Enviva Inc (EVA) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Enviva Partners Q4 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Ray Kaszuba, Treasurer. Please go ahead.

Thank you. Good morning, and welcome to the Enviva Partners Fourth Quarter and Full Year 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 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 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 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 our other recent filings with the SEC. We assume no obligation to update any forward-looking statements to reflect new or changed advents or circumstances.

During this call we will be using GAAP and non-GAAP figures and we want to be clear on the basis of each. On October 2, 2017, we consummated the acquisition of the fully operational terminal in Wilmington, North Carolina. Because this was a transfer between entities under common control, GAAP requires us to recast all financial results of the partnership to include the results of the Wilmington Drop-Down since the date the acquired entity was initially organized such that Wilmington's results are now included in our GAAP results for each period presented in our earnings release.

And certain inter-company transactions between us and the Wilmington were eliminated. The effect of this recast represent financial segments as if we had developed a Wilmington terminal in a partnership when the fact it is our sponsor status strategy to develop new projects outside of the partnership. Unless otherwise indicated, our financial results are recast on this basis and we will make it clear when we use figures that are not recast. Reconciliation 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-K or earnings release. I would now like to turn it over to John.

Thank you, Ray. Good morning, everyone, and thanks for joining us today. As announced in our earnings release published this morning, we closed out a pretty good 2017. We were particularly pleased with the way the fourth quarter shaped up and are very encouraged by the progress we've made expanding our customer diversification with new contracts, new customers and new geographies. With respect to the fourth quarter, consistent with our guidance, on the basis of strong production and more than 800,000 tons sold, we generated our highest quarterly EBITDA. This strong operating and financial performance enabled our fourth quarter distribution of $0.62 per unit, a 16% increase over the fourth quarter of 2016, and resulted in a per unit distribution for full year 2017 of $2.36, again consistent with our guidance. I would also add that our most recent distribution was our tenth consecutive increase, a track record we have maintained every quarter since our IPO, and one which we believe underpins our distribution philosophy.

You will also note that our released highlighted significant contracting activity. In Europe, during the fourth quarter, we entered into off-takes with ENGIE and Ørsted to supply volumes incremental to our existing contracts with these utilities. These contracts further extend our relationships in Europe and demonstrate continued growth in the European market.

In Japan, I'm happy to announce that we have successfully converted the MoU we previously announced into U.S. dollar-denominated definitive agreements for a total of 630,000 metric tons per year starting in 2022 and running for at least 15 years. Our counterparty, one of the premier trading houses in Japan has entered into a long-term take-or-pay contract directly with the partnership for 180,000 tons per year and a similar long-term take-or-pay contract with our sponsors new joint venture with John Hancock for an additional 450,000 tons per year. Our customer will supply these tons to the largest dedicated biomass project in Japan announced yet to date. The contracts are subject to certain CP's including a final investment decision, which we expect to be satisfied by the end of 2018, at which point the contracts will be confirmed.

In addition, the partnership has entered into a firm U.S. dollar-denominated long-term off-take contract with Marubeni Corporation to supply 100,000 metric tons per year for 10 years commencing in 2022 through a new power plant in Japan. Although these long-term take-or-pay contracts come online in a few years, I would also add that the Japanese market needs tons today. And we are entering to smaller short-term agreements with companies like Mitsui for deliveries in 2018. I expect that as the Asian markets continue to grow and we will continue to grow along with them delivering both short-term and long-term volumes to customers seeking the reliable high quality, sustainable fuel supply Enviva is known for.

Our sponsor's new joint venture with John Hancock is an important catalyst that our sponsor expects will develop and acquire incremental capacity to serve this fast-growing market. The first investment transaction of the new $525 million joint venture was to acquire the Greenwood facility in South Carolina, which is subject to receiving the necessary permits it plans to expand to a 600,000-metric ton per year run rate over the next year or so. Current and future product will be terminal through the partnership's Wilmington port facility. As part of this transaction, the partnership entered into an offtake agreement to purchase the production of the Greenwood facility for just over 4 years. This secure source of supply lines up pretty well with the incremental volumes we recently signed and provide certainty in a market that is pretty short supply and appears to be getting even shorter.

While we are happy with what we've done, many of you know I'm fond of saying, we're just getting started. And here's what we expect for 2018.

