Darling Ingredients Inc. (DAR) Q1 2020 Earnings Report, Transcript and Summary

Good morning. Welcome to Darling Ingredients, Inc. conference call to discuss the Company’s first quarter 2020 results. After the company’s prepared remarks, there will be a question-and-answer session and instruction will be given at that time. [Operator Instructions] I would now like to turn the conference over to Mr. Jim Stark. Please go ahead.

Welcome to the Darling Ingredients Earnings call. Participants on the call this morning are Randall C. Stuewe, Chairman and Chief Executive Officer; Brad 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 website. 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 could materially differ 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 in 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. Darling does not accept live animals and does not participate in the euthanasia of animals. Rendering of animals that die outside the food chain is classified by the Department of Homeland Security to be a critical infrastructure industry. Additionally, rendering of animal remains is a higher use for organic material than disposal and landfill. The rendering process also reduces the spread of bacteria and viruses, and protects our planet by reducing greenhouse gases, carbon dioxide, methane and other emissions, which would otherwise result from natural decomposition. 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 and essential service to the global food production system, which classifies our employees as essential workers. I want to thank those hard-working employees of Darling Ingredients around the globe for your efforts during this pandemic. It is your devotion and commitment to the company that enabled us to close the first quarter with a strong financial performance. I also want to add our thanks to all the frontline heroes battling COVID-19. Darling appreciates the dedication being demonstrated during these challenging times. First off, on the COVID-19 front, our team worked quickly to institute social distancing, provided PP&E as necessary, allowed work from home when possible, stepped up our sanitation schedules, eliminated all nonessential visits to our locations and established other guidelines necessary to keep our employees safe while at our factories or while they are servicing our suppliers and customers. We dutifully continue to follow CDC, OSHA, provincial and country guidelines for maintaining a safe workplace at our 200-plus plant locations on five continents around the world. Now let’s go to the first quarter highlights. During the quarter, we repurchased 2.2 million shares totaling $55 million. That was the largest repurchase we have made in our history and we will continue to be opportunistic with capital allocation around share repurchases. We feel strongly about our company, its role in the global food supply chain and the anticipated cash coming from our core business and Diamond Green Diesel. As we indicated on our last call, we expected Diamond Green Diesel to receive $430 million of retroactive blenders tax credit for 2018 and 2019 during April, which we did. DGD has also started to receive the BTC for 2020. And as we noted in the earnings release yesterday, DGD had more than $600 million of cash in April which led the DGD Board to distribute early $125 million distribution to each of its partners. We anticipate receiving another $65 million to $75 million in July, consistent with the distribution policy of DGD. Given our current operating margins and available cash within DGD, there is adequate cash to pay for the expected construction cost of nearly $400 million for the balance of 2020. Now let’s put some color around our operating moments in several areas. During the first quarter of 2020, Darling once again displayed the diversity of its global platform and its ability to deliver solid earnings in a challenging macro environment. Darling reported better results in our feed segment where raw materials processed continued to show growth sequentially and year-over-year with a 2.9% increase in volumes from the first quarter of 2019. We also saw improvement in the gross margins of this segment because of higher fat prices globally and improving protein prices domestically. Our specialty businesses also delivered nicely as they allow us to arbitrage different parts of the supply chain to higher-value products. The food segment turned in better performance sequentially compared to the fourth quarter, but was under a year ago period. This is partially due to the timing of Chinese New Year and the fact we had to curtail gelatin production in Wenzhou, China during the month of February. We are also learning that during this pandemic, our hydrolyzed collagen or Peptan products are somewhat discretionary for consumers. But demand for gelatin products has strengthened as the pharmaceutical and nutraceutical industries react to the increased buying of these products. The fuel segment performance was once again outstanding. Diamond Green Diesel achieved $2.63 per gallon EBITDA margin or $103.6 million of Darling share of DGD EBITDA in the first quarter. To date, this is the biggest EBITDA quarter on record for DGD. Echoing our joint venture partners’ comments from last week, DGD two 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 DGD three to be located in Port Arthur, Texas. We anticipate getting the green light early next year, and we expect the plant would commence operations sometime in 2024. This would increase DGD’s renewable diesel production capacity to over 1.1 billion gallons annually. In all, Darling started the year on a very positive note, generating $213.3 million of combined adjusted EBITDA for the country. Now I’d like to hand over the call to Brad, take us through a few financial highlights, and then I’ll come back to discuss the outlook for the balance of the year. Okay, Brad?

