Darling Ingredients: Reports Q4 And Fiscal 2017 Results

Irving / TX. (di) Darling Ingredients Inc., 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 fiscal 2017 fourth quarter and year ended December 30, 2017.

Fourth Quarter 2017 Overview

• Net income of USD 105.7 million, or USD 0.63 per GAAP diluted share
• Revenue of USD 952.5 million, up 7.5 percent
• Adjusted Ebitda of USD 115.8 million
• Strong global raw material volumes up 3.0 percent
• Deflationary finished product pricing in Feed segment, Consistent performance in Food segment
• Fuel segment reflects improved Q4 biofuel economics without blenders tax credit (BTC)
• Continued deleverage of USD 43 million

Fiscal 2017 Overview

• Net income of USD 128.5 million, or USD 0.77 per GAAP diluted share
• U.S. Tax Cuts and Jobs Act and the European tax reform added USD 0.53 to EPS
• No blenders tax credit in results, will be reported Q1 2018
• Adjusted Ebitda of USD 438.9 million
• Diamond Green Diesel (DGD) performance reflects USD 0.54 cents per gallon without BTC
• Broadened global reach with multiple construction projects, expansions and bolt on acquisitions
• Solid cash flow generation with full year debt paydown of USD 112.5 million
• USD 61.8 million in working capital improvement

For the fourth quarter of 2017, the Company reported net sales of USD 952.5 million, as compared with net sales of USD 885.8 million for the fourth quarter of 2016. Net income attributable to Darling for the three months ended December 30, 2017 was USD 105.7 million, or USD 0.63 per diluted share, compared to a net income of USD 40.5 million, or USD 0.25 per diluted share, for the fourth quarter of 2016. The increase in net income for the fourth quarter 2017 is primarily attributable to the reversal of deferred tax liabilities due to the U.S. Tax Cuts and Jobs Act, benefits from European tax reform, along with improved raw material volumes and pricing across the segments. For comparison purposes, fourth quarter results do not reflect the blenders tax credit.

Net Income attributable to Darling for the fiscal year ended December 30, 2017 was USD 128.5 million, or USD 0.77 per diluted share, as compared to a net income of USD 102.3 million, or USD 0.62 per diluted share, for the fiscal year ended December 31, 2016. The increase in net income for 2017 is primarily attributable to the reversal of deferred tax liabilities due to the U.S. Tax Cuts and Jobs Act along with benefits from European tax reform. Strong volumes, consistent margins, and improvements in our specialty businesses aided the Feed segment, while the Food segment delivered a consistent performance lead by CTH, our natural casings business, with Rousselot achieving record sales volumes and stabilizing margins.  In the Fuel segment, results reflect the absence of the blenders tax credit which was reinstated retroactively for 2017 during February 2018. First quarter 2018 results will reflect income of USD 12.6 million from the blenders tax credit.

Comments on the Fourth Quarter and Fiscal 2017 Year End

«We are pleased to report a strong finish to 2017, with improved fourth quarter results driven by streamlined operations across our global platform,» said Randall C. Stuewe, Chairman and Chief Executive Officer of Darling Ingredients Inc. «We leveraged higher global raw material volumes with consistent margins by managing through deflationary finished product markets in the Feed Ingredients segment. Food Ingredients delivered strong operating performance across all product lines while managing through continued macroeconomic headwinds in South American markets. Sequentially, our North American and Canadian biodiesel facilities showed improved operational performance though earnings were negatively impacted due to the absence of the blenders tax credit. We are pleased to see the reinstatement of the blenders tax credit, applied retroactively for 2017. Diamond Green Diesel excelled operationally and delivered USD 86 million Ebitda (Darling’s half being USD 43 million), or USD 0.54 per gallon, excluding the blenders tax credit. The Diamond Green Diesel expansion project to increase production from 160 million gallons to 275 million gallons annually is progressing well, with the facility expected to go down in mid-May for final tie-ins before completion in late Q2 2018.

«During the year, our global capital growth plan included multiple new construction projects, expansions and bolt on acquisitions to maximize our world of growth strategy, and engineering of our product mix to meet the needs of changing global diets. Our strong balance sheet combined with improved working capital deployment enabled further deleveraging of USD 112.5 million, exceeding our stated goal of USD 100 million in 2017. We continue to execute well, diversify our global platform and deploy prudent growth capital investments to drive meaningful growth and profitability in the future.»

