Enviva Inc (EVA) 2015 Q2 法說會逐字稿

Good morning and welcome to the Enviva Partners second quarter 2015 earnings conference call. All participants will be in listen-only mode. (Operator instructions). I would now like to turn the conference over to Ray Kaszuba, Vice President and Treasurer, please go ahead.

Thank you. Good morning and welcome to the Enviva Partners, LP second quarter 2015 financial results conference call. We appreciate your interest in Enviva Partners and thank you for participating today. On this morning's call we have John Keppler, Chairman and CEO and Steve Reeves, Chief Financial Officer. Our agenda will be for John and Steve to make some brief remarks on the second quarter results released this morning as well as our current business outlook and then open up the phone lines for questions.

Before we get started though a few housekeeping items. First, please keep in mind that during the course of our remarks and the subsequent Q&A session, we'll be making some forward-looking statements and we will refer to certain non-GAAP measures. Our forward-looking statements or comments about future expectations are subject to a variety of business risks.

Information concerning the risks and uncertainties that could cause actual results to differ materially from those in forward-looking statements can be found on our press release which was issued this morning and is posted on the Investor Relations section of our Web site, www.EnvivaPartners.com as well as our final IPO perspectives and other recent filings with the SEC.

We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. Reconciliations of non-GAAP measures to GAAP measures may also be found in this morning's press release.

Now I would like to turn it over to John to discuss business performance.

Thank you Ray and welcome everybody. For those on the phone, Ray Kaszuba has joined us as treasurer and will be our IR lead going forward. He recently joined us from Exxon Mobile so welcome Ray, we're definitely glad you're here. And, again, good morning everyone, thank you for joining us on the call.

We're pleased to report this morning on Enviva's first quarter, albeit a partial one, as a new publically traded company. Over the last several months we've spoken with many of you about our vision for the company and how we translate the very familiar assets and activities of the conventional mid-stream sector into a durable solution for a large and growing problem facing major renewable power generators around the world.

We're looking at the list this morning on the conference dial in and acknowledging that our unit holder base has continued to grow I want to take a brief opportunity to provide some background on Enviva Partners, who we are and how excited we are about where we're going.

As many of you know, I co-founded this company because we saw an opportunity to profitably eliminate the perceived tradeoff between energy and the environment. Over the last decade we've assembled a world-class team and built a high-growth master limited partnership that is today the world's largest supplier of wood pellets to utilities helping major power generators displace coal with a drop in fuel to generate renewable energy.

It's important to focus on why our customers do this. Historically coal has been the preferred fuel for base load power generation around the world because it's transportable, cost effective and the generation assets it serves provides stable firm capacity that's also dispatchable; meaning it's there when you need it. But beginning really with the Kyoto Protocol, most industrialized economies put themselves on a path to reducing the emissions intensity of energy generation and that means substantially eliminating coal. In the EU where most of our current customers are based, each nation is obligated to binding 2020 goals. While progress has been made, many countries remain far short of the EU's mandated requirements. This shortfall is a problem that's not going away and in some jurisdictions it's only becoming more challenging.

Clearly climate change remains a top-of-mind political, legal and economic issue around the world but is running headstrong into austerity, cost considerations and the need to act now. Fortunately, converting existing coal-fired assets to dedicated or coal-fired biomass assets provides a quick and cost effective solution to the challenge of meeting these binding renewable levels but without the reliability issues inherent to solar and wind.

The preferred fuel for these biomass conversions is wood pellets because wood pellets can be handled and combusted just like coal but without the negative emissions profile. According to the emissions calculations of international regulators, for instance Ofgem in the U.K., wood pellets like those we produce reduce CO2 emissions by approximately 80% compared to coal. As a result, our products are an essential part of helping countries meet binding regulatory targets for greenhouse gas emissions as well as renewable energy usage. Not surprisingly the market for our products has been growing rapidly. The demand for utility grade wood pellets was about 12 million tons last year, an increase of approximately 20% over the prior year. An independent industry analyst forecasts the market to grow at roughly a 20% CAGR through 2020.

