Business Overview and History
Darling Ingredients Inc. (DAR) is a global leader in repurposing food waste and by-products into sustainable ingredients and renewable energy. With over a century of operational experience, the company has established itself as a pioneer in the circular economy, transforming inedible materials into valuable products that nourish people, feed animals and crops, and power sustainable energy solutions.
Darling Ingredients was founded in 1882 as the Union Rendering Company in Chicago, Illinois. Over the decades, the company has evolved and expanded its operations globally, capitalizing on the growing demand for sustainable, eco-friendly products and solutions. A significant milestone in the company's growth came in 1996 when it acquired The Standard Tallow Corporation, expanding its presence in the rendering industry.
Today, Darling Ingredients operates in over 15 countries, with a diverse portfolio of business segments that include Feed Ingredients, Food Ingredients, and Fuel Ingredients. In 2011, the company made a strategic move to diversify into the renewable fuels market by forming a joint venture called Diamond Green Diesel (DGD) with Valero Energy Corporation. This venture has become a key driver of the company's growth and profitability in recent years.
Throughout its history, Darling Ingredients has faced and overcome various challenges. In 2009, the company received notice from the U.S. Environmental Protection Agency that it was considered a potentially responsible party for alleged contamination in the lower Passaic River in New Jersey. Darling asserted that it was not responsible for any liabilities of its former subsidiary, The Standard Tallow Corporation, and ultimately reached a settlement with the EPA in 2021. The company also faced challenges during the outbreak of the 2009 H1N1 flu, known as "swine flu," which initially impacted its operations. More recently, the outbreak of African swine fever in China and other parts of the world disrupted the global supply of animal by-products, affecting Darling's business.
The Feed Ingredients segment is the company's largest, encompassing the collection and processing of animal by-products, used cooking oil, bakery residuals, and blood products into high-quality proteins, fats, and specialty ingredients for the animal feed, pet food, and aquaculture industries. This segment also includes the rearing and processing of black soldier fly larvae into specialty proteins for use in animal feed and pet food, as well as the provision of grease trap services to food service establishments. The non-food grade oils and fats produced by this segment are principally sold to third parties for use as ingredients in animal feed and pet food, as an ingredient for the production of renewable diesel and biodiesel, or to the oleo-chemical industry.
The Food Ingredients segment focuses on the production of collagen, natural casings, and specialty products for the pharmaceutical, nutraceutical, food, and technical industries. This segment processes beef and pork bone chips, beef hides, pig skins, and fish skins into collagen, and collects and processes porcine and bovine intestines into natural casings. Additionally, it extracts and processes porcine mucosa into crude heparin and collects and refines animal fat into food grade fat.
The Fuel Ingredients segment includes the company's joint venture with Valero Energy Corporation, Diamond Green Diesel, which converts animal fats, used cooking oil, and other feedstocks into renewable diesel and sustainable aviation fuel. This segment also encompasses the conversion of organic sludge and food waste into biogas in Europe, the collection and conversion of fallen stock and certain animal by-products into low-grade energy sources for industrial applications, and the processing of manure into natural bio-phosphate in Europe.
Financials
Darling Ingredients' financial performance has been strong in recent years, with the company reporting annual revenue of $6.79 billion and net income of $647.73 million in fiscal year 2023. The company's operating cash flow for the same period was $899.26 million, and it generated $342.26 million in free cash flow.
In the third quarter of 2024, Darling Ingredients reported net sales of $1.42 billion, with net income of $16.95 million. The company experienced negative operating cash flow of $410.43 million and negative free cash flow of $218.69 million during this quarter. These results represent a decrease in revenue, net income, operating cash flow, and free cash flow compared to the same quarter in 2023, primarily due to lower finished product prices, decreased equity in net income from the Diamond Green Diesel joint venture, and higher interest expense.
For the first nine months of 2024, Darling Ingredients reported net income of $177 million or $1.10 per diluted share, compared to $563.2 million or $3.47 per diluted share for the same period in 2023, indicating that they did not meet their previous guidance for this period.
Liquidity
As of September 28, 2024, Darling Ingredients maintained a solid financial position with a debt-to-equity ratio of 0.93. The company had cash and cash equivalents of $114.78 million and an available credit line of $1.01 billion under its revolving credit facility, taking into account $418.10 million in outstanding borrowings, $73.00 million in ancillary facilities, and $0.70 million in letters of credit issued. The company's current ratio stood at 1.41, while its quick ratio was 0.83, indicating a reasonable level of short-term liquidity.
