Enviva Inc.
Q1 2017 Earnings Call Transcript

Published: 11 May 2017

[Operator:]

Good morning, and welcome to the Enviva First Quarter 2017 Conference Call and webcast. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ray Kaszuba, VP and Treasurer. Please go ahead.

[Ray Kaszuba:]

Thank you. Good morning, and welcome to the Enviva Partners, LP first quarter 2017 financial results conference call. We appreciate your interest in Enviva Partners, and thank you for participating today. On this morning's call, we have John Keppler, Chairman and CEO; and Steven 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 press release issued this morning, and is posted on the investor relations section of our website, www.envivabiomass.com as well as our 10-K and other recent filings with the SEC. We assume no obligation to update any forward-looking statements to reflect new or changed events or circumstances. Reconciliations of non-GAAP measures to GAAP measures may also be found in today's press release. In addition all the 2016 amounts are as reported in our 10-Q file today. I would now like to turn it over to John.

[John Keppler:]

Thank you, Ray. Good morning, everyone, and thanks for joining us today. As you likely saw in our earnings release published this morning, it's been an important quarter for us. First off, our first quarter results improved in line with our expectations for the increased adjusted EBITDA from the drop down acquisition of the Samson plant and long term off-take contract with DONG Energy which we completed in December. Looking through the recast nature of the financial the GAAP requires for the drop transaction, you'll find that for Q1, the increase in tons sold and the contract mix translates to the expected list of roughly $5 million in adjusted EBITDA over the first quarter of last year. So we're on track with the benefits of the Simpson drop even in what is our seasonally softest quarter. We also announced that we've agreed to purchase the port of Wilmington early in the fourth quarter of this year. The terminal was fully operational and contracted under long-term terminal services agreement to receive store and load approximately 1 million metric tons of wood pallets from our Sampson plant as well as a third party production plant that is currently ramping. On this initial level of throughput, we expect the partnership to generate $5 million in incremental adjusted EBITDA for 2018 growing to a run rate of $8 million in 2019. For the terminal, we will make a first payment of $56 million at closing expected early in the fourth quarter. In addition, the port is party to a long-term terminal services agreement for the throughput from our sponsors pellet production plant under development in Hamlet, North Carolina which is expected to be completed in late 2018. The Hamlet plant is a replica of our Sampson facility and its production is expected to supply the Macquarie backed MGT Teesside project in the UK. When the throughput from the Hamlet plant is terminal by the Port of Wilmington, the adjusted EBITDA of the terminal is expected to increase the $14 million initially and $16 million from once the Hamlet plant reaches full production. As part of the agreement for the drop down of the Port of Wilmington, we will pay an additional $74 million upon first deliveries from the Hamlet plant. So all in the partnership will pay $130 million for the terminal, a little over 8 times multiple. For an asset class that typically trades in the range of 9 to 11 times or higher. I think this is again an important statement of how committed our sponsor is for the success of the partnership. Given the strong footing of our results in the first quarter, and our confidence in the durable contracted cash flow profile for the full year, we increased our distribution for the seventh straight time growing at nearly 4% over the Q4 distribution to $0.5550 cents per unit. You will also note that we are confirming adjusted EBITDA on DCF guidance for the full year and then adding the one quarter of expected benefit from the Port of Wilmington drop. We now expect to distribute at least $2.36 per unit, which if you do the math suggest a healthy coverage ratio relative to our target of at least 1.15 times for the full year of 2017. Later in the call, I'll spend some time to provide an update to our long term contracted position and the overall market growth. But I want to spend a quick moment on specific further visible growth we see for the partnership. First, I am happy to announce that although our book was generally match. We've reached an agreement with ENGIE to extend our relationship and sell a total of 450,000 metric tons incrementally over the next 2.5 years. The volumes for 2018 to 2019 are subject to certain contingencies that we expect to resolve in the fourth quarter of this year. Second, as I mentioned. Construction of our sponsors' hamlet plant is accelerating. Our sponsor has begun site work and procuring equipment for the plant that is designed to help build a long term contract with MGT that run through at least 2034. When complete likely later next year, the Hamlet plant is expected to generate adjusted EBITDA similar to our other large plants of that scale. So, nice progress on the contracted position and some visibility into what assets may come next for the partnership. On our last call on late February, I laid out our objectives for 2017. These included substantial growth in our durable cash flow profile. Consistent increases in our per unit distribution, further strengthening of our contracted position, acquisition of the port of Wilmington. And visibility into future drops. We continue to believe it is important to clearly communicate our goal and then go out and execute. And likely do a bit better. We're encouraged by our progress making major strides on those goals. Even through what is typically our softest quarter of the year. But as you've heard me say repeatedly, we're not done yet. In fact we're just getting started, so more to come during the remainder of the year. I would now like to hand it over to Steve to discuss our financial results.

