Enviva Inc (EVA) 2017 Q3 法說會逐字稿

Good day, and welcome to the Enviva Partners Third 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 Mr. Ray Kaszuba, Vice President and Treasurer. Please go ahead.

Thank you. Good morning, and welcome to Enviva Partners, LP Third 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; and 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 (technical difficulty) and up the phone lines for questions.

Before we get started, a few housekeeping items. Please keep in mind that during the course of our remarks and 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 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, which is posted on the Investor Relations section of our website, www.envivabiomass.com, as well as in 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'll note from our earnings release this morning, we had a strong quarter operationally. The process improvements discussed during our second quarter conference call, which we undertook to maintain a leadership position in the industry, are now behind us. And we exited the quarter with the production profile in excess of the nameplate capacity of our facilities, were roughly 2.8 million metric tons per year. With our production at, we're perhaps a bit better than we accepted. And it’s associated to strong operating cash flow, we generated our highest ever EBITDA, which underpinned a 16% increase in our distribution over the third quarter of 2016. This is our ninth consecutive quarterly increase, a track record we have maintained since our initial public offering and one we expect to continue.

The fourth quarter is shaping up to be stronger than any quarter we've ever had, driven by the strong operating performance of our facilities. So we continue to expect to deliver a per-unit distribution for full year 2017 of at least $2.36.

In early October, we also completed the drop-down acquisition of the Wilmington terminal from our sponsors joint venture with John Hancock. Deepwater export terminals like Wilmington and our assets in Chesapeake in Panama City are the most critical pieces of the industry's value chain. In addition to volumes from our Sampson plant, the Wilmington terminal receives, stores and loads wood pellets from a third-party production plant and is also expected to handle pellets from the plant our sponsor is currently building in Hamlet, North Carolina. With capacity of the terminal approximately 3 million tons per year in Wilmington, which translates to another 2 to 3 production facilities, that terminal capacity is a key platform to support the long-term demand growth expected from Asia and Europe.

I'll spend more time at the end of the call for some broader market commentary, but I do want to provide a quick update on our contracting activities. Certainly, growth opportunities in Asia are paramount. We are diligently progressing through definitive documentation for the 650,000 metric ton per year, 15-year MLU announced during the last call, and are in late-stage negotiations with several other potential counterparties for not only the material long-term supply contracts, for which we and our sponsor will need to build additional plants and ports, but also for near-term smaller orders beginning as early as 2018.

Though Asian volumes are a key focus area for us. I'd like to remind everyone that European demand continues to dominate the market and substantial growth in this geography continues to materialize. As a case in point, I'll note the incremental volumes with both ENGIE and DONG, now called Ørsted. Earlier this year, we announced that we had reached an agreement with ENGIE to sell 450,000 metric tons over 2.5 years starting in mid-2017, and that the 2018 and 2019 volumes were subject to certain conditions. I'm pleased to announce that those conditions are now satisfied when the 2018 and 2019 volumes are firm. In addition, we've also agreed with DONG Ørsted to sell an incremental 200,000 metric tons from late 2018 through mid-2021. In all, nice additions to the longer-term contracted book, which now includes; Lynemouth, Drax, DONG, Albioma, MG, RWE and MGT. That's an important progress on our objective to increase customer diversification.

More on customers, markets and geographies a bit later, but now I'd like to hand it over to Steve to discuss our solid financial performance for the quarter in more detail.

Thanks, John. As a reminder, references in my comments 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 period. This was due to the common control nature of last year's drop transaction.

For the third quarter of 2017, we generated net revenue of a $131.5 million, an increase of 18.7% or $20.7 million from the corresponding quarter of 2016. Included in that revenue were product sales of $125.4 million on volume of 668,000 metric tons of wood pellets as compared to 534,000 metric tons for the third quarter of 2016.

Product sales increased $21.8 million from the corresponding quarter of last year due to the greater sales volumes, primarily related to tons sold under the DONG contract that was acquired in connection with the Sampson drop-down transaction, which is partially offset by lower pricing that was a function of contract mix.