We expect 2018 to be another year of safely and sustainability making more high-quality tons. We expect to maintain our leadership position as the preferred supplier around the world, extending our fully contracted position and further diversifying our portfolio of long-term customers. We expect to generate between $118 million and $122 million in adjusted EBITDA in 2018, and we expect to distribute at least $2.53 per limited partner unit for the year before accounting for drop downs or other acquisitions.

I would like to now hand it over to Steve to discuss financial results before returning to provide an update on the market and where we see additional growth opportunities.

Thanks, John. As a reminder, unless otherwise indicated, I'll be referring to the financial results on a recast basis to reflect the effects of the Wilmington Drop-Down as though it had been owned by the partnership for the full period. GAAP requires us to recast all financial statements due to the common control nature of the drop transaction.

For the full year 2017, on a GAAP basis, net revenue was $543.2 million, representing an increase of 17% over 2016. Pellet sales revenue was $522.3 million, as compared to pellet sales of $444.5 million last year. For the year, we sold 2.72 million metric tons of wood pellets, as compared to 2.35 million metric tons in 2016. The increase is primarily due to tons sold under the off-take agreement with Ørsted acquired as part of the Sampson drop down in late 2016.

Gross margin increased $2 million to $78.8 million for the full year 2017 as compared to 2016, driven by higher sales volumes and lower production costs, partially offset by higher depreciation and disposal costs. Adjusted gross margin per metric ton was flat year-over-year.

Net income on a GAAP basis for the year was $14.4 million versus $13.5 million in 2016, an increase of $900,000. Excluding the results of the Wilmington terminal for the period the partnership did not actually own it, which is the basis that is comparable to the latest guidance we've provided, net income would have been $20.6 million and adjusted EBITDA would have been $105.4 million for 2017, an increase of $21.9 million from 2016 due to an increased revenue and lower production cost.

Distributable cash flow prior to any distributions attributable to incentive distribution rights paid to the general partner would have been $70.8 million, which covers the full year 2017 distribution at 1.08x, consistent with the expectation we provided most recently for the year.

For the fourth quarter of 2017, on a GAAP basis, we generated net revenue of $161 million, an increase of 27.3% with $34.5 million from the corresponding quarter of 2016. Included in net revenue were product sales of $156.1 million on volume of 8005,000 metric tons of wood pellets as compared to the 632 metric tons for the fourth quarter of 2016.

Product sales increased $34.9 million from the corresponding quarter of last year to the greatest sales volume primarily relating to tons sold under the aforementioned Ørsted contract.

Gross margin increased to $25.7 million in the fourth quarter of 2017 from $19.2 million in the corresponding period in 2016 due primary to higher sales volumes and lower production and raw material costs offset partially by higher depreciation expense as a result of the drop-down transactions.

Adjusted gross margin per metric ton for the fourth quarter of 2017 was $47.43, compared to $42.95 for the corresponding quarter of last year. The increase in the results of the higher sales volumes and lower cost I mentioned.

Net income of $7.9 million, adjusted EBITDA was $31.9 million for the fourth quarter of 2017, after maintenance capital expenditures of $1.5 million, interest expense net of amortization of debt issues cost and original issue discount of $8.4 million and incentive distribution rights for our general partner of $1.1 million. Distributable cash flow for the fourth quarter of 2017 was $20.9 million to our limited partners, which covers the $0.62 distribution we announced at 1.28x for the quarter.

That brings me to 2018. This year, we project our net income in the range of $28.5 million to $32.5 million with associated adjusted EBITDA of between $118 million and $122 million. We expect maintenance capital expenditures of $5 million and interest plus amortization of debt issuance cost and original issue discount to be $33.5 million. As a result, the partnership expects to distribute -- to generate distributable cash flow of $79.5 million to $83.5 million for the full year, prior to any incentive distributions to our general partners.

As John mentioned earlier on the call, on this basis we expect to distribute at least $2.53 per common and subordinate unit for 2018. The guidance does not include any impact of further drop downs or acquisitions. As Steve said in the past, although deliveries to our customers are generally ratable over the year, seasonality and the mix in timing of customer shipments can impact results, which may vary quarter-to-quarter. We have good visibility into our shipping schedule and contract mix by quarter, for the full year of 2018, and we expect the profile to look a lot like 2017 where the back half saw a significant step up from the first half with the fourth quarter being the strongest by a fair bit.

More specifically we expect adjusted EBITDA for the first half of the year to be in the range of $50 million to $55 million weighted towards the second quarter with a strong back half of 2018 to achieve the full year adjusted EBITDA guidance of $118 million to $122 million.

