Q3 2020 Enviva Partners LP Earnings Call
[music].
Good morning, and welcome to the Enviva Partners LP third quarter 2020 earnings Conference call.
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I would now like to turn the conference over to Wash Moul, Vice President and Treasurer. Please go ahead.
Thank you good morning, and welcome to the you'd be about partners LP third quarter 20, plus <unk> financial results Conference call. We appreciate your interest in <unk>, There's no sense you for participating today.
Well this morning's call, we have John Cooper, Chairman, and CEO, and <unk>, Chief Financial Officer, our agenda will be for Jalan shy to discuss our financial results beneath the yesterday I didn't provide an update on our current business outlook.
We will open up the phone lines for questions.
Before we get started a few housekeeping items during the course of our remarks and subsequent <unk> 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 could differ materially from those forward looking statements can be found the <unk> earnings release issued yesterday.
IR section of our website as well as our most recent 10-K and other filings with what I see.
We assume no obligation to update any forward looking statements to reflect new arching events or circumstances.
I'm happy to report that all the hard work an extra effort.
As well as the durability and resilience of our business model once again paid off.
To date or operational and financial results remain largely unaffected by the evolving coronavirus pandemic.
The Greenwood in Waycross operations are well on their way to many integrated into our portfolio Dylan.
Delivering operating results right in line with our expectations.
With the contributions from these new additions to our fleet.
We reported our highest ever quarterly adjusted EBITDA.
And are firmly on track to deliver our full year guidance.
Based on our performance this quarter and are expected full year results, which includes the benefit of the recent acquisitions.
Our board declared a distribution of 77 and one half cents per unit for the third quarter.
Which represents our 21st consecutive distribution increase in is $15, 7% higher than the distribution for the same quarter of last year.
In addition.
We reaffirmed our guidance to distribute at least $3 per unit for full year, 2020, which would maintain the roughly 13% distribution kanger, we've recorded since our IPO over five years ago.
Our recent acquisitions increased our presence in the southeast U S and are operating portfolio now spend seven contiguous states from.
From Virginia.
All the way through North Carolina.
South Carolina, Georgia.
Florida, Alabama.
Alabama and Mississippi.
Otherwise would have been presented in product sales.
Photo sales quota of 2020 gross margin was $25 $6 million is compelled to gross margins of $26.5 million for the corresponding period of 2019.
Adjusted gross margin was $56 $8 million for the sales quarter of 2020 as compared to $41 billion for the sales quarter of 2019.
The increase in adjusted gross margin during the sales quarter of 2020 was primarily due to increases in the metric tons sold and other revenue.
And just gross margin emetic tone was $50.30 for the third quarter of 2020 in line with adjusted gross margin of $50, 56% for the sales quarter of 2019.
Net income for the third quarter of 2000 $21.4 million as compared to net income of $8 $9 million for the sales quarter of 2019.
And just as net income was $11 $2 million for the sales quota of 2020 as compared to adjusted net income of $17.4 million for the account sporting quarter of 2019.
$185 million to $195 million and distributable cash flow to be in the range of 134 $244 million prior to any distributions attributable to incentive distribution rights paid to our general partner.
The partnership also reaffirm our previous guidance to distribute at least $3 per common unit.
For full year 2020.
The guidance amounts do not include the impact of any additional acquisitions or dropdowns.
Consistent with prior years, we expect the second half of 2020 to be a significant step up from the first start with the fourth quarter being stronger than the term.
Our financial policies remain unchanged and we continue to target a conservative leverage ratio of 3.5 to four times.
Any distribution coverage ratio of 1.2 times on a forward looking annual basis EPS.
We expect our full year 2020, distributable cash flow to Carville 2019 distribution by at least 1.2 times.
Now I would like to turn it back to John.
Thanks Shai.
Notwithstanding the COVID-19 pandemic.
Regulators policymakers utilities and power generators across the world into.
Continue to make incremental commitments to phase out coal and limit the impact of climate change.
And we believe these tailwinds will drive strong growth in long term sustainable demand for our product.
The European Union policy progression over the last 12 months serves as a good example of a global leader that consistently advanced the fight against climate change.
The EU first announced the European Green deal in December of last year with the aim of making Europe. The first climate neutral continent by 2015.
Next it followed up with the proposed European climate, while in March to enshrine. This net zero target into legislation.
Even while the continent was deep in the fight against the krona virus.
In September the European Commission went one step further and proposing a 2030 greenhouse gas emissions reduction target of 55%.
At the top end of the previously contemplated range.
Notably just in October the European Parliament voted to further push the 2000 thirtys target to 60%.
