Q4 2019 Earnings Call

On this morning's call. We have John Kepler chairman and CEO and Chief Financial Officer. Our agenda be for John and try to discuss our financial results released yesterday and provide an update on our current business Outlook month and 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 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 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 physical periods as well as our forecasts information concerning the reconciliation 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 focused on operational excellence and sustainability as the foundation for extending our track record of meeting or exceeding our guides as well as we're driving long-term growth diversifying our contracted position strengthening are visible drop-down Pipeline and reducing our cost of capital.

Based on the financial results published in the 10K in earnings release issued yesterday. You've seen that we had a strong close to 2019 booking another quarter of record adjusted ebitda off on well over 1 million metric tons of wood pellets old.

For the full year, we delivered adjusted ebitda and distributable cash flow in line with our guidance. And the second half is a significant step up from the first consistent with the profile. We laid out earlier in life.

This solid operating and financial performance enables us to increase our quarterly distribution for the 18th consecutive quarter the 67 and 1/2 cents per unit at a coverage ratio of 1.59 times.

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 expect out of our base business. The Partnerships production assets have positioned us to generate between $165 and $175 million dollars of adjusted ebitda for 20 28 without the benefit of any incremental dropdowns or other acquisitions.

A highly visible drop-down pipeline underpinned by firm long-term contracts with our sponsor. We believe we are well on our way to doubling our 2019 adjusted ebitda in just a few years.

With the two new Japanese contracts. We just announced it's called for an additional $420,000 metric tons of wood pellets each year the partnership in our sponsors combined contract book is expected to grow close to seven million metric tonnes per year in 2025, but just about evenly between Europe and Asia.

This brings the weighted average remaining contract term and product sales backlog of the partnership in our sponsor to 13.8 years and always twenty billion dollars respectively wage significant book of signed contracts require our sponsor to develop additional production and terminal assets beyond the terminal in three plans. We have discussed in the past and by Design the partner expects out the opportunity to acquire these assets and the associated contracts.

Charles 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 and 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 in our sponsor. But first, I would like to hand it over to shy 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 2019 net revenue was 225 million dollars representing an increase of 18.9% over the Chrome running quarter of 2018 for the sales revenue was 195.3 million dollars as compared to for the sales revenue of 166 million dollars Thursday the 4th quarter of 2018 for the closer. We saw the approximately 1 million and forty-one thousand metric tons would be less as compared to pellet sales of about 8074 thousand metric tons in the fourth quarter of 2018.

With twenty eight point two million dollars for the fourth quarter of 2019 is compared to gross margin of twenty four point five million dollars for the corresponding period of 2018 adjusted gross margin was fifty-five million dollars for the fourth quarter of 2019 is compared to Thirty one point seven million dollars for the fourth quarter of 2018 adjusted gross. Margin parametric tone was $52.83 for the fourth quarter of 2019 is compared to $36.23 for the fourth quarter of 2018 the increases in Gross margins and adjust those margins were primarily due to higher sales volume higher pricing due to customer contract mix lower production costs and Longwood fiber cost net in Chicago for the fourth quarter 2019 was 29 million dollars 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 nine million dollars associated with early retirement of our senior notes due 2021 and the benefits of them. It's a few labels was 17.2 million dollars for twenty nineteen s compared to adjusted net income of 14.3 million for the fourth quarter of 2018.

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2019 the partnership generated adjusted damaged or fifty three point three million dollars. I stencil is compared to thirty three point eight million dollars for the June 2018.

The increase in adjusted that was primarily driven by the same factors that resulted in the increase in adjusted gross margin distributable cash flow prior to any distribution office incentive distribution, right? Facial General Powell was 59.4 million dollars, which results in a fourth quarter 2018 distribution coverage ratio of 1.59 times.

Which into the full year 2019 net revenue was 684.4 Million for the year representing an increase of 19.3% off 2018 for the revenue was 674.3 million dollars as compared to the sales revenue of $564 Million last year.

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We sold approximately 3.6 million metric tons of wood pellets is compelled to pehle sales of about 3 million metric tonnes in 2018.