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 BCC being recorded in the fourth quarter of 2019 caused by the reinstatement at that time. Now for a few of the highlights. Net sales increased $17.7 million, while cost of sales and operating expenses decreased $4 million for the first quarter of 2020 as compared to the first quarter of 2019, reflecting improved gross margins for each of our reporting segments. Net income for the first quarter of 2020 totaled $85.5 million or $0.51 per diluted share compared to a net income of $18 million or $0.11 per diluted share for the 2019 first quarter. Selling, general and administrative expenses were $11.2 million higher in the first quarter of 2020 compared to a year ago due to credits to SG&A in the first quarter of 2019, primarily related to a consumables VAT recovery as well as increased compensation expenses. We expect SG&A to be lower in the ensuing quarters of 2020 as a large portion of stock compensation expense is recorded in the first quarter. The company reported income tax expense of $18.3 million for the three months ended March 28, 2020. The effective tax rate is 17.5% which differs slightly from the federal statutory rate of 21%, due primarily due to the blender tax incentives and the relative mix of earnings among jurisdictions with different tax rates. The company also paid $11.5 million of cash taxes in the first quarter. For 2020, we are projecting an effective tax rate of 20% and cash taxes of approximately $25 million for the remainder of the year. Darling’s share of Diamond Green Diesel’s earnings for the first quarter of 2020 was $97.8 million as compared to $24.3 million for the 2019 first quarter. The significant improvement reflects Darling’s portion of the blenders tax credit for Q1 2020 as well as EBITDA margins of $1.63 per gallon before including the dollar per gallon BTC. There was no BTC in place for the first quarter of 2019 when that quarter was reported. Capital expenditures of $61.6 million were made during the first quarter of 2020 and the CapEx spend was approximately $23 million lower than the first quarter of 2019. As we indicated in the release yesterday, we are targeting a deferral of 15% to 20% of CapEx for 2020, putting us in a targeted range of $250 million to $260 million. Our liquidity position remains strong. We had $796 million available under our revolving credit facility at March 28, 2020, and as Randy mentioned, after the end of the first quarter, we received a $125 million cash distribution from Diamond Green Diesel as well as the retroactive BTC of $19 million for our biodiesel production. Lastly, our leverage ratio was 3.29:1 and we currently anticipate reducing our leverage ratio below 3:1 for the remainder of 2020. With that, I’ll return it back over to you, Randy.

All right. Thanks, Brad. As the world begins to reopen from the COVID-19 pandemic, our focus is on safety of our 10,000-plus workforce, continuing to operate our 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 the global food supply chain. To our best ability, we have continued to run our businesses as usual. All our plants globally are operational and very few have experienced any disruptions to date. Let me provide a little insight to what we see now that we are one third of the way through the second quarter. For our rendering business, volumes of raw materials so far have been consistent through April, but ultimately, they may ebb and 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 come our way for rendering in recent weeks as they were depopulated and diverted from the food supply chain, due to constraints in the meat processing industry. Used cooking oil collection, predominantly in North American business is down approximately 20% to 30% from the end of first quarter. Frankly, used cooking oil collection is a very nice business for us. But overall, it simply averages about 5% of our business mix. Right now, it’s difficult to call the overall impact for the rest of 2020 as several large states are staging the reopening of restaurants over the coming weeks. As you know, the largest generators of used cooking oil are the QSRs and while impacted by the pandemic, they’ve been the bright spot in our supply chain. Also, I want to make it clear, DGD is not having any issues securing feed stocks to run the plant at full capacity. Used cooking oil is simply a low-carbon option, one of several, and the plant has proven its unique flexibility in choosing the most economically viable feedstock. The food segment will be slightly softer in second quarter as Peptan sales are slow to rebound at the retail level, and we are once again seeing a diversion of forcing raw material out of Europe to China that impacts our edible fats business and is compressing margins a bit in our pig skin gelatin business. Because of COVID-19 disruptions to our outside contractors, our three new spray dryer construction projects have been pushed back a couple of months. We anticipate each of these units to contribute in the back half of the year. Now everyone is 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. To date, we have not witnessed any effect on renewable diesel demand, and our logistics have been smooth. However, the steep drop in heating oil values has not been met with the necessary rise in RIN values or a reduction in feedstock costs to keep from impacting near-term margins at DGD. We anticipate that DGD will earn approximately $2.25 to $2.50 EBITDA per gallon in calendar 2020, while producing around 285 million gallons of green diesel. Because of the uncertainty that COVID-19 has brought into the economies of the world, we currently anticipate our core EBITDA to be in the range of $425 million to $450 million in 2020. Combining that with our estimated EBITDA from DGD, our share of $335 million, the results and EBITDA guidance for Darling will be approximately $760 million to $785 million for the full year on a combined pro forma basis. Now with that, let’s go ahead and then open it up to questions and answers. Thank you.

[Operator Instructions] Our first question is from Craig Irwin from Roth Capital. Go ahead.

Good morning and thanks for taking my questions. I hope everybody at Darling is well these days.

We’re six foot apart, Craig, we’re safe right now.

That’s perfect. That’s perfect. So hey Randy, now all the guys in the biodiesel world have their IRS reimbursement checks, the BTC checks. And that means they have balance sheets again after being really economically pressured from a two year hiatus. They got cash to go out there and buy fats and run their little plants for money, right? Biodiesel is making a little bit of money in some places in the country. Does this create a positive bias for fats pricing looking into the second half of the year? I know there’s a lot of crosswinds, but would you expect strong fats prices to potentially become a little bit stronger over the next couple of quarters?

