Darling Ingredients Inc. (NYSE:DAR) Q3 2023 Earnings Call Transcript
Darling Ingredients Inc. (NYSE:DAR) Q3 2023 Earnings Call Transcript November 8, 2023
Operator: Good morning and welcome to the Darling Ingredients Inc. Conference Call to discuss the company's Third Quarter 2023 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 now like to turn the call over to Mr. Suann Guthrie. Please go ahead.
Suann Guthrie: Good morning. Thank you for joining the Darling Ingredients third 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. Bob Day, Chief Strategy Officer; and Mr. Matt Jansen, Chief Operating Officer of North America. Our third 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 or 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 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. Now I will hand the call over to Randy.
Randall C. Stuewe: Thanks, Suann and good morning, everyone and thanks for joining us for our third quarter earnings call. Darling's global ingredients platform delivered as predicted and DGD faced some headwinds and operational challenges during the quarter. Overall, we feel good about the momentum we are carrying into fourth quarter and 2024. Turning to the Feed Ingredients segment. Raw material volumes were flat compared to third quarter 2022. Our gross margins have returned to pre-acquisition levels demonstrating our ability to successfully integrate Valley and FASA. Our work is not done and we expect further improvement. Fat prices were lower year-over-year, but sequentially improved late in Q3. Turning to our Specialty Food Ingredients segment.
Raw material volumes increased 18% year-over-year due to Gelnex acquisition. Our global collagen platform delivered solidly and we continue to shift our product mix into higher-margin products. Hydrolyzed collagen remains an important part of our long-term growth strategy within the Food Ingredients segment. Earlier in the quarter we commissioned a new spray dryer in Epitacio, Brazil adding much needed capacity to continue our growth. I'm also excited to share that our research and development efforts in this segment have resulted in our ability to formulate a product that targets specific health concerns such as glucose moderation. We are currently in scientific trials and expect to bring this ingredient to market during 2024. On October 26, we announced that DGD volumes for the third quarter were lower due to a regularly scheduled turnaround at number 2 in St. Charles Louisiana that took the unit offline for 27 days.
After that turnaround, DGD 2 had a minor operational disruption. So in total DGD 2 was offline for 37 days in the quarter. This resulted in lower gallons produced, higher cost and lower-than-expected operating profits. Year-to-date DGD has sold 910 million gallons of renewable diesel at approximately $1.02 per gallon EBITDA. And Darling has received $163.6 million in cash dividends year-to-date. With that I'd now like to hand the call off to Brad and then I'll come back and discuss the rest of my thoughts for 2023 and 2024. Brad?
Brad Phillips: Okay. Thanks, Randy. Net income for the third quarter 2023 totaled $125 million, or $0.77 per diluted share, compared to net income of $191.1 million, or $1.17 per diluted share for the third quarter of 2022. Net sales were $1.63 billion for the third quarter 2023, as compared to $1.75 billion for the third quarter 2022, or a 7% decrease in net sales. Although, Darling's third quarter 2023 gross margin increased $10.1 million and was 23.8% as compared to 21.5% for the third quarter of 2022, operating income decreased $90 million, or 33.5% to $178.4 million for the third quarter of 2023, compared to $268.3 million for the third quarter of 2022 primarily due to Darling's share of Diamond Green Diesel earnings decreasing $49 million.
Additionally, depreciation and amortization and SG&A increased about $21 million and $32.6 million respectively as compared to the third quarter of fiscal 2022 primarily due to the Gelnex and FASA acquisitions. Now moving to non-operating results. Interest expense increased from $39.8 million in the third quarter of 2022 to about $70.3 million in the third quarter 2023, primarily as a result of increased indebtedness due to the acquisitions. For the three months ended September 30, 2023, the company reported an income tax benefit of $15.4 million and an effective tax rate of negative 13.6%, which differs from the federal statutory rate of 21% due primarily to the relative mix of earnings among jurisdictions with different tax rates and biofuel tax incentives.
The company's effective tax rate excluding the biofuel tax incentives and discrete items is 25.9% for the three months ended September 30, 2023. The company paid $40 million of income taxes in the third quarter. For the nine months ended September 30, 2023, the company reported income tax expense of $52.3 million and an effective tax rate of 8.4%. The company's effective tax rate excluding the biofuel tax incentives and discrete items is 28.4% for the nine months ended September 30, 2023. The company also has paid $127.7 million of income taxes year-to-date as of the end of the third quarter. For 2023, we are projecting an effective tax rate of 9% and cash taxes of approximately $30 million for the remainder of the year. The company's total debt outstanding at third quarter 2023 was $4.4 billion as compared to $3.4 billion at year-end 2022.
Our bank leverage covenant leverage ratio at the end of the third quarter was 3.25 times. We continue to maintain strong liquidity with $1 billion available on our revolving credit facility as of the quarter end. Capital expenditures totaled $146.2 million for the third quarter 2023 and $380.6 million for the first nine months. With that, I'll turn it back over to you Randy.
Randall C. Stuewe: Hey, thanks Brad. As previously announced a few weeks ago, we revised company guidance to $1.6 billion to $1.7 billion of combined adjusted EBITDA for the full fiscal year 2023. For Q4, we carried good momentum in from the third quarter around the world. Raw material volumes have slightly softened, but our diversified geographic footprint makes the impact negligible. Clearly, the global fats and oils have softened as a direct reflection of an ample supply of global fats and oils and delayed start-ups and inconsistent operations of renewable diesel plants. While we've seen a lot of press and noise about significant gallons of new renewable diesel coming to the market, the numbers appear to tell a very different story.
If more capacity outside of Diamond Green Diesel was operating, fat prices undoubtedly would be higher. DGD is performing well and we do not have any planned turnarounds in Q4. Margin structures are adjusting and we are very encouraged with the conversations we were having with a variety of interested parties regarding sustainable aviation fuel and our ability to deliver the margins in line with what we have communicated. Looking forward to 2024, while the heavy lift of our integration work has been completed, there are still a few opportunities that can add some margin improvement in our Feed segment and our Food segment should continue to reflect our product mix shift. From an earnings perspective, we see 2024 shaping up nicely and expect to deliver and delever with an improved performance globally.
The table is set with an improved outlook for the LCFS, growing demand for SAF, strong demand for our low CI feedstocks and favorable tax structures. Given the environment we see for 2024, we -- at this time, we anticipate combined adjusted EBITDA to be in the range of $1.7 billion to $1.8 billion. In 2024, we plan to lower capital expenditures, focused on improving our working capital usage and we anticipate regular dividends from Diamond Green Diesel. This will all help us accomplish our leverage targets by year-end. Given the anticipated dividends from DGD and the strength of our Global Ingredients business, we should be well on our way to achieving our target leverage ratio of about 2.5x by year-end 2024. With that, let's go ahead and open it up to questions and I'll come back with some closing comments.
Operator: We will now begin a question-and-answer session. [Operator Instructions] And our first question will come from Manav Gupta of UBS. Please go ahead.
See also Top 20 Drug Companies in the US by Revenue and 11 Best S&P 500 Stocks To Buy According to Ray Dalio’s Bridgewater Associates.
To continue reading the Q&A session, please click here.
