Enviva Inc (EVA) 2015 Q4 法說會逐字稿

Good morning and welcome to the Enviva Partners fourth quarter 2015 earnings webcast and conference call.

All participants will be in mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I'd now like to turn the conference over to Mr. Ray Kaszuba, Vice President and Treasurer. Please go ahead.

Thank you. Good morning and welcome to Enviva Partners LP fourth quarter 2015 financial results conference call. We appreciate your interest in Enviva Partners and thank you for participating today.

First off, we will be using slides during the course of the call, which are available through the webcast instructions on the Investor Relations section of our Web site, www.Envivabiomass.com. If are only on the call online, you go log in through the webcast link to also view the slides where the slides are also in our 8-K SEC filing from yesterday. If you are on the call-in line and the webcast, then I suggest you mute the sound on the webcast.

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 discuss our financial results for the fourth quarter released yesterday evening, provide information on recently announced off-take contracts and an update on our current business outlook. We will then open the phone lines for questions.

Before we get started, a few housekeeping items.

First, please keep in mind that during the course of our remarks and the subsequent Q&A session, we will be making some forward-looking statements and we will refer to certain non-GAAP measures. Our forward-looking statements are comments about future expectations are subject to a variety of business risks. Information concerning the risks and uncerntainties that could cause actual results to differ materially from those in the forward-looking statements can be found in our press release, which was issued yesterday and is posted on the Investor Relations section of our Web site, as well as our final IPO prospectus filled with the SEC on April 29, 2015 and our other recent SEC filings.

We assume to obligation to update any forward-looking statements to reflect new or changed events or circumstances.

During this call, we will be using GAAP and non-GAAP figures and want to be clear on the basis of each. On December 11, 2015, we consummated the acquisition of the fully operational, 510,000 metric ton per year wood pellet production plant in Southampton, Virginia, a ten-year 500 ton metric ton per year take or pay off-take contract and a matching ten-year shipping contract from our sponsor sponsors joint venture.

We own the Southampton production plant for periods prior to April 9, 2015 and after December 11, 2015.

Because this was a transfer between entities under common control, GAAP requires to us to recast all financial results to include the results of the Southampton dropdown for the applicable period, such that Southampton's results for April 9, 2015, to December 11, 2015, are now included in our GAAP results and certain inner company transactions between us and Southampton during the period were eliminated.

Unless otherwise indicated, our financial are recast on this basis and we will make it clear when use figures are not recasted. Reconcilliations of non-GAAP measures to GAAP measures may also be found in yesterday's press release.

I would now like to turn it over to John.

Thank you, Ray. Good morning, everyone, and thanks for joining us on today's call.

To kick off, I'd like to discuss a few highlights of Enviva's recent results and our continued growth plans. Steve will then review financial results and guidance in detail and I'll finish up with a market update, including our recently announced off-take contracts.

Let's start with the highlights slide. I'm delighted with how we ended 2015. As a relatively new public company, we feel it is important to continue to build investor awareness and confidence by telling people what we're going to to do and in going in executing and I think we've done just that.

We said we would complete the Southampton dropdown in the fourth quarter of 2015 and amid choppy financial markets, we did it. We provided guidance on adjusted EBITDA and DCF for the fourth quarter and we've exceeded both.

We said we would grow our distribution at a significant rate and we have grown the quarterly distribution nearly 12% in just two quarters. And we said that we expected the market activity and demand for our product to result in new, long-term off-take contracts. We and our sponsor executed two such contracts, a big one with MGT and one with Langerlo that can significantly extend our contracted position and underpin the development of additional capacity at our sponsor.

And while we're happy with these recent accomplishments, it's important to continue that momentum into 2016, and talk about what's next. We expect to continue to be the preferred supplier to major utilities around the world, seeking to reduce the carbon intensity of energy generation, by displacing coal with a drop-in fuel to generate renewable energy.

We expect to do this by maintening operational excellence -- safety, reliability, sustainability and continuous improvement to drive day-to-day success at Enviva. We expect substantial growth in EBITDA and ETF guiding to $83 million to $87 million in adjusted EBITDA and $67 million to $71 million in DCF in 2016. We expect to distribute at least $2.10 per unit in 2016 and more than 27% increase from our annual minimum quarterly distribution announce the at our IPO. less than a year ago. We expect to have the opportunity to acquire the 515,000-ton Sampson production plant from our sponsor in late 2016. That will include a ten-year off-take contract with DONG, with deliveries commencing later this year.

