Earlier this
week Darling
Ingredients (DAR: NYSE)
reported financial results for the quarter ending March 2020. The report and management’s comments during a
following earnings conference call provide a view on how the coronavirus health
crisis is impacting the supply chain that channels wastes from food production
to biofuel and other useful products. As
a link in the food production chain, Darling is considered an essential
business and all its various facilities remain in full operation.
The company
managed to squeeze $85.5 million in net income or $0.51 per share from $852.8
million in total sales in the quarter.
Both sales and earnings were higher than the same quarter a year ago,
giving management something to brag about as analysts and shareholders cued up
for questions on the post-announcement conference call. However, a blenders’ tax credit recorded in
the first quarter of 2020, skews the comparison.
A good share of
the earnings conference call was devoted to the details of Darlings many points
of exposure to price variance from its ‘food, feed and fuel’ raw materials
sources all the way through to end markets.
What stood out for some was management’s ultra-conservative move to
conserve cash as the coronavirus health threat pushes the agriculture industry
into unfamiliar territory.
The capital
budget has been sacrificed to pay for the added costs of keeping employees safe
as the coronavirus makes the rounds in the various communities where the
company operates. As much as 20% of
planned capital spending has been deferred at least until the coronavirus
threat has abated.
Cash does not
appear to be a worry as yet. Operating
activities generated $34.5 million in cash during the quarter, bringing the
cash balance to $75.3 million at end of March.
Just in case working capital seems a bit tight Darling has $795.9
million in available borrowing capacity under fully-committed revolving credit
agreements.
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| Renewable Diesel Tank |
It appears more
likely than not that Darling will get its scheduled distribution from Diamond
Green Diesel, its renewable diesel joint venture with Valero Energy (VLO: NYSE).
In additional to the scheduled payout of $125 million, it there may be an
additional distribution of $65 million to $75 million. Importantly, Diamond Green Diesel is holding
a plump cash kitty of $600 million that is more than enough to pay dividends and
complete an expansion of production capacity.
That means Darling will get an expansion of market opportunity for its
recycled cooking oils without having to ante in funding for construction at Diamond Green’s facility. The expanded
capacity is expected to come online in 2024, bringing total production capacity
to 1.1 billion gallons of renewable diesel annually.
Even during the
current period of business shutdown and work stoppages, demand for diesel has
remained strong. Of course, as the world
turns to online shopping with packages delivered to their door from far and
near, the trucking industry needs more fuel than ever. Diamond Green Diesel produces a drop-in hydrocarbon
that qualifies as a low-carbon fuel that is welcomed by the trucking industry. This
type of renewable fuel has fared better in the current market conditions than
biofuel and ethanol, neither of which are typically drop-in fuels.
Sadly food
animals must de-populated at the farm when meat processors close down to
protect their workers from coronavirus exposure. Some of those hapless animals find their way
to Darling. If constraints continue in
the meat processing industry this practice is likely to cause some spikes and
valleys in Darling’s rendering business in the coming months.
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| DAR-PRO Cooking Oil Collection |
With most of the
restaurants locked tight across the U.S. and Canada cooking oil collections
have declined by as much as 30% in the month of April. There will likely be some impact yet in May
as many communities wait for approval to reopen businesses. Despite this fall-off in used cooking oil volumes,
Darling management was quick to provide assurances that there has been to
difficulty in acquiring adequate feedstock for Diamond Green Diesel. The plant has flexibility in feedstock
options.
With mostly good
news to tell, Darling management was not hesitant to provide guidance for the
year much they usually do after a quarter financial report. They confidently
forecast cash earnings (EBITDA) for the year could range from $425 million to
$450 million. Adding in Darling’s share
of cash earnings from Diamond Green Diesel could bump Darling’s haul for the
year to $760 million to $785 million.
There are,
unfortunately, a number of shoes that could still drop from the coronavirus
centipede. In answer to questions during
the earnings conference call Darling management admitted that agriculture
commodity prices have not yet reacted fully to one of the biggest side effects
of the pandemic, the dramatic fall in oil and gas prices. The subsequent impact on prices of grains,
meats and oils may be yet to ripple through Darling’s markets.
Neither the author of the Small Cap Strategist web
log, Crystal Equity Research nor its affiliates have a beneficial interest in
the companies mentioned herein.
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