Gross margin was 81.1 Million for the full year 2019 as compared to gross margin of 69.4 million in 2018 and increase of approximately 811.6 million dollar.

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 to metric tonne was $42.54 for 2019. It's compared to $38.81 for 2018.

The increase in gross margin and adjusted gross margin will primarily due to higher sales volume higher pricing due to customer contract mix low production costs money would fiber cost.

At loss for 2019 was 2.9 Million dollars as compared to net income of 7 million for 2018 adjusted net income, which is adjusted for items like the nine million along associated with the early retirement of the 2021 senior notes, and the benefit of them is a few variables was still be three point four million dollars for 2019 years to adjust the net income of 22.2 million dollars in 2018.

Wonderfully 2019 the partnership generated adjusted or 140 1.3 million dollars as compared to one hundred two point six million for the full $20 increase in adjusted. Ebitda was mainly driven by the same factors that resulted in the increase in adjusted gross margin.

You still do a cash flow file to any distribution as we were doing the incentive distribution right paint on General Palestinians was 98.5 million dollars for the full year 2019.

Is there a

Find we tend to prefer the equity portion of the capital needed for drop down and expansion file to realizing the full benefits of different options off like we did with the unit issuance in the first half of 2019 for the Hamlet drop down and the Mid-Atlantic extension. So we target the distribution coverage ratio of 1.2 times on forward-looking annual basis.

shifting now to 2020 guidance

With the expected ramp-up of the production capacity expansion and the no tempton in Southampton plan in the second and the third quarter respectively. The continued production increase is the amulet plan through the years and organic growth in the base business the partnership expect full-year 2020. Net income to be in the range of 43.2 million to 53.2 million dollars just to be in the range of 165000275 million dollars and it's supposed to be in the range of 119 million to one other twenty nine million dollars prior to any distribution Libertyville to incentive distribution rights Pedro General Tso's.

Based on these expectation the partnership real firm Arpaio guidance to distribute between $2.80 and $2.90 per, uniforms for full-year 2020.

20/20 you stupid or cash flow negative amount attributable to incentive distribution rights is expected to cover delegate declare distribution for full 2019 inconsistent with a partnership distribution coverage Target of 1.2 times on a forward-looking annual basis.

The guy did the mound do not include the impact of any acquisition or drop down.

As we've said in the past seasonality and the mix and timing of customer shipments can impact results which may vary from quarter-to-quarter charge wage 2020 to look a lot like previous years including 2019 where the back half was a significant step up from the first serve and some quarters may have distribution coverage off one time.

Just described previously our boat evaluate our distribution in coverage on an annual basis.

In the early December the partnership successfully issued six hundred million dollars of senior unsecured bonds do 2026.

Vision says were well-received by the investment Community as evidenced by the upsizing of the initial issuance from 450 million to 550 million, which was Then followed by a fifty million dollar take on offering.

The net proceeds from the newborn we used to redeem existing 89% 21 note lowering the cost of our term date by more than two hundred basis points off and food to repay the Bowing under all 250 million dollar revolving credit facility as a result at the end of 2019. We had approximately nine million dollars of cash on and off with no balance outstanding under our global.

going

10 to 20 20 with full capacity available under our revolver. We are well-positioned to further execute on our goal strategy while employing our conservative Financial policies. Specifically we continue to expect to maintain 11:00 ratio of 3.5 to 4 times a balance capital structure a 50/50 Equity just played for job done acquisition and major expansion any distribution coverage ratio of 1.2 time on the forward-looking annual basis for twenty twenty.

We believe our strong balance sheet combined with our conservative Financial policy will serve as well as we focus on growing the Partnerships cash flow and scale of the month the next potential credit rating update and seek to further use a long-term cost of capital.

Now I would like to turn it back to John.

Thanks. Bye.

It's contract book continues to be well-balanced through at least twenty twenty-five.

With the addition of the recently executed two hundred and seventy thousand metric tons per year contract with a biomass fired power plants sponsored by the Equus group the largest independent infrastructure in office manager in Asia, the weighted average remaining term of the Partnerships optic contracts now stands at eleven point four years and our Revenue backlog is 10.6 billion dollars.

