Darling reports third quarter 2019 financial results

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, has announced financial results for the 2019 third quarter, which ended September 28, 2019.

November 12, 2019

Third Quarter 2019 Overview

Revenue of $842.0 million
Net income of $25.7 million, or $0.15 per GAAP diluted share
Combined adjusted EBITDA of $147.8 million (Darling's adjusted EBITDA plus Darling's share of Diamond Green Diesel (DGD) adjusted EBITDA as reflected on the Non-GAAP Adjusted EBITDA Reconciliation table herein.)
Repurchased 636,634 shares during 3rd quarter and subsequently 407,076 shares in Q4
Diamond Green Diesel delivered $1.35 EBITDA per gallon with Darling's share of JV earnings reflected in consolidated operating income under Fuel Segment
YTD DGD delivering $1.26 EBITDA per gallon when Q1 2019 adjusted to reflect hedge accounting
Global slaughter remains at record levels, providing ample raw material supplies
Global fat pricing improved but remained stagnant as North America biodiesel industry awaiting Blenders Tax Credit (BTC)
Global protein pricing weaker due to excess supplies and Chinese demand destruction due to African Swine Fever (ASF)
Rousselot delivered improved results with stronger sales in the Health and Nutrition category
Diamond Green II plant construction on time and budget; Diamond Green III in engineering and cost estimating for Port Arthur, Texas
Debt paydown of $33.6 million

For the third quarter of 2019, the company reported net sales of $842.0 million, as compared with net sales of $812.6 million for the third quarter of 2018. The $29.4 million increase in net sales resulted from higher finished product fat prices, strong contribution from higher sales values for Food Segment collagen ingredients and higher sales volume that more than offset lower protein pricing.

Net income attributable to Darling for the three months ended September 28, 2019 was $25.7 million, or $0.15 per diluted share, compared to a net loss of $(6.0) million, or $(0.04) per diluted share, for the third quarter of 2018. The increase was primarily due to DGD earning $32 million in 2019 third quarter as compared to a $(2.6) million loss in the 2018 third quarter due to extended downtime in the third quarter 2018 for completion of the expansion, as well as a $7.2 million write-down of our China blood plasma inventory in the third quarter 2018 due to the African Swine Fever (ASF) outbreak.

Under Darling's current share repurchase authorization, the Company repurchased 636,634 shares of common stock during the third quarter. Subsequent to the close of the quarter, the Company repurchased an additional 407,076 shares, totaling $7.5 million. Darling has $180.7 million worth of shares remaining under its current authorization with purchases to 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 2019

"We reported solid third quarter results, underscored by the strength of our vertically integrated supply chain and excellent execution amid continued trade uncertainty and escalating disease disruption due to African Swine Fever," said Randall C. Stuewe, Chairman and Chief Executive Officer of Darling Ingredients Inc. "Overall, our operating segments delivered exceptional results with improved earnings in our Feed Segment as we navigated volatile global markets. Led by our Rousselot Functional Ingredients and Health & Nutrition platform, our Food Segment is solidly positioned to capture growing global demand for collagen ingredients. In the Fuel Segment, higher sales volumes supported solid performance across operations despite the lack of the Blenders Tax Credit (BTC).

"Our Diamond Green II expansion increasing capacity to 675 million gallons of renewable diesel is progressing on schedule with expected completion in late 2021. We are also pleased to expand our relationship with Valero, our joint venture partner, as we explore advanced engineering and development cost review for a potential renewable diesel plant at Valero's refinery in Port Arthur, TX. If approved, construction would begin in 2021, with expected operations commencing in 2024, resulting in 1.1 billion gallons of total annual production capacity at DGD," concluded Mr. Stuewe.

Operational Update by Segment

Feed Ingredients – Segment stabilized, and earnings recovered on modestly improved fat prices year-over-year in light of ample supplies combined with lower global protein values impacted by strong slaughter volumes in North America; continued trade disruptions with China; and ASF moving across Asia. Slow export markets and lower biofuel demand also pressured fat markets.
Food Ingredients – Strong demand for our collagen supplements and ingredients drove solid results with capital growth investments in Brazil and France broadening opportunity to capture rising global demand. European edible fats business experienced declining volumes with raw materials continuing to be diverted to China food markets.
Fuel Ingredients – Strong execution across operations supported by solid contribution from our European bioenergy business, Ecoson, in addition to volume growth at our biogas digester operation in Belgium. Additionally, earnings from our share of Diamond Green Diesel JV (DGD) is now included in our operating income. While the facility experienced 20 days of maintenance downtime for plant enhancements and catalyst changeout, performance met expectations at $1.35 EBITDA per gallon on 58.7 million gallons of renewable diesel sold during the quarter.