One bullock and I are making eye contact here on this one. There’s a pretty wide range of opinions here. I think in the near-term here, margins in the biodiesel business, at least for Darling, at Montreal and in Butler, Kentucky, are negative. And so in the near term, biodiesel, no matter whether you have cash on the balance sheet or not is not above at least from our perspective, variable cost. So in the short term, I don’t know that I see much help there from the standpoint of fats pricing. The fats pricing that will firm at least around the horn here, is the fact is that there’s less used cooking oil, as we noted. The ethanol plants, many are idled right now. There’s less distillers corn oil. And ultimately, up and down, the integrated meat slaughters that have their own rendering plants have been up and down, thus making some of the different animal fats move up higher and lower. As I said earlier in the comments, from a biodiesel demand standpoint, which we really don’t view that as a core business for us, is that RINs have not reacted, and heating oil has not really reacted enough to make it come back. John, you got any other opinions here?

No. I think that’s fairly said. Biodiesel economics are not good at this point in time. Renewable diesel economics are good. So I’m not sure I see strong, strong demand driving from the biodiesel sector at today’s economics. And we do see lots of movement around the various relative supplies. That stuff changes all the time in terms of how long we’ll use cooking oil pickups be down. How long will it take to corn industry, the distillers corn industry, the ethanol plants to come back online. All that stuff we think’s going to happen over a period of time, and we’ll reestablish the supply chains here over the second quarter and on into the third quarter. So we don’t see fats as going materially, materially cheaper. But at the same point in time, not sure I see a driving demand factor, moving it a lot higher from these levels.

Okay. Understood. So one of the things you said in your prepared remarks is there’s enough cash on the balance sheet now at Diamond Green to cover the capex cost for the rest of the year. Would you expect Diamond Green to continue accumulating cash based on your $2.25 to $2.50 in EBITDA per gallon through the end of the year? Or is the profits that we see over the next couple of quarters, something that would most likely end up being dividended out ahead of 2021.

Yes. And Brad can chime in here and John, if necessary. Ultimately, we came into the end of March. There was a quarter on the balance sheet, $170 million, $430 million BTC coming in. And now the Jan and Feb, I think, are starting to trickle in down there. And then we kind of reaffirming the look at a 2.25% to 2.5% for the year. So I mean, all we wanted to do, and this is relations to questions Jim Stark had 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? The answer is no. And so we pulled out $125 million because there was so much cash. It wasn’t prudent to leave it there. And then we said, well, we told you back in February, we’d estimate almost a $200 million dividend. We left $75 million in there just to come out to look then each for the normal distribution dividend policy at the end of the quarter or at the end of June 30 and then it had come out in early July. What we see right now in the margins spot margins in DGD are back above $2 a gallon. It’s been a lot of volatility depending on what day, oil was either $0 or $20 a barrel. Moving heating oil around. But overall, there’s adequate cash there. And we’ve always been clear all along 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 remain where they’re at or move a little higher here. John, anything else you want to, like add?

No, I think that’s all said.

No, you mentioned the distribution policy, Randy, and that’s it. I mean, based on what we see right now, that 65, 75, Craig, would be according to the distribution policy, which would be in early July.

So, moving over to the core rendering business, right, the speculation based on headlines from the meat industry, driven a lot of the volatility in your stock over the last quarter. Actually, often, when the parties mentioned in the press are actually not feedstock suppliers to Darling even. Can you maybe talk a little bit more about the ebb and flow that you’re seeing? Is there any particular geography for pork, beef, chicken, fish are all things that you render. Any particular feedstock that’s impacting things? Where is the relative strength coming from for you guys versus some of these others that might be on the meat side, seeing a lot of issues.

It’s a good question, Craig, because it’s one that we’ve tried to be transparent throughout the quarter. There was a little bit of disruption here and there around the horn. As I remind people, only one third of Darling’s 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 were very strong in Q1. But we saw the beef side in Germany start to back off a little bit here. It’s still backed off. We’re seeing a little bit of 150 days ago. I told you we had to feed a hungry China. And then they disappeared from the market. They’re back into Europe, buying the super cheap cuts, pig skin and fatty cuts and lard back out of there. And so but volumes in April held in there. Then 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 foodservice had to retool, and they’re running 4.5 to 5.0. So, you had an uptick on one side and a downtick on the other, depending on who you were servicing. Pork guys were running strong as they could be. And you always have to keep in mind there that in the meat production system in North America, margins were very, very good when we went into the kind of the global or the U.S. or North American lockdown, they overran the runway, if you will, with production, saturated the market without foodservice and then margins went negative. They’re now coming back out of that and but at the end of the day, the animal supply chain, at least and specifically on the pork side, they got to keep the animals coming. So, we’ve been involved in the -- as Jim said in his earlier comments, we are not in the harvesting or the euthanization of animals. We pick up mortalities, but we’re getting anywhere to 30 to 35 loads of hogs a day into our Midwest plants now that are being depopulated. And so that’s been a big turn. The beef side. Really, the beef side for us has been kind of without interruption at the end of the day. The guys that have been up and down the Dakota City, the Greeleaves, the Fort Morgans, they’re all integrated. So that’s had very limited impact to us. I mean, like we said in my comments, I’ve seen April now. Volumes were pretty consistent around the horn, a little bit down here, a little bit up here. But overall, right in line with where they were in March. So no disruption. I always give a little cautious statement. If you’ve read the headlines this morning, you’ve got guys that are down and out there. And then you’ve got Joe Sanderson’s plants that have had 100 positives, and he continues to run very strong. So it’s a little bit all over the map right now. The used cooking oil side in North America. I think the guys here have called a bottom on April 2018, and it feels like it’s starting to open and volumes are coming back. That take a while. That’s probably that’s not a V or a U, that’s probably swoosh, a slow rise depending on how the different states open up over time. But overall, the volumes around the horn today are pretty much within a few percent of where they have been.