Other revenue decreased to $6 million for the third quarter of 2017 compared to $7.2 million for the same period in 2016. This decrease was due primarily to lower revenues from transactions related to market dislocations as compared to a $5.7 million transaction reported last year associated with a third-party pellet producer that could not meet its contractual obligations. This was partially offset by additional sources of other revenue.

Gross margin decreased to $21.1 million in the third quarter of 2017 from $22.4 million in the corresponding period in 2016, due primarily to higher depreciation expense as a result of the Sampson acquisition, the mix of customer and shipping contracts, the decrease in other revenue and higher production cost. However, higher sales volumes offset a large portion of those costs.

Adjusted gross margin per metric ton for the third quarter of 2017 was $46.49 compared to $56.88 for the corresponding quarter of last year. Excluding the $5.7 million we earned related to the transaction in either revenue for the third quarter of 2016 that I mentioned earlier, the adjusted gross margin per ton for that period would have been $46.25.

On net income of $6.3 million, adjusted EBITDA improved to $26.1 million in the third quarter of 2017 from $22.9 million in the corresponding period last year, an increase of $3.2 million or 13.9%, driven by the factors I previously mentioned as well as a decrease in general and administrative expenses attributable to plant development activities related to the Sampson plant. Net income for the third quarter of 2017 decreased by $4 million due to higher depreciation expense and an increase in interest expense as a result of the issuance of the senior unsecured notes last year.

After maintenance capital expenditures of $857,000, interest expense net of amortization of debt issuance costs and original issue discount of $7.3 million and incentive discretion rights for our general partner of $1.1 million, distributable cash flow for the third quarter of 2017 was $16.9 million to our limited partners, which covers the $0.615 distribution announced today at 1.04x, consistent with the expectations for the third quarter we communicated during our last earnings call.

As we have discussed previously, this is a business designed with strong cash flow capacity. This continued in the third quarter with strong operating cash flow during the quarter, resulting in $76.3 million in operating cash flow from year-to-date.

As John mentioned, we completed the drop-down acquisition of the Wilmington terminal after the end of the quarter. We funded the initial payment, primarily with a draw on our revolver. We subsequently issued $55 million of additional senior unsecured notes at a premium of 106.25% of par, representing a yield to maturity of 6.7% and used the net proceeds principally to repay the revolver borrowing. We are pleased with this add-on bond financing, which was completed at a strong mark and maintains our financial flexibility as we plan for continued long-term growth.

With only the fourth quarter remaining in the year, we maintained the midpoint of our full year 2017 guidance we communicated on our last earnings call while narrowing the range. We project to earn net income in the range of $19.5 million to $21.5 million with associated adjusted EBITDA of between $104 million and $106 million, which includes the impact of the recently acquired Wilmington terminal. We expect maintenance capital expenditures of $4.5 million and interest less amortization of debt issuance costs and original issue discounts to be $30 million. As a result, the partnership expects to generate distributable cash flow of $69.5 million to $71.5 million for the year, prior to any incentive distributions to our general partner.

As we mentioned during our last earnings call, we expect the fourth quarter to be strong, driven by the strong operating performance of our plants and favorable contract mix with $30.5 million and $32.5 million in adjusted EBITDA for the quarter.

In addition, we confirm our distribution guidance for at least -- of at least $2.36 per unit for 2017, although on coverage for the full year that will be somewhat tighter than our long-term target of 1.15x, mainly due to the financial performance in the second quarter as result of the process improvements that are now behind us. We expect to provide full year 2018 guidance during our next earnings calls. But as we have consistently stated, we seek to increase our distribution on a quarterly basis.

From a liquidity perspective, we are undrawn on our $100 million revolving facility following the repayment of the revolver with the proceeds of the net issuance.

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

Thanks. Before we open the lines for Q&A, I'd like to take a few minutes to provide an update on the growing market for wood pellets. Wood spend drives our plans for the plans in course needed to supply potential new off-take contracts. Our strategy continues to be to fully contract our production capacity. And our weighted average remaining term of off-take contracts is 9.7 years, with a revenue backlog of firm contracts at $5.5 billion.