Operational Update by Segment

• Feed Ingredients – Segment leveraged strong global raw material tonnage across geographies, with North America up by 4 percent and international up over 2 percent during the year. Managed through unstable finished product markets while margins remained consistent. Broadened manufacturing platform by expanding rendering and blood operations and by commencing construction on species specific operations. Wet pet food and specialty blending delivered improved, meaningful results.
• Food Ingredients – Segment delivered improved performance across all product lines with consistent year-over-year Ebitda of USD 131.4 million. Rousselot gelatin business stabilized in China while margin pressures continued in South America augmented by ample hide supply and weakening currencies. Sonac edible fat earnings delivered in line, and CTH casings business produced continued solid earnings on increased supply and an improved margin environment.
• Fuel Ingredients – Segment performance improved during the fourth quarter; however, the lack of the BTC negatively impacted year-over-year comparisons. North American biodiesel operations reversed third quarter losses with an improved economic environment in the fourth quarter. Rendac delivered consistent earnings on strong volumes. Ecoson bioenergy facility operated at reduced capacity while resolving current regulatory challenges.
• Diamond Green Diesel Joint Venture – Executed well and delivered solid earnings of USD 0.54 per gallon, excluding BTC. Including the retroactive BTC, the facility earned USD 247 million Ebitda on the sale of 160 million gallons. Strong cash reserve of USD 123.4 million coupled with the retroactive BTC of USD 160.4 million will provide adequate capital reserves to complete the current expansion. Construction on plant expansion is progressing as scheduled, which at full capacity increases annual production from 160 million gallons to 275 million gallons of renewable diesel. Total cost estimated at USD 190.0 million, with construction completion and commissioning expected late in Q2 2018.

Financial Update by Segment

Feed Ingredients		Three Months Ended			Fiscal Year Ended
(USD thousands)		December 30, 2017	December 31, 2016		December 30, 2017	December 31, 2016
Net sales		USD 562’206	USD 538’606		USD 2’239’492	USD 2’089’145
Selling, general and administrative expenses		46’422	42’135		180’866	169’648
Depreciation and amortization		49’239	48’735		184’172	178’845
Segment operating income		26’231	25’282		129’686	115’794
Ebitda		USD 75’470	USD 74’017		USD 313’858	USD 294’639

*Ebitda calculated by adding depreciation and amortization to segment operating income.

• Feed Ingredients operating income for the three months ended December 30, 2017 was USD 26.2 million, an increase of USD 0.9 million as compared to the three months ended December 31, 2016. Earnings for the Feed Ingredients segment were higher due to improved earnings in U.S. operations and a global increase in raw material volumes.
• Feed Ingredients operating income for the fiscal year 2017 was USD 129.7 million, an increase of USD 13.9 million as compared to fiscal year 2016. Earnings in the Feed Ingredients segment were up from the prior year due to improved earnings in both the U.S. and European operations, overall increase in sales volumes, higher finished product prices for fats and certain finished protein products and an increase in raw material volumes.

Food Ingredients		Three Months Ended			Fiscal Year Ended
(USD thousands)		December 30, 2017	December 31, 2016		December 30, 2017	December 31, 2016
Net sales (1)		USD 313’478	USD 278’378		USD 1’156’976	USD 1’055’725
Selling, general and administrative expenses		27’502	26’604		104’982	96’170
Depreciation and amortization		19’719	18’297		75’010	70’120
Segment operating income		16’274	11’738		56’409	61’212
Ebitda		USD 35’993	USD 30’035		USD 131’419	USD 131’332

*Ebitda calculated by adding depreciation and amortization to segment operating income.
(1) Net sales were adjusted for Brazil VAT reclass.

• Food Ingredients operating income was USD 16.3 million for the three months ended December 30, 2017, an increase of USD 4.6 million as compared to the three months ended December 31, 2016. The increase in operating income was primarily attributable to higher earnings in the natural casings business, improved earnings in the North Americagelatin operations and slightly higher sales price for edible fats in Europe.
• Food Ingredients operating income was USD 56.4 million for fiscal 2017, a decrease of USD 4.8 million as compared to fiscal 2016. The earnings in the gelatin business were down as compared to the prior year primarily due to lower earnings in the Company’s South American gelatin operations due to margin compression influenced by operating inefficiencies and macroeconomic factors in the first half of fiscal 2017. The casings business delivered improved performance due to overall high demand that slightly offset lower earnings in the gelatin business. Additionally, selling, general and administrative expense in the Food Ingredients segment increased approximately USD 8.8 millionprimarily due to a reduction of currency hedge gains in fiscal 2017 as compared to the same period in fiscal 2016.

Fuel Ingredients		Three Months Ended			Fiscal Year Ended
(USD thousands)		December 30, 2017	December 31, 2016		December 30, 2017	December 31, 2016
Net sales		USD 76’865	USD 68’773		USD 265’783	USD 247’058
Selling, general and administrative expenses		4’735	1’909		10’467	6’895
Depreciation and amortization		8’547	7’532		31’019	28’531
Segment operating income		8’049	10’486		13’789	29’166
Ebitda		USD 16’596	USD 18’018		USD 44’808	USD 57’697

*Ebitda calculated by adding depreciation and amortization to segment operating income.Results shown do not include the Diamond Green Diesel (DGD) 50 percent Joint Venture.

• Exclusive of the DGD Joint Venture, Fuel Ingredients operating income for the three months ended December 30, 2017 was USD 8.0 million, a decrease of USD 2.5 million as compared to the three months ended December 31, 2016. The decrease in earnings is primarily a result of lower earnings within the disposal rendering business in Europe and the absence of the blenders tax credit in the U.S. which more than offset improved earnings within the Ecoson business.
• Exclusive of the DGD Joint Venture, Fuel Ingredients operating income for fiscal year 2017 was USD 13.8 million, a decrease of USD 15.4 million as compared to fiscal 2016. The decrease for 2017 is primarily a result of the absence of the blenders tax credit in the U.S. and curtailed operations at Ecoson to address current regulatory challenges.