Customers like Drax, E.ON, Engie, which is formerly GDF Suez, and others choose to enter into long-term, often ten or more year, take-or-pay contracts with Enviva because unlike coal, global wood pellet supply is not adequate for the growing demand and there are few providers of any scale.

And unlike customers of other MLP's, ours don't have the option to curtail their activities and thereby reduce demand for our products. For instance, Drax, which accounts for close to 10% of the U.K.'s daily generation, depends on wood pellets day in and day out to keep the lights on for its customers. Enviva is the world's largest supplier to utilities using biomass and with our cost advantage, processing and terminalling assets throughout the southeast U.S., we are on track to deliver more than two million tons this year to power generators in Europe and increasingly in Asia and the United States.

It is our ownership of these cost advantage fully contracted assets in a rapidly growing industry that gives us a platform to generate stable and growing cash flows which is what we demonstrated again this quarter.

I'd like to turn it over to Steve to discuss in some detail our financials and provide guidance for the balance of the year.

Thanks John. The second quarter demonstrated solid run-rate performance for the current business. Revenue for the second quarter of 2015 was $109.7 million, an increase of 60% over the corresponding quarter of 2014 on sales of 560,000 metric tons of pellets. The increase in revenue was a result of fulfillments under contracts we assumed as part of the Cottondale acquisition, increased fulfillment under existing offtake agreements and one shipment under a new contract.

The increased sales were enabled from production from our Cottondale facility as well as improved throughput from our existing facilities. Revenues also benefited from the sale of [a ship] acquired from an unrelated party and sold into one of our offtake agreements. Because of the strength of our sales portfolio we were able to take advantage of supply and demand dislocations in the market. Transactions like these are presented on a net basis in our income statement since we don't take physical delivery of the product.

Adjusted EBITDA improved to $16 million by net income of $1 million for the second quarter of 2015 from $5.2 million for the corresponding quarter of the prior year, a 210% increase. The improvement in adjusted EBITDA was the result of higher product sales as well as improved cost position and a favorable mix of offtake and shipping contracts. The quarter also benefited from the margin on the acquired ship as well. These benefits are partially offset by higher G&A expense largely due to forming and being a public company and cost of goods sold associated with higher volumes.

Turning to cash flow, during the quarter we generated $12.4 million in distributable cash flow of which $10.7 million was generated following the date of our initial public offering. As announced yesterday, we will be making a [26.3 cent] quarterly distribution to unit holders of record as of August 14, 2015. This is the minimum quarterly distribution prorated for the 58 days we were public in the 91-day quarter just ended. This distribution results in the distributable cash flow coverage ratio of 1.71. Had we been public for the full quarter our distributable cash flow of $12.4 million would have generated a 1.27 times coverage for the minimum quarterly distribution; both are well in excess of our partnerships coverage goal.

From a liquidity perspective we closed the quarter with $77 million of cash on hand that is available for general, corporate purposes including potential acquisitions. A $25 million revolver is currently undrawn although I anticipate we will need to reserve $5 million on an ongoing basis to support letter of credit commitments.

As you saw on our press release we are providing guidance for the balance of 2015. It should be noted that all amounts reflect the base business and do not give affect to any potential drops or acquisitions occurring this year. For the balance of the year our sales book and production capacity remain largely matched for 2015 and production trends and fiber costs continue to be in line with our expectations.

For the last six months of 2015 we project to earn income in the range of $11.5 million to $13.5 million with associated adjusted EBITDA up between $30 million and $32 million. We expect maintenance capital expenditures for the next six months to be between $1.5 million and $2 million and interest less amortization of debt issuance cost and original issued discount for the same period to be $4.7 million.

As a result, the partnership expects to generate distributable cash flow of $23 million to $25 million for the second half of 2015. In addition, we're evaluating modest growth capital expenditures which would generate single-digit increases in distributable cash flow in 2016 and beyond.

Now I would like to turn it back John to discuss longer-term outlook.

Thanks Steve. When we think longer-term we think about growth. In the [business] of the modest organic growth available within our current activities and what Steve mentioned a moment ago, we expect a preponderance of our growth to come from dropdowns from our sponsor and here we look to acquire fully contracted replicas of our long line of production plants and deepwater marine terminals in order to materially increase our per-unit distributions over time.

