Enviva Inc (EVA) 2019 Q4 法說會逐字稿

Good morning. And welcome to the Enviva Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Ray Kaszuba. Mr. Kaszuba, please go ahead.

Thank you. Good morning, and welcome to the Enviva Partners, LP Fourth Quarter and Full Year 2019 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 will be for John and Shai to discuss our financial results released yesterday and provide an update on our current business outlook. Then we will open up the phone lines for questions.

Before we get started, a few housekeeping items. During the course of our remarks and the subsequent Q&A session, we will be making some forward-looking statements, which are subject to a variety of risks. Information concerning the risks and uncertainties that could cause our actual results to differ materially from those in our forward-looking statements can be found in our earnings release issued yesterday in the IR section of our website as well as in our most recent 10-K and other filings with the SEC. We assume no obligation to update any forward-looking statements to reflect new or changed events or circumstances. In addition to presenting our financial results in accordance with GAAP, we will also be discussing adjusted EBITDA and certain other non-GAAP measures pertaining to completed fiscal periods as well as our forecast. Information concerning the reconciliations of these non-GAAP measures to the most directly comparable GAAP measures and other relevant disclosures are included in our press release issued yesterday.

I would now like to turn it over to John.

Thank you, Ray. Good morning, everyone, and thanks for joining us today. Every quarter since our IPO in 2015, you've heard me focus on operational excellence and sustainability as the foundation for extending our track record of meeting or exceeding our guidance as well as for driving long-term growth, diversifying our contracted position, strengthening our visible drop-down pipeline and reducing our cost of capital.

Based on the financial results published in the 10-K and earnings release issued yesterday, you've seen that we had a strong close to 2019, booking another quarter of record adjusted EBITDA on well over 1 million metric tons of wood pellets sold. For the full year, we delivered adjusted EBITDA and distributable cash flow in line with our guidance, and the second half was a significant step-up from the first, consistent with the profile we laid out earlier in the year. This solid operating and financial performance enabled us to increase our quarterly distribution for the 18th consecutive quarter to $0.675 per unit at a coverage ratio of 1.59x. For the full year of 2019, we have now declared distributions totaling $2.65 per unit, again, consistent with our guidance.

With the Northampton and Southampton expansion projects expected to begin ramping in the second and third quarters of 2020, respectively, the continued ramp-up of production at the Hamlet plant and the organic growth we expect of our base business, the partnership's production assets have positioned us to generate between $165 million and $175 million of adjusted EBITDA for 2020, without the benefit of any incremental drop-downs or other acquisitions. Given our highly visible drop-down pipeline, underpinned by firm long-term offtake contracts held at our sponsor, we believe we are well on our way to doubling our 2019 adjusted EBITDA in just a few years.

With the 2 new Japanese contracts we just announced, which call for an additional 420,000 metric tons of wood pellets each year, the partnership and our sponsor's combined contract book is expected to grow to close to 7 million metric tons per year in 2025, split just about evenly between Europe and Asia. This brings the weighted average of remaining contract term and product sales backlog of the partnership and our sponsor to 13.8 years and almost $20 billion, respectively. The significant book of signed contracts will require our sponsor to develop additional production and terminal assets beyond the terminal and 3 plants we have discussed in the past, and by design, the partnership expects to have the opportunity to acquire these assets and the associated contracts.

Shai will take some time to discuss our recent financing activities, but our balance sheet as well as our access to and cost of capital set the stage for further growth in drop-downs.

I will take some time at the end of the call to provide a more detailed update on the long-term market drivers and development activities taking place at the partnership and our sponsor, but first, I would like to hand it over to Shai to discuss our financial results and tell you more about what we did in the last quarter to position the partnership to capitalize on the significant growth opportunities ahead of us.

Thank you, John. For the fourth quarter of 2019, net revenue was $200.5 million, representing an increase of 18.9% over the corresponding quarter of 2018. Product sales revenue was $195.3 million as compared to product sales revenue of $166 million for the fourth quarter of 2018. For the quarter, we sold approximately 1,041,000 metric tons of wood pellets as compared to pellet sales of about 874,000 metric tons in the fourth quarter of 2018.