I'll note that the full year 2018 coverage is expected to be in the range of 1.12x to 1.18x but some quarters in 2018 may be below that. As we've described previously, our board evaluates our distribution and coverage on an annual basis.

As many of you are likely aware, generally accepted accounting principles are changing with regard to revenue recognition. Our analysis of the new standard is that it will not affect the timing of our revenue recognition compared to our past practice. What will change is the presentation of certain purchase and sale transactions where because of our position in the market we're able to capitalize on market dislocations on the supply or demand side. These transactions were previously presented on a net basis in other revenue and now it will be presented gross in product sales and cost of sales. Please bear in mind that this is simply presentation and does not change the underlying economics or cash flows.

As we report our 2018 results under the new standard, we plan to provide context related to the change. From the liquidity perspective, we are undrawn on our $100 million revolving credit facility and our first debt maturity is 2020 -- 2020, excuse me.

Before I hand it back over to John just because we have received a few questions related to the new tax reform legislation, I want to mention, quickly mention that we do not believe that any impact to Enviva Partners or unitholders will be material or different from that experienced by other MLPs generally. Now I would like to turn it back to John.

Thanks, Steve. As we look forward, our strategy continues to be to fully contract our production capacity. And our weighted average remaining term of off-take contracts is 9.5 years, with revenue backlog from firm contacts of $5.8 billion, not including the Japanese contract mentioned earlier, which we expect to be confirmed by the end of 2018, further extending the weighted average term and increasing the backlog.

There have been several noteworthy developments in the market both in our current core market of Europe as well as Asia that underpinned the more than 18% annual growth rate and demand for wood pellets expected by industry experts through 2021 with further significant growth to 2030.

Let's start with Europe. As expected demand continues to quickly grow to meet the binding 2020 renewable energy mandates and as more stringent mandates are set. The European Union continues to progress its policy-setting process for the 2030 mandates for renewable energy and reduction of carbon emissions, which is expected to conclude within the year. Of note, the European Parliament recently voted to increase the share of renewable energy generation to 35% by 2030, substantially higher than the 20% goal for 2020.

Dispatchable and based on biomass fire generation and combined heat and power have proven to be effective lower cost complements to intermittent sources of renewable power, which should make them valuable options as the mandates become stronger and more and more intermittent sources of renewable power are used.

In Germany, the currently forming coalition government has announced it will seek to significantly reduce coal fired generation to help meet its 2030 carbon target. Certain coal fired combined heat and power facilities are system-relevant assets and can be cost-effectively converted to biomass fire generation.

In the U.K., the government affirmed an additional Renewable Obligation Certificate or ROC, an incentive for Drax, which Drax said will allow it to convert a fourth unit to biomass from coal by the end of the year, expecting to drive increased and more stable demand for wood pellets across its power plant.

In the Netherlands, EUR 6 billion were made available to renewable energy projects during the spring 2018 round of the renewable incentive program called the SDE+. We expect this round will result in additional incentives to several large-scale industrial sea projects using wood pellets, which is expected to drive further growth. In addition, you've heard me talk about opportunities in the heating market for wood pellets in Europe. And we have recently executed contracts to deliver several shipments to the operator of the district heating loop in Paris, demonstrating the flexibility afforded in our portfolio of production facilities in off-take contracts.

Shifting to Asia, where significant growth is expected as the Japanese government target 6 to 7.5 gigawatts of biomass fire capacity by 2030, representing 15 million to 20 million metric tons a year of demand. The government has actually approved 13 gigawatts of biomass fire generation from the 2017 fee and tariff application well in excess of expectations.

In addition to the recent European/Japanese contracts that we have announced, we are progressing negotiations for several other contracts in both geographies, representing significant volumes for as long as 20 years, as expected demand continues to grow fairly dramatically around the world.

We have positioned the company with a durable competitive advantage to capitalize on that demand growth and the premium the market puts on long-term proven supply with a reliability Enviva provides to our customers through a portfolio of plants and terminals that benefit from the robust, scalable raw material basin of the southeast in the United States and proven capability to develop plant and terminal infrastructure at the sponsor level. The 3 pillars of growth you've heard me talk about align with that long-term positioning. First, while we tend to focus on growth from drop downs, what's exciting is that we have strong underlying organic growth in our business driving year-over-year cash flow increases. Based on our productivity improvements, cost reduction initiatives, opportunities to leverage fixed costs and pricing step ups in our long-term off-take agreements, we believe we can organically grow adjusted EBITDA from the $105 million level last year by 7% to 10% on a compound basis going forward before considering the benefit of drop downs or other acquisitions. And the second pillar of our growth is exactly that. Investments in new plants and terminal infrastructure that are ultimately made available to the partnership for acquisition from our sponsors. I quickly mentioned earlier that our sponsor recently announced that it has extended its development relationship with John Hancock with a new joint venture. In the new JV, Hancock will invest 75% of the $525 million in capital while our sponsor will invest 25% and continue to serve as the managing member and operator.

