Q2 2019 Earnings Call
Good morning.
Welcome to the worst wasn't my team earnings conference call.
All participants will be in listen only mode.
So you mean assistance, especially what we call for specialists for pressing the star key followed by zero.
After today's presentation.
I'll ask questions.
Please note today's event is being recorded.
Oh, no it's called <unk> right. So <unk> Treasurer. Please go ahead Sir.
Thank you.
Good morning, and welcome to the deeper partners LP second quarter 2019 financial results Conference call.
We appreciate your interest in every other partners and thank you for participating today.
On this morning's call, we have John Kemper, Chairman, and CEO , and Shai, even chief Financial Officer.
Our agenda will be for John and try to discuss our financial results released yesterday and provide an update on our current business outlook.
Then 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 and a 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 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 and other 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 fiscal periods as well as our forecast.
Information concerning the reconciliations 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.
As nations around the World continue to take major steps to combat climate change.
And Veeva is addressing the problem today.
Helping reduce the lifecycle greenhouse gas emissions a major utilities.
We are playing an increasingly important role mitigating the intermittency of solar and wind.
By enabling power generators.
To produce renewable base load and dispatchable electricity and heat.
Adoption rates continued to accelerate for biomass as demonstrated by the additional 1.1 million metric tons per year of long term offtake contracts, we had our sponsor just announced.
Some with duration into the mid 2040.
With these recently executed contracts our sponsor not only extended its existing relationships with several major Japanese trading houses.
But also brought on new long term customers.
We are likewise very excited about the partnerships new contract with LDL.
To deliver to the island of Guadeloupe.
Which is our second contract to a Caribbean Island nation.
While Europe and Asia, our two largest current markets.
This new contract is proof that replacing fossil fuels with biomass for base load power generation is a model that can be replicated in many different forms around the world.
To be able to fulfill our long term contracted demand.
We and our sponsor continue to work on adding and developing new production in terminal capacity.
To that end.
Within the partnership.
Expansions are underway at our north Hampton, South Hampton facilities.
And the health plan.
Which we recently acquired.
No operating.
Collectively these projects are expected to increase the partnership's production capacity to about 4 million metric tons per year.
And balance the partnership's booked through 2025.
The newly announced contracts, which are sponsor expects to become from the next few quarters.
And the firm contracts previously signed by the sponsor and its development joint venture.
Total 3 million metric tons per year.
Combined with our long term contracted position of approximately 3.5 million tons per year today.
We expect to supply approximately 6.5 million metric tons per year by 2025.
This incremental long term contracted demand underwrites not only the expanded production up the sponsors currently operating Greenwood Plaza.
And the proposed new steel plant you have heard us talk about.
But also to additional build and copy plans around our sponsors deepwater terminal under development at the port of Pascagoula.
This brings the visible dropdown inventory of fully contracted assets at the sponsor to four plants in a port.
It is our expectation that each of these will be made available to the partnership or acquisition.
With the preponderance of our growth coming from these accretive acquisitions from our sponsor.
Complemented by organic growth and expansions within the partnership.
We believe we will be able to stay up late and sustainably.
<unk> per unit distribution growth consistent with our past track record well into the future.
On that point.
That will take some time to detail the financial results.
But the quarter shaped up largely as we discussed on our last call.
With the second quarter being a step up from the first quarter.
And we continue to expect the second half of the year to be a step up over the first half.
The seasonal factors now largely behind us.
We expect our performance for the remainder of the year to put us inside our previously announced guidance range.
A 140.7 million to $148.7 million of adjusted EBITDA.
Given our confidence in the underlying business and our expectations for full year 2019 and beyond.
Our board declared a quarterly distribution of 66 cents per unit for the second quarter of 2019.
Representing the partnership's 16th consecutive distribution increase.
And maintenance of a mid teens distribution CAGR since our IPO.
I will also note that the partnership continues to expect to distribute at least $2.65 per unit for full year 2019.
And to distribute between $2.87.
And $2.97 per unit for full year 2020.
I will take some time at the end of the call to provide an update on the long term market drivers and activities taking place at the partnership and our sponsor.
To meet the significant opportunities ahead of us.
But I would like to now hand, it over to shy to discuss our second quarter financial results.
Thank you John .
Well the second quartile 2019, net revenue was $168.1 million.
But there's nothing an increase of 24% over the second quarter with when you do.
Well it doesn't revenue was $167.2 billion as compared to product sales revenue of one of his there'll be $3.2 million for the second quartile block deal.
Well the quartile, we sold 869000 metric tons of wood pellet this compared to 699000 metric tons in the second quartile to anything.