We expect to capitalize on our market leadership extending our contractual position as we close into additional firm with long-term off-take contracts and we expect to continue expanding margins through debottlenecking opportunities at our plant and continued focus on recuse reducing costs.

As we go forward, I expect to be reporting that we have completed these goals. In the time when the broader energy industry is experiencing significant volatility, our job is to continue to distinguish our durable, increasing cash flows, and ability to execute on visible growth opportunities whether based on our core European industrial market or other geographies and pellet applications.

I'd like to now hand it over to Steve to discuss the fourth quarter and full-year financial results as well as guidance for 2016.

Thanks, John. Turning to the fourth quarter 2015 financial results slide, the fourth quarter strong operating performance drove solid financial results for the business. On sales of 629,000 metric tons of pellets, net revenue for the fourth quarter of 2015 was $117 million, representing an increase of 48% over the corresponding quarter of 2014. We sold approximately 215,000 metric tons of pellets more than the fourth quarter last year, primarily as a result of increased contracted sales volume.

While the absolute gross margin increase was driven principally by the higher volumes sold, adjusted gross margin per metric ton also improved relatively to the corresponding quarter of 2014 from $30.93 per ton to $39.37 per ton. The improvement was driven by a decrease in operating costs, raw materials and shipping costs, primarily offset by unfavorable pricing on a contracted shipment in heritage part of the acquisition.

A net income of $9 million adjusted EBITDA improved to $21.6 million for the fourth quarter of 2015, from adjusted EBITDA of $9.4 million for the corresponding quarter of the prior year -- 830% increase.

The increase is a result of the factors already mentioned and an $820,000 utility refund received by one of our production facilities.

After maintenance, capital expenditures of $900,000 and interest expense net of amortization of debt issuance cost and original issue discount of $2.6 million, distributable cash flow for the fourth quarter of 2015 was $18 million.

On November 5, we provided guidance for the fourth quarter of $14.8 million to $15.8 million and adjusted EBITDA of $11.3 million to $12.3 million in distributable cash flow both assuming with Southampton dropdown had not occurred.

On that basis for comparison purposes the fourth quarter 2015 adjusted EBITDA would have been $17.1 million and distributable cashflow would have been $14 million representing material outperformance driven by optimization, within our shipping and sourcing contract, timing of maintenance outages, supplier incentive payments, and lower operating costs partially offset by lower sales, primarily due to the timing of loading on ships and port at the end of the year.

Turning now to the full year 2015 financial results slide. For the full year 2015, on a GAAP basis, net revenue was $457.4 million, representing an increase of 58% over 2014. We sold approximately 867,000 metric tons of pellets more than last year, primarily as a result of increased contracted sales volume. Adjusted gross margin per metric ton also improved relative to 2014, from $25.91 per ton to $38.89 per ton, driven by customer mix, lower shipping costs, decreased wood costs, and increased utilization at our plant.

On net income of $23.1 million, adjusted EBITDA improved to $77.3 million for the year from adjusted EBITDA of $28.3 million for 2014, a 173% increase. The increase was the result of the higher volumes sold, more favorable pricing under our customer contracts and lower input and shipping costs. Higher G&A expenses, mainly due to costs associated with being a public company partially offset some of that improvement. Distributable cash flow for

2015 was $62.8 million.

Turning to 2016 outlook and guidance. We have previously provided guidance for 2016 with the announcement of the Southampton dropdown and we are reaffirming that guidance. Just for clarity, it should be noted that all amounts reflect the base business as of today, and do not give effect to any potential drops or other acquisitions during the year, not even the Sampson plant.

For 2016, we project to earn net income in the range of $43 million to $47 million with associated adjusted EBITDA of between $83 million and $87 million. We expect maintenance capital expenditures of $4.1 million and interest less amortization of debt issuance costs and original issuance discount for the same period to be $11.9 million. As a result, the partnership expects to generate distributable cash flow of $67 million to $71 million for the year.

And though deliveries to our customers are generally rateable over the year, our quarterly income and cash flow is subject to some modern seasonality due to the potential for colder weather in the first quarter. I expect the first quarter of 2016 adjusted EBITDA to be similar to the first quarter of 2015.

In addition, the mix and timing of customer shipments can impact results, which may vary somewhat quarter-to-quarter. Therefore, our board evaluates with our distribution coverage on on annual basis.

Based on the current number of units outstanding, distributable cash flow is expected to be $2.71 to $2.87 per unit, before any distributions paid to the general partner. We also expect to distribute at least $2.10 per common and subordinated unit in 2016, which represents an increase of more than 27% over the annualized minimum quarterly distribution from our IPO in April.

