Enviva Partners, LP (NYSE:EVA) Q4 2019 Earnings Conference Call February 27, 2020 10:00 AM ET
Ray Kaszuba – Senior Vice President, Finance and Treasurer
John Keppler – Chairman and Chief Executive Officer
Shai Even – Chief Financial Officer
Conference Call Participants
Derrick Laton – Goldman Sachs
Pavel Molchanov – Raymond James
Good morning, and welcome to the Enviva Fourth Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.
I would now like to turn the conference over to Ray Kaszuba. Mr. Kaszuba, please go ahead.
Thank you. Good morning, and welcome to Enviva Partners, LP fourth quarter and full year 2019 financial results conference call. We appreciate your interest in Enviva Partners, and thank you for participating today.
On this morning’s call, we have John Keppler, Chairman and CEO and Shai Even, Chief Financial Officer. Our agenda will be for John and Shai to discuss our financial results released yesterday and provide an update on our current business outlook. Then we will open up the lines for questions.
Before we get started, a few housekeeping items. During the course of our remarks and the subsequent Q&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 our 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 reconciliation of these non-GAAP measures to their most directly comparable GAAP measures and other relevant disclosures are included in our press release issued yesterday.
I would now like to turn it over to John.
Thank you, Ray. Good morning, everyone, and thanks for joining us today. Every quarter since our IPO in 2015, you heard me focus on operational excellence and sustainability as the foundation for extending our track record of meeting or exceeding our guidance, as well as we’re driving long-term growth, diversifying our contracted position, strengthening our visible drop down pipeline, and reducing our cost of capital.
Based on the financial results published in the 10-K and earnings release issued yesterday, you’ve seen that we had a strong close to 2019, booking another quarter of record adjusted EBITDA on well over 1 million metric tons of wood pellet sold.
For the full year, we delivered adjusted EBITDA and distributable cash flow in line with our guidance, and the second half was a significant step-up from the first consistent with the profile we laid out earlier in the year.
This solid operating and financial performance enabled us to increase our quarterly distribution for the 18th consecutive quarter to $0.675 per unit at a coverage ratio of 1.59 times. For the full year of 2019, we’ve now declared distributions totaling $2.65 per unit, again consistent with our guidance.
With the Northampton and Southampton expansion projects expected to begin ramping in the second and third quarters of 2020 respectively, the continued ramp up a production that the Hamlet plant and the organic growth we expect out of our base business. The partnerships production assets have positioned us to generate between $165 million and $175 million of adjusted EBITDA for 2020, without the benefit of any incremental drop-downs or other acquisitions.
Given our highly visible drop-down pipeline, underpinned by firm long-term offtake contracts held in our sponsor. We believe we’re well on our way to doubling our 2019 adjusted EBITDA in just a few years.
With the two new Japanese contracts we just announced, which call for an additional 420,000 metric tons of wood pellet each year. The partnership and our sponsors combined contract book is expected to grow to close to 7 million metric tons per year in 2025. We’re just about evenly between Europe and Asia.
This brings the weighted average remaining contract term and product sales backlog as a partnership and our sponsor to 13.8 years and almost $20 billion respectively.
The significant book of signed contracts will require our sponsor to develop additional production and terminal assets beyond the terminal entry plans we have discussed in the past and by design, the partnership expects to have the opportunity to acquire these assets can be associated contracts.
Shai will take some time to discuss our recent financing activities, but our balance sheet as well as our access to and cost of capital set the stage for further growth and dropdowns.
I will take some time at the end of the call to provide a more detailed update on the long-term market drivers and development activities taking place at the partnership and our sponsor. But first, I would like to hand it over to Shai to discuss our financial results and tell you more about what we did in the last quarter to position the partnership to capitalize on the significant growth opportunities ahead of us.
Thank you, John. For the fourth quarter of 2019, net revenue was $225 million, representing an increase of 18.9% over the corresponding quarter of 2018. Product sales revenue was $195.3 million as compared to product sales revenue of $166 million for the fourth quarter of 2018. For the quarter, we sold approximately 1.041 million metric tons of wood pellets as compared to pellet sales of about 874,000 metric tons in the fourth quarter of 2018.
Gross margin was $28.2 million for the fourth quarter of 2019 as compared to gross margin of $24.5 million for the corresponding period of 2018. Adjusted gross margin was $55 million for the fourth quarter of 2019 as compared to $31.7 million for the fourth quarter of 2018.
Adjusted gross margin per metric ton was $52.83 for the fourth quarter of 2019 as compared to $36.23 for the fourth quarter of 2018. The increase in gross margin and adjusted gross margin was principally due to higher sales volume, higher pricing due to customer contract mix, slower production cost, and lower wood fiber cost.
