lining is we had record raw material volumes globally and now DGD is fully operational, and we expect to produce 65-70 million gallons of renewable diesel in the fourth quarter with spot margins in excess of $1.25 per gallon."

"Feed segment results were largely impacted by a lower pricing environment and the deflationary lag in our U.S. raw material formulas combined with an inventory write down of Chinese plasma related to ASF. Food segment results improved sequentially and delivered consistent year-over-year results with solid performance from our Rousselot collagen platform and higher sales volumes in China," stated Mr. Stuewe.

"In the Fuel segment, strong volumes supported improved performance across Europe and offset slightly weaker results in North American biodiesel due to lower RIN pricing and the absence of the Blenders Tax Credit (BTC). We remain optimistic that the BTC will re-instate late in the fourth quarter 2018."

"We continue to act on our World of Growth strategy to grow our core business and closed on the acquisition of Arkansas-based Triple – T Foods in early October.  The acquisition, which includes both cold storage and a wet pet food operation, further expands our premium protein business in the growing specialty pet food industry. We are also excited to announce board approval for the Phase III Super Diamond expansion to 675 million annual gallons of renewable diesel with the construction of a second independent parallel plant.  Additionally, the project will include the construction of a new renewable Naphtha, or green gasoline, plant and improved logistics capability. The estimated cost for the entire project is approximately $1.1 billion with completion expected in the fourth quarter of 2021. This capital cost is expected to be funded from cash generated by DGD's operations. Margins remain attractive, and we look forward to meeting the increased demands for sustainable low carbon fuel and capturing higher LCFS margins from our increased capacity," concluded Mr. Stuewe.

Operational Update by Segment

• Feed Ingredients – Raw material formulas lagged due to declining fat and protein markets throughout the quarter. Earnings were further impacted by inventory write-down of Chinese plasma due to ASF, ample fat supplies with DGD prolonged downtime and record slaughter pushing tonnage higher by 6.1 percent. Trade disruptions with China also impacted global protein values.
• Food Ingredients – Global gelatin demand remains robust. Earnings stabilized with improvements in Brazil and higher sales volumes in China. Competing oilseed markets weighed on our Sonac Edible fats margins. CTH casings business saw decreased sales volume and lower earnings.
• Fuel Ingredients – Delivered consistent results with Ecoson improvement supported by strong volumes from new biogas digester production in Belgium. North American biodiesel results moderated in Canada due to depressed RIN pricing and the absence of the BTC. Rendac, our European disposal rendering business, posted sound returns fueled by solid volumes in Belgium and the Netherlands.
• Diamond Green Diesel Joint Venture (DGD) – Entity performance was hindered by lower volume and higher operating expenses associated with the extended turnaround downtime as well as hedge losses. DGD posted $0.04 EBITDA per gallon on 23.1 million gallons of renewable diesel sold during the quarter. Facility ramped up to 275 million gallon annual run rate in early October. LCFS global, premium markets spot priced recently at approximately $1.89 per gallon.

Financial Update by Segment

• Feed Ingredients operating income for the three months ended September 29, 2018 was $11.9 million, a decrease of $22.4 million, or (65.3)%, as compared to the three months ended September 30, 2017. This was due to lower finished product prices which compressed margins and an increase in cost of sales from inventory write downs in China relating to lower market values due to ASF of approximately $7.2 million. This more than offset a decrease in selling, general and administrative expense primarily due to a gain of approximately $4.3 million from an accrued settlement of a lost profits claim from a previous business interruption event.
• Feed Ingredients operating income during the nine months ended September 29, 2018 was $70.8 million, a decrease of $34.6 million, or (32.8)%, as compared to the nine months ended September 30, 2017. Segment operating income was down in the nine months ended September 29, 2018 as compared to the same period in fiscal 2017 due to lower finished fat product prices and higher depreciation charges from increased capital expenditures that more than offset increased raw material volumes.