This aggressive approach was matched just last week when Japan's new Prime Minister in his first policy speech the parliament since taking office.
Pledged as the country will be carbon neutral by 2050.
As you know Japan has been underway with substantial de carbonization efforts, including the feed in tariff system for renewables that has enabled much of the more than 3 million metric tons per year of long term demand that we and our sponsor of contracted over the last several years.
But this net zero announcement.
Combined with the Japanese government higher commitment to shutdown or Decarbonise 100 coal plants in the country.
Suggest we will continue to see tremendous growth in this market.
Phasing out coal is critical to limiting the impact of global warming.
Biomass plays a fundamental role in this response to climate change and as a requirement in every single pathway. The UN IP cc has laid out in order to achieve the goal of limiting temperature increases to 1.5 degree Celsius above three industrial levels.
Germany is a good example of the major economy, making an unprecedented commitment to translate the VCC guidance directly into tangible environmental benefit.
Following the early passage of the coal acts along several policy initiatives are now exploring the subsea framework that will be necessary to support leveraging bio energy produced from healthy growing sustainable for us and displacing coal by converting existing infrastructure from coal to low carbon fuels like wood pellet.
Yes.
As the final legislative process unfolds over the next several months the partnership and its sponsor remain an ongoing dialogue with multiple large utilities and power generators about their plans to convert existing coal fired assets to buybacks.
Similarly, the UK government in interest cost of the annual progress report produced by the committee on climate change recently announced its plan to publish a new comprehensive strategy to decarbonise its economy in order to achieve its net zero target.
And confirmed that several linchpin decarbonization strategies, such as the deployment of sustainably sourced biomass in combination with carbon capture our forthcoming.
As part of our commitment to provide incremental transparency into the sustainability of our business practices.
The partnership and our sponsor recently published our first corporate sustainability report.
This report provides a description of in vivo is 16 year sustainability journey.
From the partnership's humble beginnings as a startup in 2004.
The publicly traded company with a global footprint that isn't veeva today fees.
Featuring a comprehensive review of our contributions of fighting climate change.
Our fiber procurement approach and forest land conservation efforts.
Our environmental health and safety processes.
Our human capital and diversity policies.
And our corporate governance practices.
As one of the Veeva Sounders.
Im, particularly proud of this report.
As it describes not only how far we've come.
But how big the opportunity is ahead.
Many of these opportunities involve innovation and new ideas about how to further promote for us growth in carbon sequestration.
And protect force habitats in the southeast U.S.
One example of this our sponsor recently formed a partnership with a widely recognized innovator and north America's leading developer of forest carbon offsets.
Leveraging finite carbons online platform in Vienna is helping private landowners participate in the program to receive income in exchange for their commitment not to harvest particular tracks of their land.
And therefore facilitates the conservation and protection. The forest habitat that are critically important to biodiversity wildlife and carbon storage.
Such as Bottomland hardwood for us.
Given how important forest lands are to mitigating climate change the symbiotic relationship between the healthy demand for forest products and landowners decisions to continue to invest in forest land translates into a powerful combination for policymakers around the world.
This natural synergy is driving continued increases in the worldwide demand for our product.
The partnerships current contract portfolio.
Which includes the 20 year 270000 metric ton per year EPS you higher contract that just went from in September.
Has the total weighted average remaining term of 12.8 years.
And a total product sales backlog of $14.9 billion.
Assuming all volumes under the firming contingent offtake contracts held by our sponsor and the sponsored joint venture were included our total weighted average remaining term and product sales backlog would increased to 13.7 years and $19.4 billion.
To meet the growing contracted demand for sustainably produced biomass within the partnership we have continued commissioning our expansion project at the North Hampton plant.
We also have begun commissioning new equipment related to the expansion project, our south Hampton plant.
And expect to complete the installation of all equipment around the end of this year.
At Greenwood procurement and detailed engineering activities are well underway.
And the project to expand that plant's production to 600000 metric tons remains on track for completion by year end 2021.
Finally, the construction of our sponsors fully contracted Lucille plant and the Pascagoula terminal remain on track for completion midyear 2021.
In addition, our sponsor expects to complete the purchase of the project site and commence certain preconstruction activities for our next fully contracted plant later this year in EPS, Alabama.
A final investment decision by our sponsor the expected around the end of the year.
Which pretty astonishing is that when complete.
Our current operations combined with the development projects I just described.
Well establish a footprint across the southeast us that supports more than 4000 jobs with an annual economic impact of close to $3 billion.
As I've said before it.
It is a privilege to be able to grow this business at a time when so much of the world continues to face challenging and uncertain circumstances.
And although it might seem like a quiet quarter.