We are also focused on further diversification of our customer base in Europe and increasingly, Asia. And to that end, we are now supplying the alignment facility in the United Kingdom. We expect to deliver our first vessel to Albioma's facility in Martinique before the end of the year. And we have extended our relationships with ENGIE and DONG, as I mentioned earlier on the call.

Looking forward, the favorable tailwinds in our industry continue with experts forecasting worldwide demand to increase 18% per year to 2021 with further substantial growth to 2030 and beyond. A significant part of that growth is from Asia as Japan is targeting 6 to 7.5 gigawatts of biomass-fired capacity by 2030, representing 15 million to 20 million metric tons a year of demand. The recent feed-in tariff program designed to enable this capacity actually received applications for 15 gigawatts of biomass-fired capacity, significantly exceeding expectations. And approvals for the feed-in tariff are beginning to become public. Several utilities and trading houses have announced new dedicated and co-fired biomass projects. As I mentioned earlier, we are in late-stage negotiations with several potential counterparties representing material volumes for off-take contracts as long as 20 years.

Last year, we -- I'm sorry, last quarter, we announced the memorandum of understanding for the sole source supply of 650,000 metric tons per year for 15 years to the largest dedicated biomass project announced to-date in Japan, and that continued to move forward towards definitive documentation as expected.

Elsewhere in Asia, South Korea imported a record amount of wood pellets in the third quarter, up 70% since last year to meet the growing demand of its biomass-fired power facilities. Today, that demand is typically fulfilled using short-term tenders. But as more biomass-fired capacity is built, largely on a project finance basis, the market is beginning to see a shift towards longer-term take-or-pay off-take contracts for the reliable, creditworthy fuel supply required to meet the demand for biomass.

Shifting to our current core market of Europe, demand continues to grow as the 2020 renewable mandates approach. In Belgium, ENGIE received a 5-year extension to run its 180-megawatt Max Green facility on biomass. The facility uses approximately 800,000 metric tons per year of wood pellets at full capacity.

In Germany, coal-fired power generation needs to be reduced substantially by 2030 in order to meet the commitments under the Paris Climate Change Accord, just as some policymakers call for a complete phase-out of coal. Many coal-fired combined heat and power facilities are system-relevant assets, and the conversion of coal-fired power plants to biomass-fired generation has proven to be an effective lower-cost complement to intermittent sources of renewable power.

In the United Kingdom, the government awarded a Contract for Difference, or CfD, to a 85-megawatt biomass-fired CHP project in Grangemouth, Scotland under the latest U.K. government auction. The government has announced a further CfD auction round, including biomass CHP to take place in the spring of 2019.

In the Netherlands, EUR 6 billion were made available to renewable energy projects under the autumn round of the renewable incentive program called the SDE+. Given that the category for biomass co-firing had already realized EUR 3.6 billion in subsidies in prior rounds, we expect several large-scale industrial steam projects will be successful in this round, leading to further enhanced wood pellet demand in the Dutch market.

Worldwide, the markets are growing, and I'll tell you that we are in a unique position to capitalize on the demand growth, in particular, in the Japanese market, which places a premium on long-term supply that can grow alongside expected demand.

In contrast to other regions, the U.S. Southeast presents a flat marginal cost curve for incremental production. And with the reliability Enviva provides to our customers through our portfolio of plants and ports that benefit from this robust scalable raw material basin, we are positioned with a durable competitive advantage. That advantage translates today to roughly a 20% market share for Enviva, that in an industry that is seeing substantial increases in long-term demand, underpins the first of the 3 pillars of growth you've heard me consistently talk about. That first pillar is investments in new plant and port capacity that ultimately are made available to the partnership. We have now successfully completed 3 drop-downs since our IPO. Our sponsor continues to evaluate sites in the Southeastern United States for additional production facilities, which could use -- which could utilize untapped capacity at our existing terminals as well as incremental terminal locations. Our sponsor's joint venture with John Hancock continues to progress construction of the newest production facility in Hamlet, North Carolina, which our sponsor anticipates could begin material production in the first quarter of 2019. Our practice has been to fully contract, develop, derisk and then drop the facilities into the partnership once they have achieved that full-scale operations.