[Steven Reeves:]

Thanks John. As a reminder in my comments references to the prior year will be to recap financials included in the press release that reflect the effects of the Samson plant as though it was included for the full year due to the common control nature of the transaction. But first quarter of 2017, we generated net revenue of $122.1 million an increase of 13.9% or $14.9 million from the corresponding quarter of 2016, included net revenue or product sales of $119 million on volume of 623,000 metric tons of wood pulp. Product sales increased Art $15.6 million from the corresponding quarter of last year, primarily due to higher sales volumes under off the contract with DONG Energy which we acquired in the fourth quarter in connection with the Samson drop down transaction. Other revenue was $3.1 million for the first quarter of 2017 compared to $3.8 million for the same period in 2016. The first quarter of 2016 included a $1.7 million payment from a supplier from whom we purchase pallets and provided logistics services who chose to terminate their agreement. Well typically our most challenging quarter due to the colder weather, gross margin improved to $18.5 million in the first quarter of 2017, an increase of $2.7 million from the corresponding period in 2016. Gross margin benefitted from the higher sales volume that impacted product sales as well as favorable customer in shipping contract mix. Lower plant utilization was largely offset by reduced wood fiber sourcing cost. Adjusted gross margin per metric ton improved $43.19 during the first quarter of 2017 as compared to $40.42 for the same period of 2016. My net income of $2.5 million adjusted EBITDA improved to $22.9 million for the first quarter of 2017 from $15.6 million in the corresponding period last year an increase of $6.3 million or 38.3% driven by many of the same factors that improved gross margin. Net income for the first quarter of 2017 decreased by $3 million, due to higher interest expense, as a result of the issuance of the senior unsecured notes last year. After maintenance capital expenditures of $452,000 interest expense net of amortization of debt issuance cost and original issue discount of $7.3 million and instead of distribution rights for our general partner of $537,000. Distributable cash flow for the first quarter of 2017 was $14.6 million to our limited partners, which covers the 55.5 cent distribution announced for May 3 at one time. As we have discussed in the past, our distribution strategy is to maintain at least the 1.15 times coverage on an annual basis. As part of our distribution planning for the full year, we expect and plan for lower coverage ratio in the first quarter of each year given the seasonality present in this time period. We are confident for the full year given the solid footing of the first quarter, we're confirming our guidance and with the announcement of the Port of Wilmington dropdown transaction expect to close in the fourth quarter of this year, we are increasing our distribution guidance for 2017 to at least $2.36 per common and subordinate unit reflecting the partial year accretion of that transaction. We now project our net income in the range of $29 million to $33 million with associated adjusted EBITDA of between $111 million and $115 million. We expect maintenance capital expenditures of $5.1 million and interest let memorization of debt issuance cost and the original issuance of discounts to be $29.7 million. As a result the partnership expects to generate distributable cash flow of $76.2 million to $80.2 million for the year prior to any incentive distribution to our general partner. As I've said in the past, please keep in mind that all our deliveries to our customers are generally ratable over the year. The mix and timing of customer shipments can impact results, which may vary somewhat from quarter to quarter. From a liquidity perspective, based on strong operating cash flow performance, we ended the quarter with nearly $12 million in cash on hand and aside from $4 million in letters of credit no outstanding balance on our $100 million revolving facility. As mentioned in our press release today, we plan to finance the first payment for the Port of Wilmington by borrowing on that facility. Now I'd like to turn it back to John.

