Darling Ingredients Inc. (NYSE:DAR) Q1 2023 Earnings Call Transcript
Darling Ingredients Inc. (NYSE:DAR) Q1 2023 Earnings Call Transcript May 10, 2023
Darling Ingredients Inc. beats earnings expectations. Reported EPS is $1.14, expectations were $0.99.
Operator: Good morning. And welcome to the Darling Ingredients Inc. Conference Call to discuss the company's First Quarter 2023 Results. After the speakers’ 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 now 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 2023 earnings call. Here with me today are Mr. Randall C. Stuewe, Chairman and Chief Executive Officer; Mr. Brad Phillips, Chief Financial Officer; Mr. John Bullock, Chief Strategy Officer; and Ms. Sandra Dudley, Executive President of Renewables and U.S. Specialty Operations. Our first quarter 2023 earnings news release and slide presentation are available on the Investor Relations 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 can materially differ because of factors discussed in yesterday's press release and the comments made during this conference call and in 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. I will now hand the call over to Randy.
Randall Stuewe: Thanks, Suann. Good morning, everybody, and thanks for joining us for our first quarter 2023 earnings call. We have had a very solid start to the year. All business units performed as expected and our DGD system attained full rate during the month of March. Looking at our segments in detail, for the first quarter 2023, we ended the quarter at $418.4 million in combined adjusted EBITDA. The Feed Ingredients segment ended the quarter at $213.1 million, our Specialty Food Ingredients segment earned $73.2 million, while our Fuel segment earned $153.6 million in EBITDA, with approximately $129.3 million attributed to Diamond Green Diesel. Turning to the Feed Ingredients segment in detail. Globally, raw material volumes were up 39% compared to first quarter 2022.
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While we saw a decline in global fat prices, protein prices remain strong around the world. While lower fat prices will modestly impact the segment, it will be more than offset by higher earnings in Diamond Green Diesel in future quarters. Integration of our recent acquisitions remains a key focus. I'm pleased to report that once again we realized sequential gross margin improvements. We continue to make improvements at our recently acquired Eastern USA plants that will improve reliability and efficiency, as well allow us to produce and market higher value finished products. We are pleased with the progress and believe by year end, we will be nearly complete. Turning to our Specialty Food Ingredients segment. The global collagen and gelatin business remains robust.
We closed on the Gelnex acquisition on March 31st, and integration work has already started. Together, we believe we have the strongest and most robust collagen system in the world with a pipeline of new products for years to come. Moving to our Fuel segment. Diamond Green Diesel is running very well and set another sales record in first quarter. We have achieved a milestone with the DGD system operating at 1.2 billion gallons annually. It should be noted that March shipments were light with ship loadings moving into Q2. With lower fat prices and inbound logistics running smoothly, second quarter is shaping up to be a record for Diamond Green Diesel. Now with this, I'd like to hand the call over to Brad to take us through the financials, then I'll come back and discuss my outlook and thoughts on the balance of 2023.
Brad?
Brad Phillips: Okay. Thanks, Randy. Net income for the first quarter 2023 totaled $185.8 million or $1.14 per diluted share compared to net income of $188.1 million or $1.14 per diluted share for the 2022 first quarter. Net sales were $1.79 billion for the first quarter 2023 as compared to $1.37 billion for the first quarter 2022 or a 31% increase in net sales. Operating income increased 10% to $255.8 million for the first quarter of 2023 compared to $232.9 million for the first quarter of 2022, primarily due to a $78.4 million increase in gross margin. As Randy said, the gross margin continued to sequentially improve for all segments. Darling's share of Diamond Green Diesel's earnings increased $22.5 million quarter-over-quarter, which more than offset depreciation and amortization increasing $36.8 million, SG&A increasing about $33.4 million and $4.5 million in additional restructuring costs primarily related to the Peabody closure.
Total other expenses increased approximately $21.7 million quarter-over-quarter with an increase in interest expense of $34.7 million, partially offset by an increase in foreign currency gains of $6.1 million and an increase in other income of $6.9 million, which was primarily due to casualty loss insurance proceeds received for the prior year Tacoma plant fire. Now turning to income taxes. The company recorded income tax expense of $27 million for the first quarter of 2023 with an effective tax rate for the first quarter of 12.4%, which defers 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 company also paid $39 million of income taxes in the first quarter.
For 2023, we are projecting an effective tax rate of 14% and cash taxes of approximately $140 million for the remainder of the year. The balance sheet now exceeds $10 billion in assets with the inclusion of Gelnex. Since Gelnex closed at the very end of the first quarter, no earnings activity was recorded during Q1. The company's total debt outstanding at first quarter 2023 was $4.7 billion after the Gelnex acquisition as compared to $3.4 billion at fiscal year end 2022. In conjunction with the Gelnex funding, we entered into a three year interest rate swap to fix $600 million of floating rate debt at an average swap rate of 3.78% and also entered into a two year cross currency swap of $557 million to hedge a euro intercompany loan, which synthetically converted US debt to euro debt and reduced the interest rate by 1.2%.
Our bank coverage leverage ratio at the end of the first quarter was 3.19 times as compared to 2.54 times at fiscal year end 2022. We continue to maintain strong liquidity, with $866 million available on our revolving credit facility as of quarter end. Capital expenditures totaled $111.3 million in the first quarter with $454 million of expenditures anticipated for the remainder of the year. The company repurchased approximately 773,000 shares of its common stock for $43.8 million during the first quarter. With that, I'll turn it back to you, Randy.
Randall Stuewe: Thanks, Brad. Again, Darling is off to a tremendous start for 2023. Raw material volumes are in line with expectation, integration activities are on target, energy prices in Europe have moderated, our global collagen and gelatin business is quite strong, and Diamond Green Diesel is expected to perform very well with lower raw material prices, strong green premiums and robust global demand. The earning power of our unique vertically-integrated business we have built will become very evident over the next few quarters. Finally, we remain committed to our financial management policy that we have previously discussed. DGD is now nearly delevered and dividends should become a reality very soon. Leverage post our Brazilian acquisition has peaked and we will target a 2.7 leverage ratio by year-end along with the goal of investment grade for 2024.
Other than our previously-announced Miropasz bolt-on acquisition in Poland, which is expected to close by year-end, our M&A activity has been paused so we can concentrate on integration, value creation and deleveraging. I have high expectations for the second quarter. And if the operating environment continues, we are estimating combined adjusted EBITDA to be in the range of $485 million to $525 million. For the year, we are once again reconfirming our guidance of $1.875 billion combined adjusted EBITDA. Now with that, let's go ahead and open it up to Q&A, please.
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