Q3 2021 Enviva Partners LP Earnings Call
Can be found in our earnings release as well as our other SEC filings.
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 financial measures pertaining to completed reporting periods as well as our forecast.
Information concerning the reconciliations of these non-GAAP measures to their most directly comparable GAAP measures and other relevant disclosures are included in our earnings release.
It's also important to note that our guidance for full year 2021 does not reflect the potential recast of our historical results, which may be required under GAAP due to the simplification transaction.
2021 guidance reflects our Standalone reported performance through October 14th 2021, when we closed the simplification transaction combined with our expected performance on a consolidated basis from the closing date through year end.
We believe our 2021 guidance provides investors with the best information to evaluate the company's financial and operating performance.
I would now like to turn the call over to John.
Thank you Kate.
Everyone and thanks for joining us today.
It's only been a few weeks since we were last on a call together.
Where we announced our transformative simplification transaction and our plans to convert our organizational structure from a master limited partnership to a corporation.
Since that time, we've had the pleasure of meeting with dozens of investors and.
And the feedback has been universally positive.
It has been really good to see a constructive market reaction to a transaction structure to be nontaxable to our unit holders that eliminated our <unk> bought in a tremendous growth profile.
Lower our cost of capital and ultimately moves us to a structure that makes us investable by the broadest global investor base possible.
All of this while preserving our dividend guidance on growth for next year and maintaining our conservative balance sheet.
We're pretty excited about the first steps, we've taken to unlock significant value to shareholders as we evolve our same great business into an even better corporate structure.
We are progressing quickly with our conversion from an MLP to a corporation.
And as you will have seen from our press release, we issued yesterday afternoon.
We have established November 19th as the record date for our unit holder meeting, which.
Which will be held on December 17th.
We expect the conversion to be completed by the end of the year and our first expected trading day as a corporation is Monday January <unk> 2022.
Once we are trading as a corporation.
We will have created a unique opportunity for investors across the globe to participate in the step change accretion we have ahead of us.
Whether that's through investing in and visa, Inc, or possibly through one of the many indices and which we will become eligible for inclusion.
One exciting tailwind supporting our growth is the rapidly decarbonising industrial sector.
Today, we are very pleased to announce our inaugural contract with a European customer who will process, our solid biomass into refined liquids could ultimately become high grade renewable fuels like sustainable aviation fuel and biodiesel.
This is an important milestone for us and is the first of many we see ahead as we work with large industrial customers around the world to not only decarbonize, our energy supply chain, but also to make they're difficult to abate industrial processes less greenhouse gas intensive and more sustainable.
Our initial tranche under the industrial contract I referenced is were 60000 metric tons per year of wood pellets with a tenure of 10 years.
We expect deliveries to commence in 2023 subject to certain conditions precedent.
As our new customer brings on additional production trains each year over the following five years.
As their sole source wood pellet supplier forecast our contracted volumes to grow in lockstep.
Growing to an expected $1 2 million metric tons per year once the customers production capacity is fully ramped.
So I will discuss our third quarter financial results in more detail, which were right in line with the expectations, we outlined several weeks ago.
As I shared with you during our simplification transaction and conversion call, we expected to generate between $61 million and $65 million of adjusted EBITDA for the quarter and we landed at the midpoint of that range delivering about $63 million.
Based on the durability of our business model and the strong cash flow visibility, we have going forward. Our board of directors declared a distribution of <unk> 84 per unit for the third quarter of 2021, and eight 4% increase over the distribution paid for the same quarter of last year.
This represents our 25th consecutive distribution increase since our IPO and maintains the 12% distribution CAGR. We have delivered since then.
We are also reaffirming the full year 2021, and 2022 guidance, we discussed recently, which we updated alongside our simplification transaction and conversion announcement.
From a distribution standpoint, we are reaffirming $3 30 per share for full year, 2021, and $3 62 per share for 2022.
Returning capital to our shareholders has always been a critical part of the way, we manage our business and.
