Q2 2021 Enviva Partners LP Earnings Call
Also very happy to say, it's been a straight down the fairway quarter for us.
Will be delivered the stable results you've come to expect.
Given that I'll keep my prepared remarks fairly short for this call.
So while COVID-19, and its variance remained ever present in the headlines we've been encouraged over the last few months to see the world, making strides in reopening.
Here in Viva are people have remained healthy and safe and that has enabled us to keep our plants and force running 24, 7 and our supply chain humming.
The durability and resilience of the business model, we have built allowed us to deliver financial results that are right in line with our expectations.
As I shared with you last quarter and just like in recent years.
We expected the second quarter to look a lot like the first and that's just where we landed generating about $49 million and adjusted EBITDA.
That's a 31% increase in adjusted EBITDA over the same period of last year.
We continued to execute on our growth strategy.
Closing 2 significant accretive dropdown transactions.
These acquisitions increased in vivas fully contracted production capacity by 14% and increased our deepwater marine terminal throughput capacity by 38%.
The projected increase in annual adjusted EBITDA of around $45 million. Once these assets are fully ramps translates into an investment multiple of about 8 times adjusted EBITDA.
Again, right in line with past transactions for plants and terminals.
To finance the equity portion of our recent acquisitions.
We issued for 9 million units and the significantly oversubscribed equity offering at an attractive 5.4% discount to the then current market price.
Part of the reason, we believe we have consistently been successful in raising new equity to finance our growth is because of the fully contracted growth profile of the business we.
Which has enabled us to consistently and sustainably grow our distributions quarter over quarter.
And this quarter was no different.
Based on our solid first half financial performance, coupled with the contracted cash flow acquired as part of the acquisitions and the growth profile, we expect for the second half of the year.
The board declared a distribution of 81 and 1 half cents per unit for the second quarter of 2021.
A 6.5 per cent increase over the distribution paid for the same quarter of last year.
This represents our 24th consecutive distribution increase and maintained the 12% distribution kanger, we have delivered since our IPO.
Importantly.
We are reaffirming our full year 2021 guidance, including an adjusted EBITDA range of $250 million to $270 million in our 2022 guidance, including an adjusted EBITDA range of $310 million to $330 million.
From a distribution standpoint, we're guiding to at least $3.30 per unit for full year 2021, and at least $3.62 per unit for 2022.
Each before accounting for the benefit of future Dropdowns or other third party acquisitions.
Will these acquisitions may have dominated or financial headlines during the second quarter. Our team also made tremendous progress on capacity expansions at our North Hampton, South Hampton and Greenwood plants and.
An advanced the multi plant expansions at our Sampson hamlet and Continental plans.
Our production capacity expansions are underpinned by the partnerships fully contracted revenue backlog.
Which now totals $16 billion.
With a weighted average remaining contract term of 13.2 years.
When combined with additional contracted production held by our sponsor, including the recently executed agreement with a major Japanese trading house, we announced yesterday.
Our revenue backlog and our total weighted average remaining term would increase to approximately $24 billion and $14 for years, respectively.
Our sponsor continues to develop and evaluate wood pellet production plants to service growing backlog of longterm contractor demand.
Currently exceeds $4 billion.
Additionally, our sponsor has material contract volumes under various stages of negotiation with utilities power generators, and industrial companies and both existing and evolving markets like the Mou, We also announced yesterday with a European utility to supply wood pellets for 12 years to a facility in the Netherlands.
To serve this demand our sponsor is currently developing a fully contracted wood pellet production plant in <unk>, Alabama.
For which we expect construction to start in earnest during this upcoming winter.
With completion around 12 months thereafter.
Our sponsor is also evaluating a potential future plant site Inbond, Mississippi.
Given this sides close proximity to the port of Pascagoula production from our plans and bond could be delivered at a low cost and low carbon footprints.
With powerful net zero commitments made by governments around the world, We expect no shortage of new markets and new commercial opportunities ahead for the partnership.
