Q3 2019 Earnings Call
Good morning, everyone and welcome to the Darling ingredients Inc. conference call to discuss the company's third quarter 2019 financial results on the call today, we have Mr. Randall seems to be chairman and Chief Executive Officer, Mr., Brad Philips Executive Vice President and Chief Financial Officer, Mr., John Bullock Executive Vice.
President and Chief strategy Officer, and Miss Melissa Gaither, Vice President of Investor Relations and Global Communications.
After the speakers opening remarks, there will be a question and answer period instructions to actually question will be given at that time.
Today's call is being recorded I would now like to talk turn the call over to Melissa Gaither, Vice President of Investor Relations and Global Communications for Darling ingredients Mesquite. There. Please go ahead.
Thank you Chad good morning, everyone. They keep are joining us to discuss Darling ingredients earnings results for the third quarter ended September 28, 2019, I meant means its formal presentation. Please refer to the presentation section of the IR website, but earnings slide deck, Randy do eat our chairman and CEO will begin today's call.
With an overview of our third quarter operational and financial result, focusing on year over year comparisons followed by discussion about some of the trends impacting our business.
So what executive Vice President and Chief Financial Officer will then provide additional details about our financial result, finally, Randy will conclude the prepared portion of the call within general remarks, after which we'll be happy to answer your question. Please.
Please see the full disclosure on our non U.S. GAAP measures about the earnings release and earnings Slide presentation now for the Safe Harbor statement. The conference call will contain forward looking statements regarding Darling ingredients business opportunities and anticipated results of operation. Please bear in mind that forward looking information is subject to many risks uncertainties and actually.
Results may differ materially from one is projected to many of these risks and uncertainties are described in Darling dinner report in the Form 10-K for the year ended December 29, 2018, and our recent press release issued yesterday and our filings with the FCC forward looking statements. In this conference call are based on our current expectations and believe we do not take any duty.
Update any of the forward looking statements made in this conference call or otherwise now I'd like to turn the call over to Randy.
Thanks, Melissa good morning, everyone. Thank you for joining us our circular and vertically integrated global system for re purpose thing the animal derived bio nutrients into sustainable and renewable ingredients for food green fuel and value added feed delivered very solid and improving results in the third quarter.
Our discussion today will focus on the combined results of Darlings overall portfolio. It should be noted that during the third quarter, we consulted with the FCC and they do not objected. This methodology as this is how we view and operate our business.
For the quarter, our combined adjusted EBITDA was 147.8 million versus 97.5 million in the third quarter of 2018. It should be noted that DGD was shut down for expansion during last year's third quarter sequentially. Our results also approved when adjusting for the land sale.
In China now, let me provide some global highlights for the quarter first.
Our food segment improved both year over year and sequentially led by our global College and business or health and nutrition platform is gaining momentum and our capacity to serve this growing sector will be augmented by three additional plants commissioning in mid to late 2020.
Our fuel segment anchored by Diamond Green diesel delivered solid results year over year results reflect last year's expansion shutdown and sequential results reflect the 20 day catalyst turnaround performed this year during the third quarter.
DGD earned $1.35 per gallon on 58.7 million gallons of renewable diesel sales in this current quarter year to date DGD has delivered a $1.26 EBITDA per gallon when adjusting for hedge accounting in the first quarter of 2019 for fourth quarter and next year.
We anticipate running at full capacity and current margins are approximately one dollar and 40 cents per gallon.
This is once again portraying the significant earnings power of our vertically integrated system for the production of low carbon intensity green fuels.
And our global feed segment, we delivered significant year over year and sequential improvements in light of a very challenging macro environment simply put the combination of trade disruptions African swine fever, and the lack of certainty of bio fuel programs and the BTC are pressuring global protein and fat markets.
Offsetting this this this deflationary pressure our continued strong material volumes as the world prepares to feed a hungry China, it should becoming clear it should becoming clear the darlings diverse global business model via raw material mix geography, and ability to produce a wide array of sustainable ingredients.
We'll provide the catalyst for the creation of long term shareholder value.
In terms of our capital structure, we maintain a disciplined approach and continue to deploy capital to capture growth. We received dividends over the last 12 months of 107.6 million from DGD and during the third quarter, we paid down 33.6 million in debt this improved our debt ratio meaning.
Fully as we continue to advance toward investment grade levels. Additionally, we repurchased $19.3 million of stock. So far in 2019 with purchases of 636634 shares in the third quarter and 407076 shares in early fourth quarter.
For a total of 1 million shares purchased thus far in 2019.
Our diamond Green diesel to expansion is proceeding on schedule and will more than double our current production volume to 675 million gallons of renewable diesel and 60 million gallons of renewable gasoline once completed in late 2021.
