Q1 2020 Earnings Call
[music].
Good morning, welcome to Darling ingredients Inc. conference call.
Well discuss the company's first quarter 2020 result, after the company's prepared remark that would be a question and answer session and instructions will be given at that time today's call is being recorded I would now like to turn the conference over to Mr. Jim Arc. Please go ahead.
Welcome to the Darling ingredients earnings call.
Participants on their call this morning, or Randall C., Stuewe, Chairman and Chief Executive Officer.
Fred Phillips, Chief Financial Officer, and John Bullock, our Chief strategy Officer.
There is a slide presentation available and you can find that presentation on the investor page under the events and presentations link on our corporate web site.
During this call, we will be making forward looking statements, which our 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 could materially different because of 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.
As a reminder, for those who have followed Darling the past and an update to those new to our story.
Darling serves the food and agriculture industries as a critical control point for the infrastructure of our global food chain.
Darling primarily receives byproducts from meat production and is also able to receive and process whole animals, but only once they are deceased.
Darlene does not accept live animals, and does not participate and the euthanasia of animals.
Rendering of animals at die outside the food chain is classified by the department of Homeland security to be a critical infrastructure industry.
Additionally, rendering of animal remains as a higher use for organic material than disposal and landfill.
Rendering process also reduces the spread of bacteria and viruses and protects our planet by reducing greenhouse gases carbon dioxide methane and other Mrs missions, which would otherwise result from natural de composition.
Now I would like to turn the call over to Randy Hey, Thanks, Jim Good morning, everyone. Thanks for joining US first off as Jim said, we are considered a critical in a central service to the global food production system, which classifies our employees is essential workers I want to thank those hard working employees of Darling ingredients around the globe for your effort.
It's during this pandemic it is youre devotion and commitment to the company that enabled us to close out the first quarter with a strong financial performance.
Due to the China timing of Chinese new year, and the fact, we had to curtail gelatin production and went through China. During the month of February. We're also learning that during this pandemic are hydrolyzed college in or Pep than products are somewhat discretionary for consumers, but demand for our gelatin products has strengthened as the pharmaceutical Nutriceutical industries.
Actor the increase buying of these products.
The fuel segment performance was once again outstanding Diamond Green diesel a cheap to 63 per gallon, even die margin or 103.6 million.
Of Darlene share of D.G.D., but on the first quarter. Today. This is the biggest even not quarter on record for D.G.D.
Echoing our joint venture partners comments from last week D.G.D. to plant expansion is on time on budget and should be completed in late 2021, and we continue to make progress on the advanced engineering and development cost review for D.G.D. three to be located in Port Arthur Texas, We anticipate getting the green.
My early next year, and we expect the plant would commence operation sometime in 2024. This would increase D.G.D.'s renewable diesel production capacity to over 1.1 billion gallons annually.
In all Darling started the year on a very positive no generating 213.3 million of combined adjusted even for the country.
Now I'd like to hand over the call to Brad take us through a few financial highlights it and then I'll come back to discuss the outlook for the balance of the year. Okay. <unk>. Thank you Randy before we go through our results. Please note that Darling did not adjust our results for the blenders tax credit recorded in the first quarter of 2020 compared to the first quarter 2019 with the meat.
You see being recorded in the fourth quarter of 2019 caused by the reinstatement at that time.
Now for a few of the highlights net sales increase 17.7 million Oh cost of sales and operating expenses decrease 4 million for the first quarter of 2020 as compared to the first quarter of 2019, reflecting improved gross margins for each of our operate reporting segments.
Net income for the first quarter of 2020, total 85.5 million or 51 cents per diluted share compared to a net income of 18 million or 11 cents per diluted share for the 2000 not team first quarter.
In general and administrative expenses were 11.2 million higher in the first quarter of 2020 compared to a year ago due to credits to S.G.N.A. in the first quarter of 2019, primarily related to a consumable fat recovery as well as increase compensation expenses, we expect S.G.N.A. to be lowering the ensuing <unk>.
<unk> 2020, as a large portion of stock compensation expense is recorded in the first quarter.
The company reported income tax expensive 18.3 million for the three months ended March 28 2020.
Effective tax rate of 17.5%, which differ slightly from the federal statutory rate of 21% due primarily does it a blender tax incentives and the relative mix of earnings among jurisdictions with different tax rates. The company also paid 11, and a half million of cash taxes in the first quarter for.
<unk> 20 way or projecting and effective tax rate of 20% and cast taxes, approximately 25 million for the remainder of the year.
Darling share of Diamond ring diesels earnings for the first quarter 2020 was 97.8 million as compared to 24.3 million for the 2019 first quarter significant improvement reflects darlings portion of the blunders tax credit for Q1, 2020, as well as even margins of $1.63 per.
Gallon before including the dollar per gallon V.T.C.
There's no B.T.C. in place for the first quarter of 2019 when that border was reported.
Capital expenditures of 61.6 million were made during the first quarter of 2020.
<unk> was approximately $23 million lower than the first quarter of 2019.
As we indicated in the released yesterday, we are targeting a deferral, a 15% to 20% of cap X. for 2020.
Putting us in a targeted range of 250 to 260 million.
Oh liquidity position remains strong we had 796 million available under a revolving credit facility at March 28, 2020, and as Randy mentioned after the end of the first quarter. We received 125 million dollar cash distribution from Diamond ring diesel as well as the retroactive V.T.C. of 19 million for.
Our bio diesel production.
Lastly are leverage ratio was 3.29 to one and we currently anticipate reducing our leverage ratio below three to one for the remainder of 2020, what's that <unk> turn it back over you Randy Alright, Thanks brand.