I will spend some time later in the call outlining are growing customer contract pipeline and the underlying actions being taken by governments and industry and key jurisdictions to progress the substantial day carbonization initiatives required to meet binding emissions reduction targets.
But now I would like to turn it over to shy to share more detail on our second quarter results and financial highlights.
Thank you John and good morning, everyone. As John mentioned are solid results for the second quarter of 2021, we're right in line with our expectations.
In terms of net revenue for the second quarter of 2021, we generated $285 million, which represents a 70% increase over the current funding quarter of 2020.
The significant increase in net revenue is a result of incremental quoted sales as we commend delivered to new customers and delivered larger volume to existing customers.
They just that growth margin for the second growth of 2021 was $56.1 million an increase of floating put on 1 medium below $33, 4% as compared to the second growth of 2020.
Adjusted gross margin to metric Dylan was approximately $41 for the second quarter of 2021, both form day $49.55 per metric zone in the second quarter of 2020.
The decrease in adjusted gross margin and Metrodome was primarily attributable to increased purchases of pellets from sales policies that generally is a low margin than are produced volume.
Adjusted gross margin was also impacted by posting killed during the commissioning of expansion project it denominal of openings.
Net income for the second growth of 2021 was $2.6 million Dodo as.
As compared to net income of 8 from $5 million for the second quarter of 2020.
Adjusted net income was $908 million for the second quarter of 2021 is compared to adjusted net income of $8.7 million below for the corresponding growth and 20th Wimpy.
It is highlighted earlier the partnership generated adjusted EBITDA of $48.9 million for the second quarter of 2021, an increase of 31% from the second quarter of 2020.
A significant increase in adjusted EBITDA was driven primarily by higher Avenue.
Although we began signing contracts with Japanese contemplative, a few days ago deliveries into Japan are really just starting to ramp desio.
Distributable cash flow attributable to in Viva partners was 32 per $9 million for the second quarter of 2021.
Which represent the 27% increase from the cones blending quoted in 2020 and result in a distribution coverage ratio of zero point 61 time, which is consistent with this time last year.
The partnerships liquidity as of June 30th 2021, which included cash on hand, and availability on the revolving credit facility was $568 million.
And Viva commitment to conservative managing into balance sheet is unchanged.
We continue to expect to fund future drove down acquisitions in major expansions, using 50% equity and 50%.
We also continue to target the conservative leverage ratio of 3.5% to full time any distribution coverage ratio once on 2 times on a forward looking annual basis.
Pivoting now 12 financial outlook as John mentioned, the partnership reaffirmed a full year 2021, and 2022 guidance.
As we have said in the pit seasonality customer mix and timing of shipments can impact results and coast variances from quarter to quarter.
We expect the shape of adjusted EBITDA for this year and next year to look similar to 2019 and 2020 with the second half of the year being materially higher than the first.
Additionally, we expect fourth quarter results to be a significant step up from the sales growth though.
Portfolio of 2021, we expect adjusted gross margin and based on to be within the mid forties.
All confidence in achieving though guidance is underpinned by the recent acquisition intended with the benefit we expect to realize from a mid Atlantic and renewed expansion.
Additionally, many of our UK and European customer delivery schedule on a slightly waited to the big household deal.
Similar to 2019 and 2020, we expect the second half of the year to contribute to about 60%, although annual projected adjusted EBITDA before accounting for the benefit of an additional $20 million and.
And adjusted EBITDA contribution formally newly acquired assets, resulting in the next 2 quarters shaping up to be very strong for us.
Before I attempt to call back to John I want to comment on the current macro inflation trend.
When we look at Enviva supply chain.
The fortunate position of being fairly insulated from an inflationary officials.
We have an annual escalated as part of our contracts.
Which are designed to compensate for inflation.
