Enviva Inc (EVA) 2018 Q2 法說會逐字稿

Good day, and welcome to the Enviva Partners Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Ray Kaszuba. Please go ahead.

Thank you. Good morning, and welcome to the Enviva Partners, LP Second Quarter 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 Shai Even, Chief Financial Officer. Our agenda would be for John and Shai to discuss our financial results released yesterday 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 yesterday, which is posted on the Investor Relations section of our website 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.

During this call, we will be discussing GAAP and non-GAAP figures and want to be clear on the basis of each. As of January 1, 2018, the partnership adopted FASB ASC 606 revenue from contracts with customers. Unless otherwise indicated, the financial results for the 3 months ended June 30, 2018, are prepared on this basis. In addition, presenting our financial results in accordance with GAAP, in certain cases, we have also provided financial results excluding the full financial impact of the Chesapeake Incident. References to the full financial impact of the Chesapeake Incident include the approximate costs incurred through June 30, 2018, in connection with emergency responses, disposal of wood pellet inventory, asset disposal and repair, as well as associated business continuity expenses, which included the incremental logistics costs and loss of margin on incremental wood pellet production, offset by insurance recoveries received to date. Reconciliation of non-GAAP measures to GAAP measures may 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 today. As I hope you noticed in our earnings release, the partnership and its sponsor achieved some very important milestones since our last earnings call, so we have a fair bit to discuss today. But before we dive in, I would like to take the opportunity to introduce Shai Even, our new Executive Vice President and Chief Financial Officer. Shai joined us 2 months ago after building a highly successful career in the MLP and broader energy space, most recently as CFO of Alon Energy. From discussions with many of our investors and financial partners, it's clear many of you already know him and are familiar with his proven track record. He will be a key member of the Enviva team as we continue to take advantage of the tremendous growth opportunities before us. I'll turn the call over to Shai shortly, but first I want to share some of the key highlights for the quarter.

On the contracting front, we extended our relationship with Drax, the largest purchaser of biomass in the world by executing a 650,000 metric tons per year take-or-pay off-take contract starting in 2022. Drax has been an Enviva customer since 2010 and we are very proud to be a part of their continued growth in biomass power generation.

As you know, the partnership strategy is to fully contract our production capacity. With the extended Drax contract, the partnership is now fully contracted through 2025 with a weighted average remaining term of firm offtake contracts of 8.5 years and a revenue backlog from firm contracts of $6.3 billion.

We are also very excited to announce that we have just executed a 180,000 metric tons per year 15-year offtake contract with a major investment-grade Japanese trading house starting in 2022, subject to conditions precedent that we expect to be met by the end of the year.

In addition, our sponsor recently executed 2 15-year off-take contracts with Sumitomo Corporation starting in 2021 and 2022, supplying 2 different projects in Japan for volumes that totaled 520,000 metric tons per year. This brings the partnership and our sponsor's long-term take-or-pay off-take contracts with major investment-grade Japanese trading houses to almost 1.5 million tons per year and makes the Enviva enterprise one of the largest contracted suppliers to Japan. If volumes under the firm and contingent contracts held by the partnership, our sponsor and the Hancock JVs are included, the weighted average remaining contract term would extend from 8.5 to 11.7 years, and the product sales backlog would increase from $6.3 billion to $12.2 billion.

These new contracts also represent significant potential diversification. If the contracts currently held by the sponsor and its joint ventures become firm, and the associated volumes are supplied by the partnership, we would expect that our largest customer in the next several years would only represent about a 1/4 of our product sales, down from 2/3 in 2017. These long-term take-or-pay contracts extend out almost 2 decades and are expected to underpin the development and construction of additional production plants, some of which we have identified as Hamlet, Greenwood and Lucedale and additional port infrastructure, particularly in Pascagoula, Mississippi that we would expect to be made available for drop-down into the partnership.

From an operational standpoint, we also had a good quarter, notwithstanding the incremental costs associated with our extended logistics change to the Chesapeake Incident, which is now firmly behind us. As we described in the press release in late June, the Chesapeake terminal returned to operation on June 28, in line with our expectations. From the time our domes were cleared out from the initial fire event, our organizational depth enabled us to complete the repairs and recommission the facility in about 65 days.

More importantly, throughout the entire process, we had no injuries, there was no impact on the local community and we did not miss any shipments to our customers, validating the portfolio approach of our business model and the resulting reliability that we believe no other wood pellet supplier in the world can match. Meanwhile, our underlying operations continue to see productivity improvements with 11% more tons sold in the second quarter of 2018 over the second quarter of 2017, while cost per metric ton decreased by 6% over the same period.