[John Keppler:]

Thanks. Before we open up the line for Q&A. I'd like to take a few minutes to provide an update on a contracted position in the market generally. Our strategy continues to be to fully contractive production capacity of the partnership and as the market leader to take advantage of short term opportunities. We have a weighted average remaining contract term of 9.8 years and a contracted revenue backlog of $5.6 million, while we are excited about the incremental ENGIE volumes. We're also focused on further diversifying our customer base with potential new customers and markets in Europe and Asia. And there continues to be market developments around the world that underpin the strong growth in long term demand for wood pallets. Let's start with Europe, as the market continues to progress towards the binding 2020 renewable energy mandate. And also begins establishing the next set of requirements for further carbon emissions reductions and renewable energy adoption. The European Union recently announced the new plant to almost completely de carbonized its economy by 2050. Even as the 2030 goals for additional emissions reductions and renewable energy generation move through the legislative process. In addition, numerous power generators representing most European Union countries committed to no longer invest in new coal fired power generation after 2020. Demonstrating industry and popular support in Europe for renewable energy generation and reduced emissions side by side with the continued regulatory support. Somewhat reinforcing the point about the end of coal, the UK also achieved a noteworthy milestone, as it recently completed a full 24-hour period without burning coal to generate power. In addition, the successor to the Department of Energy and Climate Change, the UK Department of Business Energy and Industrial Strategy published a study that confirmed wood pellets sourced and produced using the practices employed in the southeast US are a low carbon sustainable energy source. Materially refuting some of the more vocal critics of biomass as a long term part of Europe's greener energy future. In addition, the cold winter experience in Europe depleted inventories of wood pellet. The fund's ability of wood pellet between the industrial and heating markets when combined with some of the capacity shortages in the market, should create an opportunity to profitably capitalize on seasonal sales in the thermal applications. Some of our production already migrated to this market. We're the world's largest producer and given our book of long term off-take contracts with a manageable storage position in Europe, you heard me talk briefly about last quarter we should be well positioned to benefit from the strategy. Let's move on to Asia, where industry experts believe the demand for industrial wood pallets will grow more than 30% a year through 2021. The market is expected to be led by Japan, where the government recently reconfirmed its targeted generation next for 2030 of approximately 6 gigawatts to 7.5 gigawatts of biomass fire capacity representing 15 million to 20 million tons of biomass demand anyway. As biomass project apply for the program with an important deadline later this year, several new projects have been announced including Kansai Electric Power's conversion of its Aioi plant to biomass through a joint venture with Mitsubishi Corporation - and Chubu Electric's plant for a new 1 gigawatt co-fired unit at its Taketoyo facility. For Enviva specifically we have discussed in the past the opportunities present in the Japanese market and from a process standpoint, we're in good shape. We have a series of substantially complete term sheets and are actively negotiating specific long term off-take contracts with several major counterparties on new dedicated biomass plants and large scale coastline projects. Our customers expect to make final investment decisions in the fourth quarter of this year and are expected to begin receiving material would pallet deliveries in 2020 and 2021. So obviously, much more to come as these agreements are signed and the new projects under submission by many of the Japanese power developers, trading houses and utility joint venture partners complete the -- feed-in tariff process early in the fall. We always good progress in Europe and Asia, it's also noteworthy to see consumer preference outside of any regulatory framework for incentives driving several major multinational corporations to layout specific plans to reduce their carbon footprint and increased adoption of renewables for their own operations and supply chain. It is increasingly recognized that biomass can play an important role as reliable complement to other renewables as these corporations evaluate their options for uninterruptible power and heat as part of their plan to de-carbon. So to recap a few headlines for the quarter, solid Q1 result in our seasonally softest thought this quarter, we're on track with the expected uplift of the business with the Samson drop completed late last year. We announced our seventh consecutive distribution increase. Confirmed guidance for the full year and then announce our plans to increase it a bit for the full year based on the acquisition of the Port of Wilmington terminal in early Q4. Our sponsor is commencing construction activities for the Hamlet plant, with expected completion in late 2018 and against the balance book we've extended our contracted volumes in ENGIE and made really good progress in new markets like Japan and in continental Europe. As I look back on the 2 years since our IPO, we have developed a strong track record of doing what we said we would. We continue to demonstrate the durability of our cash low profile based on our long term contracted position and the strong operational performance exhibited by our fleet of production and term linked facilities, which I would again note is not exposed to volatility in price or volume of commodity fossil fuels. And with a highly visible growth in front of us, I'm excited about the opportunities to increase our per unit distributions going forward. Before we close, I would like all of us to thank a very hard work of all the Enviva employees. Who work very hard every single day keeping our plant, our ports and most importantly each other say every single day. That's the foundation that results in another solid quarter. Operator, can you please open the lines for questions.