Financial Update by Segment

Feed Ingredients	Three Months Ended		Nine Months Ended
($ thousands)	September 28, 2019	September 29, 2018	September 28, 2019	September 29, 2018
Net sales	$ 496,978	$ 482,744	$ 1,480,244	$ 1,467,365
Gross margin	117,186	99,005	336,638	344,169
Loss (gain) on sale of assets	(2,429)	107	(7,343)	526
Selling, general and administrative expenses	47,319	39,702	142,615	131,914
Depreciation and amortization	50,182	47,321	148,271	140,933
Segment operating income	22,114	11,875	53,095	70,796
Adjusted EBITDA (1)	$ 72,296	$ 59,196	$ 201,366	$ 211,729


(1) Adjusted EBITDA calculated by adding depreciation and amortization to segment operating income

Feed Ingredients operating income for the three months ended September 28, 2019 was $22.1 million, an increase of $10.2 million, or 85.7% as compared to the three months ended September 29, 2018. This was due to the acquisition of Triple-T Foods in October 2018, higher margins on fat sales due to an increase in fat prices and a negative impact on Chinese inventories relating to ASF recorded in fiscal 2018.
Feed Ingredients operating income for the nine months ended September 28, 2019 was $53.1 million, a decrease of $17.7 million, or (25.0)%, as compared to the nine months ended September 29, 2018. This was primarily due to a decrease in protein finished product sales prices, lower spreads in poultry pet grade products and higher factory, depreciation and amortization costs from the addition of several new facilities and partial multiemployer pension withdrawal charges.

Food Ingredients	Three Months Ended		Nine Months Ended
($ thousands)	September 28, 2019	September 29, 2018	September 28, 2019	September 29, 2018
Net sales	$ 276,467	$ 265,208	$ 830,466	$ 847,457
Gross margin	61,824	54,478	187,375	162,495
Gain on sale of assets	(253)	(33)	(13,518)	(244)
Selling, general and administrative expenses	22,811	21,843	68,129	67,894
Restructuring and impairment charges	-	-	-	14,965
Depreciation and amortization	19,743	19,697	59,115	60,725
Segment operating income	19,523	12,971	73,649	19,155
Adjusted EBITDA (1)	$ 39,266	$ 32,668	$ 132,764	$ 94,845


(1) Adjusted EBITDA calculated by adding depreciation and amortization and restructuring and impairment charges to segment operating income

Food Ingredients operating income was $19.5 million for the three months ended September 28, 2019, an increase of $6.5 million or 50.0% as compared to the three months ended September 29, 2018. The increase was primarily due to improved results in the collagen markets, a gain on sale of assets in China and no restructuring and impairment charges in the current year as compared to the same period in fiscal 2018 when the Company closed its Argentina collagen plant.
Food Ingredients operating income was $73.6 million for the nine months ended September 28, 2019, an increase of $54.4 million or 283.3% as compared to the nine months ended September 29, 2018. The increase was primarily due to improved results in the collagen business and the closure of our Argentina collagen plant which more than offset lower casing and edible fat margins.

Fuel Ingredients	Three Months Ended		Nine Months Ended
($ thousands)	September 28, 2019	September 29, 2018	September 28, 2019	September 29, 2018
Net sales	$ 68,604	$ 64,624	$ 193,767	$ 219,774
Gross margin	10,116	11,164	31,912	49,203
Loss on sale of assets	13	98	16	190
Selling, general and administrative expenses	912	(2,822)	583	(4,056)
Depreciation and amortization	7,895	9,370	24,055	26,378
Equity in net income/(loss) of Diamond Green Diesel	32,020	(2,630)	94,390	109,655
Segment operating income	33,316	1,888	101,648	136,346
Combined Adjusted EBITDA (1)	$ 48,739	$ 14,397	$ 144,583	$ 171,814


(1) Combined adjusted EBITDA calculated by subtracting equity in net income of DGD from segment operating income and adding depreciation and amortization with Darling's share of DGD's EBITDA (referenced in the DGD Operating Financial Results table included herein calculated by taking 50% of the depreciation, amortization and accretion expense plus the operating income)

The company's Fuel Ingredients segment operating income for the three months ended September 28, 2019 was $33.3 million, an increase of $31.4 million or 1,652.6% as compared to the same period in fiscal 2018. The increase is primarily due to current year equity in net income at the DGD Joint Venture from higher capacity as compared to a net loss in the prior year period at the DGD Joint Venture, which more than offset the business interruption gain recorded at Rendac in fiscal 2018.
The company's Fuel Ingredients segment operating income for the nine months ended September 28, 2019 was $101.6 million, a decrease of $34.7 million or (25.5)% as compared to the same period in fiscal 2018. The decrease is primarily related to the 2017 blenders tax credits booked in the first quarter of 2018 as compared to no blenders tax credits booked in fiscal 2019.