The first investment of the new JV is the acquisition which closed last week of the production facility in Greenwood South Carolina. The JV is expected to complete its ramp and invest incremental capital to increase the production of the plant to a 600,000-metric ton per year run rate in 2019. In addition to the Greenwood plant, the new JV is expected to develop at least 2 additional production facilities and a terminal in support of additional capacity needed to fulfill a portion of the long-term growth anticipated in the industry.

Our sponsors practice has been to contract, develop, de-risk and then drop the facilities into the partnership once they have achieved both scale operations. With our growing European and Asian pipeline of contract opportunities, this development activity is essential to meeting our expected share of demand. Our sponsors existing joint venture with John Hancock, continues to construct the production facility in Hamlet, North Carolina, which our sponsor anticipates could begin production in the first quarter of 2019. As we previously announced, in the fourth quarter we dropped Wilmington terminal from our sponsors JV, bringing another critical piece of the supply chain into the partnership's portfolio.

The Wilmington terminal will receive store and load, their production of the Hamlet plant driving incremental EBITDA to the partnership. Pursuant to the contribution agreement for the Wilmington terminal, the partnership will make a second payment to the JV related to the long-term committed throughput and cash flow commencing upon first deliveries of the Hamlet plant. So the visible drop-down inventory today consist of the additional EBITDA from the Wilmington terminal driven by the volumes from the Hamlet plant. The Hamlet plant itself, which is contracted to supply the Macquarie-backed MGT Teesside project in the U.K., and the Greenwood plant, which lines up quite nicely to the long-term demand expected from Asia.

We expect the second portion of the Wilmington terminal drop down to be completed in early 2019. And then one plant drop-down acquisition in 2019 and the other in 2020, which is all upside to the guidance we have provided. So drops, along with annual organic growth are complemented by the third pillar of our growth strategy, third-party acquisitions directly made by the partnership where the assets and opportunities make sense and are consistent with our core business.

We've built a solid platform to capitalize on the expected long-term growth. That's a strategy that has led to several accomplishments since our IPO that we are very proud of. But I'm even more excited about the future. The foundation of Enviva's culture is saying what we're going to do, going out and doing it, and maybe doing a little bit better. And for 2018, we expect to continue to lead the industry in safety to maintain operational excellence and continue to leverage productivity improvements, to capitalize on our leading position to further extend and diversify our contracted position, adding to the more than a dozen customers we have today, to organically grow adjusted EBITDA, delivering between $118 million and $122 million, and to distribute at least $2.53 per unit.

Before we open up for Q&A, I would like to thank all of the great people at Enviva for their dedication and hard work. Our team including our newest colleagues in Greenwood, South Carolina is focused on keeping our plants, ports and most importantly, each other safe every day.

Operator, can we please open the line for questions.

(Operator Instructions) Our first question today will come from Brian Maguire with Goldman Sachs.

This is Derrick Laton in for Brian. Just wanted -- do you talk a little bit about your operational performance in the quarter? I know you guys highlighted a pretty strong third quarter. Just want to see how things are progressing and turning their relative to your expectations in fourth quarter and as we're looking ahead to 2018?

Sure, yes. So we presented I think a very strong -- this is Steve, -- a very strong fourth quarter. We sold a little over 800,000 tons. In the quarter, obviously, we benefited from little bit of inventory carry in but it was strong operating performance. I think also we've guided to in the past, the first quarter of the year for seasonal factors, is always a relatively more challenging quarter given the ambient temperatures and the higher moisture content and that pattern continues in 2018 but nothing that is beyond what we would normally expect this time of the year.

Great, and then just one follow-up on there. Just speaking on some of the fiber cost and some of the weather that we've seen already in the first quarter, I'm just curious how input costs are turning for you guys? And are you seeing any kind of fiber price inflation that you may not be able to offset or you're just going to continue to pass that through on your contractual structures?

