Enviva Inc (EVA) 2017 Q1 法說會逐字稿

Good morning, and welcome to the Enviva First Quarter 2017 Conference Call and Webcast. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Ray Kaszuba, VP and Treasurer. Please go ahead.

Thank you. Good morning, and welcome to the Enviva Partners, LP First Quarter 2017 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; Steve Reeves, Chief Financial Officer. Our agenda will be for John and Steve to discuss our financial results released this morning and provide an update on our current business outlook. We will then open up 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'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 the forward-looking statements can be found in our press release issued this morning and is posted on the Investor Relations section of our website, www.envivabiomass.com, as well as our 10-K and other recent filings with the SEC. We assume no obligation to update 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 today's press release. In addition, all references to 2016 amounts are as reported in our 10-Q filed today.

I would now like to turn it over to John.

Thank you, Ray. Good morning, everyone, and thanks for joining us today. As you likely saw in our earnings release published this morning, it's been an important quarter for us. First off, our first quarter results improved in line with our expectations for the increased adjusted EBITDA from the drop-down acquisition of the Sampson plant and long-term off-take contract with DONG Energy, which we completed in December.

Looking through the recast nature of the financials that GAAP requires for the drop transaction, you'll find that for Q1, the increase in tons sold in the contract mix translates to the expected lift of roughly $5 million in adjusted EBITDA over the first quarter of last year. So we're on track with the benefits of the Sampson drop even in what is our seasonally softest quarter.

We also announced that we have agreed to purchase the Port of Wilmington early in the fourth quarter of this year. The terminal is fully operational and contracted under long-term terminal services agreements to receive, store and load approximately 1 million metric tons of wood pellets from our Sampson plant as well as a third-party production plant that is currently ramping. On this initial level of throughput, we expect the partnership to generate $5 million in incremental adjusted EBITDA for 2018, growing to a run rate of $8 million in 2019. For the terminal, we will make a first payment of $56 million at closing, expected early in the fourth quarter.

In addition, the port is party to a long-term terminal services agreement for the throughput from our sponsor's pellet production plant under development in Hamlet, North Carolina, which is expected to be completed in late 2018. The Hamlet plant is a replica of our Sampson facility, and its production is expected to supply the Macquarie-backed MGT Teesside project in the U.K. When the throughput from the Hamlet plant is terminaled by the Port of Wilmington, the adjusted EBITDA of the terminal is expected to increase to $14 million initially and $16 million once the Hamlet plant reaches its full production.

As part of the agreement for the drop-down of the Port of Wilmington, we will pay an additional $74 million upon first deliveries from the Hamlet plant. So all in, the partnership will pay $130 million for the terminal, a little over 8x multiple, for an asset class that typically trades in the range of 9 to 11x or higher. I think this is again an important statement of how committed our sponsor is to the success of the partnership.

Given the strong footing of our results in the first quarter and our confidence in the durable contracted cash flow profile for the full year, we increased our distribution for the seventh straight time, growing at nearly 4% over the Q4 distribution to $0.5550 per unit. You will also note that we are confirming adjusted EBITDA and DCF guidance for the full year, and then adding the 1 quarter of expected benefit from the Port of Wilmington drop. We now expect to distribute at least $2.36 per unit, which if you do the math, suggests a healthy coverage ratio relative to our target of at least 1.15x for the full year 2017.

Later in the call, I'll spend some time to provide an update to our long-term contracted position and the overall market growth. But I want to spend a quick moment on specific further visible growth we see for the partnership. First, I'm happy to announce that although our book was generally matched, we have reached an agreement with MG to extend our relationship and sell a total of 450,000 metric tons incrementally over the next 2.5 years. The volumes for 2018 and 2019 are subject to certain contingencies that we expect to resolve in the fourth quarter of this year.

Second, as I mentioned, construction of our sponsor's Hamlet pellet plant is accelerating. Our sponsor has begun site work and procuring equipment for the plant that is designed to help fill the long-term contract with MGT that runs through at least 2034. When complete, likely later next year, the Hamlet plant is expected to generate adjusted EBITDA similar to our other large plants of that scale. So a nice progress on the contracted position and some visibility into what assets may come next for the partnership.