As the world begins to reopen from the covert 19 pandemic. Our focus is on safety of our 10000, plus workforce containing to operator plants as efficiently and cost effectively as possible and continuing to execute our global growth strategy for Darling, we are an essential business and a critical part of global food supply chain.
To our best stability, we have continued to run our businesses as usual all our plants globally or operational and very few of experienced any disruptions today.
Let me provide a little insight to what we see now that we are one third of the way through the second quarter.
<unk> rendering business volumes of raw material, so far I've been consistent through April, but ultimately they may Evan flow as our meat processing suppliers try to find a balance of running their plants, while protecting their employees as we mentioned at the top of the call Darling can process whole animals and birds and we have had a good number of hogs and chickens calmer.
Away for rendering in recent weeks as they were D. populated then diverted from the food supply chain due to constraints and the meat processing industry.
Used cooking oil collection predominantly in North American businesses down approximately 20% to 30% from the end of first quarter frankly use cooking oil collection is a very nice business for us, but overall it it's simply averages about 5% of our business mix.
Right now it's difficult to call. The overall impact of there were for the rest of 2020 is several large states are staging the reopening of restaurants over the coming weeks as you know the largest generators abuse cooking oil or the Q.S. ours and while impacted by the pandemic they've been the bright spot in our supply chain also I want to make it clear d.
G.D. is not having any issues securing feedstocks to run the plant at full capacity use cooking oil is simply a low carbon option one of several and the plan is proven its unique flexibility and choosing the most economically viable feedstock.
The food segment will be slightly softer and second quarter as captain sales are slow to rebound at the retail level and we were once again seeing a diversion of porcine raw material out of Europe to China that impacts are edible fast business and it's compressing margins a bit in our pig skin gelatin business.
Covert 19 disruptions to our outside contractors are three new spray drier construction projects I've been put back a couple of months, we anticipate each of these units to contribute in the back half of the year now everyone is <unk> keenly aware of the upheaval in the fuel markets around the globe, particularly gasoline.
Demand being down significantly in the U.S., but diesel demand remains fairly strong as you know DGD produces a drop in green hydrocarbon for global compliance to low carbon fuel initiatives today, we have not witnessed any effect on renewable diesel demand and our logistics of been smooth however, the steep dropping heating oil.
Values has not been met with unnecessary rise and run values are reduction in feedstock cost to keep from impacting near term margins that D.G.D.. We anticipate the D.G.D. will earn approximately $2.25 to $2.50, even not per gallon in calendar 2020, while producing around 285 million gallon.
Green diesel because of the uncertainty to cope with 19 is brought into the economy's World. We currently anticipate our <unk> to be in a range of 425 to 450 million and 2020.
Binding that with our estimated even off from D.G.D., our share of 335 million the results and even not guy was for Darling will be approximately 760 to 785 million for the four year on a combined pro forma basis.
Now with that let's go ahead and it open it up to questions answers. Thank you.
We will have a cross send them harm same about this crime to ask the question you May plus five then one on your cell phone.
Speaker phone please [laughter] crack when the key to withdraw your class. Some please press I then too.
Crime, we will <unk>.
I've first question from Kragh or win from Ross cap and I'll go ahead.
Ah good morning, and thanks for taking my question I hope everybody at Darling as well these days.
There were six foot apart Craig we're safe right now that's perfect. That's perfect. So hey, ranting now all the guys in the bio diesel world have their <unk> their I.R.S. reimbursement checks the B.P.C. checks and that means they have balance sheets again.
Being really economically pressure from the two year hiatus.
They got they got cast about their and bypass and <unk> and run their <unk> their little plans for.
For money right I mean, they find easels, making a little bit of money in some places in the country.
Yeah. There's this create a positive bias for cats pricing looking into at that the second half of the year I know, there's a lot of cross winds, but would you would you expect strong thatched prices to potentially become a little bit strong over the next couple of course.
John Bullock and I are making eye contact her on this one there's you know.
Pretty wide range of opinions here I think in the in the near term here margins in the bio diesel business at least for Darlene at a at Montreal, and then in a Butler, Kentucky or negative.
And so in the near term bio diesel no matter, whether you have cash on the balance sheet or not is not above and at least from our perspective variable costs. So when the short term I don't know that I see much much help their from from the standpoint of batch pricing the the facts pricing that will from at least around the horn here is.
The fact is that there's less used cooking oil as we noted the ethanol plants minier idled right now, there's less distiller's corn oil and ultimately up and down the integrated meet slaughters that have their own rendering plants have been up and down thus, making some of the the different animal fats move up higher and lower.
Or as I said earlier in the comments you know from a bio diesel demands standpoint, which we really don't do that as a core business for US is it ruins of not reacted and heating oil has not not really reacted enough to make it come back Jon you got any other opinions here.
I think I think that's fairly said bio diesel economics are not good at this point in time.
Economics are good.
So I'm not sure I see a strong strong demand driving from the bio diesel sector at today's economics, and we just see lots of moving around the various relatives supplies that stuff changes all the time in terms of how long will use cooking all pickups me down how long will it take to corn industry.
Corn industry ethanol plants to come back on line you know all that stuff, we think's going to happen over a period of time and we'll reestablish to supply chains here you know all over the second quarter and on into the third quarter. So you know, we don't see bad spelling materially materially cheaper, but at the same point in time not.
Sure I see a driving to manufacture moving it a lot higher from the levels.