On the supply side, we have seen and expect to see seasonality benefit driving low cost of production in the third and fourth quarter and our team is focused on improving efficiency, the coastal fleet and leveraging I'll, increasing size and scale to reduce growth companywide.
Now I would like to turn it back to John.
Thanks <unk>.
From a market development perspective, as you may have seen 2 weeks ago. The EU Commission released its fit for 55 package.
Which is intended to deliver a 55% reduction in carbon dioxide emissions from 1990 levels by 2030.
A key milestone needed for the EU to reach carbon neutrality by 2050.
The commission continues to recognize the importance of sustainable biomass and meeting aggressive emissions reduction targets and the indispensable role biomass plays in mitigating climate change.
As drafted the proposals under the latest renewable energy directive or Red 3.
Further heightened member countries obligations to increase the share of renewables, such as biomass and their energy generation portfolios.
Red 3 proposals also outlined refinements to the sustainability criteria for biomass and as proposed they're generally on line within view of of practices.
Another advancement and the you that is worth highlighting is the constructive carbon price environment that has developed.
Since November 2020.
EU emissions trading system prices have more than doubled allow.
Allowing energy generated by biomass to be more profitable than carbon insensitive feedstocks like hold on natural gas even in markets, where there are no direct incentives or subsidies for renewable energy generation.
Given this backdrop, we have seen increased momentum around fuel switching decisions as subsidy frameworks become potentially less influential on end users decisions to transition to biomass usage.
In Germany.
Following last year's formal adoption of the call exit law.
Regulations for long term financial support too Decarbonize district heating networks with renewable alternatives, including biomass are expected to be finalised during the third quarter of this year with.
With regulations for dedicated Powerplants expected thereafter.
The Finalization of these regulations should provide a path to convert the commercial discussions underway with a number of major German utilities and heat and power generators.
Into longterm fuel supply contracts that support their planned conversions to biomass.
Utilities have long been the prime consumers of biomass in Europe, but the global industrial sector is becoming an emerging market for in visa.
Where steel mills cement manufacturers lime producers and chemical plants are evaluating large scale cole to biomass switching.
Indiana is delivered multiple test cargoes to larger European industrial customers that are piloting biomass as a day carbonization solution for their operations.
With a tremendous growth we have achieved combined with what we see ahead tools like our proprietary track and trace system in our industry, leading responsible source on policy.
We'll continue to ensure that our wood pellets remain sustainably produced from force, whose inventories have and continue to grow over time.
As you May recall, we also subject our operations to stringent third party annual audits and we are pleased to report we continued to be certified under leading independent globally recognised sustainability standards like FSC PFC.
Hi, Ed SPP.
We expect the progress that we're making on our own net zero commitments to further reinforce our environmental leadership and reputation for sustainability.
We are progressing efforts to immediately mitigate or offset all of our scope on emissions and we have several exciting process changes and input substitutions underway on our manufacturing facilities.
We are also evaluating a number of on site and adjacent renewable energy generating alternatives in connection with our scope 2 emissions, which we are committed to cut by 50% by 2025 and mitigate fully by 2030.
Finally.
We have several additional partnerships and development. In addition to the maritime shipping initiatives. We've described previously to help our supply chain partners make measurable progress in our scope 3 emissions.
Sustainability is at the core of our value proposition and our net Sarah advancements only make the product we manufacturer that much more valuable in our effort to displace coal.
Grow more trees and fight climate change.
Before we close I wanted to take a moment to think the whole on Viva team for the tremendous progress we've made this past quarter or.
Our colleagues continued to George <unk> day in and day out safely and reliably with an unrelenting focus on keeping each other healthy and making a positive impact on our communities.
We are deeply embedded in the communities, where we operate.
Loud to serve their needs as a good corporate citizen, a neighbour and I'm thankful for the support and recognition we continued to receive our efforts and contributions.
With the incredible momentum across the globe for renewable energy I am very excited about what comes next for our team.
The World continues to want less carbon more quickly and more cost effectively.