Darling Ingredients Inc. and Subsidiaries Consolidated Operating Results For the Periods Ended September 28, 2019 and September 29, 2018 (in thousands, except per share data) (unaudited)

		Three Months Ended			Nine Months Ended
				$ Change			$ Change
		September 28,	September 29,	Favorable	September 28,	September 29,	Favorable
		2019	2018	(Unfavorable)	2019	2018	(Unfavorable)
Net sales		$ 842,049	$ 812,576	$ 29,473	$ 2,504,477	$ 2,534,596	$ (30,119)
Costs and expenses:
	Cost of sales and operating expenses	652,923	647,929	(4,994)	1,948,552	1,978,729	30,177
	Loss (gain) on sale of assets	(2,669)	172	2,841	(20,845)	472	21,317
	Selling, general and administrative expenses	83,549	67,447	(16,102)	249,569	232,907	(16,662)
	Restructuring and impairment charges	-	-	-	-	14,965	14,965
	Depreciation and amortization	80,407	78,842	(1,565)	239,057	235,915	(3,142)
Total costs and expenses		814,210	794,390	(19,820)	2,416,333	2,462,988	46,655
	Equity in net income/(loss) of Diamond Green Diesel	32,020	(2,630)	34,650	94,390	109,655	(15,265)
Operating income		59,859	15,556	44,303	182,534	181,263	1,271
Other expense:
	Interest expense	(19,359)	(20,080)	721	(60,088)	(66,220)	6,132
	Debt extinguishment costs	-	-	-	(12,126)	(23,509)	11,383
	Foreign currency gain/(loss)	466	(2,106)	2,572	(654)	(7,082)	6,428
	Gain/(loss) on disposal of subsidiaries	-	3,038	(3,038)	-	(12,500)	12,500
	Other (expense)/gain, net	(2,614)	(2,786)	172	(7,158)	(4,103)	(3,055)
Total other expense		(21,507)	(21,934)	427	(80,026)	(113,414)	33,388

Equity in net loss of unconsolidated subsidiaries		(665)	(162)	(503)	(1,087)	(57)	(1,030)
Income/(loss) before income taxes		37,687	(6,540)	44,227	101,421	67,792	33,629
Income taxes expense/(benefit)		10,850	(1,403)	(12,253)	23,900	3,992	(19,908)
Net income/(loss)		26,837	(5,137)	31,974	77,521	63,800	13,721
Net income attributable to noncontrolling interests		(1,116)	(900)	(216)	(7,530)	(2,952)	(4,578)
Net income/(loss) attributable to Darling		$ 25,721	$ (6,037)	$ 31,758	$ 69,991	$ 60,848	$ 9,143

Basic income/(loss) per share:		$ 0.16	$ (0.04)	$ 0.20	$ 0.42	$ 0.37	$ 0.05
Diluted income/(loss) per share:		$ 0.15	$ (0.04)	$ 0.19	$ 0.42	$ 0.37	$ 0.05

Number of diluted common shares		168,266	164,656		168,453	165,774

Darling Ingredients Inc. and Subsidiaries Condensed Consolidated Balance Sheets September 28, 2019 and December 29, 2018 (in thousands)

		September 28,	December 29,
		2019	2018
ASSETS		(unaudited)
Current assets:
	Cash and cash equivalents	$ 69,122	$ 107,262
	Restricted cash	159	107
	Accounts receivable, net	355,006	385,737
	Inventories	353,003	341,028
	Prepaid expenses	46,378	35,247
	Income taxes refundable	4,952	6,462
	Other current assets	25,061	22,099
	Total current assets	853,681	897,942
Property, plant and equipment, less accumulated depreciation, net		1,714,768	1,687,858
Intangible assets, less accumulated amortization, net		537,360	595,862
Goodwill		1,212,313	1,229,159
Investment in unconsolidated subsidiaries		447,689	410,177
Operating lease right-of-use assets		119,063	-
Other assets		46,179	53,375
Deferred income taxes		13,846	14,981
	Total assets	$ 4,944,899	$ 4,889,354