It was really quite busy as the enviva team focused on executing our business plan.
Integrating the green wouldn't waycross plants that combined to increase the partnership's production capacity by more than one third.
And delivering exactly what we have promised.
As a result, we were able to print our highest quarterly adjusted EBITDA ever.
Generating $54.4 million.
We again increased our distribution now for the 20 onest consecutive time.
And we reaffirmed our increased guidance for the year.
And with the increasingly critical role we play in the efforts of by climate change.
We are really just getting started.
As I close I want to thank all of my colleagues at and Veeva for their hard work and relentless focus on keeping our people healthy and operating our business uninterrupted.
I've had the pleasure of making my way to each of our plants imports over the past several weeks to reconnect.
Safely and with all the CDC directed social and professional distancing.
And while the pandemic is certainly a challenge.
I can tell you that the excitement the enthusiasm and the commitment to the job at hand has never been stronger.
I am continually humbled by the dedication of colleagues who work hard every day to make sure. We can deliver on the promises we have made well into the future.
We have a strong and durable business model made stronger by the people that enviva.
Thank you.
Operator can you. Please open the line for questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Once again that was star then one if you would like to ask a question.
Our first question will come from Mark.
Carver of Heikkinen Energy Advisors. Please go ahead.
Yes, everything so straightforward I didn't really have a question, but since it was already in Q I thought I'd.
Just a broader question on.
You you made those acquisitions earlier this year do you have any any.
Any thoughts on the potential for further at third party acquisitions.
And any commentary on the.
Potential M&A landscape right now.
Our Marshall. Thank you. It's it's great to hear from you know if you guys are doing well.
Hello, guys, absolutely interesting quiet quarter, Greg pretty straightforward. We're we're obviously delighted with the progress that we're making on integration the acquisitions we.
We are a proven acquirer, we know that the most recent waycross acquisition was.
With the acquisition of the largest player in the World that we can then currently own which is consistent with you have the track record and the approach that we've taken in M&A historically in the assets that we would look at need to be pretty strategic are they also need to be competitive with what we would otherwise be able to develop and acquire from our sponsor.
Which which is also we've also proven to be relatively attractive investment and acquisition multiples. So from an M&A perspective, we're pretty judicious were pretty conservative in our thinking around it on its got to be something pretty important either it's going to get become with a strategic port location and new fiber basket. It's got to be bought well built its got to be in there.
Right fiber basket, it's got to be indirect cost position and there just aren't that many of those in the world, but when there are we take a good long look at them.
Thank you and then I guess another question.
In terms of lumber pricing lumber prices increasing in the last few months does that have any.
Could you talk about any impact there I know you're buying pellets, which are at a huge discount and basically.
Aside.
Product.
Of the lumber industry to a degree.
Just just higher lumber prices mean.
More lumber demand and therefore more opportunity for supply, which could potentially lower the cost for you or or does it does it seem to go up at all with lumber prices or do you have any mill, you really really sort of spotted you really spotted the symbiotic nature of our fiber procurement with with what the more traditional forest products.
Industry undertakes so as to increase demand for forest products in the high value components of that like sawtimber telephone poles, and the like which Youre seeing increased demand for means that there is a greater proportion of by products that the landowner ultimately needs to remove from that forest tracked it to enable more efficient and more effective reform.
A station and so we're really an important part of that and obviously with greater degree of supply that means that over time, we intend to continue to see and if you look historically at our financials, we've tended to realize.
A decline in our underlying fiber prices because of greater fiber availability.
Thank you and good to see such a straightforward quarter.
Thanks Marshall.
Again, if you would like to ask a question. Please press Star then one.
And our next question will come from Elvira Scotto of RBC capital markets. Please go ahead.
Hi, good morning, everyone.
You talk about Germany.
Q.
Hi, I'm, a little more color around that.
What you're what you're seeing and hearing in your discussions in Germany, and then just maybe around when you will you can see a potential contract.
Yes.
Yes, absolutely over and a great to hear your voice the.
So, Germany, we began talking about Germany as the coal ex allow began to be developed in that country as part of its broader participation in the landscape is can the climate goals, which are important to note are are becoming increasingly more aggressive right not only moving to net zero.
So really looking at the European client along as it is targeting.
50% to 60% deductions, which are very significant step up to what their historical expectations were so you've got a pace of change that is accelerating across the European continent, I'd say complements about Japan sales, but it's not.
But in Germany.
Validate the months ago, we articulated over business assuming of course, it's going to take a little bit of time for the regulations to mature the policymaking get worse and what we've seen is progress is back on that base. So.
So did the guidance describe roughly 84 months were 18 months in the preliminary framework is in place.