And like all great things about Veeva, that's not going to change with the simplification of our structure and conversion to a corporation.
As in Visa, Inc. Our dividend policy will continue to reflect the fundamental commitment we have to deliver a stable durable and over time growing return of capital to our shareholders.
Now I'd like to turn it over to Shai to share more detail on our third quarter results and financial highlights.
Thank you John and good morning, everyone.
For the third quarter of 2021, we generated net revenue of 237 million.
Each represents a 5% increase over the corresponding quarter of 2020.
The increase in net revenue as a result of incremental product sales as we ramp deliveries to new customers and deliver allows us volumes to existing customers.
This increase in revenue and product sales volume was temporarily dampened by COVID-19 related issues experienced by our contract sales and supply chain partners. Although we believe these issues are beginning to be behind us.
Adjusted gross margin for the third quarter of 2021 was approximately 57 million.
Which was relatively flat as compared to the third quarter of 2020.
Adjusted gross margin per metric ton was approximately $48.
For the third quarter of 2021 down slightly from the $50 per metric ton achieved in the third quarter of 2020 the.
The decrease in adjusted gross margin per metric ton was primarily attributable to the issues that affected our revenue in product sales volume adjusted Scott.
Net income was almost breakeven for the third quarter of 2021 as compared to net income of one 4 million for the third quarter of 2020.
Adjusted net income was $28 million for the third quarter of 2021 as compared to adjusted net income of 16 million.
Political and funding quarter and 2020.
Adjusted net income increased by 76% when comparing the third quarter of 2021 with the third quarter of 2020.
As John mentioned earlier, and Veeva generated adjusted EBITDA of approximately $63 million for the third quarter of 2021, an increase of approximately 16% from the third quarter of 2020.
The increase in adjusted EBITDA was primarily due to the benefits of the Lucedale plant and Pascagoula terminal acquisition.
Distributable cash flow was $49 5 million for the third quarter of 2021, which represents a 17% increase from the corresponding quarter in 2020.
Our distribution coverage ratio on a cash basis for the third quarter of 2021 was 1.13 time.
When we refer to distribution coverage being on a cash basis. It mean, we are not fully factoring in the 9 million units issued as part of the simplification transaction that are subject to the dividend reinvestment commitment.
Our liquidity as of September 30th 2021, which included cash on hand, and availability under our revolving credit facility was $192 million.
As we convert from a partnership to a corporation and Veeva commitment to conservatively managing its balance sheet is unchanged.
We now expect to fund future growth projects increasingly with cash flow generated from the business and we will be transitioning to a fully self funded growth model for capital expenditures over the next five years with timing dependent on the cadence of new plant construction.
Our long term dividend coverage ratio target is one five times on an annual cash basis, and we expect to have the financial flexibility to increase dividends over time.
As we near the close of 2021 and with solid visibility into 2022 were reaffirmed our full year 2021, and 2022 guidance.
S. K mentioned at the beginning of Alcoa, our guidance for full year 2021 does not reflect the potential recast of our historical results, which may be required under GAAP due to difficult litigation transaction.
The important takeaway from our guidance that we expect adjusted EBITDA to increase by 20% when compared to full year 2021 to 2020 and we.
<unk> adjusted EBITDA to increase by another 20% or more when we compare 2022 to 2021.
Bill just isn't another company with a similar profile of visible durable cash flow growing at this rate.
And we believe we have much more shareholders valued yet to unlock.
Now I would like to turn it back to John.
Thanks Shai.
The future has truly never been brighter for in vivo.
We are entering 2022 with a contracted revenue backlog of over 21 billion.
Which is complemented by a similarly large and growing customer pipeline.
This customer pipeline is high quality and diverse.
We continue to have a healthy number of opportunities in our traditional markets for biomass fired power and heat generation.
Notably in the United Kingdom in the European Union, where Germany, and Poland represent sizeable addressable markets for us.
Asia continues to offer a material source of growth, which includes incremental demand from Japan emerging potential in Taiwan and maturing opportunities in South Korea.