Gross margin was $28.2 million for the fourth quarter of 2019 as compared to gross margin of $24.5 million for the corresponding period of 2018. Adjusted gross margin was $55 million for the fourth quarter of 2019 as compared to $31.7 million for the fourth quarter of 2018. Adjusted gross margin per metric ton was $52.83 for the fourth quarter of 2019 as compared to $36.23 for the fourth quarter of 2018.

The increases in gross margin and adjusted gross margin were primarily due to higher sales volume, higher pricing due to customer contract mix, lower production costs and lower wood fiber costs.

Net income for the fourth quarter of 2019 was $0.9 million as compared to net income of $9.4 million for the fourth quarter of 2018. Adjusted net income, which is adjusted for items like the $9 million associated with early retirement of our senior notes due 2021 and the benefit of the MSA Fee Waiver, was $17.2 million for 2019 as compared to adjusted net income of $14.3 million for the fourth quarter of 2018.

For the fourth quarter of 2019, the partnership generated adjusted EBITDA of $53.3 million, our highest ever, as compared to $33.8 million for the fourth quarter of 2018. The increase in adjusted EBITDA was primarily driven by the same factors that resulted in the increase in adjusted gross margin. Distributable cash flow, prior to any distributions attributable to incentive distribution rights paid to our general partner, was $39.4 million, which results in a fourth quarter 2018 distribution coverage ratio of 1.59x.

Switching to the full year 2019. Net revenue was $684.4 million for the year, representing an increase of 19.3% over 2018. Product sales revenue was $674.3 million as compared to product sales revenue of $564 million last year. For the year, we sold approximately 3.6 million metric tons of wood pellets as compared to pellet sales of about 3 million metric tons in 2018.

Gross margin was $81.1 million for the full year 2019 as compared to gross margin of $69.4 million in 2018, an increase of approximately $11.6 million. Adjusted gross margin was $151.6 million for the full year 2019 as compared to $115.8 million for the full year 2018. Adjusted gross margin per metric ton was $42.54 for 2019 as compared to $38.81 for 2018. The increase in gross margin and adjusted gross margin were primarily due to higher sales volume, higher pricing due to customer contract mix, lower production costs and lower wood fiber costs.

Net loss for 2019 was $2.9 million as compared to net income of $7 million for 2018. Adjusted net income, which is adjusted for items like the $9 million associated with the early retirement of the 2021 senior notes and the benefit of the MSA Fee Waiver, was $33.4 million for 2019 as compared to adjusted net income of $22.2 million in 2018.

For the full year 2019, the partnership generated adjusted EBITDA of $141.3 million as compared to $102.6 million for the full year 2019. The increase in adjusted EBITDA was primarily driven by the same factors that resulted in an increase in adjusted gross margin.

Distributable cash flow, prior to any distribution attributable to incentive distribution rights paid to our general partner, was $98.5 million for the full year 2019. As a reminder, we tend to prefund the equity portion of the capital needed for drop-downs and expansions prior to realizing the full benefit of this transaction, like we did with the unit issuance in the first half of 2019 for the Hamlet drop-down and the Mid-Atlantic expansion. So we target a distribution coverage ratio of 1.2x on forward-looking annual basis.

Shifting now to 2020 guidance. With the expected ramp-up of the production capacity expansion at the Northampton and Southampton plant in the second and the third quarter, respectively, the continued production increases at the Hamlet plant through the year and organic growth in the base business, the partnership expects full year 2020 net income to be in the range of $43.2 million to $53.2 million, adjusted EBITDA to be in the range of $165 million to $175 million and distributable cash flow to be in the range of $119 million to $129 million prior to any distributions attributable to incentive distribution rights paid to our general partner. Based on this expectation, the partnership reaffirms our prior guidance to distribute between $2.87 and $2.97 per common unit for full year 2020.