The fact that we resolved favorably.
European Im sorry for the the German policymakers put in place the bonding log regulations on framework that will enable.
Major coal fired generators to birds to lower carbon fuels like withheld.
Our dialogue with our customers is going okay.
Eric remarks, Dave.
To accelerate and where were in deep analog without exactly they're going to plan.
Plans, the feasibility work and Dave on his cross about a couple of follow way and what we would expect is certainly over the course of the next we 12 to 18 months breast sales rep visibility into the specific asset specific terms and conditions that we will be supplying.
Under long term contracts.
And that was in parallel undertaking the conversion process is for those some customers are ahead of that curve so somewhat.
But the rest of the nation across our broader portfolio, but we consistently.
At the end of the tunnel here.
Clear ability in the five to 10 million ton market.
Obviously as the European community continues to accelerate and his efforts against climate change. We think this is part.
Part of it that and we'll look forward to participating in that market.
Great. Thank you and then.
Yes.
As you know data has become our has accelerated Debbie Carbonization falls.
The any recently made hydrogen.
Pillar in its de carbonization upgrades.
Any impact at all.
If we start to see hygiene Gen kind of grow within that renewable hi, do you see any impact to biomet square in will you.
Great. Great question, Yes, we look at hydrogen like like a lot of potential emerging technologies. There's a lot of hope there can be at times hype around that.
I think I think hydrogen certainly has a role to play its a speculation of course on both cost and time.
And ultimately these things can tend to be resolved over a longer period of time, but the pace of change and the urgency getting on change requires.
And Mike why biomass become such an export.
All in the overhauls box is because it can realize today well cost at Hyatt.
Against the Intermittency of solar and wind as the potential for hydrogen and the five other flavors that may come forward.
But longer term benefits, but in a much more speculative.
Constantine.
Thats why we can.
The makers not Europe, but that elsewhere, particularly Asia. So intently focused on the integration of of biomass to displace some of the most intense carbon emissions alternatives to fossil fuels.
Great. Thank you very much.
Thanks Omar.
The next question comes from Moses Sutton of Barclays. Please go ahead.
Hi, Thanks for taking my question pretty clean straightforward quarter Im just one general question on my end and any updated thoughts on never converting to a C corp, or sort of solving for the demand for a different company structure.
Thinking through not only what's happened with some MLP, but also yieldco is other Lps like Brookfield vehicles, and how how they perform since those changes or due to tax benefits of the MLP structure really makes such a change not worthwhile to even entertain.
Moses always get a child and Greg question is all as you know.
The MLP structure that we've been in and the sponsor led dropdown profile is particularly a high growth MLP ourselves.
Has worked pretty well for us if you look if you look historically, we've been able to generate a 13% distribution CAGR since our IPO and we've continued to grow pretty aggressively including Theres, some pretty choppy periods. Both this year and last year in terms of the capital markets. So for US It's a model that works well not so much.
Solely for the purposes of the tax structure, but really more so on the allocation of risk and responsibility in activity between the sponsor and the partnership we have been convicted about ensuring that the partnership is fully insulated from the development the contracting the construct.
Second activities of large scale infrastructure assets.
It's largely been driven by the scale of the organization historically as a small company smaller company at IPO. It may have into bigger bite for us to develop assets on our own balance sheet, and and I think that that time and scale begin to make sure that we can think about where that right alignment of risk and allocation has heretofore most of that big developments been done upstairs.
We started to put our nose under the Genset as big we've got two great expansions underway at the North Hampton.
And south Hampton facilities were modestly expanding me.
Production at the Greens, the recently acquired Greenwood asset and we tend to think that there is a good runway ahead for incremental expansions within our current portfolio.
As we think about developing larger scale assets when we get to the right scale and size I think that does begin to raise important questions in the future about what that right allocation of risking responsibilities heretofore. Its worked really really well, we're certainly on on the path to more than doubling the size of last year's EBITDA and obviously that that then from a free cash flow.
Profile might create some different opportunities about how we would choose to reinvest free cash flow directly into larger scale investments within the partnership, but I think we're still a bit off from that yet.
Great No that makes a lot of sense that will have on my end. Thanks for the update there.
Bratton the smooth operations.
Those that you guys talk to you.
This concludes our question and answer session I would like to turn the conference back over to John Kessler for any closing remarks.
Well I wanted to thank everyone for taking the time to join US today, obviously, there is a lot going on in the world.
Quite privileged to be in a position that we're in and we believe that we have responsibility to keep it up.
Im looking forward to connecting with everyone again next quarter and until then please.
Please stay safe and healthy.
We're all in this together and together, we're all going to get through it.
Well Justin thank.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.