This quarter again demonstrates the power of the fully contracted business model, we've built to serve those markets deliver.
Delivering solid results with significantly increased financial performance over the same period last year.
And continuing are undeterred up to track record of stable quarterly per unit distributions that reliably increase over time.
This is our foundation and we intend to build upon.
But we're really just getting started.
And I look forward to share more about our progress next quarter.
Until then.
Thank you for listening.
Operator can you. Please open the line for questions.
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And the first question comes from.
Hello virus scotto with IPC capital market. Please go ahead.
Hey, good morning, everyone.
Hi, good morning of are good to talk to you.
Yeah, you too.
I know you talked about installation from inflationary pressures that can you comment on labor are you seeing any impact from labor shortages.
So so not directly on <unk> as you know.
We generally tend to build plants, where there are lots of trees and few people and so what we have is.
What we like to believe is a relatively stable work force.
We have seen it is frankly, a little bit at the margins kind of right at the entry level position for some of our facilities and this is.
3 or 4 people per facility, but but what you have is given some of the unemployment benefits and and sort of the effective wage rate of the government paying people to stay at home. We have seen that in terms of recruiting in terms of the number of people applying but is that has begun to abate I think that that are those.
Entry level applicants have returned reasonably and force.
Okay.
To that and then.
We've talked about in Germany per while can you give us an update there and then.
Can you prepared remarks few notepad and neither has.
Has been in commercial or has commercial discussions underway with multiple major utility operators, that's heating networks and power generation facilities can you provide any more granularity on those discussions and if you were to cooler there was discussion on.
On track helping.
On that opportunity in Germany in aggregate eat for a deeper.
Yeah, absolutely of our and I think we're pretty excited about the progress that we continue to make in German as you know that's a country that that put itself on a path to eliminating coal is generating resource similar to the way. They have done so on on nuclear and have made some very very substantive and strong commitments too.
To day Carbonization, I think I think you'll also note that in the passage of the 50.55 package and some of the recent announcements from the germs Supreme Court, they're looking for incremental specificity on exactly how and when and how soon we're going to deliver that massive day carbonization and so as as those as the cole exit law has now come into force.
The regulations that will promulgate and enable both operators of places like district heating networks that had been principally fired with fossil fuels to convert to things like things like biomass and so that draft regulation is now out which.
Frankly, we're pretty excited about it and the number of the customers with whom we're working now.
Now have what they believe is it pretty clear runway over towards not only converting but generating renewable base load heat on the basis of biomass for a long time going forward, we expect the power component of those regulations to be issued.
Sort of later this year I think the election, you're given this on election year, there's probably a little bit of noise around timing of that but again all of these pieces remain firmly on track given Germany's commitments, we'd be carbonization and as we look at the total addressable market, we would see the total addressable market in the sort of 5 to 10 million tonnes per year range, which should.
If you believe that we are able to maintain our overall market position translate into a couple of million tonnes per enviva.
Great. Thanks, and then on.
You also mentioned in your prepared remarks net.
The global industrial sector is is an emerging market opportunity for Andy that shiny way. He can quantify how big that opportunity can be and then is that true in Europe or has that opportunity elsewhere like in the U S.
Well I think that's that adds jurisdictions around the world really begin to understand the.
Pricing mechanisms for the carbon intensity of industrial activity.
Lots of opportunities will open up.
Scuse me around the World of course, Europe is leading that is often times, they have historically and reducing remarkable opportunity in the industrial adjacencies, you've heard us talk about steel demand line chemicals sugar.
Frankly, any 1 of those markets frankly, even any 1 of those customers in those markets like you've heard me reference previously a single Youll company in Europe consumes as much coal.
As the equivalent wood pellet market as it existed for the industrial generation the power he existed years ago.
So you've got not just sort of step functions in market growth on potential but as industry is look at day carbonization, rather sit very happy with the test cargoes that have been successfully process for a number of utilities are good potential.
Real customers around the world.