Operational Excellence and Sustainability Initiatives
Darling Ingredients has a long-standing reputation for operational excellence and a steadfast commitment to sustainability. The company's global network of processing facilities is designed to maximize efficiency, minimize environmental impact, and ensure the highest quality of its products. Darling Ingredients has made significant investments in advanced technologies and process improvements, enabling it to extract maximum value from its raw materials while minimizing waste.
One of the company's most notable sustainability initiatives is its joint venture with Valero, Diamond Green Diesel. This venture has established Darling Ingredients as a leader in the production of renewable diesel and sustainable aviation fuel, leveraging the company's extensive collection and processing capabilities for animal fats and used cooking oil. The success of this joint venture has been a key driver of Darling Ingredients' growth and profitability in recent years.
In addition to its renewable energy initiatives, Darling Ingredients has also made strides in reducing its environmental footprint across its operations. The company has implemented various energy-efficient technologies, optimized water usage, and increased the recycling and repurposing of waste streams. These efforts have contributed to Darling Ingredients' recognition as a sustainability leader in the industry.
Navigating Challenges and Positioning for the Future
Like many companies, Darling Ingredients has faced its share of challenges in recent years, including commodity price fluctuations, supply chain disruptions, and the ongoing impact of the COVID-19 pandemic. However, the company's diversified business model, operational agility, and commitment to innovation have allowed it to navigate these obstacles and emerge as an even stronger industry player.
Looking ahead, Darling Ingredients is poised to capitalize on several key trends and industry tailwinds. The increasing global demand for sustainable products and renewable energy solutions, coupled with favorable regulatory environments in the United States and abroad, are expected to drive further growth and expansion for the company. Additionally, the company's robust pipeline of new product innovations, strategic partnerships, and strategic investments in production capacity are expected to enhance its market leadership and profitability.
For the full fiscal year 2024, Darling Ingredients is projecting combined adjusted EBITDA to be in the range of $1.15 billion to $1.175 billion. While this is lower than their previous performance, it still represents the fourth best year in the company's 142-year history. Looking further ahead to 2025, Darling Ingredients is very optimistic and sees the potential for the combined earning power of their platform to exceed $1.5 billion. This projection is based on assumptions of steady fat prices, Diamond Green Diesel producing approximately 250 million gallons of sustainable aviation fuel (SAF) and 1 billion gallons of renewable diesel, with Renewable Identification Numbers (RINs) and Low Carbon Fuel Standard (LCFS) values staying relatively flat.
The company believes that LCFS and RINs will increase, and waste fat prices will also move higher. They estimate that a $0.01 move in the waste fat price equates to about $12 million in EBITDA annually. Furthermore, Darling is expecting the transition from the blender's tax credit to the Clean Fuels producer credit (45Z) to be positive for the company in 2025, providing additional cash for deleveraging.
Risks and Challenges
While Darling Ingredients' outlook remains positive, the company is not without its risks and challenges. Fluctuations in commodity prices, particularly for animal fats and used cooking oil, can impact the company's margins and profitability. Additionally, the highly competitive nature of the animal feed, collagen, and renewable fuels markets may pressure Darling Ingredients' pricing power and market share.
Regulatory changes, both domestically and internationally, also pose a risk to the company's operations. Shifts in environmental regulations, biofuel mandates, and food safety standards could require significant investments in new technologies and processes, potentially impacting Darling Ingredients' financial performance.
Furthermore, the company's global footprint exposes it to various geopolitical and macroeconomic risks, including currency fluctuations, trade barriers, and supply chain disruptions. Darling Ingredients' management team actively monitors these risks and implements appropriate mitigation strategies to ensure the continued resilience of the business.
Conclusion
Darling Ingredients Inc. (DAR) is a remarkable company that has demonstrated its ability to transform food waste and by-products into valuable, sustainable products that benefit people, animals, and the planet. With a proven track record of operational excellence, innovative solutions, and a steadfast commitment to sustainability, Darling Ingredients is well-positioned to capitalize on the growing global demand for eco-friendly products and renewable energy sources.
Despite the challenges faced in recent years and a softer performance in the most recent quarter, Darling Ingredients' diversified business model, strong financial position, and visionary leadership have positioned the company for continued success. The company's optimistic outlook for 2025, backed by strategic initiatives and favorable industry trends, demonstrates its resilience and potential for growth. As the world increasingly embraces the principles of the circular economy, Darling Ingredients stands as a shining example of how businesses can profitably and responsibly repurpose waste into new, valuable resources.