Great, thank you

Our next question is from Adam Samuelson from Goldman Sachs. Go ahead.

Yes, thank you. Good morning, everyone. Yes. Maybe, Randy, just come back to Diamond Green margins and it kind of ties into the biodiesel side. And just trying to think about, I mean, the normal kind of relationships that you do see between the RINs and the Hobo spread in veg oil and maybe just maybe it’s John Bullock who’s best positioned to answer. But why you haven’t really seen that margin spread or the RIN prices react as you might have thought over the last 45 days or so? Is it just because demand is just that poor for diesel and for oil and give it time and it will come back? Or just help me think about the relationship between the destocks and RINs and diesel prices?

This is John Bullock. Obviously, I think it’s an understatement of all centuries to say that over the last 60 to 90 days, we’ve seen 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 that’s changed the Hobo spread, whether or not agricultural products have had enough time to react, that’s probably true, and probably we’ll see some reaction as we go forward in terms of the ag pricing. RINs 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 every other week in relationship to how that issue is going to be handled. So you have a lot of both, kind of how the EPA is going to manage the RFS two program through the balance of this year. As well as just seismic changes in those relationships that happen literally overnight, and the market is taking some time to adapt and adjust to those. So I think part of what you’re seeing is things have moved so rapidly over the past 30 or 60 days. It’s not business as usual, and markets take a little bit of time to adjust and react. You would anticipate, based on what’s traditionally happened with the Hobo spread, that we would see some type of a reaction on the positive side in the RINs market. It hasn’t happened so far. It’s remained in that low 50s. We have seen D six RINs come up quite a bit. The ethanol-related RINs have come up, and that relationship is closed between D4 and D 6. If it continues to close, and we may see the overall RIN market be pushed by the D six values. But at this point in time, we just haven’t had time for the market to react is, I think, the best answer.

Okay. That’s helpful. And then, Randy, you gave an EBITDA outlook for the base business, $425 million to $450 million for the year. I don’t believe you gave an actual an explicit range back on the call at the end of February. But maybe just help us think about and dimensionalize the pieces that have changed in your outlook relative to where you were a couple of months ago. Within Feed and food and to potentially just help us think about the size and the drivers of those changes?

Yes, and I think if you go back, we were looking at if we go back to February, we did kind of verbally guide around the $800 million number for the year. And so at the end of the day, that was basically $450 million in the base and $350 million in DGD on a consolidated, adjusted pro forma basis. We’re without saying it, we’re taking it down just a little bit out of cautiousness right now, 225.0 to 250.0 on Diamond Green Diesel. And if you look at it, that’s $30 million, $40 million. We’re still guiding in that $760 million range for the year, down a little bit. We just don’t have the visibility out there, but it’s still, nonetheless, going to be a great year for Darling. The core business, it’s holding in there right now after if you think of it, you put up $110 million in the core business. 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. Fats and proteins still pretty consistent. The food segment is really anchored by the Rousselot business. The growth that we had planned in this year’s EBITDA was very strong demand from the hydrolyzed collagen 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 in the discretionary income and the comfort and the confidence of the consumer to step back out and start buying? And so really, that’s kind of if you’re saying the cautiousness that’s coming in on the core business is really the ramp-up of the Peptan or the hydrolyzed collagen sales, which we think will be strong in the back half of the year. We’ve met with all our customers. The one word that’s common among all of them is optimism. And so we’re going to go with their optimism at this time and say that they’re back-end loaded here in Q3, Q4.

Okay. That color is very helpful.

Thank you. Our next question is from Tom Palmer from JP Morgan. Go ahead.

Good morning and thanks for the questions. In the press release, you mentioned plans to cut some operating expenses. Just from what we’ve heard from some other companies, I’d assume there’s also some COVID related costs for employee safety and things like that. How does this net out relative to your prior expectation of, I think it was $81 million to $85 million per quarter in SG&A. And to what extent might the operating expense reductions last beyond some of these COVID costs?