We have just received a proposal from our sponsor to sell the Southampton plant along with a 500,000 metric ton per year ten-year offtake agreement for which deliveries start in the fourth quarter of 2015. The Southampton plant is substantially a copy of our Northampton facility with a current capacity of 510,000 metric tons per year. It is fully operational and performing in line with expectations.

The offtake contract is with Drax and contains terms and conditions consistent with our current portfolio. The board has formed a conflicts committee which will begin the process of evaluating the offer on our behalf. If the conflicts committee and our sponsor reach an agreement we would expect this drop to occur in the fourth quarter of 2015.

In addition to the Southampton plant our sponsor is constructing another 500,000 metric ton per year wood pellet plant using a [templated] design and also a deepwater export terminal in the Wilmington, North Carolina region. Our sponsor advises that it continues to expect the facilities to be operational in the first quarter of next year and our sponsor has also received a draft permit for it's Hamlet production facility, a building copy replica which, when constructed, will ship it's 500,000 tons of production via rail to the sponsors Port of Wilmington terminal.

That continued development activity is an important part of Enviva's growth platform and frankly to the industry as a whole where the supply chain generally isn't keeping up with the potential demand profile of our customers. As you may have read in our press release, several recent announcements and actions in key markets highlight the growth potential in our industry. The combination of the new large scale biomass plants currently moving forward in the U.K., including MGT, (inaudible) and Drax's third unit all of which have received a U.K. government backed long-term contract for differences, or CFD, will add several million tons of new demand to the market and while EU's [dated] approval is ongoing for the Lynemouth and Drax CFD's, MGT has already passed that hurdle, what I think a lot of people missed amid some of the broader noise around changes in the U.K., following it's recent election, is that the U.K. government also confirmed that both the Lynemouth and Drax projects are eligible for the rock subsidy as an alternative to CFD should they decide to opt for this route and reach commercial operation before March 31 of 2017.

We believe this is an important confirmation by the government on the importance of these biomass conversions to the U.K. When you add this U.K. demand to what we see happening in the Netherlands where several utility-led large-scale biomass co-firing projects and a number of biomass based industrial steam projects are bidding for new government-backed contracts, the independent market analyst would tell you that there's pretty clear visibility into approximately seven million tons of new demand over the next couple of years in just these two markets. That's to say nothing about the rest of Europe, Asia and the U.S. from the broader utility heating and retail sectors where we also see growth.

Although we still have considerable duration left on our current contract portfolio with a weighted average tenor of 5.6 years, as a proven critical supply partner in this industry, we and our sponsor are in active negotiations for additional fuel supply contracts, principally for these next major transfers of utility conversions for which deliveries will begin in late 2017.

In an industry that's growing approximately 20% per year, we expect to not only re-contract the volumes within our portfolio but also for our sponsor to enter into material additional volumes that underpin its capacity development activities and provide a foundation and opportunities for longer-term growth for the partnership. We're off to a great start generating and distributing durable and growing cash flows. As we close, I'd like to thank all of the hardworking Enviva associates that have contributed to this success and with that Steve and I would be very happy to answer questions.

Operator, would you please open the line?

We will now begin the question and answer session. (Operator instructions.) Mr. Jampel, your line is open.

Yes, this is James Jampel from HITE, thanks for taking the question. If you could elaborate a little bit more about some of the noise around the changes in the U.K. and especially what's going on with Drax and large drop in its stock price earlier this month and explain why some of those changes there are not a negative for Enviva?

Sure James and thanks for joining us on the call this morning. The -- so several weeks ago the U.K. government eliminated a pretty narrow tax exemption, it was called the Climate Change Tax Exemption which had been benefiting all renewable energy generators; wind, solar and the like as well as Drax. And on a headline basis this eliminated about four to six pounds per megawatt hour in revenue but for most generators, Drax included, they had forecast this benefit declining to zero over the next couple of years and I think Drax has since published some pretty clear guidance on the EBITDA impact for the next two years against that where there would have been a [deduct] and that certainly negatively affects Drax and other generators there.