Now we'd like to turn back over to John to discuss our new off-take contracts and recent market activity.

Thanks, Steve. Before we open the lines to Q&A, I'd like to take a few minutes to provide an update on our recent off-take contracts, as well as the markets we serve and I'm on the market update slide now.

The climate change conference meetings in Paris late in 2015 created some significant momentum and worldwide demand for industrial wood pellets is expected to increase to more than 27 million tons a year by 2019, a 20% annual growth rate, according to independent market expert, Hawkins Wright. Europe, our core market, is leading the increase in worldwide demand, where the European Union recently reported several major countries are still well behind their binding 2020 renewable energy requirements.

The UK is the largest current and projected consumer of industrial wood pellets and there have been several positive developments from both a policy standpoint, as well as progress at the individual plant level. From a policy perspective, as you may know, the UK Department of Energy and Compliment Change or DECC, recently announced the closure of all coal-fired power plants by 2025. And as such, renewable energy generation is expected to play a larger role in the UK's power supply.

Policymakers are beginning to compare renewable energy options on a total cost basis. While appropriately including, the additional cost of back-up generation, balancing services, transmission enhancements needed for the intermittency issues associated with solar and wind. To sum up the UK's energy policy, the energy secretary and head of deck recently said and I'm quoting here -- in the same way generators should pay the cost of pollution, we also want intermittent generators to be responsible for the pressures they add to the system when the wind does not blow or the sun does not shine.

With the success power generators have already experienced converting coal-fired plants to 100% biomass and the cost effectiveness of biomass relative to other renewables, we expect biomass power generation and demand for wood pellets to continue to grow significantly. Not to mention the additional demand expected relative to the enhanced renewable heat incentives, the UK government recently announced as well.

At the plant level in the UK, there have been three recent key developments.

First, the Lynemouth facility received EU approval of it's contract for difference or CFD, which then facilitated RWE's sale of the 420 megawatt Lynemouth plant to EPH, a large European vertically integrated energy company with more than $10 billion in assets.

EPM intends to convert to facility to wood pellet fuel by the end of the 2017 and the project is expected to need 1.5 million tons of wood pellets annually.

Second, as expected, is the third 660 megawatt unit into the next stage of the EU-stated approval process for CFD. The unit is fully operational and ramping toward full capacity when it is expected to consume 2 million tons of wood pellets annually. Drax has confirmation from the UK government that they can move forward under the Renewable Obligation Certificates or ROC

should their contract for difference not receive EU--stated approval for some reason.

And finally and perhaps most important with us, the MGT 299 megawatt biomass power plant in the Tees side in the northeast of the UK is expected to commence construction in the second quarter of 2016.

Macquarie is partnering with MGT Power to bring the project to financial close and will be the lead equity sponsor for the project as well as its financial adviser.

As may have read in our press release, we are pleased to announce that our sponsors joint venture with John Hancock, signed a contract to be the sole source wood pellet supplier for the plant. It's a roughly 1 million-ton per year contract, commencing in 2019, ramping up to full volumes in 2021 and continuing through 2034 in line with the 15-year CFD the project has received.

To fulfill these volumes, the partnership will provide 375,000 tons per year under contract to our sponsors JV on a similar tenor. And our sponsors JV will build the new additional capacity required to supply the balance of the 1 million tons. The partnerships contract is denominated in British pounds, and we feel the pricing in terms adequately compensate for selling in that currency.

Both the sponsors JV's contract with MGT and the partnership's contract with the sponsors JV are subject to financial close by MGT, currently contemplated for mid-year.

In Belgium, E.ON completed the sale of it's 556 megawatt Langerlo plant to a buyer that intends to convert the facility from coal to wood pellets. You may recall that back in December we announced a new off-take contract, one that doesn't begin until next year and this contract is now held by Langerlo's new owner. This is an important plant in Belgium, accounting for roughly 8% to 12% of the daily electricity generation in the country and we're excited about the conversion.

However, as you may already be aware, German Pellets, GMBH, affiliated with Langerlo's new owner, has recently filed for insolvency in Germany. Although the filings do not involve the project or the owner of the facility, given the financial distress of the affiliated entity, we are closely monitoring the situation. We believe that a system relevant plant like Langerlo ultimately will get converted, if not by the current owner due to it's completely unrelated financial difficulties, then by another party in the industry. And based on our track record, we expect to get our share of the fuel supply regardless of who ultimately does the conversion. I would also add, as many of you know, these types of situations can create compelling opportunities, too. So we will be keeping our eyes open for those as well.