We’ll split that. It’s a good question, Tom. And I want to make it clear. I mean, what we’re saying is, if raw materials fall off dramatically for whatever reason, we lose a plant, our suppliers lose a plant. We’re prepared to make those decisions very rapidly and furlough. We can tell you, I mean, that’s not something I like 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 drive around and collect raw materials to process. So, we’re trying to be very careful and smart about where we furlough and when we furlough. We have in the larger cities, in the metropolitan areas where used cooking oil volumes are down, we have cut back in the sense of reducing overtime to zero. We’ve knocked down the routes that we’re running to different days and we furloughed some drivers. So, we’re trying to say that we’re going to match the workload and the expenses with the raw material flow. Conversely, on the CapEx outflows for the year, we knocked it down very sharply in Q1. We’ve still got basically a moratorium on Q2, which is related to safety, environmental and expansion, meaning the Peptan plants that are under construction, those are getting the funding right now. The SG&A, Brad, you want to comment a little bit about?

Sure, Randy. On the SG&A, as I said on the prior calls for year-end, Q1 is our highest SG&A quarter, and we will be much lower on SG&A the following quarters. One of the key reasons for that is the stock compensation expense. A vast portion of that, will see SG&A come down noticeably, and this quarter, as I said on the initial remarks, we had some credits or reductions to the first quarter of 2019’s SG&A that created a larger delta than what we would normally we would normally see that kind of delta versus the prior year.

I wanted to also ask on the Diamond Green Diesel side. Obviously, during the first quarter, the fuel price decline didn’t cause much pressure on EBITDA. And I think the full year outlook seemed pretty constructive. I was just hoping for some clarity on where EBITDA per gallon is tracking currently? And where you thought the second quarter might shake out?

Yes, it’s John, Tom. I think Randy mentioned, currently, we see margins at around the $2 a gallon for the second quarter basis on what we’re seeing in the marketplace right now. That can correct itself as we move through the quarter. But we did 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 rate. And frankly, as we think these markets readjust themselves toward the balance of the year, we’re very comfortable in that $225 million to $250 million for the year outlook.

Thank you. Our next question is from Heather Jones from Heather Jones Research. Go ahead.

So, I have some questions on the core business, but I want to stick with Diamond Green for a little bit. So, just doing the real quick math of what you all did in Q1 and then around $2 for Q2. So, for you guys to say $225 million to $250 million, is that just predicated on the view that the market can’t stay at these levels? Will have to correct itself? Or do you have some hedges that give you confidence? Just because a lot of the pushback I’ve been getting is how you can achieve those levels. So if you could just give us some sense of where you’re getting that confidence from?

Well, obviously, we come off with an excellent first quarter, and that factors into our view for the year of the $225 million to $250 million. We see the current margins as being, as we said, around the $2 level. Certainly less than $2.63, but $2 a gallon is nothing to sneeze 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-on-quarter basis, you see a lot of volatility around Diamond Green Diesel’s earnings. If you annualize it out, you don’t see a lot of volatility and you see us 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 at Diamond Green Diesel. So the 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 million for the year. And once again, as we talked about earlier in this call, we have seen seismic shifts in these commodity markets occur in a rate that even old guys like myself, haven’t seen much in our lifetime and of those drops was a big drop in petroleum prices here really, really fast. And we the question is, the agricultural market has to adjust to that. Has it fully adjusted to that at this point in time? Time will see. But if it does, and that’s going to improve the margins of Diamond Green Diesel as well as we move forward.

Okay. That makes sense. On the core business, so Randy, like you mentioned, a lot of the cuts we’ve been seeing in beef and pork haven’t affected you guys because those are integrated with renderers. But we’re seeing some big declines in on the chicks placed X that on the broiler side, which poultry’s clearly a big business for you guys. So as those cuts roll through, we’re tighter on UCO, we’re tighter on choice white grease, we’re tighter on tallow, and then we’re going to start getting tighter on poultry fat. Can you help us 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 lift in fats prices. So how do you balance that in your mind? And how you think it nets out for Darling?

Yes. I share that with you. I mean, the lower supply from the integrated guys out there is absolutely putting a little bit of a floor underneath the fats pricing right now. And I just tend to believe that the animals are out there, and they’ll continue, at least on the beef and pork, which are truly the bigger suppliers of fats into the market than the poultry side, the lean meat side. That should come through our system and provide a little bit of support, but ultimately feeding economics out there with lower corn. And as we said, biodiesel economics are not very favorable out there. You can run the math there until RINs react so at the end of the day, I don’t know that there’s a lot of positive from the standpoint. Our volumes remain good. Prices remain good for fats and proteins in our system, but the outside macro environments are not real positive to continue to say that we’d see any escalation in price. John, do you want to add anything to that?

I think that’s fair. I mean, obviously, a cow or a pig has a lot more fat than a chicken does. They’re just plain bigger. So in terms of reduction of fat supply associated with poultry, I’m not so sure that I think that’s a major issue. As Randy 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 of the platform we run, we seem to be able to hang in there from an overall profitability standpoint, despite massive, massive changes from a commodity price standpoint and potentially around some volumes here, although that seems to kind of work itself out on a month-to-month basis. The news headlines, one of the things that’s important when you get into a situation like this, is not to get locked, too locked into the headline of the day. There’s a lot of different headlines out there, but the fact of the matter is, our business is positioned to be able to weather even tremendous storms like we’re seeing right now is what it looks like, as we said in the chair today.