Full year 2020 distributable cash flow, net of amounts attributable to incentive distribution rights, is expected to cover the aggregate declared distribution for full year 2019 consistent with partnership's distribution coverage target of 1.2x on a forward-looking annual basis. The guided amounts do not include the impact of any acquisitions or drop-downs.

As we have said in the past, seasonality and the mix and timing of customer shipments can impact results, which may vary from quarter to quarter. As such, we expect 2020 to look a lot like previous years, including 2019, where the back half was a significant step-up from the first half, and some quarters may have distribution coverage below 1x.

As we have described previously, our Board evaluates our distribution and coverage on an annual basis. In early December, the partnership successfully issued $600 million of senior unsecured bonds due 2026. The issuances were well received by the investor community as evidenced by the upsizing of the initial issuance from $450 million to $550 million, which was then followed by a $50 million take-on offering. The net proceeds from the new bond were used to redeem existing 8.5% 2021 notes, lowering the cost of our term debt by more than 200 basis points and fully repaid the bond under our $250 million revolving credit facility. As a result, at the end of 2019, we had approximately $9 million of cash on hand with no balance outstanding under our revolver.

Going into 2020 with full capacity available under our revolver, we are well positioned to further execute on our growth strategy while employing our conservative financial policies. Specifically, we continue to expect to maintain a leverage ratio of 3.5 to 4x, a balanced capital structure, a 50-50 equity/debt split for drop-downs, acquisitions and major expansion and a distribution coverage ratio of 1.2x on a forward-looking annual basis for 2020. We believe our strong balance sheet, combined with our conservative financial policy, will serve us well as we focus on growing the partnership's cash flow and scale, work towards the next potential credit rating upgrade and seek to further reduce our long-term cost of capital.

Now I would like to turn it back to John.

Thanks, Shai. The partnership's contract book continues to be well balanced through at least 2025. With the addition of the recently executed 270,000 metric tons per year contract with a biomass-fired power plant sponsored by the Equis Group, the largest independent infrastructure investment manager in Asia, the weighted average remaining term of the partnership's offtake contracts now stands at 11.4 years, and our revenue backlog is $10.6 billion. Including volumes under the firm and contingent contracts held by our sponsor and its development joint venture, including the newly executed contract with another major Japanese trading house, our weighted average remaining contract term and product sales backlog would extend to 13.8 years and almost $20 billion, respectively.

This significant demand for our product is driven by the increased efforts around the globe to push for firm commitments to phase out coal, limit the impact of climate change and cut greenhouse gas emissions to achieve net 0 by 2050. These commitments and the corresponding incremental policies and action plans underpin the continued strong growth expected in global demand for biomass. The recently announced European Green Deal, which aims to decarbonize the European Union's entire economy and transform the EU into the first climate-neutral continent by 2050 is a great example.

Against this backdrop, we recently hired a general manager for the continent and a country manager in Germany to accelerate our sales efforts and strengthen our customer fulfillment organization in support of our growth in Europe. More specifically, within the EU, both the Lower and Upper Houses of the Dutch government have now passed the law to phase out coal-fired power generation by 2030. The Dutch government has committed to a new incentive program for renewable energy, the SDE++ and confirmed that biomass-based heat technologies are eligible to participate in this new program.

In Germany, the government continues to progress the implementation of the Coal Commission's recommendations and many German cities, including Berlin, Frankfurt, Hamburg and Munich, have set regional coal phase-out targets, ranging from 2022 to 2030, well ahead of the national mandate of 2038. We expect those market drivers to yield incremental long-term offtake contracts beyond what we and our sponsor have already signed.

Enviva's scale and reliability, our leadership in sustainability practices and our sponsor's robust development pipeline have earned the Enviva brand increasing recognition in the market, as demonstrated with the substantial long-term offtake contracts we've signed over the last year.