The increase in product sales revenue was primarily attributable to a 24% increase in sales volume.
Gross margin was $60.5 million for the second quarter till 2018 as compared to a gross margin of $19.8 million for the same period in 2018.
Adjusted gross margin was $28 million for the second quarter, putting acting as compared to $25.6 million for the second quarter of 2018.
Doesn't go small just a metric dawn well is that it still doesn't 26 cents for the second quarter of 2019, this compared to $36.63 for the second quarter of two anything.
It doesn't go small didn't the metric dawn decreased primarily due to increased cost attributable to seasonal effect, though.
Goodwill, most significant and long lasting than during the second quarter of 2018.
But as of the end of the second quarter. This season effect those will largely behind us.
Net loss for the second quarter of 2019, well $3.8 million as compared to net income of $2.5 million for the second quarter of anything.
Adjusted net income for the second quarter of 2019 was $7 million as compared to adjusted net income of $2.7 million for the second quarter of 2018.
Adjusted EBITDA for the second quarter of 2019 was $27 million as compared to $21.1 million for the second quarter till 2018.
The increase in adjusted EBITDA was largely due to higher sales volume and $11 million then they say fee waiver, which were primarily associated with them. The dropdown transaction you have till 2019.
Yes, there was no cash flow pilots any distribution if it wasn't booked incentive distribution rights. They told you know about NIM was $17.2 million, which results in the second quarter and putting it into submission coverage ratio <unk> 0.65 time.
The coverage ratio for the second quarter of 2019 was negatively impacted by the units issued to brief on the Hamlin dropdown transaction and expansion projects. It's all know kimpton felt into production plan.
We anticipate that the Hamlin reduction plan will benefit the operation that we think would still well till 2018.
And expansion project at the no attempt on adult into production Glenn.
Well then if he thought operations beginning with the second half of 2020 subject to receiving the necessary permits.
Below the previous year and that's discussed on our last call. The partnership expects adjusted EBITDA and distributable cash flow for the second half of 29 game to be significantly higher than the first half of the year any particular, though for the fourth quarter to be stronger than that.
Well number one in perspective due to the expected benefit from that but it would be needed to be able to tell plan and the production from the family plan, we expect to sell approximately 2 million metric tons. During the second half of 2019.
From a margin perspective, we expect the second half to be significantly stronger than the first off with the west coast reverting to historical level.
Strong margins from them that plan.
Grant the fixed cost absorption.
And improved pricing due to our customer offtake contract mix.
It's not as though the partnership real friendly Julio 2019, adjusted EBITDA guidance range of 140.7 million to $148.7 million.
And who are you 2019, distributable cash flow guidance range of 92 million to $100 million bio blended distribution that it wasn't what incentive distribution rights baseball general partner.
Before I was wondering if I'm doing the partnership continues to expect to distribute agreed to do a lot of the 65 cents per common.
From a liquidity perspective at the end of the second quarter 2019, we had approximately $5 million of gasoline, we wanted to $66.5 million drawn on our $250 million revolving credit facility.
The increase in revolving borrowing and decrease in cash on hand in the second quarter of 2019, Oh due primarily to funding over the first and second payments in connection with the other transaction.
The second payment for the Wilmington terminal.
Well its capital expenditures associated with them and plan and expansion projects at Bell South Hampton Inn, multi symptom reduction plan.
As John just mentioned.
The 3 million metric tons per year of Japan. These contracts, we know sports they've signed over the last 18 months.
We'll give the partnership opportunities to acquire additional fully constructed production and terminal facilities from a spill over the next few years.
As we position the partnership to finance these activities.
Maintaining a balanced capital structure and conservative financial policy will remain a key focus.
They'll fall we continue to target is 50 50 equity desperate for these activities.
Any distribution coverage ratio of one to two time Warner forward looking general basis, taking into account expect Asia to distributable cash flow for the next well go to <unk>.
Now I would like to turn it back to John .
Thank you Shai.
The new contracts, we in our sponsor just announced significantly expanded our contracted position.
With the newly executed albumin contract the weighted average remaining term of the partnership's offtake contracts now stands at 10.4 years.
Our revenue backlog is $9.6 billion.
And our current book is well balanced or at least 2020 thought.
Including volumes under the firm and contingent contracts held by our sponsor and its development joint venture.
Which we would expect to be made available to the partnership.
Our weighted average remaining contract term and product sales backlog would extend to 13.2 years at almost $18 billion respectively.
The scale of our off take book is not surprising because time and time again when policies related to biomass have been considered.
Regulators and other key government actors around the world have confirmed the environmental benefits of biomass.