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 wage contract term and product sales backlog would extend a thirteen point eight years and almost twenty billion dollars 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 Zero by 2050.

These commitments and the corresponding incremental policies and action plans underpinned the continued strong growth expected in global demand for biomass.

The recently-announced European Greenville, which aims to decarbonise the European Union's entire economy and transform the EU into the first climate neutral continent by 2050 is a good 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 loss of phase out coal-fired power generation by 2030.

The Dutch government has committed to a new incentive program for renewable energy the sde plus plus and confirm that biomass-based key Technologies are eligible to participate in this new program.

In Germany, the government continues to progress the implementation of the cold commission's recommendations in many German cities including Berlin Frankfurt and Hamburg and Munich pact set Regional whole phase out targets ranging from twenty. Twenty two twenty Thirty well ahead of the national Mandate of 2038. We expect those Market drivers to yield in a mental long-term optic contracts beyond what we in our sponsor have already signed.

And be the scale and reliability our leadership and sustainability practices and our sponsors robust development pipeline have earned the enviva brand increasing recognition in the market wage as demonstrated with the substantial long-term optic contracts. We've signed over the last year.

As our contract backlog expands and diversifies with continued growth and markets in both Europe and Asia our sponsor continues to develop additional production in terminal facilities, which we expect to have the opportunity to acquire.

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 EPS plant number 2020.

In addition. Our sponsor has filed the permit applications required to increase production capacity and it's currently operating Greenwood plant to six hundred thousand metric tons per year.

We expect all of these assets along with the assets that would 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 force and growing more training in the areas in which we operate our track and Trace program is one of our signature tools and we continue to innovate in this industry-leading supply chain transparency program.

For instance. We had begun testing blockchain technology with our wood suppliers to provide an immutable auditable ledger to provide incremental verification in certainty around the origin of our feedstock wage 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 of the progress and impact we have made putting our policy into action.

True collaboration with silver Partners we made significant progress in implementing each of the provisions under RSP.

For instance in 2019. We launched and then expanded a pilot Longleaf restoration program and rolling more than one thousand acres.

And close collaboration with our conservation Partners in the environmental Community this program Harvest low-grade would from challenged Forest tracks in order to enable the restoration of longleaf pine and its Associated high-quality wildlife habitat to that specific landscape.

This is only the start this restoration work combined with our ongoing program to protect sensitive bottomland ecosystems via the enviable forest conservation fund enables us to work hand-in-hand with our environmental State and Community stakeholders to create better outcomes for Force carbon and biodiversity.

You know.

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 forestry plans for their Forest land and we also developed a methodology for monitoring post-harvest Forest regeneration through satellite and remote sensing technology, which greatly enhances our ability to analyze for help on the tracks from which we have received would

this is pretty important and has a direct impact on improving the greatest natural asset that we have in the effort to fight climate change, which is healthy growing Force.

Close out the call. We continue to be a company focused on clearly laying out our goals and then going out in 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 and $175 million dollars and to distribute between $2.80 and $2.57 per unit before considering the benefit of any drop down acquisition opportunities of fully contracted plan supports that we expect to be made available from our sponsor.

with a combined

Contract backlog that's grown by a third in just the last year standing now at almost twenty billion dollars and a balance sheet that has never been stronger. We're well-positioned to more than double 2019 adjusted ebitda over the next three years.

In conclusion, I'd like to thank all the great people in India for their hard work and 2019 and for their continued dedication in 2020 and Beyond.

Thank you operator. Can you please open the line for questions?

Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the key to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster. The first question today comes from Brian Maguire Goldman Sachs, please. Go ahead. Hey, this is Derek Layton. For Brian. Hey, good morning, Derek. Hey, good morning. Thanks for all the details. And you know, I think the The 20/20 guidance on ebitda make sense. Um, I think you guys had mentioned maybe previously that the 2021 ebitda range you could expect maybe between 210 and 240 million. Just assuming you took it in the Mid-Atlantic expansion projects coming through there. Is that that kind of the right way to think about the medium-term growth opportunity for you guys.

Thank you very much.