Given our confidence that the positive production volume and cost trends will continue, and the temporary nature of the impact from the Chesapeake event, our board elected to declare a quarterly distribution of $0.63 per unit for the second quarter of 2018, and we reaffirm the full year 2018 per unit distribution guidance of at least $2.53. The distribution for the second quarter represents a 10.5% increase over the corresponding quarter of last year and it is our 12th consecutive quarterly increase since IPO. The long-term fundamentals of our underlying business remains strong and we expect no change to its growth trajectory from the temporal issues associated with the Chesapeake Incident.

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

Thank you, John. For the second quarter of 2018, on a GAAP basis, net revenue was $132.1 million, representing an increase of 3.6% over the corresponding period of 2017. Product sales revenue was $129.7 million as compared to product sales of $121.7 million for the second quarter of last year. For the quarter, we sold 699,000 metric tons of wood pellets as compared to 628,000 metric tons during the second quarter of 2017, an increase of 11%.

For the second quarter of 2018, gross margin was $16.3 million, consistent with the same period in 2017. Higher sales volumes and lower production costs achieved during the second quarter of 2018 were offset by lower other revenue, lower pricing driven by customer contract mix as well as expenses incurred related to the Chesapeake Incident net of insurance recoveries.

On a reported basis, adjusted gross margin per metric ton was $37.74 for the second quarter of 2018. Excluding the full financial impact of the Chesapeake Incident, adjusted gross margin per metric ton would have been $40.40 for the quarter as compared to $42.35 for the second quarter of 2017 as adjusted for the impact of ASC 606 for comparison purposes.

On a GAAP basis, net income for the second quarter of 2018 was $3.5 million versus net income of $1.5 million for the corresponding quarter of 2017. Adjusted EBITDA for the second quarter of 2018 was $21.1 million as compared to $23.3 million for the corresponding quarter of 2017. Excluding the full financial impact of the Chesapeake Incident, adjusted EBITDA would have been $23.7 million for the second quarter of 2018, representing an increase quarter-over-quarter.

Distributable cash flow, prior to any distribution attributable to incentive distribution rights paid to the general partner, was $11.1 million for the second quarter of 2018 on a reported basis, which covers the second quarter 2018 distribution at 0.58x and is consistent with how we characterize our expectations for the quarter during our last call.

The Chesapeake terminal returned to operations in line with our expectations, and we continue to believe that substantially all of the costs resulting from the Chesapeake Incident will be recoverable.

On our February 22 earnings call, we provided guidance for full year 2018 adjusted EBITDA of $118 million to $122 million as well as distributable cash flow of $79.5 million to $83.5 million. We believe that these guidance ranges remain achievable, subject to the amount and timing of the recoveries from insurance and other responsible parties.

As you may recall, prior to the Chesapeake Incident, we stated that we expected adjusted EBITDA for the first half of 2018 to be in the range of $50 million to $55 million. We are a little bit short of that result even after excluding the net cost of the Chesapeake Incident, primarily due to a large inventory balance at the end of the quarter. We expect to deliver this excess inventory during the course of the year.

We also stated, at that time, that we expect the total for adjusted EBITDA for 2018 to look similar to 2017, where the back half will represent a significant step-up from the first half the year, and that is still the case. This led the partnership to reaffirm full year 2018 per unit distribution guidance of at least $2.53 with continued quarter-over-quarter increases expected throughout the year.

From a liquidity perspective, at the end of the second quarter of 2018, we had approximately $13.8 million of cash on hand, with $70 million of the $100 million capacity under our revolving credit facility available. In my prior life, I was often asked about our leverage ratio. And even with the $30 million drawn on our revolver, which we expect to be paid off primarily with $24 million of anticipated recoveries not booked at June 30 from the Chesapeake Incident, we are well within the range allowed for our credit agreement.

Now I would like to turn this back to John.

Thanks, Shai. I think you'll agree that it's great to have Shai on board sharing a fresh perspective on the underlying drivers of growth in our business which are safe, stable and profitable operations that is a reliable delivery to our customers under long-term take-or-pay contracts.

It's exactly that reliability, and just as important, scalability, that has enabled us to grow alongside the largest biomass power generator in the world and to become one of Japan's largest contracted suppliers in just a few short months. And it's clear that the European and Asian markets are going to continue to grow.

As we profiled in our release, in Europe, the big news is that in June, the EU Commission, council and the parliament announced that they had reached agreement on key policy terms of the RED II framework, including a binding EU-wide target share for renewables of 32% in the energy mix by 2030, up from the target of 20% by 2020. If approved, this could be important for biomass, as this agreement also reconfirms that energy generated from biomass will count towards the renewable energy target and the generators will be eligible for support under national action plans.

So the spotlight turns to large markets like Germany, the Netherlands and Ireland that have very aggressive targets for renewables and a reduction in coal usage. In Japan, the government recently approved the country's Fifth strategic energy plan. In addition to confirming renewable energy target share of 22% to 24% in Japan's target 2030 energy mix, the plan, for the first time, designated renewables, including biomass as a main source of power generation. This is indicative of a major shift in government policy that recognizes renewable energy's role as a baseload power source.