Okay I'm just understood understood. So one of those a sudden you're you're prepared remarks, if there's enough I caution to balance sheet now <unk> Diamond Green to cover the the <unk> costs for the rest of the year.
You expect time in Green quickly when you're accumulating posh based on your 225 to 250 per gallon recruiting into the air or yeah. He's the profits that we see you know over the next couple of court or something that.
Most likely end up being dividend dividend out had inside 2021.
Yeah, and then and Brad can chime in here and John if necessary.
Ultimately you know <unk>, we came into the end of March there was a quarter of on the balance sheet 170 million 430, B.T.C. coming in and now the the the Jan and I think are starting to trickle in down there.
You know and then we kind of reaffirming the look at a two and a quarter to to a 54 for the year. So I mean, all we wanted to do and this is relations to questions Gemstar could received over the last 30 days was well is darling going to have to make a cash contribution into diamond Green diesel for 2020 to meet the capital construction plan.
No and and so we pulled out 125, because there was so much cash it wouldn't prudent to leave it there and then we said why don't we told you back in February we'd S. estimate almost a 200 million dollar dividend. We left 75 in there just to come out to look then each for the the the normal distribution.
Dividend policy at the end of the the quarter on that the in June 30th and then it'd come out an early July what we see right now and the margins you know spot margins in D.G.D. or back above two bucks a gallon it's been a lot of volatility depending on what day wheel was either zero or $20, a barrel moving heating oil around but but overall.
There's adequate cash there and and we've always been clear all along that we that that the cash would remain there for the balance to fund 2020, and then we didn't anticipate much of a dividend out in 2021, but that can depend on whether the markets you know remain where they're at or move a little higher here John anything else you want to.
No I think that's also Brad Okay. No you you mentioned the distribution policy, Randy and that I mean, yeah <unk>.
We see right now 65, 75 grey would be according to the distribution policy, which would be in early July.
Excellent. Thank thank you for that.
So moving over to the court color rendering business right. The the speculation based on headlines.
You know from the meat industry, given a lot of the volatility and your stop the over the last quarter, you know actually nah nah.
<unk> mentioned the press are actually not feedstock suppliers the Darling even.
Can you may be talk a little bit more about the Evan flow that you're seeing is there any particular geography or you know ports be checking that sharp are all things that you render any particular steep feedstock, that's that's impacting things whereas.
Relative strength coming from <unk> versus some of these others that might be you know on the meat sight seeing a lot of a lot of issues.
It's it's a good question Craig's, it's one that we've you know we've tried to be transparent throughout the quarter. You know there there was a little bit of disruption here and there around the horn is I remind people only one third of darlings employees are in the U.S.
And you always have to keep that in mind that there's a global platform here around the world rendering volumes in Europe, we're very strong and Q1, but we saw the the beep side in Germany start to back off a little bit here, it's still backed off we're seeing a little bit of you know 150 days ago. I told you we had to feed the hungry child.
And then they disappeared from the market their back into a into Europe binding the super cheap cuts pig skin and fatty cuts and lard back out of there and so violent but volumes in April held in there.
You come to the U.S., you've got the poultry guys. The guys that could do retail ran six days a week. The guys that were geared at food service had to read tool and they're running for NAFTA. Five. So you had an uptick on one side and a downtick on the other depending on who you were servicing port guys were running strong as they could be and you and you.
Always have to keep in mind there than in in in the meat production system in North America margins were very very good when we went into the kind of the the the global or the U.S. or North American Lockdown. They over ran the runway. If you will with production saturated the market without food service and then margins went negative.
They are now coming back out of that and but at the end of the day. The you know the animal supply chain at least and specifically on the pork side. They got to keep the animals common. So we've been involved in the as as Jim said in his earlier comments. We we are not in the harvesting or the youth innovation of animals, we pick.
Mortalities, but we're getting anywhere to 30 30 30 to 35 loads of hogs a day under a mid west plants now that are being d. populated and and so that's been a a big turn the the beside really the the beef side for us as it's been kinda without interruption at the end of the day, the guys that have been up and down.
And the Dakota City, the Green leaves the Fort Morgan's they're they're all integrated so that's had very limited impact us I mean, like we said and my comments I you know I've seen April now volumes were pretty consistent around the horn little bit down here, a little bit up here, but overall right in line with where they were in March. So no disruption you know I always give a little.
Cautious statement you know.
No. The if you if you've read the the the headlines. This morning, you've got guys that are down out there and then you've got Joe Sanderson plants that have had you know 100 positives and he continues to run very very strong. So it it's a little bit all over the map right now they use cooking oil side in North America I think the the guys here have called a bottom on April 18th in it.
I could start and open and volumes are coming back that'll take a while that's probably that's not a v. or you that's probably a <unk> a slow rise depending on how the different states open up overtime, but but overall the volumes around the horn today are pretty much you know within a few percent of where they have been.
Great. Thank you for that Randy stay round, everyone and congratulations on on another really solid quarter I'll I'll take my rest of my question is right why.
[noise] I next question from <unk> from Goldman Sachs Go ahead.
Yes. Thank you good morning, everyone.
Yeah.
Maybe Randy just come back to the time in green margins in kind of ties into the bio diesel side and just trying to think about being the normal.
Kind of relationships that you do see between the ruins in in the hub most spread in <unk>, maybe just.
John Bullock Who's passes the answer, but why you haven't really seen that margin spread or the rent prices react as you might have thought over the last 45 days or so it is it just because command is that for for for for diesel infer.
Oil and give it time and it will come back or just let me think about the relationship between.
Between the the beat stocks and <unk> and diesel prices.