As our contract backlog expands and diversifies with continued growth in markets in both Europe and Asia, our sponsor continues to develop additional production and terminal facilities, which we expect to have the opportunity to acquire. As you know, construction is currently underway at the Lucedale plant and the Pascagoula terminal, and our sponsor is completing development activities and expects to make a final investment decision for the Epes plant in the first half of 2020.

In addition, our sponsor has filed the permit applications required to increase production capacity at its currently operating Greenwood plant to 600,000 metric tons per year. We expect all of these assets, along with the assets that will be needed to fulfill the contracted backlog held by our sponsor, to be made available to the partnership for drop-down.

As we continue to grow, we remain focused on driving our sustainability efforts not only to provide further transparency, but also to have a meaningful impact on conserving forests and growing more trees in the areas in which we operate. Our Track & Trace program is one of our signature tools, and we continue to innovate in this industry-leading supply chain transparency program. For instance, we have begun testing blockchain technology with our wood suppliers to provide an immutable, auditable ledger to provide incremental verification and certainty around the origin of our feedstock that goes all the way back to the specific point of harvest in the forest.

Following through on our commitment to transparency and stakeholder engagement, yesterday, we published our first year-end impact report under the Responsible Sourcing Policy, in which we have reported on the progress and impact we have made, putting our policy into action. Through collaboration with several partners, we made significant progress in implementing each of the provisions under our RSP. For instance, in 2019, we launched and then expanded a pilot longleaf restoration program, enrolling more than 1,000 acres. In close collaboration with our conservation partners and the environmental community, this program harvests low-grade wood from challenged forest tracts in order to enable the restoration of longleaf pine and its associated high-quality wildlife habitat to that specific landscape. But this is only the start. This restoration work, combined with our ongoing program to protect sensitive bottomland ecosystems via the Enviva Forest Conservation Fund, enables us to work hand-in-hand with our environmental, state and community stakeholders to create better outcomes for forests, carbon and biodiversity.

In addition, and for the first time, we enrolled more than 14,000 acres of forest land into our FSC Certified Forest Management Group. This helps landowners develop and publish long-term sustainable forest wood plans for their forestland. And we also developed a methodology for monitoring postharvest forest regeneration through satellite and remote sensing technology, which greatly enhances our ability to analyze forest health on the tracts from which we receive wood. This is pretty important and has a direct impact on improving the greatest natural asset we have in the efforts to fight climate change, which is healthy, growing forests.

To close out the call, we continue to be a company focused on clearly laying out our goals and then going out and accomplishing those goals, maybe even doing a little better. We exited the year by delivering results for the fourth quarter and full year 2019 exactly as we said we would.

For 2020, we expect to deliver adjusted EBITDA between $165 million and $175 million and to distribute between $2.87 and $2.97 per unit, before considering the benefit of any drop-down acquisition opportunities of fully contracted plants and ports that we expect to be made available from our sponsor. With a combined contract backlog that's grown by 1/3 in just the last year, standing now at almost $20 billion and a balance sheet that has never been stronger, we are well positioned to more than double 2019 adjusted EBITDA over the next few years.

In conclusion, I'd like to thank all the great people at Enviva for their hard work in 2019 and for their continued dedication in 2020 and beyond. Thank you.

Operator, can you please open the line for questions?

(Operator Instructions)

The first question today comes from Brian Maguire with Goldman Sachs.

This is Derrick Laton on for Brian. I think the 2020 guidance on EBITDA makes sense. I think you guys had mentioned maybe previously that the 2021 EBITDA range, you could expect maybe between $210 million and $240 million, just assuming you get Hamlet and the Mid-Atlantic expansion projects coming through there. Is that kind of the right way to think about the medium-term growth opportunity for you guys?

Derrick, thank you very much. The -- as you heard us talk about in our prepared remarks and we did reaffirm the guidance we gave for the $2.87 to $2.97, very consistent with the uptick in EBITDA that you articulated. And nothing in the trajectory of the business has changed. And clearly, as we've mapped out, our trajectory of being on a path to double the 2019 adjusted EBITDA is pretty exciting. So I think that's the right way to look at it.