• Food Ingredients operating income was $13.0 million for the three months ended September 29, 2018, a decrease of $2.1 million, or (13.9)%, as compared to the three months ended September 30, 2017. This decrease was primarily due to lower earnings in the European gelatin markets, which is more than offset by improved results in China and South and North American gelatin markets. The Company's edible fat prices were lower as a result of lower competing fat markets, and the casings business delivered slightly lower earnings due to an increase in raw material prices as compared to the same period in fiscal 2017.
• Food Ingredients operating income was $19.2 million for the nine months ended September 29, 2018, a decrease of $21.3 million, or (52.6)%, as compared to the nine months ended September 30, 2017. This decrease was primarily due to the restructuring and impairment charges incurred as a result of the Hurlingham, Argentina, gelatin plant shut down and lower earnings in the European gelatin market. The Company's edible fat prices were lower as a result of lower competing fat markets compared to the same period in fiscal 2017. The casings business delivered slightly lower earnings due to an increase in raw material prices as compared to the same period in fiscal 2017.

• Exclusive of the DGD Joint Venture, the Company's Fuel Ingredients segment operating income for the three months ended September 29, 2018 was $4.5 million, an increase of $4.3 million, or 2,150.0%, as compared to the same period in fiscal 2017. The increase is primarily due to a business interruption insurance gain recorded at Rendac of approximately $4.1 million and overall higher sales volumes at Ecoson.
• Exclusive of the DGD Joint Venture, the Company's Fuel Ingredients segment income for the nine months ended September 29, 2018 was $26.7 million, an increase of $20.8 million, or 352.5%, as compared to the same period in fiscal 2017. The increase in earnings is primarily due to the reinstated fiscal 2017 blenders tax credits in North America of approximately $12.6 million recorded in the first quarter of fiscal 2018 as compared to the lack of blenders tax credits in the same period of fiscal 2017 and higher overall sales prices due to strong demand from the biodiesel industry.

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 a global developer and producer of sustainable natural ingredients from edible and inedible bio-nutrients, creating a wide range of ingredients and specialty solutions 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 useable 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 recycled oils (used cooking oil and animal fats) into valuable feed and fuel ingredients, and collects and processes residual bakery products into feed ingredients. In addition, the Company provides environmental services, such as grease trap collection and disposal services to food service establishments. The Company sells its products domestically and internationally and operates within three industry segments: Feed Ingredients, Food Ingredients and Fuel Ingredients. 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 third quarter 2018 financial results at 8:30 am Eastern Time (7:30 am Central Time) on Wednesday, November 7, 2018.  To listen to the conference call, participants calling from within North America should dial 1-844-868-8847; international participants should dial 1-412-317-6593.  Please refer to access code 10125255.  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 November 15, 2018, by dialing 1-877-344-7529 (U.S. callers), 855-669-9658 (Canada) and 1-412-317-0088 (international callers).  The access code for the replay is 10125255.  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 3.625% Notes that were outstanding at September 29, 2018. 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 3.625% 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. 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," 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("GHG") emissions that adversely affect programs like the U.S. government's renewable fuel standard, 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 2009 H1N1 flu (initially known as "Swine Flu"), Highly pathogenic strains of avian influenza (collectively known as "Bird Flu"), bovine spongiform encephalopathy (or "BSE"), porcine epidemic diarrhea ("PED") or other diseases associated with animal origin in the United States or elsewhere, such as the recent African Swine Fever ("ASF") outbreak in China; 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 (including, without limitation, China) regulations (including new or modified animal feed, Bird Flu, PED, BSE, ASF or similar or unanticipated regulations) affecting the industries in which the Company operates or its value added products; risks associated with the DGD Joint Venture, including possible unanticipated operating disruptions and issues relating to the announced expansion project; risks and uncertainties relating to international sales and operations, including imposition of tariffs, quotas, trade barriers and other trade protections imposed by foreign countries; 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.}

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SOURCE Darling Ingredients Inc.