As you may recall, as partial consideration for the Sampson drop-down acquisition undertaken by the partnership last year, we issued approximately 1.1 million in common units at attractive terms to affiliates of John Hancock. We believe and informed that they sold them this week, which may account for the heavier-than-usual trading volume. The proceeds on that equity sale are being realized at the same time as our sponsor and as joint venture partner are fulfilling capital calls to fund the completion of the Hamlet plant. We do note that the incremental liquidity in our units achieved as a result of the sale is consistent with the interest of many of our investors about increasing our public flow. Though all the significant step changes in our growth will occur from drops, the second pillar and one that defines our quarter-over-quarter consistent growth is driven organically through contract price escalators and the production cost reductions and throughput improvements that lead to the underlying 1% to 2% productivity increases we expect from our assets annually. As many of the plant production costs are fixed, incremental production volumes come with robust margin. The drops, coupled with organic growth are core pillars of our planned growth strategy, and are complemented by our third pillar, third-party acquisitions, which as a proven acquirer have been sources of accretive growth in the past where the assets and the opportunities made sense and were consistent with our core business.

The net-net, a good quarter, underpinned by robust production increases, strong operating cash flow and expansion of our contracted position. We've continued to make investments in plant and port infrastructure, a strategy that has led to an annualized growth rate in our quarterly distribution of 19% since our IPO. Looking forward, we expect additional plants and ports to serve the substantial new contracted demand on the horizon coupled with solid execution and productivity increases that will further drive the cash flow growth that should enable us to increase our per-unit distributions each quarter.

As we close, I would like to thank all the great people at Enviva for their dedication and hard work. Our seamless focus on keeping our plants, ports and most importantly, each other safe each and every day. That's the foundation that results in another solid quarter and a platform for long-term growth.

Operator, can we please open the line for questions.

(Operator Instructions) The next question comes from Mr. Brian Maguire from Goldman Sachs.

This is Derrick Laton on for Brian. Just really quickly, it looks like the average price per ton fell just a little bit sequentially there. Just curious if there's anything to highlight and if maybe it was more related to some of the seasonality or just some contractual pass-throughs of maybe lower input cost per year that goes through to your customers.

Derrick, it was -- this is Steve. It's largely just a function of how contracts mix out from quarter-to-quarter. There is some variation in our contracts and the mix of individual contracts will give you some volatility on that metric from quarter-to-quarter.

Got you, that makes sense. Okay. And then just curious if you could speak a little bit to how input costs have been tracking for you guys and if you'd experienced maybe any impacts from hurricanes in the quarter that I know there was some wet weather in the South.

Sure. Now input costs have been a good story for us this year. They've been on a steady decline through the year from a -- for a variety of reasons, including some good effort relative to our sourcing group. With respect to the hurricane specifically, we really saw no impact from those. There was no damage to our facilities. It didn't really affect the fiber supply particularly. We closed our -- at least some of our facilities just for the safety of our employees for a short period of time. But that came right back up, and there was really no material effect in the quarter.

The next question comes from Mr. Ryan Levine from Citi.

Would you be able to provide some EBITDA guidance related to the new DONG contracts to start next year and go through 2021?

No, we don't provide specifics for all of the individual contracts on -- I think that would be imprudent from a commercial perspective.

Is it fair to say that the EBITDA per ton for that contract is comparable to what you're seeing elsewhere with your European customers?

I think the way that we characterize that is that you've seen very stable adjusted gross margin per ton generation and modest increases due to productivity that we are able to achieve at our assets. That's a trend that we would expect to maintain.

Okay. And then in your guidance, it looks like there's an asset impairment and disposal charge for Q4. What does that relate to? And is that anticipated to continue into next year?