[Operator:]

The first question comes from John Ragozzino from Drexel Hamilton. Please go ahead.

[John Ragozzino:]

Good morning gentlemen. How are you?

[John Keppler:]

Good morning, John.

[Steven Reeves:]

Hi, John.

[John Ragozzino:]

I got a couple of quick one's for you. First on to Wilmington Port, if I read release there is about a million contracted, you adding the Sampson capacity at full - 600,000 tons a year and the 3 million total tons per year of throughput facility. A very ramp of - outlook that you have or you can provide regarding the contract of the additional 1.4 million tons of uncontracted capacity?

[John Keppler:]

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

[John Ragozzino:]

Okay. Thanks for the clarification. That makes a lot more sense. What about the - I am kind of jumping ahead of my questions, let's say but post - is there still any product have been down the plant which I would assume does service for Wilmington Port as well. And it's churning 600,000 ton plant, then you've got I guess another 400,000k that you can still work with on contract basis?

[John Keppler:]

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

[John Ragozzino:]

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

[Steven Reeves:]

I think that's correct and I would point out that there's capacity there. There's also some incremental capacity [indiscernible].

[John Ragozzino:]

Okay, great. That's helpful. Just one more on the Hamlet, it's said in the press release May 2018 completion. How should we be thinking about the timing for a dropdown transaction and ultimately like cash flow contribution?

[John Keppler:]

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

[John Ragozzino:]

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

[John Keppler:]

So across the broad portfolio of our sponsors development activities, you've seen some favorable progress, I think we've reported on our valuation of the Pascagoula terminal, Abbeville, Lucedale and Laurens remains in the next one.

[John Ragozzino:]

Great. Well, thanks a lot John I appreciate it as always.

[John Keppler:]

Thank you.

[Operator:]

The next question comes from Brian Maguire from Goldman Sachs. Please go ahead.

[Derrick Laton:]

Hi, good morning. It's Derrick Laton on for Brian. Thanks for taking my questions. I just had couple of quick ones. So you mentioned earlier in the prepared remarks that you benefited a bit from favorable customer and shipping contract mix. I'm wondering if you can just expand on this a little bit and maybe are we expecting to see this continue to be somewhat benefit in the second quarter?

[Steven Reeves:]

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

[Derrick Laton:]

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

[Steven Reeves:]

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

[Derrick Laton:]

Great. Thanks and maybe just one more, quick one. So it sounds like Sampson has gone pretty well. Maybe you can just give us how things went there ramping up that facility and how that went kind of against your expectations? Thanks. I'll turn it over.

[Steven Reeves:]

Yes, I think we commented on any specific facility. But it's a great big plant, and we're very happy with the acquisition of it.