I'll remind you that the Japanese government is targeting 6 to 7.5 gigawatts of biomass power capacity by 2030, representing 15 million to 20 million metric tons per year of biomass demand, which would double the worldwide industrial market today. Obviously, this will require more biomass. And as our customers continue to scale, their focus is on the stability and the sustainability of wood fiber in the Southeast United States.

And here we are increasingly perceived as an essential part of derisking our customers' renewable power generation investments by providing a fuel supply chain that benefits from Enviva's portfolio of production plants and export terminals, and our industry-leading sustainable forestry practices.

To meet the growing customer demand, we will need to continue our successful track record of investing in incremental plants and port capacity, so I also wanted to provide a brief update on our sponsor's development activities. Our sponsor's first joint venture with John Hancock continues to construct a production plant with a nameplate capacity of 600,000 metric tons per year in Hamlet, North Carolina, which our sponsor expects to begin production in the first half of 2019.

Our sponsor's second joint venture with Hancock continues to invest incremental capital in its wood pellet production plant in Greenwood, South Carolina and expects to increase the Greenwood plant's production capacity from 500,000 to 600,000 metric tons per year, subject to receiving necessary permits. Production from the facility is currently sold to the partnership.

In addition, the second Hancock JV is progressing the development of a new cluster that includes a deep water marine terminal in Pascagoula, Mississippi, and a wood pellet production plant in Lucedale, Mississippi, and has also recently executed option agreements to potentially acquire development sites for wood pellet production plants in Epes, Alabama and Taylorsville, Mississippi.

Our sponsor's practice has been to fully contract, develop, derisk and then make production plants their associated contracts and export terminal available for acquisition by the partnership once they have achieved full scale operation. Our current visible drop-down pipeline includes the additional EBITDA from our Wilmington terminal, with volumes from the Hamlet plant. The Hamlet plant itself, which is expected to supply the Macquarie-backed MGT Teesside project in the U.K. and the Greenwood plant.

We expect to have additional visibility by the end of the year on the timing of the Pascagoula cluster, including the Lucedale plant, which winds up quite nicely to our market development activities in Japan. We expect the second portion of the Wilmington terminal drop-down and one plant drop-down acquisition in 2019 and another plant drop-down in 2020.

Finally, I want to highlight the progress of one of our key sustainability programs. Since the Enviva Forest Conservation Fund was launched in 2015, our sponsor has contributed to the conservation of more than 15,000 acres of bottomland forest. Our initial tenure target was 35,000 acres conserved, so we are well on track.

Programs like the conservation fund and our industry-leading Track & Trace system, demonstrate our commitment to sustainability in ways that extend far beyond third party audits, compliance and certification, which is why we are recognized as not only leaders but also innovators on this critical issue.

So in sum, a busy quarter which, again, demonstrated solid operating performance and further productivity gains, substantial increases on our long-term contracted position and good progress of development of new capacity to serve long-term contracted demand in our core markets. We believe these pillars create a strong platform for sustainable long-term growth that will enable us to continue to increase our per unit distributions over time.

As we close, I would like to thank all the great people at Enviva for their dedication and hard work keeping our plants, ports and most importantly, each other, safe every day.

Operator, can you please prepare the line for questions?

(Operator Instructions) Our first question comes from Brian Maguire of Goldman Sachs.

It's Derrick Laton, on for Brian. Yes, pretty solid volumes there in 2Q considering some of the challenges from Chesapeake, and it sounds like operational efficiencies drove a 6% improved cost structure there. I'm just curious if you could talk about some the efforts that you made in the quarter to keep costs lower in other parts of your business to kind of offset some of those continuity cost from Chesapeake? And if you had any learnings there that you might be able to apply going forward to kind of further reduce your cost structure.

Thanks. That's a great question. As we've worked very hard to communicate quarter-over-quarter, our operations management system we call the Enviva Operational Excellence Management System is designed very specifically on a couple of key points. One is reliability uptime which then, of course, drives the increased availability of our assets to drive more production of those assets as well as continuous improvement initiatives. So these are our focus, not only at cost reduction, but at additional debottlenecking within any of our facilities. So for instance, if you can increase the productive rate of a pellet press even 0.1 tons per hour, well given the span of those pellet presses across our portfolio that translates into material thousands of tons increase quarter-over-quarter. What I'll also say is that on the cost front, our ability to continue leverage scale, particularly on raw material purchases, has enabled us to increase volumes at lower cost quarter-over-quarter. And that's a trend that we would seek to, obviously, continue and underpins the portion of the 7% to 10% EBITDA growth we target on an annual basis.