On our last call in late February, I laid out our objectives for 2017. These included substantial growth in our durable cash flow profile, consistent increases in our per unit distribution, further strengthening of our contracted position, acquisition of the Port of Wilmington and visibility into future drops. We continue to believe it is important to clearly communicate our goals and then go out and execute and likely do a bit better. We're encouraged by our progress making major strides on those goals, even through what is typically our softest quarter of the year. But as you've heard me say repeatedly, we're not done yet. In fact, we're just getting started, so more to come during the remainder of the year.

I would now like to hand it over to Steve to discuss our financial results.

Thanks, John. As a reminder, in my comments, references to the prior year will be to the recast financials included in the press release that reflect the effects of the Sampson plant as though it was included for the full year due to the common control nature of the transaction.

For the first quarter of 2017, we generated net revenue of $122.1 million, an increase of 13.9% or $14.9 million from the corresponding quarter of 2016. Included in net revenue were product sales of $119 million on volume of 623,000 metric tons of wood pellets. Product sales increased $15.6 million from the corresponding quarter of last year, primarily due to the higher sales volumes under our off-take contract with DONG Energy, which we acquired in the fourth quarter, in connection with the Sampson drop-down transaction.

Other revenue was $3.1 million for the first quarter of 2017 compared to $3.8 million for the same period in 2016. The first quarter of 2016 included a $1.7 million payment from a supplier, from whom we purchased pellets and provided logistics services, who chose to terminate their agreement.

In what is typically our most challenging quarter due to the colder and wetter weather, gross margin improved to $18.5 million in the first quarter of 2017, an increase of $2.7 million from the corresponding period in 2016. Gross margin benefited from the higher sales volume that impacted product sales as well as favorable customer and shipping contract mix. Lower plant utilization was largely offset by reduced wood fiber sourcing costs. Adjusted gross margin per metric ton improved to $43.19 during the first quarter of 2017 as compared to $40.42 for the same period of 2016.

On net income of $2.5 million, adjusted EBITDA improved to $22.9 million for the first quarter of 2017 from $16.6 million in the corresponding period last year, an increase of $6.3 million or 38.3%, driven by many of the same factors that improved gross margin. Net income for the first quarter of 2017 decreased by $3 million due to higher interest expense as a result of the issuance of the senior unsecured notes last year.

After maintenance capital expenditures of $452,000, interest expense, net of amortization debt of issuance costs and original issue discount of $7.3 million, and a set of distribution rights for our general partner of $537,000, distributable cash flow for the first quarter of 2017 was $14.6 million to our limited partners which covers the $0.5550 distribution announced on May 3 at 1x. As we have discussed in the past, our distribution strategy is to maintain at least a 1.15x coverage on an annual basis. As part of our distribution planning for the full year, we expect and plan for a lower coverage ratio in the first quarter of each year, given the seasonality present in this time period.

With our confidence for the full year given the solid footing of the first quarter, we're confirming our guidance. And with the announcement of the Port of Wilmington drop-down transaction, expected to close in the fourth quarter this year, we are increasing our distribution guidance for 2017 to at least $2.36 per common and subordinated unit, reflecting the partial year accretion of that transaction. We now project to earn net income in the range of $29 million to $33 million, with associated adjusted EBITDA of between $111 million and $115 million. We expect maintenance capital expenditures of $5.1 million and interest less amortization of debt issuance cost and original issuance discounts to be $29.7 million.

As a result, the partnership expects to generate distributable cash flow of $76.2 million to $80.2 million for the year, prior to any incentive distributions to our general partner. As I've said in the past, please keep in mind that although deliveries to our customers are generally ratable over the year. The mix and timing of customer shipments can impact results, which may vary somewhat from quarter to quarter.

From a liquidity perspective, based on strong operating cash flow performance, we ended the quarter with nearly $12 million in cash on hand. And aside from $4 million in letters of credit, no outstanding balance on our $100 million revolving facility. As mentioned in our press release today, we plan to finance the first payment for the Port of Wilmington by borrowing on that facility.

Now I'd like to turn it back to John.

Thanks. Before we open up the lines for Q&A, I'd like to take a few minutes to provide an update on our contracted position and the market generally. Our strategy continues to be to fully contract the production capacity of the partnership, and as the market leader, to take advantage of short-term opportunities. We have a weighted average remaining contract term of 9.8 years and a contracted revenue backlog of $5.6 billion. While we are excited about the incremental energy volumes, we're also focused on further diversifying our customer base with potential new customers and markets in Europe and Asia. And there continues to be market developments around the world that underpin the strong growth and long-term demand for wood pellets.