[Derrick Laton:]

Great. Thank you.

[Operator:]

The next question comes from Ryan Levine with Citi.

[Ryan Levine:]

Good morning.

[John Keppler:]

Hi, Ryan.

[Ryan Levine:]

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

[John Keppler:]

Sure. That's a great question. So the market generally is expected as I pointed out in our prepared remarks. The market is generally expected to grow to be about the same time as the European Utility market. And we have no reason to believe that our ultimate position in that market would be anything in consistent with our current market share within the broader European sector and so that would suggest incremental plants required to be built to service that demand over time.

[Ryan Levine:]

Okay.

[John Keppler:]

To be fair you also asked the question of where those be developed, it has been our past practice and our consistent belief that I will look to insulate the partnership from the broader contracting and development and construction risk associated with the build of the new asset. And so, one would expect to continue to do that up there with the long term opportunity for the partnership to acquire those assets.

[Ryan Levine:]

Do you foresee using your current assets or any excess capacity to serve new contracts or were those new contracts be served in parallel with new construction asset?

[John Keppler:]

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

[Ryan Levine:]

Great, thank you.

[Operator:]

Next question comes from Poe Fratt with D.A. Davidson. Please go ahead.

[Poe Fratt:]

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

[John Keppler:]

Sure so the - there is an annual. The most important one is that there is an annual deadline in the fall that requires any potential participant in the feed-in tariff mechanism to have submitted a qualified application and I think it's in late September or early October. That's the material milestone that fit approval then give them the certainty of the 24 yen per kilowatt hour about $200 a megawatt hour for the life of the contracts that then run through to 2040.

[Poe Fratt:]

And do they have to have certain supply agreements in place before they bid or that was my impression before that you make we may get news on this. Third quarter as far as some of these potential contracts coming through is that right?

[John Keppler:]

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

[Poe Fratt:]

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

[Steven Reeves:]

Sure. I would say there were, we ended the quarter with a bit more inventory in the port then on the seas, so implying that there was a little bit left behind. With respect to the broader part, I would expect the rest is going to be reasonably ratable and I think our guidance kind of thinking about where we were and with the contracts we've picked up, you would expect the full year to be in the $2.75 million range will be a pretty good proxy.

[Poe Fratt:]

Great. And then the ENGIE contract, you alluded to some contingencies that need to be cleared up at the end of the year. So it seems like it's going to be impacted 2018 and 2019. Can you sort of spread out that if you wouldn't mind what volume you're going to see in 2018 and 2019 on that?

[Steven Reeves:]

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

[Poe Fratt:]

Okay. Perfect. Thanks for your help.

[Steven Reeves:]

[indiscernible]

[Operator:]

Our next question comes from Pavel Molchanov from Raymond James. Please go ahead.

[Pavel Molchanov:]

Thanks for taking the question. One with the income statement numbers that jumped out at me in Q1 was SG&A $8.3 million that was up almost $1.5 million from the prior quarter. Is that going to be the kind of a new run rate about $8 million apiece?

[Steven Reeves:]

No, no it won't be Pavel. We had in the quarter, there was a number of one-time items which we I think beak out a little bit in the back schedules. But we have some costs associated with the cleaning up wiggins for sale as well some of the transaction cost associated with both the port transaction as well as another transaction we looked at but chose the -- . So the run rate will be below that number.

[Pavel Molchanov:]

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

[Steven Reeves:]

That will be a step change I would say.

[Pavel Molchanov:]

Okay. At the end of 2018?

[Steven Reeves:]

Yes.

[Pavel Molchanov:]

Okay. Appreciate it.

[Steven Reeves:]

Thank you.

[Operator:]

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

[John Keppler:]

Thanks everybody for joining us on today's call obviously important quarter for us, strong progress and we look forward to the balance of the year. And we'll see you again in couple of months. Thanks everyone.

[Steven Reeves:]

Thank you.

[Operator:]

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