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Current portion of long-term debt	$ 61,092	$ 7,492
	Accounts payable, principally trade	192,010	219,479
	Income taxes payable	10,404	4,043
	Current operating lease liabilities	35,223	-
	Accrued expenses	297,164	309,484
	Total current liabilities	595,893	540,498
Long-term debt, net of current portion		1,559,809	1,666,940
Long-term operating lease liabilities		83,754	-
Other non-current liabilities		113,222	115,032
Deferred income taxes		219,329	231,063
	Total liabilities	2,572,007	2,553,533
Commitments and contingencies
Total Darling's stockholders' equity		2,308,493	2,273,048
Noncontrolling interests		64,399	62,773
	Total stockholders' equity	$ 2,372,892	$ 2,335,821
		$ 4,944,899	$ 4,889,354

Darling Ingredients Inc. and Subsidiaries Consolidated Statement of Cash Flows Nine Months Ended September 28, 2019 and September 29, 2018 (in thousands) (unaudited)

				Nine Months Ended
				September 28,	September 29,
Cash flows from operating activities:				2019	2018
	Net income			$ 77,521	$ 63,800
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization		239,057	235,915
		Loss/(gain) on disposal of property, plant, equipment and other assets		(20,845)	472
		Loss on disposal of subsidiaries		-	12,500
		Asset impairment		-	2,907
		Gain on insurance proceeds from insurance settlements		(1,371)	(1,253)
		Deferred taxes		(4,765)	(15,708)
		Increase (decrease) in long-term pension liability		1,122	(375)
		Stock-based compensation expense		18,543	13,606
		Write-off deferred loan costs		4,721	8,163
		Deferred loan cost amortization		4,435	6,265
		Equity in net income of Diamond Green Diesel and unconsolidated subsidiaries		(93,303)	(109,598)
		Distribution of earnings from unconsolidated subsidiaries		57,118	27,418
		Changes in operating assets and liabilities, net of effects from acquisitions:
		Accounts receivable		20,388	9,657
		Income taxes refundable/payable		8,058	(9,838)
		Inventories and prepaid expenses		(34,371)	(25,960)
		Accounts payable and accrued expenses		(19,799)	(23,004)
		Other		6,173	4,731
			Net cash provided by operating activities	262,682	199,698
Cash flows from investing activities:
	Capital expenditures			(245,092)	(213,726)
	Acquisitions, net of cash acquired			(1,431)	(51,301)
	Investment of unconsolidated subsidiaries			(2,000)	(10,000)
	Proceeds from sale of investment in subsidiaries			-	82,805
	Gross proceeds from disposal of property, plant and equipment and other assets			15,402	3,361
	Proceeds from insurance settlement			1,371	1,253
	Payments related to routes and other intangibles			(3,150)	(1,253)
			Net cash used by investing activities	(234,900)	(188,861)
Cash flows from financing activities:
	Proceeds from long-term debt			511,985	623,698
	Payments on long-term debt			(566,107)	(661,268)
	Borrowings from revolving credit facility			325,485	386,436
	Payments on revolving credit facility			(332,884)	(362,463)
	Net cash overdraft financing			27,858	3,361
	Deferred loan costs			(7,027)	(9,668)
	Issuance of common stock			39	182
	Repurchase of common stock			(11,740)	-
	Minimum withholding taxes paid on stock awards			(3,247)	(2,215)
	Distributions to noncontrolling interests			(4,500)	(8,005)
			Net cash used by financing activities	(60,138)	(29,942)
Effect of exchange rate changes on cash				(5,732)	(6,238)
Net decrease in cash, cash equivalents and restricted cash				(38,088)	(25,343)
Cash, cash equivalents and restricted cash at beginning of period				107,369	106,916
Cash, cash equivalents and restricted cash at end of period				$ 69,281	$ 81,573
Supplemental disclosure of cash flow information:
	Accrued capital expenditures			$ 3,978	$ (5,295)
	Cash paid during the period for:
		Interest, net of capitalized interest		$ 49,727	$ 58,731
		Income taxes, net of refunds		$ 21,475	$ 28,682
	Non-cash operating activities
		Operating lease right of use asset obtained in exchange for new lease liabilities		$ 16,425	$ -
	Non-cash financing activities
		Debt issued for assets		$ -	$ 24

Selected financial information for the Company's Diamond Green Diesel Joint Venture is as follows:

Diamond Green Diesel Joint Venture Condensed Consolidated Balance Sheets September 30, 2019 and December 31, 2018 (in thousands)

			September 30,	December 31,
			2019	2018
Assets:			(unaudited)
	Total current assets		$ 193,457	$ 186,258
	Property, plant and equipment, net		653,463	576,384
	Other assets		30,587	24,601
		Total assets	$ 877,507	$ 787,243

Liabilities and members' equity:
	Total current portion of long term debt		$ 293	$ 189
	Total other current liabilities		47,373	40,619
	Total long term debt		8,859	8,485
	Total other long term liabilities		4,409	539
	Total members' equity		816,573	737,411
		Total liabilities and members' equity	$ 877,507	$ 787,243

Diamond Green Diesel Joint Venture Operating Financial Results Three Months and Nine Months Ended September 30, 2019 and September 30, 2018 (in thousands) (unaudited)

			Three Months Ended			Nine Months Ended
					$ Change			$ Change
			September 30,	September 30,	Favorable	September 30,	September 30,	Favorable
Revenues:			2019	2018	(Unfavorable)	2019	2018	(Unfavorable)
	Operating revenues		$ 262,118	$ 104,811	$ 157,307	$ 859,647	$ 407,121	$ 452,526
Expenses:
	Total costs and expenses less depreciation, amortization and accretion expense		183,022	103,794	(79,228)	633,109	169,632	(463,477)
	Depreciation, amortization and accretion expense		15,242	6,516	(8,726)	38,574	18,890	(19,684)
Total costs and expenses			198,264	110,310	(87,954)	671,683	188,522	(483,161)
	Operating income		63,854	(5,499)	69,353	187,964	218,599	(30,635)
Other income			506	556	(50)	1,781	1,348	433
		Interest and debt expense, net	(320)	(318)	(2)	(965)	(637)	(328)
		Net income	$ 64,040	$ (5,261)	$ 69,301	$ 188,780	$ 219,310	$ (30,530)

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:

Reconciliation of Net Income to (Non-GAAP) Adjusted EBITDA and (Non-GAAP) Pro forma Adjusted EBITDA
Three and nine months ended September 28, 2019 and September 29, 2018

		Three Months Ended - Year over Year		Nine Months Ended - Year over Year
Adjusted EBITDA		September 28,	September 29,	September 28,	September 29,
(U.S. dollars in thousands)		2019	2018	2019	2018

Net income/(loss) attributable to Darling		$ 25,721	$ (6,037)	$ 69,991	$ 60,848
Depreciation and amortization		80,407	78,842	239,057	235,915
Interest expense		19,359	20,080	60,088	66,220
Income tax expense/(benefit)		10,850	(1,403)	23,900	3,992
Restructuring and impairment charges		-	-	-	14,965
Foreign currency loss/(gain)		(466)	2,106	654	7,082
Other expense/(income), net		2,614	2,786	7,158	4,103
Debt extinguishment costs		-	-	12,126	23,509
Loss/(gain) on sale of subsidiary		-	(3,038)	-	12,500
Equity in net (income)/loss of Diamond Green Diesel		(32,020)	2,630	(94,390)	(109,655)
Equity in net (income) of unconsolidated subsidiaries		665	162	1,087	57
Net income attributable to noncontrolling interests		1,116	900	7,530	2,952
	Adjusted EBITDA	$ 108,246	$ 97,028	$ 327,201	$ 322,488

Foreign currency exchange impact (1)		3,088	-	14,749	-
Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP)		$ 111,334	$ 97,028	$ 341,950	$ 322,488

DGD Joint Venture Adjusted EBITDA (Darling's share)		$ 39,548	$ 509	$ 113,270	$ 118,745

Darling plus Darling's share of DGD Joint Venture Adjusted EBITDA		$ 147,794	$ 97,537	$ 440,471	$ 441,233


(1)	The average rates assumption used in the calculation was the actual fiscal average rate for the three months ended September 28, 2019 of €1.00:USD$1.11 and CAD$1.00:USD$0.76 as compared to the average rate for the three months ended September 29, 2018 of €1.00:USD$1.16 and CAD$1.00:USD$0.76, respectively. The average rates assumption used in the calculation was the actual fiscal average rate for the nine months ended September 28, 2019 of €1.00:USD$1.12 and CAD$1.00:USD$0.75 as compared to the average rate for the nine months ended September 29, 2018 of €1.00:USD$1.20 and CAD$1.00:USD$0.78, respectively.