I think that's what was factored into that share price decline then. Since, of course, I think Drax has reported some pretty favorable earnings on biomass and has modestly recovered but what's important here is that this doesn't affect Enviva directly. It is clearly a challenge to the current cash flow profile for the next two or so years for generators in the U.K. but doesn't affect the CFD. This is, in many ways, a continuation of the governments policy to substitute the contract for differences which doesn't necessarily include this particular climate change levy exemption, substitute the CFD for the rock regime and, again, consistent with what we have continued to see out of the U.K., strong endorsement of the projects that have received the CFD's and continued good announcements there and, frankly, we don't see a revenue impact to Enviva in anyway, we're insulated from that.

Okay, thank you for that. I think I recall from the IPO that you guys were talking about mid-teens annual distribution growth rate over the next few years and I'm sure that was predicated on a stock price that was considerably higher than $14.99 which it is right now. So how do you guys plan to grow the distribution and meet that target given the lower equity price we see in the market now? Will the dropdown multiples be adjusted to ensure we can get to that growth?

Yeah, I think the dropdown multiples will obviously be a reflection of current market conditions, that is an independent negotiation on the conflicts committee, so you know, it certainly will be a factor in their deliberations and ours relative to the price of dropdowns going forward.

Will that -- go ahead.

No, go ahead.

Will the first dropdown, which I guess is in 4Q 2015, will there be equity necessary for that?

I believe our sponsor would prefer at least a portion of equity for tax purposes but we as a company have a fair amount of cash on our balance sheet. The actual specifics relative to the form of consideration is still to be negotiated at this point in time but we have a reasonably robust balance sheet to support a low equity component to that if that's where it turns out.

I'm sorry, you were a little bit quite there, there's -- did you say that there's enough room to avoid equity if required in the first dropdown or no?

I'm sorry, no, I believe our sponsor will request a small, at least a small, stub of equity relative to their tax considerations on the drop. The actual form of consideration and its composition will be a negotiation that goes forward here in the third quarter.

I see, okay. Yeah, I guess in our experience in the world of MLP's to a degree you can set a tone early on of when the equity price declines like this for favorable dropdown multiples in order to ensure everyone that the model is still working; that would be much, much appreciated and contributes to the long run viability of the dropdown model. We just would hate to see the model be irreparably broken because of this unfortunate decline in price that we've seen so far.

Sure, thanks. And, again, we exited the quarter with a lot of cash on our balance sheet which we will intend to use for our acquisition purposes.

And the last one for me, if we're looking for a double mid-teens growth rate and we got a 4Q 2015 drop, I mean, how should we think about a distribution increase before that? Is that likely or should we stay at MQD until we have an actual change in the business?

Sure, our distribution growth will really start -- it will be based on the stable operating performance and conservative coverage ratios I think we've previously identified to the extent that dropdown affords us the ability to increase the distribution, you would expect us to pass that through on a reasonably consistent basis going forward.

I see, so it could be that there could be a distribution raise announcement concurrent with the dropdown?

Yeah, we're not providing guidance relative to future distribution rates but it will be based on the boards view relative to the stable cash flow generation of the business as it's composed at that point in time.

And lastly, any idea why the stock has gone from 20 to 15, you must be curious yourselves as are we?

Well I think, again, can't comment on the specifics of stock movements but I think we've seen a pretty broad decline in the MLP sector generally as well as at the old (inaudible) space so there's a lot of activity in the marketplace that would not necessarily be company specific that I think is affecting evaluations across the MLP universe.

Okay, thank you so much and good luck.

The next question is from Pavel Molchanov from Raymond James, please go ahead.

Hi guys, thanks for taking the question. You know, recognizing that your current customer base is essentially just the three original customers in Europe, I'm wondering, is there any progress that you're making on diversifying the sales mix either into new customers in Europe or potentially to new geographies altogether?

Yeah, Pavel, thanks for the question and good to chat with you. You know, the -- clearly we've been transparent and reported out against larger long-term contracts with major utilities. We serve, frankly, a much broader set of customers than that including when most of, many of, the major utilities in Europe on just differently structured agreements, we have volumes going into those customers, we have delivered into Asia in the past, we have deliveries scheduled into the EU or rather the European heating market scheduled for later this year as well so we are beginning to see more material growth in volumes in both our core utility sector as well as the adjacencies and we should expect that to continue given the business development activities and sales and marketing activities of our company.