Sure I guess -- so I think the overall trend continues to be very favorable for us from a fiber procurement perspective. You know that again the dynamics in the first quarter if you look at on a continuous quarter basis, that it is a little more expensive in the first quarter around weather events, which have occurred but nothing extraordinary or unusual relative to past practice.

The next question comes from Ryan Levine with Citi.

Just curious, what's the rationale for creating this new development JV? And why a separate one than your existing structure?

That's a great question Ryan, I think it's a reflection of the continued interest of both Hancock and our sponsor in maintaining that development relationship. There were certain attributes, the initial joint venture that, that certainly our colleagues in Hancock, wanted frankly to have the opportunity to invest incremental capital beyond the 50-50 basis that we started with. And so the longevity and the opportunity that we've been able to continue to create in, in what is a relatively long-dated market for our product, line up pretty well with the investment philosophy at Hancock and so we structured a new opportunity to enable that to continue very favorably for each of the parties.

Does Enviva have a right of first offer or other type of contractual rights to get the business station(inaudible) in the development assets at that company? At the new joint venture?

So let me make sure that we clarify the entities. The -- our sponsor is in the joint venture with John Hancock, and our sponsor has the rights similar to the first joint venture to compel the sale of those assets or membership interests assuming certain thresholds are met consistent with then the ROFO that exists for the partnership between it and its sponsor, as part of the initial ROFO undertaken at the IPO, which is a 5-year deal.

Okay. And then regarding the 10-year Japanese contract, what are the renewal options that are in that agreement? Are there any or what's the next steps as these contracts were to expire?

I think the general expectation both of the parties to that contract as well as the industry generally is that the assets and the operations of these biomass facilities will continue to run well beyond the initial term of any off-take agreement and well beyond the 20-year feed-in tariff that underpins the Japanese development.

Okay. Is there any contractual reopeners or is it subject to a negotiation in 10 years?

No there is not a reopener. There is -- there will be a renegotiation as and when appropriate.

And then in your 2018 guidance, what are the cost reduction assumptions that you have baked into that outlook?

Sure, so as we look at the guidance, we're obviously picking up the port terminal for full year and the Wilmington terminal for the full year but we're assuming continued productivity consistent with what we've got to in the past and in the 1% to 2% range.

And then the MoU comments in your prepared remarks, did I hear that right that it's subject to the final investment decision later this year before that would become a firm contract? Is that their current expectation?

That's right Ryan. As we've talked about this particular agreement in the past and notably the Japanese market generally we've try to provide additional visibility and clarity, given the growing nature of that market. The -- this is a very large contract that we announced, previously was in an MoU stage, giving some visibility into the sort of the difference an MoU may mean in that market compared to some others and guided for the fact that we would be endeavoring to convert that to a definitive agreement in the first half of this year. We've now done that, these are now definitive agreements subject to certain CPs, one material one is naturally the final investment decision by the counterparty, which we expect to be resolved later this year and that the contract would become firm and biding by the end of this year.

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

On your kind of baseline 2018 revenue outlook, can you give an approximate mix among the different customers or off takers?

I think off top my head, well I think you're going to see -- maybe I could characterize it this way, as you look at 2018 is a significant expansion in the terms of the number of different customers, we're going to be dealing with kind of the dozen range. I still think we will be concentrated around 3 or 4 kind of main customers that represent roughly 75% of the book Drax being the largest.

Okay, and maybe between Drax and ENGIE, would that be maybe 75% of the total?

I think it's -- I think little bit less than that actually.

Okay, and then kind of along the lines of customer -- ongoing customer diversification, you've mentioned in the press release the German coalitions government looming coal phase out decision, given that it's not official yet, have you already been having any preliminary dialogue with potential German buyers who might be preparing for that before it even happens?

You're spot on this. This is John. The utility set in many of the generators, not surprisingly, have been reading the tea leaves for some time given the nuclear reductions and the challenges that they have to maintain baseload both electric and thermal generation, right? Many of these assets are a combined heat and power facilities, system relevant not just to -- but the grid but, frankly more importantly, the industrial steam applications that drives significant fraction of German manufacturing in and around these assets. So very, very important to understand the lifetime and the potential to continue to utilize these assets in a low-coal or no-coal future and so as you surmised we've been in some fairly detailed discussions with a number of those generators.

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

Well, thank you all again for joining us today. We certainly appreciate your time and attention. Obviously, a lot of great things going on in the business and we look forward to our next conversation. Thank you.

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