Also we are very excited about additional opportunities to expand our relationship with our joint venture partner Valero as we explore advanced engineering and development cost reviews of a new renewable diesel plant in Port Arthur Texas adjacent to Valeros existing refinery. The proposed facility would produced 400 million.
Tons of renewable diesel increasing total DGD production capacity to more than 1.1 billion gallons annually.
In addition to the nearly 100 million gallons of renewable gasoline the new plant will be the first renewable diesel plant in Texas and a full production would make diamond green diesel the largest producer renewable diesel in the United States and the second largest globally. We expect a final decision on this investment in 2021.
Option to start the same year and commissioning to take place sometime in 2024.
And on a final note. We believe there is good momentum building around the blenders tax credit and we anticipate a positive decision by year end. It is expected to one dollar per gallon credit will be made retroactive for 2018 and will be extended to cover 2019 and 2020 production. If it is reinstated we have the book.
Tangible to receive an additional 78.7 million of EBITDA for 2018 and year to date 99.9 million in Diamond Green diesel for 22019, the soonest, we could receive a retroactive payment for the credit would be in early 2020, so with that let's have Brad take us through financial few finance.
I will highlight Brad Okay. Thanks, Randy net income for the third quarter of 2019 totaled 25.7 million or 15 cents per diluted share compared to a net loss of 6 million or negative four cents per diluted share for the 2018 third quarter.
The significant to significantly increase was primarily due to DGD, earning 32 million in the 2019 third quarter compared to a 2.6 million loss in the 2018 third quarter net income for the nine months of 2019 totaled 70 million or 42 cents per diluted share compared to 60.
Point 8 million or 37 cents per diluted share for the nine months of 2018.
As Randy mentioned, we are reporting darlings, 50% share of the earnings from the Diamond Green diesel JV enter property operating income for all periods presented rather than as a non operating items operating income for the 2019 third quarter was $59.9 million as compared to 15.6 million and the 2000.
18 third quarter and operating income for the nine months 2019 was 182.5 million as compared to 181.3 million in the comparable 2018 period.
Now looking at Texas. The company reported income tax expense of 10.9 million for the three months ended September 28 2019.
The effective tax rate is 28.8%, which differs from the federal statutory rate of 21% due primarily to the relative mix of earnings among jurisdictions with different tax rates and nondeductible compensation related items. The company also paid 8.9 million of income taxes in the third quarter as you know con.
Yes continues to discuss the taxes tenders package, including the biofuel tax incentive we are optimistic that the biofuel tax incentive will ultimately be reinstated for 2019, we are projecting an effective tax rate of 30%, excluding the biofuel tax incentives.
If the tax incentive is reinstated retroactively for retroactively for 2018 in 2019, the effective tax rate is projected to be 15%.
Finally, we are projecting cash taxes of approximately 15 million for the fourth quarter.
Capital expenditures were 245.1 million made during the first nine months of fiscal 2019.
We also received a 12.1 million cash dividend from Diamond Green diesel subsequent to the end of the third quarter, bringing total cash dividends received for 2019 from Diamond Green diesel to Darling to be 67.5 million and $107.6 million in the past 12 months, our liquidity remains strong.
Wrong with unrestricted cash of 69.1 million.
And $926.9 million available under our revolving credit line with that ill turn it back over to you read Hey, Thanks, Brad This was a solid quarter, both financially and strategically and while our macro environment presents challenges, we are executing well against our long term growth initiatives driving consistent and improved performance.
Amplified by our vertically integrated supply chain, we're carrying solid momentum into fourth quarter and next year, our circular repurchasing system will provide us a chance next year to prefer to improve earnings even further globally. The demand for low carbon fuels will continue to expand and we are positioned well to capture a guy.
Greater share of the L. CFS in 2020, our expanded footprint for the production of Hydrolyzed College and peptides will also fuel both revenue and earnings growth and finally, our global rendering system should feel the positive effects of a growing global biofuel demand and improving feeding economics.
Lastly, we talked about our sustainability commitment that has always been integral to who we are and what we do everyday essentially our purpose is to re purpose and by doing so leaving a positive impact on our global environment, Our community and our people. We also recognize setting and meeting our sustainability goals is another.
Opportunity for us to positively impact people and the environment, while also improving our risk profile and creating long term shareholder value in September our sustainability Committee published our first SG factsheet, which highlights our progress on seven priority SG focused areas based on both the global.
Reporting initiative or Jianghai and SaaS be the sustainability accounting standards Board. This was clearly and certainly a collaborative effort among our global team and we look forward to building on our momentum as we advance our on growing corporate sustainability commitment and finally as always we appreciate all the contributions of our very.
Hardworking Darling team members and thank them for their continued dedication so Chuck with that let's go ahead and open it up to Q and a.
Thank you we will now begin the question and answer session to actually question. You May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we'll pause momentarily to assemble our roster.