This is John <unk>, you know, obviously I think is an understatement of all centuries to say that over the last 60 to 90 days leasing changes in commodity pricing out there that nobody ever thought we would see right. So these are unusual times, we've obviously have a massive impact on the petroleum price.
Change the hobos spread but they're not agricultural products for that enough time to react that's probably true and probably we'll see some reaction as we go forward in terms of the egg pricing.
Rents have other elements that are impacting them right. There's open questions on what's happening with the small refinery exemptions and there's news about that.
The other week in relationship to how that issue is going to be handled. So you have a lot of you have a lot of both kind of how the G.P. A's going to manage the our best to program through the balance and this year.
As well as just seismic changes and those relationships that happen literally overnight and the market is taking some time to adapt and adjust to though so I I think part of what you're seeing as things are both so rapidly over the past 30 or 60 days.
Business as usual and markets take a little bit of time to adjust them react you would anticipate based on watch traditionally happened with the homeless Fred that we would see some type of a reaction on the positive side and the rental market you know [noise]. It hasn't happened so far to remain in that low fifties.
I've seen d. six friends come up quite a bit the ethanol related rents and come up and that relationship is close between D. for D. six if it continues to close and we may see the overall landmark it'd be pushed by the D. six days, but at this point in time, we just haven't had time for the market to react as I think the best answer.
Okay. That's that's helpful.
Then ready you gave a and even outlet for for the base business for 25 to to support 50 for the year I I don't believe he gave an actual explicit range.
On the call at the end of February, but maybe just help us think about.
And dimensionalize the pieces they didn't change in your outlook relative to where you are a couple of months ago, but then feeding in food and.
Potentially just help us thinking about the size and the drivers are those changes.
And I think if you go back you know we we we were looking at if we go back to February we did a kind of you know verbally guide around the 800 number for the year.
You know is in and so at the end of the day that was basically for 50 in the base and and 350 in in D.G.D. on a consolidated adjusted pro forma basis.
<unk> <unk> <unk> without saying that we're taking it down just a little bit out of cautiousness right now to 25 to 250 on on Diamond Green diesel and if you look at it. That's a you know that's 30 40 million, we're still guiding in that 760 range for the year down a little bit we just don't have the visibility.
The out there, but it's still a and nonetheless are going to be a great year for Darling. The core business you know it's holding in there right now after you know if you think of it you you put up a 110 in the core business with you know it feels like the feed segment is pretty solid as long as raw material doesn't fall off the face of the Earth right now.
That's in protein still pretty consistent the food segment is really anchored by the Russolillo business. The the growth that we had planned in in this year's Eve. It off was very strong demand from the hydrolyzed College in business. That's a split between online and retail I can say the online sales are really very strong.
Out there and but the retail sales are lagging right now and the question is how quickly can we get those big box retailers back open ended discretionary income and the comfort and the confidence of the consumer to step back out and start mine and and so really that's kinda, if you're saying the cautiousness that's coming in on on the core business.
This is really the ramp up of the of the pep than or the hydrolyze College in sales, which we think will be strong in the back half of the year. We've met with all our customers you know the the one word that that's common amongst all of them is optimism and and so we're going to go with their optimism at this time and say that they're back end loaded here in into three to four.
Okay that color is a very helpful. All off that's not thank you.
I looks question is from <unk> from J.P. Morgan go ahead.
The morning, and thanks for the question and the press release, you mentioned plans to cut some operating expenses just from what we've heard from some other companies I'd I'd. Just soon there's also some kobe to related costs for employees safety and things like that how does it let out relative to your prior expectation.
I think it was 80 185 million per quarter, an S.G.N.A. and to what extent might be operating expense reductions last beyond some of these these covered costs. Thanks.
Well, we'll split the it's a good question, Tom and and I want to make make it clear I mean, what we're saying is if raw materials fall off dramatically for whatever reason, we lose the plant our suppliers lose a plant we're prepared to make those decisions very rapidly and for low we can tell you I mean, that's not.
Thing I liked to do as we talked about a hungry China 150 days ago 150 days ago. I was short 150 drivers in North America trying to <unk>, you know drive around and collect raw materials to process. So we're we're trying to be very careful and smart about where we furlough and when we for low it.
We have in the larger cities in the metropolitan areas, where use cooking oil volumes are down we have cut back in the sense of reducing the overtime to zero. We've we've knocked down the the routes that we're running to the different days and we furloughed. Some drivers. So we're trying to say that we're we're going to match the work load in the expenses.
As with the with the raw material flow Conversely on the cap X. outflows for the year you know, we we knocked it down very sharply in Q1, we've still got basically a moratorium on cue to which is related to safety, environmental and and and expansion, meaning a pep than plants that are under construction.
Those are that are those are getting the funding right now the S.G.N.A., Brad you want to comment a little bit about sure Randy on the S.G.N.A. as as I said on the car calls for your rent.
Q1 is or high S.S.G.N.A. water and we will be much lower on S.G.N.A. The following quarters one of the key reasons for that is the stock compensation expense.
Bass portion of that Tom is record recorded in the first quarter. So we'll see S.G.N.A. come down.
Noticeably.
Or is it on the initial remarks, we had some credit so reductions to the first quarter of 19 sinister United created a a larger don't so than what we would normally we wouldn't normally see that kinda down some funny versus upon.
Okay. Thanks, Thanks for the color there I wanted to also ask on on the Diamond ring diesel side, obviously during the first quarter of the fuel price declined didn't cause much pressure on <unk>.
And I think the full year out like seem pretty constructive I was just hoping for some clarity on where you bit dot per gallon is tracking currently and where you thought the second quarter might shake out. Thanks.