And our sponsor has a long-term contract with the Danish oil and gas natural utility (inaudible).

The next question is from John Ragozzino from RBC Capital Markets. Please go ahead. Mr. Ragozzino your line is open, you can go on with your question.

I'm sorry, can you guys hear me now?

Hey John.

Hey John, yeah.

Sorry, I've got some headset issues, I apologize.

No worries.

Good morning and [solid core] congrats. Just a couple of quick questions, most of mine have been answered but John perhaps you can give me a little bit of color regarding, I get a lot of questions regarding the enforceability of the EU's environmental mandates similar to the [2020, 20] targets. Can you just perhaps provide a couple of potential repercussions that we've seen in the past regarding the enforceability or any penalties that [nations] have faced in the situation where they haven't fallen into compliance just provide a bit of an idea of what their motivation to make sure that they are in compliance by that timeframe is?

Sure, the -- good question. I mean, admittedly we're still multiple years away from 2020 and I think the urgency that many of the countries are adopting gives good reason to expect that they're going to get there and biomass is a big part of that.

Where historically we've seen enforcement, and I think there's some good examples one in Poland and one in Austria where those governments failed to meet the mandated environmental or energy requirements as the case may be, when they were not in compliance what happened was they went through the European, I believe, Court of Justice that resolved the issue and ultimately enforced daily fines, quite punitive fines, for the period of time that they remained out of compliance.

And so I think as a precedent that can be reasonably well drawn to understand that that is one of the key mechanisms, fines and enforcement against countries failing to comply with the binding 2020 obligations.

That's extremely helpful, thank you. And then in regards to the update on the Hamlet and the permit receipt, is that in line with your prior expectations that were laid out in the [S1]?

Yes, that's right.

Okay and then one more quick one on I think James was touching upon dropdown multiples in the current environment, what do you see as far as a likely or probable mark -- or difference between a dropdown multiple for an asset on the production side versus a terminalling asset, I there a meaningful difference there, could you give us a little bit of how you're looking at that?

Well I think one of the inputs to any of the analyses and certainly the independent financial advisors will probably draw the same conclusion. You've got a different set of comparables, a more liquid set of comparables on terminal drops than you would on production plants and so while we have some public observable comps, including what we've done ourselves internally for acquisitions of pellet plants, I think you do have a differential between that and what could be achieved independently on a terminal market.

Okay, fair enough and then just one more I guess bigger picture, I'll bring it back to the distribution policy, in the current [tape], I mean, you commented about boards decision that they'll probably assess the additional distributable cash flow and the [ramp] in coverage as kind of a primary driver of the decision to increase distributions. To what degree do you believe that they take into consideration just the current market sentiment and whether or not they will be adequate value applied to such a robust level of distribution growth and perhaps consider, you know, holding off and building coverage until a more positive market sets in and that you actually have a reasonable expectation for a positive response on the stock price from a distribution increase?

Well, I mean John that's a great question and a very strategic one based on timing and market conditions at that time. I mean, quite clearly we are a company that is building stable and growing cash flows and our intent and our strategy is to materially grow per unit distributions over time but it does start with that stable operating performance and conservative coverage.

We generated that today and it's a great spot to be in, you know, to have the luxury of being able to continue to perform as we have and achieve the growth that we certainly see as possible in the dropdown profile. That gives us all of the opportunity to drive value to shareholders.

All right, that's all I've got, thanks very much this morning, I appreciate it.

Thanks John.

The next question is from [Richard Haydn] from [KAC], please go ahead.

Thank you. I'm sure everybody knows this but what is the targeted distribution ratio over time?

I'm sorry, do you mean coverage ratio?

Coverage ratio, excuse me.

Yeah, we've generally got it to 1.15 times over time.

1.15, okay. And second, if you were to purchase this new facility at Southampton, what would be the capital structure in terms of debt versus equity?