And the fact that enviva and its customers are reducing the lifecycle greenhouse gas emissions of energy generation through the use of biomass.
The policy review process has been a rigorous.
Taking into full account the perspectives of a broad range of stakeholders, including scientists.
Academics.
Environmental Ngs forced owners utilities and the broader voting electric.
And the voice of the World has been clear.
Sustainable biomass is a carbon neutral fuel source.
That's what the U.S. EPA is concluded under both Republican and Democratic administrations.
That's what the E. U is concluded under both Red one and read too.
And that conclusion continues to be reflected in national policies in the UK and across Europe .
As well as in Japan, and South Korea.
Biomass is a key component in all pathways articulated by the United Nations IP cc needed to achieve the 1.5 degree Celsius goal limiting climate change.
Several additional policy developments around the world continue to support that conviction.
In Japan, the cabinet approved a plan to reduce greenhouse gas emissions to zero as part of its strategy to fight global warming.
In addition, the South Korean government recently adopted its third basic energy plan, which called for an increase in the share of renewable power generation to 30% to 35% by 2040.
Up from its previous goal of 20% by 2030.
The government also confirmed as policy that would lead to the ultimate phase out of coal and nuclear generation.
In June .
The United Kingdom became the first major economy in the world to pass the launch of Green greenhouse gas emissions to net zero by 2050.
Meanwhile, the newly elected President of the Commission also announced the goal to make Europe . The first climate neutral confidence by 2050.
This enhanced you climate goal further reinforces policymaking countries like Germany.
When the government recently announced that it expects to adopt into law by early 2020 .
The coal Commission's recommendation to phase out coal by 2038.
With increased certainty around the timing of the expected end of coal markets are responding.
For instance.
Ooh carbon prices are up fivefold since 2017.
With many forecast, suggesting you further doubling in price.
We believe that in combination with the regulatory environment in Europe .
The so called cost of coal evidenced by carbon pricing or taxes.
Grades additional economic incentive.
The customers to drive coal out of the system more quickly.
Like Weve seen in the United Kingdom and Denmark.
With that.
The need for Dispatchable heat and power will accelerate biomass conversions in markets like Germany, and Poland that had been particularly heavy coal users.
Our continued growth in existing markets in Japan in northwest Europe , and the UK.
Complemented by inbound sales inquiries from new geographies like Germany.
Poland, Taiwan, South Korea, and other island Nations.
Suggests robust long term market demand for biomass that goes well beyond our existing contract backlog.
As I mentioned earlier on the call. We in our sponsor will have the opportunity to invest into new production in terminaling capacity in order to fulfill our combined long term contracted demand approximately six and a half million tons per year by 2025 up from three and a half million tons per year today.
The partnership is progressing the expansion projects at our existing north and South Hampton production facilities as detailed engineering is in process major pieces of equipment are being delivered.
And site preparation work is advancing.
The partnership expects to complete the construction of the expansion activities in the first half of 2020.
We started up thereafter subject to receiving our final permits.
Projects like these are expected to be highly accretive.
At our operations and development teams continue to evaluate new opportunities to drive organic growth and capacity expansions.
The US Department of Commerce recently announced a 10 million dollar grant to build the biomass storage dome. In addition to the current warehouse at Port Panama City.
This would increase throughput capacity for enviva support and potentially allow the partnership to consider production expansions in that region.
With respect to development at the sponsor level.
Where the preponderance of our capacity growth has occurred historically.
Our sponsors received the final permits for both the terminal at the Port of Pascagoula handily steel production plant.
In addition.
The sponsor continues to evaluate the potential for build and copy wood pellet production plants and EPS, Alabama.
And at other sites in Alabama and Mississippi.
That would export wood pellets to the past Waterman.
These are of course complemented by additional activities evaluating potential production sites around the partnership's existing terminal facilities and Wilmington, North Carolina.
In Chesapeake Virginia.
By design the expectation is that all of the assets developed by the sponsor and its joint venture as well as the related contract backlog will be made available to the partnership for dropdown acquisitions.
As we continue to grow sustainability remains the foundation of our business and the core of our value proposition.
Our industry leadership is not defined solely by the size and scale of our global operations, but also by our unparalleled sustainability practices.
You may have seen that we and our sponsor recently announced our revised responsible sourcing policy as part of a long standing pledge to continuously improve environmental performance.
The revised policy was developed in conjunction with independent organizations, including environmental Engineers.
Hey, wildlife agencies, Foresters and other community stakeholders.
Ongoing collaboration with these independent organizations has resulted in tangible specific goals and implementation plans.
That will be reviewed twice annually to track progress.