And our first question will come from Heather Jones of Heather Jones Research LLC. Please go ahead ma'am.
Good morning, Thank you.
Thank you for the question.
So I wanted to start with.
Diamond Green.
Randy did you say that in 2020.
Should run at.
Full full capacity for the entire year.
That would be our goal.
Okay, So where we should anticipate a catalyst downtime or whatever it like we had in Q3.
No I wouldn't say that there won't be a catalyst change out next year, but we'll we're going to us that we're going to say 275 million gallons at $1.40. So that'll that should answer your question.
Okay and.
You, probably expect assets, but on the spot margins.
So as dollar 40, the goal or what you're seeing right now because if if I look at current diesel pricing and brands and.
And even assuming not a full capture on the I'll CFS I get too.
Margins well in excess of a Buck 40. So I was wondering if you could help me.
I understand that better.
Your math is a pretty good Heather the Buck 40, I'm throwing out there.
Is simply a benchmark that.
For this moment right now the margins that were CN anywhere in in Q4 to Q1 range from anywhere from a $1.50 to $2.10 a gallon so.
You always want to set yourself enough I don't want to have to go out here, we've not in Havent practice guidance in the past. So we're just throwing $1.40 out.
And that's just kind of where we think the year could average, but I suspect right. Now if you said me for me to recast it looks like it'd be a whole lot better for next year.
Awesome.
My final question is on the.
On the food business.
You mentioned doing more of the hydrolyzed.
Collagen next year. So just wondering thank you all were like at 39 million EBITDA this quarter like how should we be thinking about that.
Run rate and say Q2 of next year, one additional capacity has come on in that in that division.
Yeah. The the two plants and there are three plants that are under construction right now and the two in Europe will finish up in late Q2 next year to be commissioned in Q2 I want to say, so really the any any growth of that would be.
Pretty much in Q3 Q4, and then later in the in the year than the third plant would come online in a in South America for us so.
I think we're finishing out a pretty good year in the food segment I can see the food segment up anywhere you know, 10% next year, plus and that would build momentum even very pretty rapidly Q3 onwards.
Okay awesome. Thank you.
Our next question will come from Chip Moore of Canaccord. Please go ahead.
Yes, Hey, good morning. Thanks.
Randy and follow up on that maybe you can expand on the growth trends, you're seeing particularly in the causing peptides market. We've got the three plants coming on next year. How are you thinking about raw material availability in spreads there.
Yes really.
If you say are we growing our total production capacity, a little bit, but more or less we're adding different types of finishing capacity on three or four existing plants. So really no impact on raw material availability from a total demand perspective, the challenges in raw material.
Ill ability for that business next year are going to be pig skin availability as as I referenced trying to feed a hungry China. They they will eat all cuts of meat and they will make soup from bones, they will take pig skin to fry.
So at the end of the day, we're seeing pig skin move up rapidly in Europe today, we're watching it now start to escalate very rapidly in China.
There was a lot of product that was in cold storage there, it's starting to move up pretty rapidly. So naturally we've got to move our pricing up too to match that and so far the industry appears to be able to react fairly well to those escalations and raw material price. So we're very bullish on that that segment the demand side.
Chip is one where you're starting to from the health and nutrition standpoint, you're seeing just a real movement to the forefront of collagen and college and peptides and different.
Whether its health and nutrition or food applications sports nutrition drinks and wallets, it's pretty much a a significantly driven by as a us phenomenon, we're seeing it move around the world pretty nicely right now and and to be honest. The most of the capacity out there is that we're constructing is committed as.
We go forward and now we're pretty excited about it.
And just a follow up on that Randy given those trends.
How long do you think this expansion served you when might we think about the need for more capacity out in the next couple of years.
I think were.
Essentially we've got a plant in France coming on that that's going to be making our fish products, our fish hydrolyzed colleges.
Our GAAP, Belgium plant that should start up second quarter next year, then down in Brazil. Another bovine hide plant that will come online and then we've got to a fourth one the that should come on probably the start of 2020 .
Hey, good morning, guys.
Good morning, good morning.
Oh, they think about it and you generate more more cash, particularly from Diamond Green diesel.
Can you talk about how you're thinking about the capital allocation.
Oh, the increase cash over the next couple years will you be devoting it more to capex projects from legacy.
Darling will you be giving it back to shareholders to share repurchase how do you think about de leveraging all that because it seems like that's couple of years there'll be a increasing cash flow opportunity then how do you allocate that.
Can I just gave you the simple yes to all your questions there, but I'll give you a little color around him no number one you know we've had a pretty robust capital program here.
Internally as we if we as we growing both but some of our specialty businesses and you think about our specialty businesses.
That's where we're trying to add additional value to the one stop shop concept with the.
Well.