Let's start with Europe as the market continues to progress towards the binding 2020 renewable energy mandate and also begins establishing the next set of requirements for further carbon emissions reduction and renewable energy adoption. The European Union recently announced the new plan to almost completely decarbonize its economy by 2050, even as its 2030 goals for additional emissions reductions and renewable energy generation move through the legislative process. In addition, numerous power generators, representing most European Union countries, committed to no longer invest in new coal-fired power generation after 2020, demonstrating industry and popular support in Europe for renewable energy generation and reduced emissions, side by side with the continued regulatory support.

Somewhat reinforcing the point about the end of coal, the U.K. also achieved a noteworthy milestone as it recently completed a full 24-hour period without burning coal to generate power. In addition, the successor to the Department of Energy and Climate Change, the U.K. Department of Business, Energy & Industrial Strategy, published a study that confirmed wood pellets sourced and produced using the practices employed in the Southeast U.S. are a low-carbon sustainable energy source, materially refuting some of the more local critics of biomass as a long-term part of Europe's greener energy future.

In addition, the cold winter experienced in Europe depleted inventories of wood pellets. The fungibility of wood pellets between the industrial and heating markets, when combined with some of the capacity shortages in the market, should create an opportunity to profitably capitalize on seasonal sales in the thermal applications. Some of our production already migrates to this market. We are the world's largest producer. And given our book of long-term off-take contracts, with a manageable storage position in Europe you heard me talk briefly about last quarter, we should be well positioned to benefit from this strategy.

Let's move on to Asia, where industry experts believe the demand for industrial wood pellets will grow more than 30% a year through 2021. The market is expected to be led by Japan, where the government recently reconfirmed its targeted generation mix for 2030 of approximately 6 to 7.5 gigawatts of biomass-fired capacity, representing 15 to 20 million tons of biomass demand annually. As biomass projects apply for the program with an important deadline later this year, several new projects have been announced, including Kansai Electric Power's conversion of its Aioi plant to biomass through a joint venture with Mitsubishi Corporation Power and Chubu Electric's plan for a new 1 gigawatt coal-fired unit at its Taketoyo facility.

For Enviva specifically, we have discussed in the past the opportunities present in the Japanese market. And from a process standpoint, we're in good shape. We have a series of substantially complete term sheets and are actively negotiating specific long-term off-take contracts with several major counterparties on new dedicated biomass plants and large-scale coal-firing projects. Our customers expect to make final investment decisions in the fourth quarter of this year and are expected to begin receiving material wood pellet deliveries in 2020 and 2021. So obviously, much more to come as these agreements are signed and the new projects under submission by many of the Japanese power developers, trading houses and utility joint venture partners complete the METI feed-in tariff process early in the fall.

So while we see good progress in Europe and Asia, it's also noteworthy to see consumer preference outside of any regulatory framework or incentives driving several major multinational corporations, to lay out specific plans to reduce their carbon footprint and increase adoption of renewables for their own operations and supply chains. It is increasingly recognized that biomass can play an important role as a reliable complement to other renewables as these corporations evaluate their options for uninterruptible power and heat as part of their plans to decarbonize.

So to recap a few headlines for the quarter: Solid Q1 results in our seasonally softest quarter, we're on track with the expected uplift to the business with the Sampson drop completed late last year, we announced our seventh consecutive distribution increase, confirmed guidance for the full year and then announced our plans to increase it a bit for the full year based on the acquisition of the Port of Wilmington terminal in early Q4. Our sponsor is commencing construction activities for the Hamlet plant with expected completion in late 2018. And against the balance book, we've extended our contracted volumes with MG and made really good progress in new markets like Japan and in Continental Europe.

As I look back on the 2 years since our IPO, we have developed a strong track record of doing what we said we would do. We continue to demonstrate the durability of our cash flow profile based on our long-term contracted position and the strong operational performance exhibited by our fleet of production and terminalling facilities, which I would again note is not exposed to volatility in price or volume of commodity fossil fuels. And with a highly visible growth in front of us, I'm excited about the opportunities to increase our per unit distributions going forward.

Before we close, I would like all of us to thank the very hard work of all of the Enviva employees, who work very hard every single day keeping our plants, our ports and most importantly, each other, safe every single day. That's the foundation that results in another solid quarter.

Operator, can you please open the lines for questions?

(Operator Instructions) The first question comes from John Ragozzino from Drexel Hamilton.