We talked about the burgeoning industrial demand earlier on the call specifically demand for sustainable aviation fuel and biodiesel.
Only a fraction of the picture.
The full addressable industrial market is truly exponential when you layer on the potential for Decarbonising industries like steel cement Lyme and the chemical verticals.
Over the next 12 months, we expect to continue our successful track record and convert a number of our pipeline opportunities and the binding long term contracts. In addition to affirming our previously signed exclusive memoranda of understanding.
Given our robust contracted position and growing demand profile. We are also aggressively growing our production capacity.
Earlier this year, we acquired the Lucedale plant in Pascagoula terminal.
Spec each to be ramping up production during the first half of 2022.
The Lucedale plant increases our production capacity by roughly 14%.
Additionally, we have a series of highly accretive projects underway and.
And nearing completion, namely the mid Atlantic and the multi plant and the green with expansions.
These expansion projects when combined represent a capacity increase similar to our new mid sized plant.
As we look further out to meet the growing demand for our products.
We acquired projects at 15 plant sites as part of our simplification transaction.
All in various stages of evaluation and development.
One is the fully contracted <unk> plant, which is currently under development.
We expect to commence construction in early 2022 with an in service date scheduled for mid 2023.
<unk> is designed and permitted to produce more than 1 million metric tons per year of wood pellets, which would make it the largest wood pellet production plant in the world.
We think our next most likely Greenfield plant is in bond Mississippi.
Which we are designing to produce between 750000 and more than 1 million metric tons per year of wood pellets.
We expect construction of bond to commence once <unk> is operational.
But the timing of construction could be expedited, depending upon the schedule and delivery requirements of additional offtake contract opportunities under negotiation and general market conditions.
Shaping a secure and sustainable energy future continues to be at the forefront of the global energy dialogue and I am very excited to have accepted an invitation to present next week a cop 26.
Respected climate and energy authorities and policymakers from around the world about the important and well recognize role that modern bioenergy plays as a part of a global solution to climate change.
Our renewable products help our customers meet their net zero targets.
We expect our own net zero commitments to further reinforce our environmental leadership and reputation for sustainability.
We are in a very fortunate position to have built a business that by design generates only a modest level of emissions from our own operations.
We recently announced a 10 year contract with Green gas USA and integrated renewable natural gas solutions provider to Decarbonize natural gas related emissions in our own operations.
We have built a track record of making important commitments and then delivering on them with a broad range of stakeholders.
This renewable natural gas contract is a big step towards our net zero commitment.
And.
Since it is expected to display a 75% of our current scope one emissions on an annual basis.
It is something we are particularly proud of.
Before we close.
I want to recap what has made 2021, such an incredible year for Veeva for our team and for our stakeholders.
First.
We completed the sizable acquisition of the Lucedale plant in Pascagoula terminal Simon.
Simultaneously with a successful equity offering and concurrently with our mid Atlantic multi plant and green with expansions all underway.
Second we completed our simplification transaction and commenced the process to convert to a corporation a milestone we expect to complete by year end.
Third we signed our inaugural industrial contract.
One, which we expect to be just the first of many as we expand our customer base into the rapidly growing industrial sector, a sector that could drive exponential growth for us.
And finally.
We accomplished all of this while delivering pure leading returns to our equity holders.
We're fortunate to be able to define our company and relatively simple terms.
The world continues to want less carbon.
More quickly and more cost effectively.
And that's exactly what we offer.
We are incredibly privileged to have the opportunity to continue to build a company and a unique platform that was greater as a partnership and we will be even better as a corporation at delivering real climate change benefits today.
Ill consistently.
Safely and sustainably generating superior returns for all of our stakeholders.
Now, let's open up the call for questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
And to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
And the first question will come from John Mackey with Goldman Sachs. Please go ahead.
Hey, everyone. Good morning. Thank you for taking my question wanted to congratulate you on the industrial contract and just dig into that a little bit more can you maybe just talk a little bit about the path to getting to that $1 2 million tonnes.