Okay, and my final question is, I know you guys had done some restructuring of your dead stock business and how you price that. So given that restructuring, do you still benefit from improvement in meat and bone meal prices because that is that has seen some really nice improvement over the last couple of months. And so is that do you guys still get that benefit?

Well, yes, the answer is yes. There’s two sets of mortality businesses in the world today for us. There is the RIN back in Europe, which is the that has to be incinerated or taken out of the food and feed chain. That continues to be a very much a tariff-driven business that does get some benefits as prices move up. In the U.S., we’ve restructured the business in the sense that we’ve increased the charges for our service. It’s just become more expensive to hire drivers and to run those routes. And so yes, we fundamentally looked at our business. We looked at our business all throughout the United States, whether and really, you hate to always say it this way. But the pandemic forced us 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 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 weren’t getting paid fairly before, but we probably weren’t. And so I feel very proud about what our leadership team’s done in the Midwest on our dead stock business. As I said, Heather, we’re part of the supply chain for depopulation right now, which is very sad that meat should be being slaughtered and given to the people that are in food lines right now, and it just breaks my heart, but that it’s happening. But at the end of the day, instead of it going to the landfill, it’s going profitably back into an ingredient system, and we’re going to benefit from it.

Okay, thank you so much for the color.

Our next question is from Ben Kallo from Baird. Go ahead.

Hey, good morning all. Take it off mute there. So Randy, you said that you don’t have a problem with feedstock to run Diamond Green Diesel. Could you just talk about going forward with the expansion? And then how you evaluate the next plant, number three, in light of potentially lower volumes of feedstock. And if that even factors in there, and then I have a few follow-ups.

So Ben, this is John Bullock. I mean, obviously, the availability of feedstock is one of the most important considerations as we look at any expansion associated with Diamond Green Diesel. Our view has been because of the way we were positioned in relationship with the supply chain. And our view of the supply chain that we were in a position to be able to, several months, to make sure that nothing has changed fundamentally in our perspective on it. But right now, the way it seems is, we’ve had a disruption in supply in the short term. Kind of looks like that’s all starting to work itself back. We’ll see how far it works itself back over the next four or five months.

Great. And then as we think about the capital allocation and the dividend up, how do you guys weigh purchasing, buying back stock versus delevering?

Yes. I think opportunistically, we stepped in. I mean you can do the math of where we stepped in and acquired. We still have $125 million authorized of dry powder here. If for some reason, the confidence and the view of what we’re seeing in the world is different, the Board will meet to authorize that from time to time. There’s a committee that’s been formed. But I mean, long term, what Brad’s intending to do here is, is that our view is still on taking the cash and delevering. As we still talk, 150 days ago, our target is to get our to get sub three, get investment-grade and be down to 2.5 times here. 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 probably a superior alternative to buybacks at this time and just positioning. Clearly, Ben, I think it’s safe to say in the world today, cash is king. And everybody gets that. We’re sitting on quite a pile of cash right now, and we’ll use that to delever 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 I know it’s early, but as you bring on more volume, how do we think about the EBITDA margins? I think a lot of it is just straightforward, straight-line it, whether it’s 225 or 250. But as you bring on more volumes, how does that weigh in with whether there are step-ups and mission requirements in certain areas that elevate the carbon credits. And I know it’s early, but any kind of read on that. It’s a downward pressure on EBITDA margin as you bring volume on.

I think this is John. I mean, I think we’ve talked about in the past, we’ve been extremely steady at $1.25 without the tax credit, $2.25 with the tax credit. We see the carbon markets and the carbon demand around the world growing. California continues forward. Obviously, Canada now with the reelection of Prime Minister Trudeau is moving forward on their nationwide program. New York has a carbon reduction program. We’ll see if an LCFS program develops out of that. We just continue to see the LCFS, the reduction of carbon as a trend that continues to move forward, that’s going to create demand and that means that as long as we think we’ve got the feedstock and we’ve got the facilities located in the right place with the right capabilities, that there’s going to be very good margins associated with that, as we bring these additional capacities online. Now whether it’s $2.25 or $2.50 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 expansions.

Right. Thanks, John.

Our next question is from Ken Zaslow from Bank of Montreal. Go ahead.

Hey, good morning to everyone. Can I just take a step back for a second, what do you think the lasting effects of COVID-19 will be on your business?

Ken, this is John. I mean, that’s a really difficult question to answer. I think the important thing here, in the short term, we see a lot of headlines and things change on a day-to-day basis. We have seen a tremendous growth in meat demand that had occurred over the last seven to eight years. COVID probably sets that growth factor back a little bit over the next year but like anything else, we’re going to get through this. We’ll 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 pause and interruption, clearly a disruption economic activity that’s disrupted the normal growth patterns that we had seen in the protein markets around the world. Don’t know that we see that, that fundamentally changes what the direction of the world is. May mean a disruption for six months, 12 months, 18 months, that type of thing. But at the end of the day, we don’t also see it as resulting in a major decline in protein demand, probably more just of a disruption of the increase that we had normally be seeing, had normally been seeing, if you take a look at this on like a year-long type of a cycle or 18-month type of a cycle deal, so.