Yeah, Yeah, John I think Randy mentioned, you know currently we see margins it around the $2 a gallon for the second color.
Basis on what we're seeing in the marketplace right now.
Correct itself as we move through the quarter, but we didn't see the rapid decline in the diesel fuel prices right at the end of the first quarter started to happen in March there and then went through April.
But still running at a very good right and and frankly as we think these markets where you adjust themselves towards the balance of the year were very comfortable in that 225 to 50 for the your outlook.
Okay. Thank you.
I liked the question is from hundred gallons from have their Jones, we used to go ahead.
Good morning.
<unk>.
We're good.
Good good good to hear it.
So half of questions on the core business that I want to stick with dining green for a little bit. So I'm just doing the real quick math or what y'all, Dan and Q1, and then around $2 for Q. too. So for you guys to say 225 to 50 [noise] is that just predicated on a view that the market can't stay at these levels. It.
I'll have to correct itself or do you have some hedges I give you confidence just.
Because a lot of the push back up and getting [noise].
Is you know how you can achieve a smaller so if you could just give us some sense of.
I'm fine.
Where you're getting that confidence from.
Well, obviously, we come up with an excellent excellent first quarter and that factors into our view for the year of the 225 to 50, you know we see the current margins as being as we said you know around the two dollar level certainly less than 263, but $2. A gallon is is nothing this news about and at the end of the day as we've.
Always seen with Diamond every single year, Heather and I say this a million times on these calls.
Every year on a quarter I'm, Puerto basis, you see a lot of volatility around Diamond ring diesels earnings. If you analyze it out you don't see a lot of volatility U.C.S. over the last couple of years, making $1.25 without the tax credit that translates into about $2.25 or slightly more.
With the tax credit and we make more money when we produce more gallons of down and bring diesel. So this story kind of works that way, we don't see it working any differently than that we had such a really good first quarter, though that gives us some confidence that we may be able to beat the 225 for the year and once again as we've talked about earlier in this.
All we have seen seismic shifts in these commodity markets occur and rate that even old guys like myself haven't seen much in our lifetime. Yeah. One of those drops was a big drop and petroleum prices you are really really fast and we you know the question is the agricultural market has to adjust to that.
As a bully adjusted to that at this point in time time, we'll see but if it doesn't that's going to improve the margins are diamond ring diesel as well as we move forward.
Okay that makes sense. Thank you on the core business. So.
Oh, Randy like you mentioned a lot of the cuts we've been C.N.N. beef and pork haven't affected you guys because those are integrate it with rendering but we're saying some big [noise].
Declines and.
On the six placed accent on the pool on our side, which alters clearly a big business for you guys. So asked those cuts roll through.
You know we're tight on <unk>.
We're tight on choice White Green for tighter on top Tallow and then we're going to start getting tighter on paltry fat.
You have to think about how you look at that the balance between your raw materials to process, which would going down would be a negative. But then you should have some list and.
That's priceless or how how to you balance having your mind and how you think of nuts out for Darling.
Yeah, I I I share that with you I mean, the the lower supply from the from the the integrated guys out there is absolutely put in a little bit of floor underneath the fats pricing right now and and I just tend to believe that the the animals are out there and they'll continue at least on the beef and or which.
Truly the the bigger suppliers of facts into the market than than than the poultry side to lean meat side.
You know that that should come through our system and provide a little bit of support but you know ultimately feeding economics out there with lower corn and as we said bio diesel economics or not very favorable out there. Yeah. You can run the map there until ruins react so at the end of the day I don't.
That there's a there's a lot of positive from the standpoint, our volumes remain good prices remain good for fastened proteins in our system, but the outside macro environments are not real positive.
To to continue to say the that we'd see any escalation in price Jon you want to anything that I I think that's fair I mean, you know, obviously, a cow or a big has a lot more fat than a chicken does or just plain bigger. So in terms of reduction of fat supply associated with all three I'm not so sure that I I think that's a major issues.
You said, we got a lot of volatility happening out there. There's a lot of news a lot of pluses and minuses happening what's interesting about our system, though is because of the diversification diversification of the platform. We run we seem to be able to hang in there from an overall profitability standpoint is like massive massive changes from a commodity price Dan.
Point and and potentially around some volume's here, although that seems to kind of work itself out on a on a month to month basis. The the news headlines you know one of the things. It's important when you get into a situation like this is not to get locked to locked into the headline of the day, there's a lot of different headlines out there, but the fact that matter as our business.
His position.
Be able to whether even tremendous storms like we're saying right now is what it looks like as we said in the chair today.
Okay. My file question is I know you guys had done some restructuring of your.
I have your Deadstock business, and how you price that et cetera. So given that restructuring do you still benefit from improvement in meeting down the aisle prices because that is that I've seen some really nice improvement over the last couple of months and so is that you guys still get that benefit.
Well there there yes. The answers yes, there's two there's two sets are mortality businesses in the world today for US there is the <unk> in Europe, which is the you know there has to be incinerated or or taken out of the the food and feed chain that that continues to be a very much a tariff driven business that does get some benefits is.
'cause move in the U.S., we've restructured the the business in the sense that we've we've increased the charges for our service. It's just become more expensive to hire drivers and to run those routes and so yeah. We we fundamentally looked at our business, we looked at our business all throughout the United States weather and and really you you hate to always say.
This way, but the pandemic forced us to to look in the mirror and say what are we good at what aren't we good at what should we be doing where can we leverage something and at the end of the day. We've we've changed a lot of our business model in North America in order to leverage the strengths of an essential and critical service that we provide to get paid fairly.
