Darling Ingredients Inc. (NYSE:DAR) Q4 2023 Earnings Call Transcript February 28, 2024
Darling Ingredients Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Darling Ingredients Incorporated Conference Call to discuss the company's Fourth Quarter and Fiscal Year 2023 Results. [Operator Instructions] Today's call is being recorded. I would like to turn the call over to Ms. Suann Guthrie. Please go ahead.
Suann Guthrie: Thank you. Thank you for joining the Darling Ingredients' fourth quarter and fiscal year 2023 Earnings Call. Here with me today are Mr. Randall C. Stuewe, Chairman and Chief Executive Officer, Mr. Brad Phillips, Chief Financial Officer, Mr. Bob Day, Chief Strategy Officer, and Mr. Matt Jansen, Chief Operating Officer of North America. Our fourth quarter and fiscal year 2023 earnings news release and slide presentation are available on the Investor page under the Events and Presentations tab on our corporate website and will be joined by a transcript of this call once it is available. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events.
These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results can materially differ because factors discussed in yesterday's press release and the comments made during this conference call and in the Risk Factors section of our Form 10-K, 10-Q and other reported filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. Now I will hand the call over to Randy.
Randy Stuewe: Okay. Thanks, Suann. Good morning, everyone. Thanks for joining our fourth quarter and fiscal year '23 earnings call. In 2023, Darling Ingredients delivered its sixth consecutive record year in terms of combined adjusted EBITDA at $1.61 billion. The vertical platform we have built demonstrated its ability to perform solidly despite significant volatility in the global food, feed and fuel ingredient markets. Turning to the Feed Ingredients segment. Despite lower prices for most finished goods, our global spread management process and increased volumes compared to 2022 helped to offset the impact. Our laser focus on margin management and continued strategic review of our asset mix, both segment and geographic, ensured our margins remained in alignment with our expectations.
In addition, during 2023, we made the decision to close two bakery plants, Muscatine, Iowa and Bryan, Texas. Turning to our Specialty Food Ingredients segment. Raw material volumes increased about 11% year-over-year, primarily due to our Gelnex acquisition and continued product mix shift. We continue to see strong performance and continued growth in China and North America consumer markets, and remain very optimistic about our Health Nutrition business line. Hydrolyzed collagen will continue to play a key role in our long-term growth strategy. Leveraging our extensive research and development in this area, we have successfully isolated individual peptides with targeted benefits related to various health concerns such as glucose moderation and memory retention.
The potential applications are expensive, and we are excited to introduce some of these innovative products to the market later this year. Turning to our Fuel segment. Our European Renewable Energy segment continues to deliver very strong results. Lower diesel prices, RINs and LCFS values and a lower of cost or market inventory valuation impacted DGD margins for the quarter. However, DGD had an impressive year with 1.25 billion gallons of renewable diesel sold at an EBITDA per gallon of $0.81, which is still above our 12-year-old investment case of $0.79 of EBITDA per gallon. With this, I'd like to turn the call over to Brad to take us some financial comments, and then I'll come back with my thoughts on the rest of '24. Brad?
Brad Phillips: Okay. Thanks, Randy. Net income for the fourth quarter of 2023 totaled $84.5 million or $0.52 per diluted share compared to net income of $156.6 million or $0.96 per diluted share for the fourth quarter of 2022. Net sales were $1.61 billion for the fourth quarter 2023 as compared to $1.77 billion for the fourth quarter 2022. Operating income decreased $90.4 million to $158.8 million for the fourth quarter of 2023 compared to $249.2 million for the fourth quarter of 2022, primarily due to Darling's share of Diamond Green Diesel's earnings decreasing $118.8 million attributable to lower RINs and LCFS values and a $60.9 million lower of cost or market adjustment. This decline in DGD's earnings was somewhat offset by Darling's Global Ingredients fourth quarter 2023 gross margin, increasing $47.6 million as compared to the fourth quarter of 2022 due to continued improvement from integration work within our acquired companies, which was supplemented in the fourth quarter by a reimbursement for certain costs related to Valley proteins.
A selection of pet food ingredients being prepared in a kitchen for quality and safety testing.