Yes, and I would add to that, Ken. I mean, I’ll give you on three different levels. One, we’re learning to manage our business a little differently. The culture that we’ve built in the company over my tenure was very hands on, very visit-oriented. Lots of travel, lots of engagement. We’re learning to use a lot of video and a lot of phone 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 has been very tiring, no matter what industry you’re in, this has been very stressful and tiring. Every day, we come in the office, and 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 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 weak players come to market and say, this is time to leave. And whether we can get to a valuation there or 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, 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 outcome of this. The good news is, as I go home and I’m tired and beat up every day, I remind myself, people have to eat, and nothing’s changed there. People are going to eat they’re not becoming vegetarians, life is good, and we will weather through this, and this too, shall pass.

No, I appreciate that. I would also probably say that there’s less capex spending that may be the market eventually gets tighter for you, which is actually a good thing rather than any sort of growth. But the other thing I would ask is, on the collagen business, how you break it down between pharmaceutical and other parts of the business? And what is the growth algorithm there? Because I would think that the pharmaceutical side would actually outweigh the other part, but maybe I’m wrong.

Yes, this is John, Ken. Traditionally, then the traditional gelatin has been the much larger volume part of our business. Peptan has been the new product line that has been coming on pretty strong. But you’re right, the traditional gelatin has been the much larger by volume 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, a pandemic puts everybody back to taking vitamins and looking heading to the local GNC 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 Peptan still, we believe, is a product that will come on, and the fundamentals for that product still look very, very well. It just had a very temporary setback associated with the COVID crisis.

And then just my last question is labor. I get the tightness today. But do you see the easing of the labor as a positive over the longer-term for you guys? I’m assuming I’ll leave it there. I won’t assume anything. You tell me.

So far, we have tried to and I want to talk from a social perspective, we have reacted in North America to the wage or incentive increases that were put in place by we’re on the fringe of the meat processing industry, but it spills over and up. So we’ve reacted there. For the most part, we’re not seeing any labor issue. Some absenteeism, as you can guess, in some of the larger metropolitan areas, especially New York, where we we’ve had a little bit of setback there. But overall, labor, labor is fine. We actually employ a different skill set than the meat processing industry. And then more importantly, within the average number of employees per plant location around the world’s 30. So that’s on two or three shifts, depending on an inspected or uninspected plant. And so at the end of the day, they’re nicely spaced. I think the question will become, once this the model, as you asked before, what’s changed forever? Well, 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 and the delivery services now as the world powers back up. And I suspect drivers will continue to be fairly, fairly tight for the near future, unless that becomes obviously, wages will have to react to attract talent, which had already started last year, and then we’ll see where it goes from there. But overall, skill sets are available and life feels pretty good for us out there in the labor area right now.

Thank you very much.

Our next question is from Tyson Boyer from KC Capital. Go ahead.

Good morning, gentlemen.

Good morning, Jason.

Between lower fuel costs and what should be higher yields from your rendering and product yields from rendering, at least here temporarily, what impact are you seeing that on your margins and benefits that we should see in the second quarter?

This is John, Tyson. We have very good meal prices at this point in time. Fat prices remain good. We are bringing in some whole animals that has been talked about earlier. And in some cases, that does have slightly better yields, although I’m not so sure from an overall mix standpoint that, that would change our yields all that dramatically in our system. You saw 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. And I think that’s been a positive impact. It clearly was a positive impact to us in first quarter. 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 a finished product standpoint on meal price is very good. Fat prices continue to hang in there very well. Not sure I see a big change in our overall yield, though. No.

Okay. The discussion on the lift in fat prices, given the headwinds of both soy and palm in the global markets, how realistic is it to assume that we’ll get this lift going through the yield through the year if palm and soy do not correspond?

Yes. I mean, for us, we look at it from a very, very macro sense. And you start with the two biggest oils in the world, palm and soya. And palm has an incredible correlation into the fuel supply, especially in the tropical climates around the world. And so at the end of the as we came into the year, we felt like palm stocks were under control, tree production was going to be down, and we had a pretty bullish horizon there for the year. Then all of a sudden, we heating oil or diesel fuel prices collapsed around the world, and that pressured palm, palm then pressured soya. And then remember, the largest amount of soya oil gets refined and packaged and put into food service trucks. Or rapeseed oil in Europe, same thing, as it goes to restaurants and pubs to deep fry stuff. And until that market kind of comes back, there’s too much fat in the world right now that needs to make its way. I don’t know that 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 35-gallon jug. So overall, you’ve just got this supply bubble that’s putting pressure on it right now. If foodservice comes back strong, and we get some normalization back into the petroleum kind of world, then I think you’ll see fat prices improve. The second thing will be what will the slaughter be in the second half of the year globally? Will that be constructed to it? Will biodiesel margins improve via something’s got to give, RINs or heating oil prices there, to get that industry back up. But right now, there’s a little bit of headwind there. We’re somewhat insulated from it. But overall, I’m not sure I see anything really different than that on the horizon today.

