Q2 2024 Earnings Summary
- Darling Ingredients expects to deliver $1.3 billion to $1.4 billion of combined adjusted EBITDA for the year, supported by improving fat prices and operational excellence, with the expectation that Diamond Green Diesel (DGD) will run at full capacity in the second half of the year.
- The company's Sustainable Aviation Fuel (SAF) unit is ahead of schedule and on budget, with an anticipated start-up in the fourth quarter of 2024, potentially providing additional earnings upside.
- Darling Ingredients has improved gross margins, controlled capital spending without sacrificing operational excellence, paid down debt, repurchased common stock, and received a $77.1 million cash dividend from DGD, strengthening its financial position and enhancing shareholder value.
- Declining margins in the Food segment due to increased competition and price pressures: The Food segment's EBITDA decreased to $73 million in Q2 2024 from a consistent $85 million to $90 million range since the Gelnex acquisition. This decline was attributed to customer destocking and increased competition in the gelatin market, particularly from South American competitors who have introduced additional capacity and lowered prices to gain market share.
- Uncertainty in achieving EBITDA guidance amidst margin pressures: Analysts expressed concerns about Darling Ingredients' ability to meet its $1.3 billion to $1.4 billion EBITDA guidance for 2024. The company needs to improve quarterly EBITDA by nearly $100 million compared to the first half average, relying on factors like fat price improvements and operational adjustments, which may not fully materialize. ,
- Regulatory and market uncertainties impacting renewable diesel margins: The renewable diesel market faces challenges from perceived overcapacity and an uncertain regulatory environment, including potential delays in California's Low Carbon Fuel Standard (LCFS) program enhancements and the transition from the Biodiesel Tax Credit (BTC) to the 45Z tax credit. These factors, along with competition from imported biofuels, may negatively impact margins at Diamond Green Diesel. ,
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EBITDA Guidance Confidence
Q: What gives confidence in meeting the full-year EBITDA guidance?
A: Management is confident in achieving the full-year EBITDA guidance of $1.3 to $1.4 billion due to several factors. Fat prices have increased from the mid-$0.30s per pound to $0.40–$0.42, contributing an additional $60 million in EBITDA for every $0.05 increase. They expect Diamond Green Diesel (DGD) to run at full capacity in the second half, boosting earnings. Additionally, margin improvements from adjusting processing fees and leveraging infrastructure are anticipated. -
Margin Improvement Outlook
Q: What are the drivers for margin improvement in the second half?
A: Margin improvements are expected from higher fat prices, with every $0.01 increase adding $12–$15 million annually to EBITDA, mainly in the Feed segment. Adjustments in processing fees and procuring raw materials at better prices will also enhance margins. Europe, Canada, and South America are making procurement changes that should widen margins going forward. -
DGD Margin and Capture Rate
Q: Will DGD capture rate improve in Q3 with feedstock prices rising?
A: Yes, with feedstock prices rising, the feedstock price lag that previously depressed DGD margins will now work in their favor, potentially leading to a materially higher capture rate in Q3. -
BTC to 45Z Transition Impact
Q: How will the transition from BTC to 45Z credits affect the business?
A: Management believes 45Z will be implemented by January 1. The end of the BTC may cause imported biofuels to decline due to unfavorable margins without the credit, improving renewable diesel margins domestically as competitors reduce production. Darling is well-positioned to manage the transition risk better than others. -
Capital Allocation Priorities
Q: How is capital being allocated between debt reduction and share buybacks?
A: Debt repayment is the priority, aiming to reduce debt to $4 billion or below. They are generating cash from DGD distributions, improving working capital, and managing CapEx, targeting under $400 million for the year. Share buybacks are considered opportunistically but are secondary to debt reduction. -
DGD Dividends and Debt Reduction
Q: Will DGD continue to pay steady dividends contributing to debt reduction?
A: Yes, they are optimistic about additional distributions from DGD in the second half. Debt reduction is expected to accelerate in Q3, with DGD distributions playing a significant role. Focus on working capital improvements in the core business will also aid in reducing debt. -
SAF Market Outlook
Q: What is the view on SAF supply and demand dynamics going into 2025?
A: The SAF market is evolving with European regulations coming online in 2025. Compliance is required later, but there's strong interest in getting ahead. Demand is building, though the picture is somewhat murky due to unclear rules on imports and 45C credits. A blend of domestic and export sales is expected for their 250 million gallons of SAF. -
Political Risks and Policy Changes
Q: Are there political risks affecting the business outlook?
A: While technically risks exist, management believes biodiesel, renewable diesel, and SAF are nonpartisan issues with broad support due to their importance to agricultural states. They feel comfortable with current policies and expect positive outcomes. The company is favorably positioned as policies transition, such as moving to a Production Tax Credit (PTC). -
Food Segment Performance
Q: What caused the decline in the Food segment's EBITDA, and what's the outlook?
A: The decline was due to customer demand and deflationary pressures leading to rapidly falling prices for commodity gelatin. Overcapacity from South American competitors added pricing pressure. However, demand is picking up, and management remains optimistic about the segment's performance in the back half of the year. -
Internal Initiatives for Margin Enhancement
Q: How are internal initiatives contributing to margin improvements?
A: They are repricing multiyear supply contracts upon renewal based on the current market, which significantly improves margins. Procurement changes in Europe, Canada, and South America are also enhancing margins. An action item list by location is in place to strengthen the business. -
Capital Expenditures and SAF Expansion
Q: What are the plans for CapEx and potential new SAF investments?
A: CapEx spending is winding down, with targets under $400 million for the year. A significant import terminal for fats is being constructed at Port Arthur. Plans for a second SAF plant (SAF 2) are on hold until they secure contracts for more gallons, despite it being engineered and costed out.
Research analysts covering DARLING INGREDIENTS.