John I appreciate the color you gave on the ramp.
Just curious if any of that it depends on your customer I don't know needing to get more comfortable with the technology or the.
Chemistry of it or is it really just a matter of <unk>.
How quickly they can build that capacity.
Sean Great to talk with you. This morning, and thanks for the question what I think you would I think you see going on in the industrial sector and I would expect that we would see this replicated in a number of the different verticals that were targeting lime cement.
Steel as well as what we have is a phased in approach much the same way that the early adopters of power and heat generators migrated to a biomass strategy as well and so we've got an initial tranche with our customer coming online and the full expectation is as I've continued to stamp those out year over year for the five year period of construction.
I think it's an appropriate from from our diligence in perspective, it's inappropriate.
Phased approach to construction and we look forward to the contract ramping towards full life of $1 2 million metric tons per year.
And thank you for that maybe just a quick follow up.
Is there any chance you could kind of give us some guidance on I don't know.
Barrels per day, our gallons per year of Fas 60000 tons per day.
I Couldnt do so.
Obviously, that's a key.
Quite important confidential piece of information for our customers out there.
Totally understand maybe just shifting gears last one more then ill turn it back over.
Just curious on what Youre hearing from some of your customers given the recent spike in coal gas power carbon prices et cetera, and whether or not that could be driving both new contracts and then also maybe some better re contracting on your.
Existing contracts that are alright, a couple of years than two.
Thanks.
Yes, John Great Great comments, and I think your question highlights a good amount of what we actually see going on in the market right now.
For our product, which which continues to be structurally short supply in a market where demand continues to grow and as we highlighted in our prepared remarks potentially exponentially. What we do see is longer term upward pressure on pricing.
As well as the.
The continued emphasis on the certainty of supply and given that we are the world's largest supplier in this market. We do think that that is an important set of tailwind for us complemented by a pretty constructive global energy complex right now, which is driving up prices for more traditional fossil fuels combined with the pressure.
To increase renewables in the adoption of Baseload and dispatch Bo.
Power only on the basis of biomass means that we have a pretty compelling market position right now.
Yes.
That's great. Thanks for the time.
The next question will come from Mark Strouse with Jpmorgan. Please go ahead.
Yes. Good morning, Thank you very much for taking our questions.
I was just hoping you could go back to the the metric tons sold being down.
You mentioned, some kind of COVID-19 issues I'm wondering can you just give us a bit more color there and then obviously youre, leaving your guidance and your target for next year unchanged. So how should we be thinking about that metric going forward.
Kind of a follow on to that is the the.
The gross profit per metric ton.
A bit better than what we were expecting.
How does that flow through.
Given what you're expecting on the tonnage.
No Mark great and thanks for the call always glad to have the opportunity to talk with you.
As we highlighted a couple of weeks ago on our call. What we saw in the third quarter was was the sort of knock on effects of COVID-19, and some of the labor related challenges within our supply chain and contractors I think it's important to point out that we have of course been largely insulated from the impacts of COVID-19, but not ultimately immune.
Our facilities have continued to operate at a very healthy and safe workforce without very healthy is it workforce, our vaccination rates are up pretty considerably and with that that's the <unk>.
Results of a lot of work by folks on our team to ensure that as we operate in continue to work in the southeast US This is an area of the country that got hit pretty hard with COVID-19, and case rates going up pretty significantly.
Roughly from the period of the fourth of July through about Labor day what.
What we saw is that debt pretty significantly impacted some of our supply chain partners and they had labor availability and health challenges within their workforce, which meant that we couldnt actually bring those folks on our sites until they can demonstrate that they were also COVID-19 free.
Created additional sort of downtime and longer maintenance outages, and we would have otherwise expected and so as a result, you saw lower production profile in the quarter, we generally see that abating and certainly.
The decrease in case rates, which is pretty widely reported these days is a tailwind for us there. So we're optimistic that this is beginning to be behind us.