For it not to say, we were getting paid fairly before but we probably work and so feel very proud about what our leadership teams done in the mid west on our our Deadstock business you know as I said Heather. We're we're part of the the the supply chain for depopulation right now, which is very sad that meet should be being slaughtered and given to the people that are.
In food lines right now and it it just breaks my heart that that it's happening, but at the end of the day instead of it go into the landfill, it's it's going profitably back into an ingredient system.
And and we're going to benefit from it.
Okay. Thank you so much for the <unk> color.
I'm next question as some then <unk> go ahead.
And then.
But pick it up there hey, good Lord you all so.
Ready you said that you don't have a problem with being stalked regarded refusal could you just talk about going forward with with the expansion and then how you evaluate.
The next <unk>.
Number three.
In light of real potentially lower volume some feedstock if that even factors and then there.
I have a few follow up quickly.
<unk> I mean.
Obviously, the availability of base dot you're one of the most important considerations.
Look at any expansion associate finding Randy.
Our view advantage, because it away, leaving physician and relationships and apply thing in our view of the supply channel I don't know who ran a position to be able to.
Move forward on not on any down when I sold to the to evaluate I'm going to do so that's right we always monitor.
He's gay their products are making these capital investment itself so on <unk>.
Or make a decision dogs.
Engineering later this year the final decision as I thought we were being early 2000 L. 21.
We will continue to monitor the feedstocks supply over the next several months to see what happens obviously, we saw big drop in a drop and use cooking all pick out but that seems to be coming back here as we reopen we saw some decline and distiller's corn, all but the ethanol industry. You started opened back up again, so I I think the answer to that.
We're not blind will always monitor the market, we were very comfortable to get to the stage of investigation about diamond ring diesel three that we were at.
We are today very comfortable we will continue to monitor the information over the next several months to make sure that nothing has changed fundamentally in our perspective on it but right now the way it seems as we've had a disruption in supply and a short term kind of looks like that's all starting to work itself back we'll see how far worse itself back over the next.
Four or five months.
Oh, Great and then as we think about.
Capital allocation and the does it how how do you guys way purchasing by Ducks dogs versus.
Versus the library.
Yeah, I think you know Opportunistically, we stepped in I mean, you can do the math of where where we stepped in acquired.
You know, we still have 125 million authorized to dry powder here, if if for some reason the the confidence in the view of what we're we're seeing in the world is different the board will meet to authorize that from time to time there. There's a committee that's been form, but I mean long-term what brads intending to do here.
Is it to our our view is still on taking the cash and delivery you know as as we still talk 150 days ago, our targets to get our to get sub three get investment grade and be down to two and a half times here and and I think that can be accomplished here.
Potentially by the end of the year here would be our goal. So we're still viewing delevering as as probably you know it's superior alternative to buybacks at this time and just positioning clearly band you know I think it's safe to say in the world. The day caches King and everybody gets at you know, we're sitting on quite a pile of cash right now.
We'll use that to deliver here most likely during the second quarter as long as a second wave doesn't flow through this thing, which we don't think it will.
Great and then you know it's early but as you bring on more volume how do we think about the either dog <unk> I I think a lot of was just straight forward <unk> you know whether it's good 25 to 50, but as you bring a lot more volumes, how does that way in with.
<unk>, whether they're step ups.
You're missing requirements in certain areas that the elevate the the carbon credits and I know, it's early but I read on that so downward pressure on either the larger that you bring volleyball.
I think it's a John I mean, I think we've talked about in the past we've been extremely steady at $1.25 without the dash read it to 25 with the tax credit we see the carbon markets and the carbon demand around the world Rawling.
California continuous forward, obviously, Canada now with the reelection of Prime Minister Chicago is moving forward on their nation wide program, New York has a carbon reduction program. We'll we'll see if an L.C.F.S. program develops out of that we just continue to see the L.C.F. asked the reduction of carbon as a trend that continues to move forward. That's.
Going to create demand and that means that.
We think we've got the feedstock and we've got the facilities located in the right place at the right capabilities.
There's going to be very good margins associated with that as we bring these additional capacities online now you know whether it's to 25 or 250, a gallon, we'll see as we get out there in any event, it's going to be an excellent margin from our perspective and that's why we're excited about these expenses.
Great. Thanks, sorry about the feedback effects.
I looks question, it's from Canada, South flow from bank among we I'll go ahead.
Hey, good morning, everyone.
And again.
I just take a step back for a second what do you think the lasting effects of <unk> will be on your business.
[laughter] 10, this is John <unk> I mean.
Yeah, that's a really difficult question answer I I think the important thing here and the short term, we see a lot of headlines and things change on a day to day basis, we had seen a tremendous growth and meet demanded it occurred over the last seven eight years call that probably set set growth factor back a little bit over the next.
You are too, but you know like anything else, we're going to get through this will figure out how to solve the medical problem and then we believe that the world economies will continue to move forward. So we've got a short term pausing interruption clearly I just ruptured economic activity. This disrupted the normal growth patterns that we've seen in the protein markets around.
A world don't know that we see that that fundamentally changes what the direction of the world is May mean, you know a disruption for six months 12 months 18 months that type of thing, but at the end of the day and we don't also see it as mate, resulting in a major decline in protein demand probably more just have a disruption at the increase.
That we had normally B.C. normally been seeing if you take a look at this on like a year long type of a cycle 18 month type of a cycle deal. So yeah, and I I would add to that can I mean, yeah. There are give you on three different levels. One we're learning to manage our business a little differently. The the culture that we've built in the.
