Darling notes mixed pricing environment in softer Q2

Weakness in Food Ingredients segment and lack of blenders credit contribute to lower net income.

Darling Ingredients Inc., a global developer and producer of sustainable natural ingredients from edible and inedible bio-nutrients for customers in the pharmaceutical, food, pet food, feed, industrial, fuel, bioenergy and fertilizer industries, announced financial results for the 2017 second quarter ended July 1, 2017.

For the second quarter of 2017, the company reported net sales of $896.3 million, compared with $877.3 million for the second quarter of 2016. Net income attributable to Darling for the second quarter was $9.1 million, or 5 cents per diluted share, compared to net income of $32.0 million, or 19 cents per diluted share, for the second quarter of 2016. The decrease in net income in 2017 is primarily due to weakness in the Food Ingredients segment, particularly the gelatin business, and the absence of the blenders tax credit, which was included in the second quarter 2016 but has not yet been reinstated for 2017.

"We are pleased with second-quarter performance across most of the segments in light of a mixed global pricing environment and headwinds in South America," Darling chairman and chief executive officer Randall C. Stuewe said. "Sequentially, the Feed segment delivered a very nice performance, while the Food segment results were disappointing due to margin compression from rising raw material prices in our global gelatin business and ongoing macroeconomic issues in Argentina.

"The Fuel segment excelled operationally in the midst of the stalled decision on the blenders tax credit. We remain optimistic that the political environment surrounding the biofuel industry today continues to support the Renewable Fuel Standard and the reinstatement of the blenders tax credit," Stuewe added.

Results by segment

Feed Ingredients. Margins held, and the segment performed well, supported by solid global raw material volumes, especially in Europe. North American protein markets were mixed, with strong pet food demand offset by lagging meat and bone meal pricing. Global fat markets remained firm, with demand trending lower late in the quarter in concert with lower palm oil complex prices.

Feed Ingredients operating income for the 2017 second quarter was $39.0 million, a decrease of $2.4 million (5.8%) from the year-ago quarter. The decrease was due to higher depreciation from new plant locations that were not operating in the first three months of 2016.

Feed Ingredients operating income during the first half was $69.9 million, up $14.6 million (26.4%) from the first six months of 2016. The higher earnings were due to an overall increase in finished product prices, sales volumes and raw material volumes compared to the same period in fiscal 2016.

Food Ingredients. While the Rousselot gelatin business showed steady performance in Europe, the South American gelatin business continued to face headwinds, with margin compression from rising raw material prices and ongoing macroeconomic issues. The CTH casings business delivered improved results as the short hog supply in China drove strong demand for hog casings. Sonac edible fats held margins and contributed as expected despite a weakening global palm oil market.

Food Ingredients operating income was $11.0 million for the second quarter, down $8.7 million (44.2%) versus the 2016 quarter. Earnings in the gelatin business were down primarily due to performance in the South American and North American markets. Darling's South American gelatin business was the primary driver behind the lower earnings — affected by rising raw material prices and continued macroeconomic factors. The North American gelatin business was influenced by higher raw material prices.

The casings business delivered improved performance due to high demand in China that slightly offset lower earnings in the gelatin business. Additionally, selling, general and administrative (SG&A) expenses in the Food Ingredients segment increased approximately $4.8 million primarily due to currency hedge losses in the 2017 second quarter compared to currency hedge gains in the same 2016 quarter.

Food Ingredients operating income was $25.2 million for the six-month period, a decline of $16.3 million (39.3%) versus the 2016 period. Earnings in the gelatin business were down due to the South American market. The casings business delivered improved performance due to high demand in China. SG&A expenses increased approximately $6.3 million primarily due to a reduction of currency hedge gains versus the first half of 2016.

Fuel Ingredients. Rendac and Ecoson brought consistent performance for the segment, but a decline due to the absence of the blenders tax credit affected North American biodiesel facilities. The Ecoson bio-phosphate plant provided normalized results with slightly lower supply volumes, while the Rendac disposal rendering operations leveraged strong volumes.

The Fuel Ingredients segment's income for the second quarter was $2.1 million, down $4.5 million (68.2%) from the same period in fiscal 2016. Results for the North American region for 2017 do not include the blenders tax credit, while fiscal 2016 did. Earnings in Rendac and Ecoson for the three months ended July 1, 2017 were unchanged as compared to the same period in the prior year. Fuel Ingredients income for the six-month period was $5.6 million, a decrease of $7.1 million (55.9%) versus the first half of fiscal 2016.

Diamond Green Diesel (DGD) joint venture. DGD executed well operationally, delivering on its financial profile, and posted earnings before interest, taxes, depreciation and amortization of 61 cents/gal. despite the lack of the blenders tax credit in 2017 versus 2016. A solid cash position and capacity expansion to 275 million gal. of annual production is tracking as planned for second-quarter 2018 completion.

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