And as a result, you should expect to see a continued increase in our overall production profile as we go through the year and obviously then carry into 2022, which gave us the confidence to not only reaffirm for full year 2021, but full year 2022 as well.
With respect to the margin profile I think that we've tried to traditionally guide to mid Forty's guide for a full year basis subject to the seasonality.
Visions that generally make it a little bit more costly to do to produce in the first and second quarter of the year and then the back half of the year being stronger.
We back off on that right now.
And also to add the next next deal with.
The expansion projects, we are bringing online.
About the size of the mid sized new mid size new plant when you're combining the expansion the volume coming from the expansion project of the mid Atlantic the multi plant expansion in Xinjiang facility.
Altogether, we can see more than 600000 metric tons for 2022.
Okay. Thanks for that and then just a follow up to John's question on the industrial customer.
Sure.
Obviously, not asking for specifics here, but do you have other similar sized deals in your kind of near term pipeline over the next 12 months.
Do you think have a good probability of closing.
And maybe.
You kind of comment on the size of those potential customers. As this deal that you signed is this kind of indicative of what we should be expecting going forward.
We certainly believe so and I think that the industrial application given.
Given the given the processes that we are serving many industrial customers will operate multiple trains of production similar to the contract. What we've just announced so I think that you can expect to hear from us Similarly structured contracts as we as we open up new markets, new segments, and new verticals within the industrial sector, but.
From a notional contract value. That's obviously a size that makes a whole lot of sense for us.
Got it thank you very much.
The next question will come from Ryan Levine with Citi. Please go ahead.
Hi, good morning.
Couple of questions on the industrial dynamic what type of what type of complexity of the refiners may be needed to handle the pellets.
For this feedstock can you is there any color you could share around the application here.
So there are a number of pathways for.
Both biofuels and sustainable aviation fuel production, including gasification process.
We have others that are proven in various different applications. Our customer of course is using one of those and so from our material handling basis.
The perspective that we offer of courses that we are delivering our solid fuel product. The same spec that we deliver around the world, but it is delivered into the front end of a plant that's going to be ultimately, making a different product.
Are there any rins or for any other.
Fuel credits that help enable this.
Use case.
And then as the U.
U S centric or is there certain markets that are more conclusive.
Okay.
Here Youre pallet.
The application.
So great Great question, Ryan I mean, certainly there are there are worldwide markets for this and depending upon the particular jurisdiction. There are different market drivers of adoption in this case, it's a European European plant and so theyre benefiting from European demand.
For sustainable aviation fuels and biodiesel and so they are participating in that market clearly the U S market has a number of different regulatory structures <unk> and others.
Certainly low carbon fuel standards in particular locales that an emerging customer set is also seeking to participate in but the contract. We just announced of course is a European based customer.
Okay.
European dynamics Dawn assume any type of fuel credit or elsewhere.
And that's more centric to the U S is there any comparable program that helps on the rates.
That's correct.
So.
Over over time, I think we can see a lot of different structures emerging I mean, obviously thats an important topic of cop 26, right now, but the customers the customer contract that we announced today has its own contracted downstream position with a <unk>.
<unk>.
The existing players in this market.
Appreciate it thank you.
Again, if you have a question. Please press Star then one our next question will come from Elvira Scotto with RBC capital markets. Please go ahead.
Hi, good morning, everyone.
A couple of follow up questions around the industrial contract.
First does the contract had a similar structure and margins.
Shifting contracts does it have price escalators.
Et cetera is it similar basically.
Yes, great to talk to you and yes. It is.
By design, when we think about.
New customers, new geographies, new segments, we want to make sure that the underlying cash flow profile of the contract is similar to the alternatives that we have and so you should expect the same credit characteristics as a margin profile Thats M escalators in the same contract structure.
Thank you that's that's helpful and then.
So the second question that I have on that contract as to the initial tranche of 60000 metric tons per annum. So I think you said a plan a year over the next five years, so to get to that one 2 million by 2027, I mean should we just assume.