Company over over my 10 year was very hands on very visit oriented lots of travel lots of engagement. We're we're learning to use a lot of video and and a lot a lot of phone to the to accomplish what we need to so that's it's teaching us to run our business a little differently now. The second thing is is I think.
This is going to create some pretty interesting opportunities to grow the company again, I think you're going to find that this this has been very tiring no matter what industry are in this has been very stressful and tiring every day, we come in the office and and it's a it's it's kind of a whack a mole situation, it's a diverse platform.
Which is not without a lot of interesting things every day that happens most good some bad but we we react to it so at the end of the day I think you're going to see in our industry, you're going to see some weight players come to market and say this is time to leave.
And whether we can get to evaluation, they're not the thing John and I feel so proud about was we passed last year on five or six businesses that traded at 14 times to 17 times and at the end of the day I, we're starting to see businesses come back to the market between six and eight times. So seems like there's an opportunity to grow that's the that's the out.
Kind of this the good news is as I go home and I'm I'm tired and beat up every day I remind myself people have to eat and nothing's changed their people are gonna eight they're they're not becoming vegetarians life is good and and we we will whether through this and this to show pass.
No I I appreciate that I I would also probably say that there's less cat back spending maybe the market. Eventually gets tighter few which is actually a good thing rather than any sort of gross but <unk>. The other thing I would ask is on the college in business, how how you break it down between pharmaceutical in other parts.
To the business <unk> in what is the growth algorithm. There was I would think that the pharmaceutical side would actually outweigh the other part, but maybe I'm wrong.
Yeah. This is John can turn traditional aided in the traditional gelatin has been the much larger volume part of our business Captain has been the new product line that has been coming on pretty strong material right. The traditional gelatin has been a much larger by volume side segment and you're also absolutely right, we see the demand being.
Reinvigorated in the gelatin side of this business like we haven't seen in four or five years, you know a pandemic puts everybody back to taking vitamins.
And L. OK heading to the local G.N.C. store to see what they can take to feel healthier and so we see a tremendous amount of demand coming back into those products, but captain still we believe as a product that it will come on and the fundamentals for that products still look very very well. It just had a very temporary setback associated with it.
And then just my last question is labor.
I I get to tightness today.
What do you see the labor and the positive over the longer term for you guys I'm assuming.
Oh leave it there I wouldn't assume <unk>, you're telling me.
Yeah <unk> you know so far you know we have tried to and I want to talk from a social perspective, we we have reacted in North America to the the wager incentive increases that were put in place by you know we're on the fringe of the meat processing industry, but it's spills over enough. So we've reacted.
You know for the most part we we're not seeing any labor issue.
Some absenteeism is you can guess in some of the larger metropolitan areas, especially New York, where we've we've had a little bit of sat back here, but overall labor labor is fine.
We we actually employ a different skills that than the than the meat processing industry and more importantly, you know within the average number of employees per plant location around the world's 30. So that's on two or three shifts dependent on and inspected or uninspected plant and so at the end of the day.
They're nicely space I I think it you know the question will become once this the model as you ask before what's changed forever well <unk> you know every day I drive home and I end up picking up five Amazon packages. So we're going to compete for drivers with the Amazon in the delivery services now as the world powers backup and I suspect.
<unk> will continue to be fairly fairly tight for the near future unless that becomes you know obviously wages laughter react to attract talent, which had already started last year and then we'll see where it goes from there but overall you know skill sets are available in life feels pretty good for us out during the labor area right now.
Thank you very much.
I next question it's <unk>.
<unk> pop and I'll go ahead [noise].
Good morning, gentlemen.
Weren't in Tyson.
Between lower feel cost and what should be higher yields from your rendering and our product yells from rendering at least here temporarily.
What impact or are you, saying that on your marshals benefits that we should see on the second quarter.
This John Tyson, we we we have a very.
Very good meal prices at this point in time that prices remain a good we are bringing in some whole animals and talked about earlier and in some cases that does have slightly better yells, although I'm not sure sure from an overall mixed standpoint that that would change our yields all that dramatically in our system.
You know use our margins in first quarter were very good we've not seen this good a protein prices in quite some time in our businesses around the world.
I think that's been a positive impact it's <unk> with a positive back to us in first quarter and and we continue to see those protein prices. The meal prices remain strong as we go through the second quarter. So far so I think that's a positive impact there. So I'd say overall margins look good from.
From a finished products standpoint on <unk> meal prices very good that prices continue to hang and they're very well I'm not sure I see a big change in overall yield, though no like I've read discussion on the left or fat prices given that had ones are both Sawyer and Paul and the global markets.
How realistic is to assume that we'll get this left going through the yield or through the year, Yeah. Paul man, So I do not correspond.
Yeah, I I mean for US we look at it from a very very macro sense and you you you start with the the two biggest soils in the world home and soil.
And Paul has an incredible correlation into the fuel supply, especially in the the tropical climates around the world and and so at the end of the is we came into the year. We felt like palm stocks were under control tree production was gonna be down and we had a pretty bullish horizon there for for the year then all the sudden.
You know heating oil or diesel fuel prices collapsed around the world and that pressured palm Palm then pressure Sawyer and then you know remember the largest amount of soil gets refine and packaged input into the food service trucks or rapeseed oil in Europe same thing as it as it goes to restaurants and pubs.
Two to the deep Fry stuff and until that market kind of comes back you know there there's too much fat in the world right now that needs to to make it's way I don't know that the the consumer in North America or Europe can buy enough one liter bottles at the store to offset what they were eating out in the restaurants in the the 35 gallon jug so.