I would also point out the latest data from a track and trace system.
This is a proprietary and unique system in the broader wood products industry that provides unmatched transparency into our fiber procurement.
We track and trace we track every ton of Woodfibre, we procure on a primary basis from the landowner all the way through to our customers.
And Paul was all the characteristics of the tracks from which we procure including the source of the wood fiber.
The forest track details age classes and species mix.
We also monitor how much of a harvest came to enviva as low grade fiber.
And just as importantly, how much went to others in the wood products industry.
It's pretty rare.
It's not unique.
For a company to be able to identify not only what raw material it bought.
But also understand.
What happens to the material it didnt buy.
This level of transparency.
Gives our customers and regulators around the world comfort in the sustainability of our activities and our ability to reduce lifecycle greenhouse gas emissions.
Since we began deliveries of wood pellets in 2011.
In markets like the United Kingdom.
Coal consumption has decreased from 51 million tons in 2011 to just 13 million tons last year.
Meanwhile.
Forced acreage enforce inventory grew substantially.
As our track and trace data highlights there are 262000 more acres of forest land and 270 million metric tons more standing wood fiber in the areas in which we operate over just the same short period from 2011 to 2018.
At Enviva, our purpose is to displace coal and grow more trees and it's clear we are making a difference sustainably.
In sum the second quarter is now on the books would result, largely as expected.
We believe we will end the year with strong operational and financial performance and continue our track record of increased distributions.
Longer term with the new contracts announced by our sponsor we are aligned on growing and extending the runway for sustainable durable cash flow generation.
The level of growth and stability that we were able to achieve as an enterprise is made possible by the dedication and hard work of the great people that enviva.
We're keeping our plants.
Ports and most importantly, each other.
Hey, 24 hours a day.
365 this year.
Thank you.
Operator can you. Please open the line for questions.
Absolutely we will now begin the question and answer session.
To ask a question your press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
So much our next question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
Today's first question comes from Brian Maguire of Goldman Sachs. Please go ahead.
Hi, good morning, everyone and congratulations on the new contract wins.
Thank you very much it's a really important step workforce.
I just had a question on the.
Some of the seasonal costs in the quarter.
I understand the year is still sort of playing out relatively how you expected.
It seemed like the gross margin per time gross profit over time with a little bit lower.
Just wondering if you could explain some of the seasonal costs that you are experiencing maybe how much of it was related to the hamlet ramp up versus higher fiber cost and considering I think a lot of your contracts are cost pass through in nature.
Is this something that we should sort of expect from time to time.
No a great question I think is.
As we articulated on our call for Q1.
Given the very intense rainfall and wetter weather season that we experience coming through the first part of the year.
That did drive up the cost of deliberate fiber.
As we described in both our prepared remarks in our release as we kind of came to the second quarter that is now largely behind us and again I would suggest that this the straddle a 2018 to 2019 was certainly much more significance and much lengthier than we've seen historically.
That's now behind Us and certainly I think as we described on our call in.
With respect to Q1 Q2 was going to be an important step up I think we just demonstrated that and certainly with the addition of the hammer plant.
The larger sales volume that we expect in the second half of the year.
We'll be continuing fairly strongly into the big step up to age over over first half of this year I think I can provide some better visibility into and AG and walk as well and thanks John .
So as John mentioned for the rest of the way, we expect to see improvements coming from generally from full bucket.
If you will.
We expect to bring.
They GM that will unfold the folio back to its normal range.
The first is that we mentioned all of you on the call, but there is that we're expecting much greater fixed cost absorption.
With the expectation that we were going to sell and produce around 2 million tons. During the second half of data so thats a significant.
Uplift compared to the first half of deal we have been expecting wood fiber cost for the second half of 2019.
To revert back to historical levels.
So we are expecting roughly four to $5 per metric ton improvement over the first half.
We're expecting both biting due to customer Allstate contract mix.
And as John just mentioned, we also of course expecting the benefits from Domba eminent blend that we felt benefit go basin. During the second half. So we'll deal efforts into during the first half of deal.
As the first quarter, the first quarter that we just acquired the them that the production plan.
And combining dentek, taking the income and combined them taking into account their DNA. We expect did expect us to put us in a range of between $90 million to $100 million of.
Overall, adjusted EBITDA and getting us back to the guidance that we just provided.
Okay. So it sounds sounds like you sort of on track to exit the year with a fourth quarter EBITDA that implies a run rate close to 200 million or so of EBITDA.
I understand there is some seasonality in fourq is usually a little bit better than expected.
And then next year, you've got the mid Atlantic expansions and full year hamlet ramping I think in the past you talked about a 2020 EBITDA number that north of 200 million of EBITDA is that still.