Okay. And then I think the midpoint of the 2020 distribution guidance that you reaffirmed implies about a 10% increase in the distribution. It's pretty sizable there relative to the last couple of years. Is that kind of the right way to think about that going forward as you continue to grow maybe in the high single digits or low double-digit EBITDA -- distribution growth?

Certainly, if you look historically, that's right in line with what we've done historically, and I think that's a reasonable trajectory going forward.

Okay. And then just last one from me, just the EBITDA margin expansion is pretty sizable in the fourth quarter. It looks like you guys are benefiting pretty nicely from the operating leverage and some cost savings. I'm just thinking about other areas for margin opportunity in '20. I think you had mentioned in the commentary around the outlook, the expectation for some price increases on the long-term contracts. Is that more related just to typical inflationary offset increases? Or are there any additional pricing opportunities out there for you this year?

So when we talked about the organic growth inside the business, the range we look at is roughly 7% to 10%. And that's really driven in 3 buckets. One is the headline price increases that we see in our long-term contracted position that occur year-on-year. As well, we look at productivity improvements inside the plant where our production teams have very specific continuous improvement targets that really drive additional operating leverage and capacity expansions inside that on a very low capital cost basis. And then there's the cost reductions that we see just given the continued scale of the business and our ability to drive costs down in the business. Those are really the 3 buckets. And as you pointed out, those are an important part of the overall margin uplift. There's nothing unique this year that is pricing-specific, though.

The next question comes from Pavel Molchanov with Raymond James.

See, you referenced Germany again with the coal phase-out. Does it surprise you a little bit that it's been 12 months since the Parliament approved the coal plan and yet we still haven't really seen any actual contracts for pellets from German power companies?

Actually, not at all. I think we've tried to be pretty consistent in our expectations around the market development. And frankly, what we see and what we tried to talk a little bit in the prepared remarks is that the cities are being even more aggressive than sort of the national-level parliament focus on the exit and -- where you see cities like Hamburg and Berlin setting even more aggressive targets that will exit their hard assets well in advance of the 2038 mandate. We continue to be pretty excited about that. I think the notation that we made of actually putting people in Germany, we've got a country head in Germany that's being staffed out, and we remain in direct dialogue with many of the major utilities on exactly their plans for conversions and how we're going to build these exchanges to deliver product into Germany. Very similar market development strategy that we had for Japan. And as we've guided previously, we'd expect for initial test deliveries [to grow] throughout the 12 months contract, execution to begin over the next 12, 18, 24 months and deliveries right thereafter.

Okay. And then kind of following up on the Japan asset. Can you just remind us when do you begin deliveries into the Japanese market? If you can provide kind of quarterly guidance on that would be helpful. And what are the volumes in the most near-term perspective?

That's a great question, Pavel. Material contract deliveries begin in 2021. And what we'll do is we'll provide -- as we continue to execute the -- Shai pointed out a number of these continue to go firm. But by 2025, the ramp between 2021 and 2025, if you look at the $7 million run rate that we talk about, $3.5 million is going to Japan in 2025. So 2021 to 2025, 0 to $3.5 million.

And just to clarify, the $3.4 million that you have in Japan in terms of backlog, is that essentially 5 plants' worth? Is that the right approach?

I think it's actually a little bit more than that because what we've got is we've got some existing assets that are hanging around the hoop at roughly 600,000 tons. And then you've got the expansions that we have underway at some of our existing facilities. The most recently constructed facility, the Hamlet plant, is about 650,000, as it gets through its full ramp this year, 600,000 at the end of the year. And then we got the Lucedale that's really more of a 700,000s plant. And so that's really the expectation. But we have a range. And as they continue to grow, you'll see the size get a little bit bigger as Lucedale commences. But again, pretty significant operating leverage. And so we're pretty excited what the backlog represents as those new plants begin.

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

Well, we certainly appreciate everyone's time today. Thank you for joining us. As you know, I'm fond of saying that we are just getting started, and that is still the case. We look forward to chatting again next quarter. Thank you.

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