Sure. From time to time, what we do in our maintenance CapEx, there'll be assets that get disposed of as part of that activity. So there will always be some level of small noise associated with that as we go forward.

What assets are you disposing?

Well, as we do maintenance capital, we’ll replace, say, a cyclone -- or something along those lines and to the extent that -- especially – to the extent that the asset life still existed on the books, there would be a disposal associated with that. So it's not assets that are taken out of service that aren't being replaced.

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

So as we're on the cusp of 2018 just as a high level, what percentage of your anticipated volumes for 2018 are contracted as of today?

We're fully contracted.

Okay, got it. And then a question about in Asia Pacific, potentially Asia Pacific market that has not been getting a lot of attention, while we saw last month the government of Australia put out a new emissions policy that has a very explicit emphasis on base-flow generation and preserving their coal-fired power plants. Given that this is very similar or analogous to what we've seen in U.K. and so forth in Europe. I'm curious if you had any interest coming in from Australian generators with regard to beginning to blend pellets?

Thanks for the question, Pavel. The -- I'd answer it this way, that facing -- any generator facing an emerging regulatory set, which is in sensing baseload generation and seeking to reduce emissions, ultimately focuses on biomass conversions. They're the lowest cost alternative. They represent the lowest system cost and present attractive opportunity. So as that comes into relief, I think, and certainly into a broader perspective from a generator set, I think that will be interesting potentially over time.

Okay. That sounds like it's kind of premature at this stage to -- for you guys to get into any discussion on that.

I think, generally, the industry, whether it's in Australia, in New Zealand, the broader continental Europe that we've talked about, Asia, the intense focus on baseload generation and low-cost alternatives for carbon emissions reduction tends to ultimately result in biomass conversions, and we think that's generally a good thing.

The next question comes from [Mr. Richard Hayden] from [THC].

Could you remind me what the nameplate capacity was prior to the productivity improvements? You indicated it's now 2.8 million tons -- metric tons?

Sure. It was a little bit shy of that, and so a little bit less than the 2.8 million we're seeing today. And again, I think, as we talked in the prepared remarks, we exited the quarter on top of that. And so we're encouraged, but we need to maintain that momentum.

And John, what was it prior, say, for the first quarter there?

2.75 million, I think.

The next question comes from Mr. Lin Shen from HITE.

I think you have been working, try to extend your market in Asia, especially in Japan, for some time. I guess, maybe you can tell me a little about what are the challenge you're facing now. Do you think you may be able to solve that over next couple months?

So Lin, if I understood the question correctly, you're more broadly talking about the Japan contracting profile. Again, we're extremely pleased with the progress we're making. This is a market because of its robust growth and its acceleration, we've chosen to communicate a little more discreetly about the opportunities to give some visibility into that market's potential and it’s emerging contracting profile. Again, that's a market that, as I shared, is targeting 6 to 7.5 gigawatts, the most recent FiT applications, were for 2x that. So the generator, the trading house demand and the investments in both the new dedicated biomass plants that we'll provide for distributed generation of our biomass basis as well as co-firing within the larger utility set, a very robust demand. Most of that materializes in terms of beginning of the deliveries in the 2021, 2022 time frame. And so today, there's a process of extensive diligence, extensive -- of contract negotiation as what I would say is a relatively conservative market begins to execute, binding long-term off-takes. That can go as long as 20 years. So we're very excited about the progress we're making. I think that, as we shared last quarter, the execution of the sole source MOU is indicative of our presence in the market. Our continued contracting activity that we expect to be in a position over the next 2 to 3 quarters to provide for a lot more visibility in terms of the specifics, counterparties and the tenor of those contracts. You'll note that you've heard me talk in the past, we have offices in Tokyo today. We have a number of people there supporting that market. It's a continued replication -- or reflection of the investment we're making there because of the expectations we have for the market.

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

Everyone, thank you so much for joining us today, and we appreciate your time and attention. We very much look forward to our next conversation. Have a great day.

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