That's helpful. And then one on just your growth in Asia, I understand you can't speak on a customer-specific basis, but just curious if you can give some color around what's really helping you win new business in this area? Are these customers more looking towards reliability of deliveries and then you kept a little bit larger footprint than a lot of your competitors or are they a little bit more cost focused? And with some of the new capacity that's going to be coming online in North America, just curious if you anticipate any pricing pressures from that or do you still feel confident and be able to win more business there.

Again, a great question. Here's the way I'd size that up is that, that our customers and the growth profile in not only Europe but also, increasingly, Asia, is not about the next hundred thousand tons, it's about the next 5, 10, 15, 20 million tons. And the ability to scale and grow at a flat marginal cost curve is essential to our major counterparties and so they look to us and into the Southeast United States, given our portfolio of plants, the sustainable forestry practices and the flat marginal cost curve that we face across the Southeast U.S. as a key differentiator in the marketplace. And I think that's one of the major reasons why we had become one of the largest, if not the largest, supplier in the channel on a contracted basis over the term. And that translates into, well, quite frankly, is our proven ability to grow. And so not only do we talk about our existing assets and the volumes that we continue to contract within partnership, but really laying the groundwork for the development activities upstairs at the sponsor, the Lucedale facility, the potential Taylorsville, the Epes, that will underpin the long-term growth and capacity because, just as a reminder, this is a market that is very short capacity. Most of the new capacity will need to be built and originated, and that's where the customers in Japan and Europe are increasingly looking to proven delivery partners like Enviva.

Our next question comes from Shereen Undavia of Raymond James.

I wanted to ask about the coal fade out process in Germany. It sounds like the commission will announce the fade out timing by the end of the year. As a practical matter though, how long do you think it would take before German utilities begin to sign the same type of pellet contracts that you've been seeing in Japan?

That's a great question. Let me start with it. We're now in a bit of a transition between RED I and RED II, and so that will be part of the timing considerations. But your point on the German coal commission, I think many folks are underestimating the impact that this commission actually has. If folks look back to the German election, the issue of coal was critical in the formation of the new coalition government. And so that the government's, frankly, delegation of the balance between the phase-out of coal and lignite and frankly, the impact on jobs in the broader German economy against its very, very stringent objectives for climate change, will lead to a transformation of the German power industry, I think. And I think all eyes are very focused on the combined heat and power aspects. And here's where I think the customer set is actually out ahead of much of the regulatory and coal commission work. The customer set is looking at its asset base and trying to ascertain which are the system-critical commodity in power assets that are, today, fired by coal or lignite that can be effectively converted to biomass, preserving jobs, preserving the integration between power generation and the thermal generation that supports so much of German industry, and so I think that there's a very solid case we made that Germany will be a very large market for us. What that translates into timing? I think that we would be looking at contract execution in the next 18 to 24 months, based on the rationalization of the coal commission and the implementation of the appropriate regulatory infrastructure that will enable these conversions. From there, I think it could be very quick, given the plans in place and the work that our utility customers are already undertaking.

Okay. And then I have a follow-up question about Japan. You have about 3 full plants worth of Japanese contracts. As a matter of logistics, would it make sense to build these plants on the West Coast or would you continue to stick with your traditional Southeastern footprint?

That's a great question. And just let me go ahead and just do a quick reset on our contracted position because, obviously, there was a lot to report this quarter. So if we look from the partnership's perspective, with the additional Drax contract and the incremental Japanese contract that we announced 480,000 tons, the partnership is fully contracted through 2025 with contracts to extend out through 2034. This sets us up for some time and as, again, an underpinning of the basis for the 7% to 10% EBITDA growth we target. At the sponsor level, we maintain the MGT contract, which is approximately 600,000 tons, 450,000 tons in incremental Japanese volumes that we previously announced, plus the Sumitomo contract of about 520,000 metric tons. And so we -- all of this does need new capacity. So you've heard me mention Hamlet, you've heard me mention Greenwood, you've heard me mention Lucedale, and negotiation for new volumes in Europe and Asia will continue to increase that, that requirement, and you heard me also mention then the potential sites in Epes and Taylorsville. The reason why we continue to maintain our focus on the Southeast U.S. is because it has the lowest cost fiber basin in the world. And when you look at our cost hour on a delivery basis in the markets around the world, we continue to believe that the lowest cost position will continue to win. And we have yet to find an opportunity to scale on a sustainable forestry basis, volumes aside from fiber basins in the Southeast U.S. And that combination of fiber plus advantaged logistics, to anyone in the world, has led us to continue to conclude that the Southeast United States, given its flat marginal cost curve, is the right place for us to be.

(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to John Keppler for any closing remarks.

I just like to thank everybody, again, for joining us today. As many of you know, I'm fond of saying that we're just getting started, and that's really just the case. I look forward to our next conversation and outlining what we've been able to accomplish in the very next quarter. Talk to you all soon.

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