Darling Ingredients (DAR +1.62%) just reported another encouraging quarter, and the market is responding in kind. On one hand -- and similar to its post-earnings pop despite light revenue three months ago -- shares of the rendering and biodiesel company rose nearly 10% in Thursday's after-hours trading after it announced second-quarter sales fell 16.7% year over year, to $859.3 million. Darling noted global raw material volumes were still stronger on a year-over-year basis, but once again blamed its revenue decline on a combination of lower finished product prices, primarily in the global fat markets, as well as a $113.9 million negative impact from foreign exchange.
On the other hand, Darling remains focused on cost and debt reductions, as well as working capital improvements to offset the impact of these headwinds. Specifically, Darling reduced working capital by $33.8 million from last quarter, slowed capital spending, and -- with the help of a $25 million dividend from its Diamond Green Diesel joint venture with Valero that it received in April -- repaid nearly $70 million in debt this quarter.
Earnings before interest, taxes, depreciation and amortization climbed 7.3% sequentially, to $105.5 million, and adjusted earnings came in at $0.13 per diluted share. Analysts, on average, were anticipating higher revenue of $891.8 million, but significantly lower adjusted earnings of $0.07 per share.
"Our earnings improved sequentially, with all segments showing EBITDA margin improvements," added Darling Ingredients CEO Randall Stuewe. "[...] We very much believe in our strategy and the long-term positioning of our global platform of creating sustainable ingredients for a growing population."
Digging deeper
Darling Ingredients doesn't typically provide quarterly guidance, making it all the more difficult for analysts to forecast its results with any reasonable degree of certainty. Still, we can expect management to provide more clarity during tomorrow's conference call. In the meantime, let's dig deeper into the performance of each of Darling's business segments.
First, Feed Ingredients revenue again played an outsized role driving Darling's revenue decline, with sales down 14.9% year over year, to $529.4 million. Feed Ingredients operating income fell 52.6%, to $35.4 million, including a $1.5 million non-cash inventory step-up adjustment related to Darling's acquisition of VION Ingredients last year. For its weakness here, Darling can thank both foreign exchange and continued declines in the value of finished protein and fat products.
Next, Food Ingredients revenue declined 14.5% year over year, to $283.3 million, and led to a 37.1% increase in operating income, to $15.5 million. Food Ingredients operating income would have climbed a more modest $0.8 million, or 7%, after adjusting for its own $3.4 million non-cash inventory step-up adjustment. Within this segment, Darling's gelatin business once again performed admirably thanks to increased demand in China, and lower raw-materials prices in Europe.
Finally, Darling's Fuel Ingredients segment, excluding the Diamond Green Diesel joint venture, saw net sales decline 40.1% year over year, to $46.5 million, while operating income fell 61%, to just more than $2 million. Including DGD earnings, Fuel Ingredients segment income fell a more modest 13.4%, to $5.8 million, mostly resulting from what Darling describes as an "uncertain regulatory environment with respect to the U.S. mandated [renewable volume obligation] requirements" for 2015, and declining petroleum prices.
Similar to last quarter, however, Stuewe again reiterated: "Our Diamond Green Diesel Joint Venture continued its strong operational performance in the second quarter of 2015 shipping over 44 million gallons of renewable diesel. We remain optimistic that the U.S. Biofuels Tax Extenders package will be reinstated and will retroactively add approximately $25 million to income in the second quarter."
To sweeten the pot, Darling's board also approved the repurchase of up to $100 million of common stock, "depending on market conditions," which equates to roughly 5.5% of Darling's float based on Thursday's closing price.
In the end, putting aside Darling's "light" revenue, this appears to represent yet another good quarter of progress for Darling despite operating in a difficult global environment for its products. But these difficulties won't last forever. And as long as Darling focuses on operational efficiencies and improving its financial position in the meantime, this quarter reinforces investors' beliefs that Darling should ultimately emerge a stronger business for it.