Okay. Do you blend any of your renewable diesel? Not with petrol, but with bio?

No, we do not. This is John. We do not blend with bio, no.

And what’s your position on companies that do blend and then sell it as renewable?

For both biodiesel and renewable diesel are biomass-based diesel. So if companies do blend that, that’s OK with us.

Is there a reason you don’t do it?

Because we are a wholesale supplier, we not moved upstream in that supply chain. To sell-off of at-rack. And that’s a strategic decision we’ve made. We’ve evaluated it over the years as to whether or not we were able we were better positioned we would be in a better position if we did that. Quite frankly, we haven’t seen the advantage of doing that.

Okay. And last topic, your partner in Diamond has come out here recently in favor of a possible review of RFS 2020 levels, even before 21’s come out. How does that correspond with your own endeavors of wanting those levels to maintain themselves? And is that a way to get around the small refinery exemptions, if they just see a wholesale reduction in RFS levels?

At the end of the day, I’ll say this, Valero has been a phenomenal partner for us with Diamond Green Diesel, and I think two companies couldn’t work together better. We recognize that they are a refining company, and they have a refining company’s interest to consider as well. As what they have invested in Diamond Green Diesel, just as we are an agricultural company with an investment in Diamond Green Diesel and we have our interest. So from time to time, from a macro policy perspective out there, Valero and Darling may have slightly different perspectives on the marketplace, then we bring our own perspective to the marketplace. It has never affected our relationship. We respect the right of Valero to deal with RFS two as they see fit, just as they see respect our view of how we deal with RFS 2. At the end of the day, we’re just two voices out there, putting our input into RFS 2. I think the macro picture around RFS two remains as it has always remained: It is a critical component of the demand for the American farmer. 1/3 of the corn produced in the United States goes into ethanol, 1/3 of the soybean oil produced in the United States goes into biofuels, biodiesel and renewable diesel. The American farmer is an extremely powerful political force. And anybody that wants to take on RFS two is going to have to deal with the American farmer at the end of the day from a political perspective. That political pillar has been there, is there and will continue to be there.

All right, thank you gentlemen.

And our last question is from Carla Casella from JP Morgan. Go ahead.

Hi, you mentioned that your facilities have been able to process full animals instead of the typical rendering. I’m wondering if the margins differ when you’re doing a full animal versus the offal?

It depends on Carla, this is Randy. It depends on the supplier. Essentially, we’re servicing the large integrated producers out there now that are trying to make room in the hog houses for the next little litter to come along. And so it’s a tragic thing for them. We’re trying to I would tell you that the margins are similar to the dead stock business in a sense, that we’re just providing a service of instead of picking up one mortality, as I said, we’re picking up I heard last night, 30 to 35 loads a day as they depopulate in that Iowa, Nebraska, Minnesota, Illinois area. So it’s pretty similar. It’s just tragic.

Yes. Okay, great. And then on the farming demand side, can you just talk about the health of your customers in that business? And I’m trying to understand, I mean, given you’re so much more global today, what percentage of your business does go to that, to the farmers or to the growers?

Carla, why don’t you ask the question again? We’re not sure what we’re trying to answer here.

I guess I’m trying to get a sense for the customer base and the health of your customer base in the U.S., thinking of the, I guess, the associated farmers, I guess you mean ranchers or the health of the customer base in the U.S. for the your end product? Is there any effect there from the COVID?

Well, this is John. I think, overall, if you look at the people, the different industries that use our products. On the fat side, it’s clearly the biofuels industry and the feed market out there. We continue to think that the demand is going to be strong on the biofuel side, particularly the renewable diesel side. So I don’t see a big impact there. From a feed standpoint, we talked about earlier, while we hear a lot of news about animals and animals have to be destroyed in the short-term and so forth, the context of that is we have been seeing an increase in animal production in the world of 2% to 3% pretty consistently for the past four or five years. That probably gets flatlined here for some period of time as a result of COVID, whether or not that exists more in the short term than the long term, I don’t know. Meat and bone meal right now, demand is extremely strong in the marketplace out there as we’ve seen some DDG production and so forth, cut back there. So I don’t know that I don’t think we see a big decrease in demand going. We had been seeing a tremendous increase in utilization. We still see that on the fuel side. On the feed side, maybe it flat lines for a little bit here, but long term, we don’t see a real change in the direction. The American farmer today is not doing very well. But we sell very little directly back to the American farmer, we sell the products that are sold to the American farmer. In some cases, in a lot of cases, the products that we sell our product to ultimately go off the food chain to the consumer, as opposed to going directly back to the farmer. So overall, we think the demand will continue out there for our products.

All right. I think that as I’m looking up on the board here, that concludes the question-and-answer session. I want to thank everybody for their time and the questions today, and we look forward to talking to you and updating you in August as we move forward with the Q2 performance. Be safe, stay healthy. Thank you.

This concludes the conference. Thank you for attending today’s presentation. You may now disconnect.