You know overall, you've just got this this supplied bubbled, it's that's putting pressure on it right now if food service comes back strong and we get some normalization back into the petroleum kind of World then no I think you'll see fat prices improve the the second thing will be what will the slaughter being the second half of the year globally.
Will that be constructive to it will bio diesel margins improve the something's gotta give a wrens or heating oil prices there to get that industry backup, but right now there's a little bit ahead. When there were somewhat insulated from it but overall I'm not sure I see any anything really different than that on the horizon today.
Okay.
[noise] deemed blend any of your renewable diesel.
Not with Petro about with mild.
No you're not just John we did not blend with I don't know, what's your position on companies that do bland alone sell it adds renewable.
About bio diesel in renewable diesel our biomass base diesel so yeah companies do blend that.
That's okay with us.
Is there a reason I don't do it.
Because we we we're a wholesale supplier, we've not mood upstream and that supply chain to sell off of Iraq, and that's a strategic decision. We've made we've evaluated over the years as to whether or not we were able we were better position, we would be in a better position if we did that.
Quite frankly, we haven't seen the advantage of doing.
Okay and the last topic your partner in Diamond has come out here recently in favor of a possible review of our fast 20 levels.
Even before 20 ones come out.
How does that correspond with your own endeavors of one of those levels to maintain themselves out a way to get around the small refinery exemptions, if they just steal wholesale reduction or or or fast levels.
I yeah.
Yeah <unk> at the end it out that us Valera less than a phenomenal partner for us with a diamond Vin diesel and I think two companies can work together better we recognize that they are refining company and they have a refining companies interest to consider as well as what they have invested in diamond ring diesel justice.
We are and agricultural company with investment in Diamond ring diesel and we have our interests. So from time to time from a macro policy perspective out there.
Darling may have slightly different perspectives on the market place and we bring our own perspective to the market place. It has never affected our relationship. We respect the right of allowed to deal with our offense to as they see fit just as they see.
Respect Army, you and how we deal with our best to at the end of the day. We're just two voices out there putting our input into our office too I think the macro picture around our best to remains as it has always remain it as a nickel component of the demand for the American farmer, one third of the corner.
It is in the United States. He goes into ethanol one third of the soybean oil producing the United States goes into Biofuels by abuse alone or nobody so the American farmer is an extremely powerful political force and anybody that wants to take on our fast too is going to have to deal with the American farmer at the end today from a political perspective.
That political pillar has been there is there and we'll continue to be there.
Alright, Thank you gentlemen.
Size.
Hmm.
The last question, it's some Carla fellow from J.P. Morgan go ahead.
Hi, He mentioned that year facilities has been able to process the whole animal.
The typical band drink I'm running at the margins <unk> when you're doing a full animals are says.
The awful.
It depends on the Carlos Randy It depends on on the supplier you know essentially we're we're servicing the large integrated producers out there now that are you know trying to make room in in the in the hog houses for for the next little litter to come along and so it's it's a tragic thing.
For them, we're trying to you know I would tell you that the the margins are are similar to the the deadstock business in in a sense that we're we're just providing a service you know instead of picking up one mortality as I said, we're picking out but I heard last night 30 to 35 loads that day, and say depopulate in that Iowa, Nebraska, Minnesota.
Noise area so.
It's pretty similar it's just tragic.
Yeah, Okay, great and then on the.
Farming demand side, he was talking about how the your customers and not that's nice.
And I I'm trying to understand I mean, giving your sound looks more grumble today, what what percentage of your business does go to that.
Because it to the farmers here to that the grammar.
<unk> why don't you ask the question again, we're not sure what we're trying to answer your.
I guess and try and get a cent say the customer base and how think your customer base in the U.S. thinking of that I guess the.
[laughter] farmers I guess, you mean ranchers are the health of the customer base me you ask for the.
Your your end product.
Is there any effects there from the coding.
Well this is John.
I think overall, if you look at the people that the different industries that use our products.
On the fat side, it's clearly that by the Biofuels industry and feed market out. There you know we continue to think that the demand is gonna be strong on the bio fuel side, particularly they were normal diesel side. So I don't see a big impact their from a fetus standpoint, we talked about earlier, while we hear a lot of news about.
Animals and animals and to be destroyed in the short term and so forth the context of that as we have been seen increase in animal production in the world. The two to three per cent pretty consistently for the past four or five years that probably gets flat line here for some period of time as a result of Kelvin whether or not that exist more than the short term. The long term I don't know you know me.
Bowling me all right now demand is extremely strong in the marketplace out there as as a as we've seen some D.D.G. production and so forth.
Cut back there so I I don't know that but I don't think we see a big decrease in demand going we had then saying a tremendous increase and utilization we still see that on the field side on the feed side, maybe a flat lines for a little bit here, but long term, we don't see a real change in the in the direction.
You know the American farmer today is not doing very well, but we celebrate a little directly back to the American farmer, we sell it to products that are sold to the American farmer in some cases and a lot of cases the products that we sell our product to ultimately go out their food came to the consumer as opposed to going directly back to the to the farmers. So overall, we think.
At a man will continue out there for our products.
Okay. That's great. Thank you.
Oh, right I think that the as I'm looking up on the border that concludes the question answer session want to think everybody for their time and the questions today and we look forward to talking to you an update in in August as we move for with the Q2 performance be safe stay healthy. Thank you.
That's cool close the <unk>. Thank you find pond in today's present post him you may now this cannot.
[laughter].
[laughter].