I got a couple of quick ones for you. First, on the Wilmington port. If I read the release correctly, there's about 1 million contracted, you've added the Sampson capacity at full capacity of 600,000 tons a year and there's 3 million total tons per year of throughput capacity. Is there a ramp or expected like outlook that you have you could provide regarding the contract of the additional 1.4 million tons of uncontracted capacity.

Yes. So let's parse that up a little bit. So today, the terminal receives, stores and loads of fully contracted volumes of 1 million tons a year. That accounts for the Sampson plant as well as a third-party production plant that's currently ramping. Given the combination of those, you'll get a little bit more than 1 million over their ramp rate. Then we add the fully contracted position of the Hamlet plant which is, again, like Sampson initially, a 500,000-ton plant growing to 600,000-ton plant. At full run rate, the combination of those 2 gets you to about $16 million in incremental adjusted EBITDA for the partnership. And as you point out, there's an incremental capacity that can be filled by additional volume, either generated by plants invested in by our sponsor or additional volumes coming through from third parties.

That makes a lot more sense. What about the third -- I mean, I'm kind of jumping ahead of my question. But post-Hamlet, is there still any progress being done in the Lawrence plant which will, I would assume, does service at Wilmington Port as well. And assuming it's a 600,000 ton plant, then you've got what, I guess, another 400k that you can still work with on a contract basis?

That's right. And as you heard us talk about previously, our sponsor maintains a wide portfolio of additional investable opportunities, options for incremental capacity to serve both the growing European market and more specifically I would add the growing Japanese market.

Fantastic. And then so the long-term run rate of $16 million, there is a little bit of upside to that if we consider 2020 and beyond if we do assume that there is some utilization increase of beyond just what we have clear visibility on.

I think that's correct. And I would point out that there's capacity there. There's also some incremental capacity at the Port of Chesapeake.

Okay. Great. That's helpful. Just one more on the Hamlet. It says in the press release, late 2018 completion. How should we be thinking about the timing for a drop-down transaction and ultimately like cash flow contribution?

Likely Sampson. I think that the facility will come online. We want to make sure that it's appropriately ramped and then drop it in under negotiated agreement between the partnership and the complex committee of our sponsor.

Okay. And then just one more, again, on the Lawrence plant, is there any sort of initial work that's done either permitting or engineering, planning? Where are you on that process?

So across the broad portfolio of our sponsors' development activities, you've seen some favorable progress, as I think we reported on our evaluation of the Pascagoula terminal, Abbeville, Lucedale and Lawrence remains in the mix as well.

The next question comes from Brian Maguire from Goldman Sachs.

It's Derrick Laton, on for Brian. I just had a couple of quick ones. So you mentioned earlier in the prepared remarks that you benefited a bit from favorable customer and shipping contract mix. Wonder if you could just expand on this a little bit and then maybe are we expecting to see this continue to be a similar benefit in the second quarter?

So I think the way -- this is Steve. The way you should probably think about it, our revenue per ton kind of bounces around within our historic range of the high 180s to the low 190s. That's a function of contract mix, which is both a customer statement as well as what shipments go out CIF versus FOB. So we really tend to focus more on a gross margin per ton perspective. So what I would -- I would expect to see the revenue line kind of bounce around in this historical range, but you should see improvement on gross margins as you get through the back half of the year given the seasonal challenges in first quarter.

Great. That's helpful. And then just one more, so kind of given where maintenance CapEx was for the quarter, I know you reiterate your guide for about $5 million in 2017. But given the run rate at first quarter, should we expect this to ramp up a bit? Is that maybe a function of seasonality? Or is that -- should we look for that to be a little bit higher in the back half of the year similar to 2016?

It will differ quarter to quarter. Yes, it's really not so much seasonal as much as a function of scheduled maintenance downtime. And so with the plants in the Mid-Atlantic, we take generally a kind of ratable downtime approach. Whereas some of the Southeastern plants we'll go down in the second to fourth quarter. So it's more a function of when we schedule our downtime. But the $5 million for the full year is the likely right -- is the right run rate.

Great. And maybe just one more quick one. It sounds like Sampson has gone pretty well. Maybe could you just give us how things went there ramping up that facility and how it went kind of against your expectations?

Yes. I don't think we commented on any specific facility, but it's a great big plant. We're very happy with acquisition of it.

The next question comes from Ryan Levine with Citi.