Ratable kind of additions or how do you get from 60000 to one two.
So I'd say it will be a step addition, each year sort of linearly for those five years in a step based function for additional production trends at our customer.
Got it perfect.
Thanks, and then.
Quest simply and quickly do you think.
Industrial market can grow and just a follow up from a previous question. Let me are you.
Can you kind of compare.
The number of discussions that you're having with various client.
Cancel customers globally what percent of that is are those discussions industrial versus your traditional customers.
Well I wouldn't characterize it necessarily as a percentage what I'd say is that the mental momentum behind <unk>.
The carbonization and deep decarbonization of difficult industry is top of mind around the world as we think about cop 26 in the major theme for Cop 20, Texas.
This is a code red for the environment and undertaking activities today that can dramatically impact and mitigate the implications of climate change is first and foremost priority and so the utilization of biomass is one of the proven low cost ways of doing so and customer adoption rates and customer interest on.
On biomass and long term certainty around that biomass and their own applications is driving a tremendous amount of customer interest in what we're up to.
As we talked about on the last several calls there are some key verticals in those difficult to abate industries.
Then lyme fuels like sustainable aviation fuel.
And so what we have is quite honestly dozens of multiple multinational companies with an interest in de carbonization.
That's our driving incremental contract discussions and so we're very proud of what we were able to get accomplished in pretty short order from a contract cycle basis, what I would say that is fairly different than the more traditional power in <unk> sector is that these are these are counterparties that can tend to move relatively quickly.
And so that means that the sales cycle may be shortening.
We look back how long ago did we initially started talking about the industrial sector and of course is announcing a major contracts relatively shorter so I'm pretty excited about that and of course. It is it is occupying a lot of.
Sales and marketing teams time, while we continue to.
Work on the core segments that we started served today and emerging markets like Germany, Poland, Taiwan, and the continued growth we see in Japan.
We're of course really happy to announce just a couple of weeks ago. Another large Japanese contract and that's a market that grows very rapidly for us do.
Great.
One final question for me, just especially since you brought it up just kind of any update you can give us on Germany, where the government is on regulation.
Sure.
When you think you can announce something.
And then congratulations on the industrial contracts I do think that one Gary.
Quickly announced.
Yes, obviously it reflects the momentum and theres similar momentum on contracts like that in Germany directly the.
The heat the heat and industrial sector. This has been a focus of all of the parties that are now forming the coalition government. The the SPD the FTP the Greens, which.
Their focus has been on how do you do this quicker faster they are starting to talk about whether it's 2038 30, how do you how do you accelerate a bunch of these pieces. Obviously that coalition is just settling itself down expectation is that it.
Around the end of the year completed which mean legislation shortly thereafter.
We should remember that there is there is a subsidy in place today for the industrial market and the activities and the focus.
This coalition government accelerating that only means frankly more momentum and more tailwind. So what we expect and given the conversations that we have with our counterparties in Germany across that whole range power.
And industrials is that this is a market that is going to continue to grow very very rapidly with additional certainty given the tailwind of the election cycle now completing.
Great. Thank you very much.
<unk> always great socket.
This concludes our question and answer session I would like to turn the conference back over to John Keppler for any closing remarks. Please go ahead Sir.
Well really appreciate everyone popping back on the phone with us or I do realize it's only been a short time since we were last together, but.
As I think that todays discussion highlights.
We're really excited about the momentum that continues to exist in the markets that we serve.
<unk> around the world to Decarbonize. The fact that cop 26 is actually generating incremental opportunities in real time for us and so we're quite privileged to be in the position that we're in and as you've heard me say before with that we believe we have a really really important responsibility to continue to deliver the consistent and strong execution that you've seen.
From us over the last several years and so we're going to continue to do the job. We do working hard every day to safely stably and reliably displace coal across a whole range of applications and we're going to do that by growing more trees and fighting climate change.
And we're certainly looking forward to talking about our progress again.
As we get through the next quarter.
Have a great day and thank you for joining us.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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