In the Netherlands, the minister of economic affairs confirmed a significant increase in the budget for the renewable incentive program, from EU3.5 billion in 2015 to EU8 billion in 2016 to help meet the binding renewable goals, which the country is currently well behind.

[W Utilities] had announced their intention to submit for the incentive in March 2016 on a coal-fired basis, mixing coal with 10% to 15% biomass. Subsequently, the Dutch parliament is now considering a complete phase-out of coal-fired generation. Following on the success seen is this the UK of full conversions of coal-fired plants to wood pellet fuel, we believe a complete phase-out of coal to lead to significant demand in biomass.

However, questions around a long-term needs of coal in the Netherlands has created uncertainty for the power generators that had planned to apply for the renewable incentive program on a coal-fired basis in March of this year. We understand that the government will try to communicate their coal-elimination plan by mid-year 2016, which will allow applications for the renewable incentive program in the second and final transfer of the year in September 2016.

What's clear here is that the Dutch government's commitment to renewable power generation, uncertainty around the long-term plans for coal-fired will allow generators to move forward with biomass fuel generation on either basis.

We're also seeing substantial growth in Asia. While demand in Korea is expected to increase to 2.5 million tons in 2019, we are also seeing significant growth in pellet consumption reported out of Japan where demand in 2015 rose to 232,000 tons, up 140% from 97,000 tons in 2014. And several biomass-fueled power stations come online, independent market experts expect Japanese demand to grow to 1.4 million tons by 2019. We have delivered to Asia in the past and we'll be looking at opportunities to supply as many of the projects there mature.

Lastly, here in the US, the EPA's clean power plan continues on its legal path, with a stay of it's implementation recently granted by the US Supreme Court. While not a part of our base assumptions of global market growth, it has been and remains a potential upside for market growth and we continue to work at the invitation of the EPA on the role of biomass in the plant.

All in all, we see great progress particularly in the UK, with MGT Lynemouth and a pretty exciting set of activities in the growing market worldwide. We remain highly encouraged that amid this growth Enviva continues to be viewed as the preferred supplier to power generators and their investors. As new financial capital enters this sector and enables key customer conversions like the ones we see in the market, we believe our history of strong operating performance, conservative financial policies and a committed financial sponsor will allow us to capitalize on these substantial growth opportunities, which as we begun to prove out, then translate into significant increases in our distribution and drive unit holder value.

Thank you all for listening. I'd like to thank all the dedicated Enviva associates for their hard work resulting in another strong quarter.

Operator, if you'd be kind enough to open the line up for questions.

Thank you. We'll now begin the question-and-answer session. (Operator Instructions). At this time, we will pause for a moment to assemble our roster.

Our first question comes from Andy Gupta of HITE Hedge. Please go ahead.

Hi. Good morning. Thanks for the positive updates here on the call.

I want to focus on the German pellet situation, which you referred to. Can you just spend a little bit of time just explaining where your contract is and their relationship with German Pellets. And why -- how this might play out and why we should we be worried about this?

Sure, Andy. That's a great question. The owner of the Langerlo plant, the acquirer of the Langerlo plant from E.ON holds the contract with us and that plant today is an existing coal-fired plant. It's operating. It's expected to shut down, I believe, at the end of April and begin that conversion process.

That conversion process has an outline. The [EDT] contract is lined up. The work is engaged and should be well underway. What I think we're highlighting here is that that entity is affiliated with the German Pellets entity of Germany that German Pellets GMBH that recently declared insolvency.

And so although there's not a direct link between those two in terms of capitalization, they're different organizational structures, these things can tend to bleed over and we want to make sure that our interests are protected. We feel very confident about. That currently that plant is a good plant. It's an important plant in Belgium. It should be converted. It's important to the grid and important to the underlying renewable energy goals associated with that country's obligations.

And it's interesting that it's affiliated with German Pellets. Is German Pellets the parent or is it owned by the same umbrella company?

No. It's no common legal structure.

I see. So this should have no impact to you guys? And can you remind us what the contract here is, the fuel source, the fuel supply contract?

As we announced in December, it's a ten-year, 450,000-ton contract commencing in 2017.

Okay. Great. Well, thank you again.

Our next question comes from Pavel Molchanov of Raymond James. Please go ahead.