Your expectation should we still be targeting that.
Yeah for clarity, we the guidance. We previously provided indicated that we would be exiting 2020 at a run rate of $200 million.
Got it.
And then.
One last one for me.
Yes, I think there's a lot of growth.
In the pipeline a lot of growth capital sort of going to be needed.
Yes, now that the IDR is our sort of in the high splits.
You have a relatively high cost of capital equity just wondering if you are the partnership that having any discussions around restructuring the IDR is either changing the.
The split terms or maybe potentially buying them out considering.
How expensive they sort of are at this point.
The.
I mean look the we're certainly mindful that others in the broader sector have undertaken.
IDR restructuring or simplification transactions I think I think as we continue to look at it. It's an evaluation of what problem, you're trying to solve and what I'd suggest is that you know historically, including for the five quarters now that we've been in hospital as we've been able to demonstrate a mid teens distribution CAGR and that's one that given the the now four plants at a port that are upstairs at the sponsor one that we would expect to be able to continue largely that's driven by the underlying both cost of development and cost of acquisition being fundamentally different and lower transaction multiples that you see elsewhere in the world. We don't see anything today standing in the way of of our ability to continue to grow.
To grow our distributions at our historic rates.
As as and when that changes or were certainly the dynamics of investment and acquisition change that would be something to consider but with a robust pipeline the alignment of interests given the tremendous amount of investment that doesn't need to occur.
That alignment is is part of a key driver of what will drive continued per unit increased in our distribution.
Okay. Thanks very much.
Yes.
And ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one at this time.
Today's next question comes from Pavel Molchanov of Raymond James. Please go ahead.
Thanks for taking the question.
Taking a kind of a high level perspective on.
Japan, and Germany. So the two countries have very similar levels of coal generation about 40, Gigawatts each Germany has the official phase out Japan does not.
And yet you've signed 3 million ton of Offtakes in Japan.
But I think at this point, none or very little in Germany, and I'm curious what accounts for that for that gap.
Hi, Bill that's a that's a great question what would I think we see happening in Germany. Today is much the same that happened in the United Kingdom in other parts of Europe .
First as Red one came into effect and now with with the Tailwinds of read too and the IP Ccs continued emphasis on the importance of base load Dispatchable energy, principally driven by biomass and ultimately of course, Germany has elected also to shut down its nukes I think that the Japan's current industrial policy would expect some of those to return.
The Germany, I think is now facing a fairly significant and steep hurdle to mitigate the implications of reducing their coal fleet at the same time as the very few alternatives exist for the generation of Dispatchable electricity and so what we see is probably the next 18 to 24 months as the coal commissions.
Recommendations now become legislated into law, which is I think the expectation that the early twenties wondering on that.
The customers and the and certainly the reverse inbound that we get associated with utilities of a mind to exercise conversions or or newbuilds of biomass generation capacity, we'd expect to be entering into contracts and that same 18 to 24 month period.
As weve kind of size the market in the past we would suggest that that's no five to 10 million ton market.
And we expected to be getting after that pretty quickly here.
If I look at the backlog the existing offtake agreements that you have Japan, obviously being that the center piece by virtue of others as well and now beyond the your existing production facilities.
How many plants would you need to happen total is it the number close to 15 accurate.
Yes the.
What I would I think Weve described here is that we've.
With the contract backlog that we have now created at both the sponsor as well as the partnership.
Weve underwritten now an incremental four plants in a port upstairs at the sponsor and with the tremendous pipeline that we have ahead.
Which is we just kind of done a little bit of a walk on the waterfront between whether its Germany, Taiwan, South Korea incremental Japan broader northwest Europe .
Poland et cetera.
You can see very clearly a very long runway to incremental plan development, which is wise as we can continue to communicate the opportunities for new plants and newbuilds.
We will continue to be expanding our operations throughout the southeast us with incremental plans imports potentially built to supply that demand.
And again focused on on in and around our existing terminal infrastructure as well as our recently announced basketball terminal and potentially beyond that.
Okay. That's helpful.
Appreciate it.
Thanks, very much for them.
And ladies and gentlemen, this concludes our question and answer session I'd like to turn the conference back over to John Cooper for any final remarks.
Well I want to thank everybody for joining US again today as you know I'm very fond of saying, we're just getting started certainly this quarters financial results the tremendous backlog we've built.
It's absolutely still the case, we're looking forward to telling you about our continued progress and thanks for being a part of India.
Thank you Sir todays reference today's conference has now concluded we thank you for attending today's presentation. You may now disconnect your lines and have a wonderful day.