I wanted to follow up on the Japanese term sheets that you have in progress for 2020, 2021. Would those term sheets require building an additional plant? And if so, would that -- where would that be financed? And is there any sizing or any color you can give around the scale of that growth opportunity?

Sure. That's a great question. So the market generally is expected, as I pointed out again in our prepared remarks, the market is generally expected to grow to be about the same size as the European utility market. And we have no reason to believe that their ultimate position in that market would be anything inconsistent with our current market share within the broader European sector. And so that would suggest incremental plants required to be built to service that demand over time. And yes, to be fair, you also asked the question on where those would be developed. It has been our past practice and our consistent belief that we would look to insulate the partnership from the broader contracting and development and construction risk associated with the build of new assets. So one would expect to continue to do that upstairs with a long-term opportunity for the partnership to acquire those assets as well.

Do you foresee using your current assets or any excess capacity to serve those new contracts? Or will those new contracts be served entirely with new construction assets?

No, I think it's both. We've demonstrated and continue to believe in the productivity improvement and capacity expansion that are available within our existing assets. Some of that we are able to monetize with the recent ENGIE volumes against what is more probably a balanced book. And so as we expect to continue to improve the operations and the capacity, that organic growth, that 1% to 2% annual productivity increases we target, some of that will certainly matriculate to the Japanese market as well.

The next question comes from Poe Fratt with D.A. Davidson.

Just a couple if you wouldn't mind. Can you just highlight the specific deadlines that are associated with the Japanese opportunities, John?

Sure. So the -- there's an annual -- the most important one is that there is an annual deadline in the fall that requires any potential participant in the feed-in tariff mechanism to submit a qualified application, and I think it's in late September or late October. That's the material milestone, that FiT approval. Then it gives them the certainty of the JPY 24 per kilowatt hour, about $200 a megawatt hour for the life of the contracts that then run through 2040.

And do they have to have firm supply agreements in place before they bid? Or -- that was my impression before that you make -- we may get news in the third quarter as far as some of these potential contracts coming through. Is that right?

So what it appears, and again I don't want to comment specifically for METI's requirements here. But what it appears is that their submissions are required to have a demonstrated supply chain, and that is consistent with our remarks about the agreed term sheets.

Great. And then can you maybe, Steve, talk about the first quarter as far as any shipment, either timing issues or anything that might have impacted shipments in the first quarter? And then also talk about the pace of the potential ramp over the rest of the year. Or conversely, if you can give us the shipment number or shipment range that's associated with your guidance, that would be helpful.

Sure. So I would say there were -- we ended the quarter with a little bit more inventory in the port than on the sea. So implying that there was a little bit left behind. The -- with respect to the broader part of the year, I would expect the rest of the year to be reasonably ratable. And I think our guidance, kind of thinking about where we were and with the contracts we picked up, you would expect the full year to be in the 2 million 750-ish range I think would be a pretty good proxy.

Great. And then the ENGIE contract, you alluded to some contingencies that need to be cleared up at the end of the year. So that -- it seems like it's going to be impacting '18 and '19. Can you sort of spread out that, if you wouldn't mind, what volume you're going to see it '18 and '19 on that?

Well, I think it's -- again, as with most of our contracts, it's going to be ratable. So you would think if there's 10 quarters between now and at the end of that period, then you would expect to be reasonably ratable.

(Operator Instructions) Our next question comes from Pavel Molchanov from Raymond James.

One of the income statements numbers that jumped out at me in Q1 was SG&A $8.3 million. That was up almost $1.5 million from the prior quarter. Is that going to be the kind of new run rate, about $8 million a piece?

No. No, It won't be, Pavel. We had -- in the quarter, there was a number of onetime items which we, I think, break out a little bit in the back schedules. But we had some costs associated with the -- cleaning up Wiggins for sale as well as some of the transaction costs associated with both the port transaction as well as another transaction we looked at, but chose to pass on. So the run rate will be below that number.

Okay. And then when you talked about $5 million of EBITDA from the marine terminal next year and then $8 million the year after, is that going to be kind of a linear progression upward? Or is there going to be a step change at some point?

That will be a step change, I would say.

At the end of 2018?

Yes.

This concludes our question-and-answer session. I would like to turn the conference back over to John Keppler, Chairman and CEO, for any closing remarks.

Thanks, everybody, for joining us on today's call. Obviously, an important quarter for us. Strong progress and we look forward to the balance of the year. And we'll gladly speak again in a couple of months. Thanks, everyone.

Thank you.

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