Hey, guys. See, you've referenced the kind of market development landscape in Asia and some of the US opportunities as well. But as you know, the courts just put the EPA's clean power plant on hold. So in practical terms, what do you think is the timetable realistically for getting an actual customer with actual volumes in either the Asian market or the domestic market?

Pavel, thanks, this is John. Again, when we answered that question last quarter, my response was, look, there's a lot of wood to chop here between here and when that clean power plant actually is an enforceable regulation. And I think that's played out pretty consistently.

What's interesting is that while the US Supreme Court has issued that stay, the EPA is still requesting plans from states and they're still looking at completing the model rule and framework from implementation. And what we see is you can see this in some public reporting, is that there are customers that are out there actively managing a compliance plan against this until from a timeline basis, your guess is as good as mine about the legal resolution. It's got some work to get through there but we do believe that if enforceable, customers are working today to develop those compliance plans and we'll be able to communicate a lot more as that comes into view.

Okay. And then kind of changing subjects. Based on your distributable cash flow guidance and also the distribution guidance, looks like you're targeting something -- somewhere around 1.3 times coverage which is certainly on the high end of most MLPs. Is that deliberate given kind of the current investor preference for safety of distribution above all else? Or do you think -- or I guess are you going to be keeping that policy on a permanent basis?

Hi, Pavel, this is Steve. I think from a long-term perspective, we still are targeting a minimum of 1.15 times as we've talked about in the past. I think in the current market conditions, we're just interested in building some cover that will allow us to do some organic growth opportunities or allow us to increase the distribution conditions warrant it later in the year.

All right. Appreciate it guys.

(Operator Instructions) Our next question comes from [Richard Haydon] of [THC]. Please go ahead.

Good morning, everybody. My question kind of dovetails the prior one. What do you think that the year-end cash distribution would be?

The year-end of 2016 cash position?

Correct.

Well, I think well, sorry. Go ahead.

What I'm trying to drive to is the financing of Sampson.

Sure. So, yes, I think that as we've guided, we think the Sampson transaction is potential in the fourth quarter of this coming year. And as we've talked about previously, I think that we would look to finance that with a combination of debt and equity. Generally 50/50 is kind of what we've guided to in the past. I think that's still a good rule of thumb going forward. We could sweep whatever cash that we -- to the earlier question, we can sweep whatever cash we choose to hold back as part of consideration for that. So after the transaction, the Sampson transaction, I would expect we have a normal level of operating cash.

Okay. But am I correct -- remaining from the Southampton and build up some cash this year, what I'm trying to do is figure out how many shares have to be (inaudible)?

Sure. Sure. So, yes we will build cash relative to our actual creation of distributable cash flow above and beyond what we distribute. So, yes.

Okay. Thank you.

Our next question comes from Elvira Scotto of RBC. Please go ahead.

Hi, Good morning. Just a follow-up on the dropdown question. So the goal is to drop down Sampson in the fourth quarter. And given how the MLP markets are behaving and for now at least the equity markets appear closed, do you think you'd still be able to do that dropdown, if the equity markets stay closed or would you need some sponsor support?

Well, thanks, Elvira. As you may recall the structure we have in place with our sponsor and sponsors JV give us a lot of flexibility to engineer a drop transaction in a wide range of capital conditions. The ability for us to put equity to our sponsor and the JV partners gives us some flexibility. And I think although we're months away from when we would be actually looking to exectute that transaction in the fourht quarter this year, we do believe that the underlying economics, the current conditions in the markets, even as they stand, provide for some attractive drop opportunities for this asset.

Great. Thanks a lot.

(Operator Instructions)

Okay. If no other questions, then that concludes our call. We appreciate everybody joining. Actually it looks like there may be one more question.

We do have one more question from Keenan Murray of Forge First. Please go ahead.

Hey, guys. Just wondering if you could be more specific when you say the owner of the Langerlo facility is affiliated with German Pellets. Can you describe affiliation in any more detail. That's one. And then my other question would be, I think, you noted that you could be opportunistic when developments such as the German Pellets insolventcy emerge. So could you potentially be referring to any of their US-based assets and potentially organically acquiring those? Is that something you're inferring?

I can't comment on any specific transactions. But we are a proven acquireer of wood pellet processing and [inter milling] assets and we're one of the largest in the industry with a portfolio willing able to execute. So I think that certainly to the extent that interesting or attractive opportunities are presented from any range of the counterparties, we'd be interested in taking a look at those.

Okay.

This concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Sure. Thanks. Thanks, everyone, for their interest and support. We're available today to answer questions should they arise. Thanks.

Thank you.

Thanks, everybody.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.