In terms of non-operating items, interest expense increased from $46.1 million in the fourth quarter of 2022 to $68.5 million in the fourth quarter of 2023, reflecting the acquisition of Gelnex earlier in 2023. For the three months ended December 30, 2023, the company recorded income tax expense of $7.2 million, yielding an effective tax rate of 7.7%, which differs from the federal statutory rate of 21% due primarily to biofuel tax incentives, the relative mix of earnings among jurisdictions with different tax rates, state income taxes, certain taxable income inclusion items in the U.S. based on foreign earnings and losses that provided no tax benefit. The company's effective tax rate, excluding the biofuel tax incentives was 33% for the three months ended December 30, 2023.
The company paid $24.9 million of income taxes in the fourth quarter. Net income for fiscal year 2023 totaled $647.7 million or $3.99 per diluted share compared to net income of $737.7 million or $4.49 per diluted share for fiscal year 2022. Net sales were $6.79 billion for fiscal year 2023 as compared to $6.53 billion for fiscal year 2022. Operating income decreased $79.3 million to $949.7 million for fiscal 2023 compared to $1.03 billion for fiscal year 2022, primarily due to $107.3 million increase in depreciation and amortization and $105.9 million increase in selling, general and administrative expenses reflective of the acquisitions completed during fiscal years 2022 and 2023. These expenses were primarily offset by $115.4 million gross margin improvement in the Global Ingredients business as reflected in the gross margin percent increasing in fiscal 2023 to 24.2% as compared to 23.4% for fiscal year 2022.
There was a $94.3 million increase in non-operating expenses in fiscal 2023 as compared to fiscal year 2022, which was primarily attributable to $133.7 million increase in net interest expense for fiscal year 2023 to $259.2 million as compared to $125.6 million for fiscal 2022. The increase in interest expense was somewhat offset by foreign currency gains as well as physical damage insurance recoveries. The company recorded income tax expense of $59.6 million for fiscal year 2023. The effective tax rate was 8.3% and cash tax payments for 2023 were $152.7 million. Now for 2024, we are expecting a 15% effective tax rate and cash taxes to be similar to 2023 of approximately $155 million. The company's total debt outstanding at fiscal year-end 2023 was $4.4 billion as compared to $3.4 billion at fiscal year-end 2022.
Our bank covenant leverage ratio at the end of fiscal 2023 was 3.26x. We currently have $832.5 million available on our revolving credit facility as of year-end. Capital expenditures totaled $174.9 million for the fourth quarter 2023 and $555.5 million for fiscal year 2023. The company repurchased approximately 926,000 shares of its common stock during fiscal year 2023 at a cost of approximately $52.9 million. The company enters fiscal year 2024 projecting $500 million in capital expenditures and is committed to applying our expected free cash flows to debt reduction. The company will continue to evaluate opportunistic share repurchases. With that, Randy, I'll turn it back to you.
Randy Stuewe: Well done. Thank you, Brad. 2023 is in the record books, and we believe we are well positioned to once again deliver strong earnings and cash flow in 2024. We have built a well-balanced global business model between our Specialty Ingredients businesses and Diamond Green Diesel. It's a bit early to guide on 2024 as the global fats and proteins markets are a bit off. This is a result of replenished global oilseed stocks, global consumer demand and phantom or delayed start-ups of renewable diesel plants. However, let me be clear, if these plants get built and become more reliable and more renewable diesel comes on the market, we should see fat prices move higher. Clearly, the incentive is there to favor low CI waste fats versus refined soybean oil.
And this is going to provide opportunity for our core Ingredients business and ultimately benefit Diamond Green Diesel. Prioritizing cost management, working capital improvements and conducting a robust review of our global asset portfolio continues to be our main focus. We are taking a deep dive into every factory's contribution and reviewing opportunities to improve performance. Now DGD is performing well. And despite concerns about RIN markets and LCFS values, our outlook for this business remains very positive as decreasing fat prices are expected to bolster DGD margins. We are excited about entering the sustainable aviation fuel market in the near future and anticipate margins that are well within the expectations we have communicated.
We remain committed to working our way toward investment grade through slightly reduced capital expenditures this year, a focus on lowering working capital and anticipated dividends from Diamond Green Diesel. Starting with Q1 2024, we aim to accelerate our earnings schedule, and I anticipate we will release and host our Q1 call at the end of April. At this time, I'll be able to provide you more details on guidance and outlook on how I see the year shaping up. With that, let's go ahead and open it up to Q&A.