Uh, as you heard us talk about in our prepared remarks and and we did reaffirm the the guidance we gave for the the 287-2297 very consistent with with the upset and needed off the articulated and and nothing in the trajectory of the business has changed and and clearly as as we've mapped out our trajectory of of being on a path to to double the 2019 adjusted ebitda Thursday exciting. So I think that's the right way to look at. Okay, thank you for that. And then, you know, I think the midpoint of the twenty-twenty distribution guidance that you reaffirmed implies about a 10% increase in the distribution is pretty sizable their 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 even dead or 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 for me off.

You know the the ebitda margin expansion.

A pretty sizable in the fourth quarter. It looks like you guys are benefiting pretty nicely from the operating leverage and and some cost savings. I'm just thinking about other areas for for margin opportunity and twenty to get mentioned in the commentary around the office at the expectation for yes, the price increases on the long-term contracts. Is that more related just a typical inflationary offset increases or are there any additional pricing opportunities out there for you this year. So when when we talked about the organic growth inside the business the the range we we look at is roughly seven to 10% and that that's really driven in in three buckets. Uh one is the heavy price increases that we see in our long-term contracted position that that occur year-on-year as well. We look at productivity improvements inside the plant where our our production teams have very specific induce Improvement targets that really drives 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 School.

Business in our ability to drive drive costs down.

Business those are really the three buckets. And and as as you pointed out, those are an important part of the overall margin uplift. There's nothing unique this year that is is is increasing specific though. Okay. Got it. I'll turn it over. Thanks guys.

The next question comes from smoking off with Raymond James, please. Go ahead Germany again. I doubt does it surprise you a little bit that it's been 12 months since the parliament approved the cold plan and yet I still haven't really seen any actual contracts for four pellets from German power companies. Actually, not at all. I think the the we we've tried to be pretty consistent in our expectations around the the uh, the market development and and frankly, you know what we see and what we try to talk a little bit on the prepared remarks is that the cities are being more aggressive than sort of the national level Parliament focus on the exit and where you see cities like Hamburg and Berlin sending even more aggressive targets that will exit. They're hard Plumb acetone.

Well in advance of of the 2038 mandate we continue to be pretty excited about that. I think the the the

The notation that we made up of putting people in Germany, we've got a country head in Germany. That's that's being staffed out and we remain in direct I along with many of the major utilities on exactly their plans for walk-ins and how we're going to build them as exchanges deliver product into Germany, very similar Market development strategy that we that we had for Japan and and as we've got previously we'd expect them or you know, initial test deliveries or 12 months contract executions to begin over the next 12 18 24 months and deliveries right there after

Okay, and then kind of following up on the Japan aspect, can you just remind us? When do you begin deliveries into the Japanese Market, you know, if you can provide kind of quarterly guidance on that would be helpful and you know, what are the volumes, you know in in in the most, you know term perspective, right? So I'm a great question for you know, material contract deliveries begin to twenty Twenty-One. And and is it will what we'll do is we'll provide as we continue to execute, uh, the bulb pointed out a number of these can see if need to go to go firm, but by 2025 that ran between 21 and 25 if you look at the seven million run rate that we talked about three and a half million is going to Japan in 2025. So 20 21 225, um 0 to 3 1/2 million and then dead

just to clarify the

The the three point four million that you have in Japan in terms of backlog that essentially five plants worth that that the right approach but I think it's I think it's actually a little bit more than that because you know, we've got is we've got some existing assets that you know hanging around the hoop that at roughly six hundred thousand tons and then you've got the the expansions that we have underway off the scillies the most recently constructed facility. The the Hamlet plant is about 6:50 as it gets through its full gram this year 600 at the end of the year and then you'll lose Dale is really more of a 700 plan. And so that's really the the expectation but we have a we have a range and as if continue to grow you'll see the same size get a little bit bigger as

You still promise, but again pretty significant operating leverage and and so we're pretty excited about the backlog represent new preference. That's great. Well then, thank you guys.

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

Well, we certainly appreciate everyone's time today. Thank you for joining us. As you know, I'm 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 life.

This conference is not concluded. Thank you for attending today's presentation. You may now disconnect.