We generally tend to see a really robust market in those areas of an industry that are very very difficult to decarbonize and so tremendous opportunity.
Again multiple segments multiple customers at scales that frankly dwarf the industrial wood pellet market at a San Jose.
Great and then my last question on comments can you provide a little more detail on.
X R.
Specifically.
How do you see that evolving and then how would you how would the economic for extended depot.
Yeah, So so I think.
I would characterize it more from from our customers basis itself again.
We're pretty good at making sure that we deliver the right product at the right time and the right place around the world and if that's ultimately used in power and heat generation or ultimately true carbon capture sequestration on displacement and industrial activities were really that fuel supply chain partners, but our customers who are investing very heavily in <unk> approaches.
I think that the opportunity sat there is given the world's focus on net zero, you're going to need negative in making solutions as part of that and vaccine and available now an alternative that can be executed very quickly and effectively and if the research from folks like the coalition for negative emissions continues to pencil out.
The favorably as we think it does.
That's a market that on the basis of power and carbon pricing if the net effects of those things are in the sort of 150 pounds.
Range.
That's probably something that haunts that scale, which was not too far away from where power prices and carbon prices on right now.
Great. Thank you so much.
All of our great to talk to you.
As a reminder, and you have a question please press 1 and.
The next question.
Comes from Pavel more channels.
Raymond James Please go ahead.
Thanks for taking the question and.
I appreciate your day, providing the detail about fit for 55.
As it relates to Europe I saw.
Small off take agreement in the Netherlands is that going to be hunter.
Country number 4.
Throwing the ball in the European market.
So a <unk> great to talk to you and thanks as a practical matter we've delivered into the large scale utility generating Margaret in the Netherlands for some time.
The Mou and deliveries that we've just announced into the Netherlands yesterday really our focus on a new segment and again, that's a focus on the industrial segment in the Netherlands, an area that that particular country has been intensely focused on as you may recall.
Have essentially announced the end of racking in the groaning and field in the utilization of natural gas as a resource to most of the industrial customers are across the nation and so the generation of steam on and thermal loads across the industrial sector there.
They need to intensely focused on Decarbonising and of course biomass in the 12 year subsidy that exists for that today for high temperature heat obligations is a very attractive alternative for a number of industries looking to both decarbonize their own industrial activities to do so on profitable generation opportunities and so that's I think another entry point for us and.
On a market segment that we believe is going to grow very rapidly both both in the Netherlands as well as elsewhere across Europe.
That's helpful.
Japan, I realized will be up relatively modest lifestyle revenue mix. This year because of course feed the dropdown just closed.
But how much do you think that will be on.
Revenue in 22.
So I think you've got a relatively linear.
Growth profile in terms of its percentage of revenue growing from if you look 2 years ago zero.
To about 50% by 2025, and so as those contracts continued to come to life in the shy mentioned in his remarks, we've got we've begun substance of deliveries last year really ramping this year and you can expect that growth curve to occur.
Effectively linearly between 2021 and 2025.
Okay. So tech 10% this year, 20% next year roughly.
I think it's I think it's a little bit more than that next year. I think you are sort of hitting the 25% 50 per cent, 75% of that 50.
For instance, we have 40 ships heading to Japan this year.
Wow.
And any impact picture noticing from the.
The COVID-19 situation in Japan, which needless to say, it's been getting worse rather than better.
No our deliveries of continued on interrupted to customers around the world.
Thank you guys.
Appreciate it.
This concludes our question and answer session I would like to turn the conference back over to John Keppler for any closing remarks.
Well, thanks, everybody for taking the time to join Us again today.
We're very privileged to be in the position we're in and we believe we have a responsibility to continue that strong track record.
You can count on us and frankly, the entire on Viva team continuing to work very hard every day stably safely and reliably displacing cole growing more trees and fighting climate change.
And we very much look forward to talking again soon and hope you guys stay healthy and have a great day. Thanks, so much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.