Well, I think ultimately that's an independent negotiation of the conflicts committee which is our independent directors on behalf of the partnership. We've been fairly conservative in our approach to leverage targeting at roughly three times leverage ratio and with cash on hand I think that that gives reasonable flexibility for the transaction.

Okay. And second, now that you've got Ray on board I assume that that implies there's going to be a more active discussion with the company with the investment community?

Yes, that will be very much true, yes. We'll be out talking about the company at conferences and in individual investor meetings from this earnings release forward.

Is there anything been scheduled yet?

Yeah, we'll be at a couple of conferences, we'll be at the Goldman conference, we'll be at the Citi conference coming up and I think we're trying to do some individual investor meetings in August as well.

Thank you, good luck.

Thanks.

The next question is a follow-up question from Pavel Molchanov from Raymond James, please go ahead.

Hey guys, just one more from me. About a month ago The Washington Post printed an article that mentioned Enviva by name but looked at the broader wood pellet space and made some claims about the environment attributes and I just thought I'd give you the opportunity to kind of give a response to that.

Thanks Pavel, yeah, The Washington Post article, since, has published a very important correction. Of course the correction didn't get the same read, of course, that the initial story did but it's important because what they did was they undermined the principle critical claim against us and that was that we were in any way materially driving harvested deforestation and they went back on that which is hugely important because the nature of this industry, and how we talk about what we do and the value we drive isn't just about the underlying economics, it's also about the sustainability because that's the value that we deliver to our customers. And as people have -- as we've been able to communicate more effectively post the IPO quiet period, you know, we're starting to see some very favorable media come out not only in the communities in which we're building facilities, our sponsor is building facilities like Wilmington, but it's also from the academic community and researchers like Duke and North Carolina State where that peer reviewed research is leading people like the chief economist from the USDA to publish extensively on the benefits of this industry. I actually pulled a quote on this today which was, and I'm quoting here from the active chief economist, he said that, "I an industry that can reduce greenhouse gas emissions, increase forest growth and create jobs sounds too good to be true but that's the reality of the emerging wood pellets market in the southeast U.S." That's a very powerful statement quite inconsistent with the shotty reporting in The Post.

Appreciate your color on that, thanks.

(Operator instructions). The next question is a follow-up question from John Ragozzino from RBC Capital Markets. Please go ahead.

Hey Steve, just a couple quick more. I hope that I'm too implied that your comments previously implied are not going to be attending the RBC conference in November.

Yes, it's just a little further out in the spectrum but we will be appearing at the RBC conference as well.

Of course, I know, and really what I wanted to ask was has the sponsor really laid out any sort of guidelines or unofficial targets as far as what they would like to kind of set as a limit on terms of their equity stake or is that something that they will continually evaluate as we move forward?

They'll continued to evaluate. They remain very bullish on the company and our prospects but that will be a fluid situation.

And then just one more, John, could you actually provide either send me a link or maybe give us a place where we could figure out where that document is? I'd love to read the whole article from the chief economist, that sounds incredibly interesting?

Yeah, we'll make sure that we either send you or post a link on the site.

Really appreciate it, thanks so much.

The next question is a follow-up question from James Jampel from HITE, please go ahead.

Yeah, thanks. I'm just as excited as John to get a link to that USDA statement, that's very interesting. And then just so I'm clear in my own head here in terms of how the dropdown might go down, you're saying that the sponsor might not want cash for tax purposes and instead might want equity taken back. Is that what I'm hearing?

What I'm saying is the sponsor would like a very small stub of equity which will facilitate their tax strategies. We have a lot of cash on hand that provides us with the flexibility to finance this in an accretive way but it's still a negotiation through the conflict committee but the request -- where we've previously guided to is a small stub of equity to facilitate the tax strategy of the sponsor.

Okay but -- and you do have the financial flexibility to avoid having to come to the public equity markets at these depressed rates?

That's correct, we do not anticipate going to the public market to raise equity capital as part of this consideration.

Great. Okay, thank you so much.

There are no more questions at this time.

Okay, thanks everyone for your interest in Enviva and as always we're available to answer questions throughout the day should you wish to reach us. Thank you.

The conference has now concluded, thank you for attending today's presentation, you may now disconnect.