Net income for the fourth quarter of 2019 was $0.9 million as compared to net income of $9.4 million for the fourth quarter of 2018. Adjusted net income, which is adjusted for items like $9 million associated with early retirement of our senior notes due 2021 and the benefit of the MSA Fee Waivers was $17.2 million for 2019 as compared to adjusted net income of $14.3 million for the fourth quarter of 2018.
For the fourth quarter of 2019, the partnership generated adjusted EBITDA of $53.3 million, our highest ever as compared to $33.8 million for the fourth quarter of 2018. The increase in adjusted EBITDA was primarily driven by the same factors that resulted in the increase in adjusted gross margin.
Distributable cash flow prior to any distribution attributable to incentive distribution rights paid to our general partner was $39.4 million, which results in the fourth quarter 2019 distribution coverage ratio of 1.59 times.
Reaching to the full year 2019, net revenue was $684.4 million for the year, representing an increase of 19.3% over 2018.
Product sales revenue was $674.3 million, as compared to product sales revenue of $564 million last year. For the year, we sale approximately 3.6 million metric tons wood pellet, as compared to pallet sales of about 3 million metric tons in 2018.
Gross margin was $81.1 million for the full year 2019 as compared to gross margin of $69.4 million in 2018, an increase of approximately $11.6 million. Adjusted gross margin was $151.6 million for the full year 2019, as compared to 115.8 million, for the full year 2018.
Adjusted gross margin per metric ton was $42.54 for 2019, as compared to $38.81 for 2018. They increase in gross margin and adjusted gross margin, were primarily due to higher sales volume, higher pricing due to customers contract mix, lower production costs and lower wood fiber costs.
Net loss for 2019 was $2.9 million, as compared to net income of 7 million for 2018. Adjusted net income, which is adjusted for items like, the $9 million associated with the early retirement of the 2021 Senior Note. And the benefit of the MSA Fee Waivers was $33.4 million for 2019, as compared to adjusted net income of $22.2 million in 2018.
For the full year 2019, the partnership generated adjusted EBITDA of $141.3 million, as compared to $102.6 million, for the full year 2019. The increase in adjusted EBITDA was primarily driven, by the same factors that resulted in that increase in adjusted gross margin.
Distributable cash flow, prior to any distributions attributable to incentive distribution rights, paid to our general partner, was $98.5 million for the full year 2019.
As a reminder, we tend to focus on, the equity portion of the capital needed for drop-down and expansion file to realizing the full benefits of this transaction, like we did, with the unit issuance in the first half of 2019, for the Hamlet Drop-Down and the Mid-Atlantic Expansions.
So we target a distribution coverage ratio of 1.2 times, on the forward looking annual basis, shifting now to 2020 guidance, with the expected ramp-up of the production capacity expansion at Northampton and Southampton plant, in the second and third quarter respectively. The continued production increases at the Hamlet Plant, through the year and organic growth in the base business.
The partnership expects full year 2020, net income to the in the range of 43.2 million to $53.2 million. Adjusted EBITDA to be in the range of $165 million to $175 million and distributable, cash flow to be in the range of $119 million to $129 million, filed to any distributions attributable, incentive distribution rights, payment to general partner.
Based on these expectations, the partnership reaffirm our prior guidance to distribute between $2.87 and $2.97 per common unit for full-year 2020.
The full year 2020 distributable cash flow, net of amounts attributable to incentive distribution rights, is expected to cover the aggregate declared distribution for full year 2019 consistent with the Partnership’s distribution coverage target of 1.20 times on a forward-looking annual basis. The guidance amount, do not include the impact of any acquisitions or drop-down
As we’ve said in the past, seasonality and the mix and timing of customer shipments can impact results, which may vary from quarter-to-quarter. As such, we expect 2020 to look a lot like previous years, including 2019 while the back half was a significant step-up from the first half and in some quarter’s distribution coverage below one time.
As we’ve described previously, our Board evaluate our distribution and coverage on an annual basis. In early December the Partnership successful issued $600 million of senior unsecured bonds due 2026. Issuance term were well received by the invested community, as evidenced by the up-sizing of the initial issuance from $450 million to $550 million, which was then followed by a $50 million tech on offering.
The net proceeds from the new bond we use to redeem existing 8.5% 2021, lowering the cost of our term debt by more than 200 basis points and fully paid the borrowing under our $250 million revolving credit facility. As a result, at the end of 2019, we had approximately $9 million of cash on hand with no balance outstanding under revolver.
Going into 2020 with full capacity available under our revolver, we are well positioned to further execute on our growth strategy while employing our conservative financial policies. Specifically, we continue to expect to maintain a leverage ratio of 3.5 to 4 times a balanced capital structure, 50-50 equity debt split for drop-down acquisition and major expansion, any distribution coverage ratio of 1.2 times on the forward-looking annual basis for 2020.
We believe our strong balances sheet combined with our conservative financial policy will serve as well as we focus on growing the positive cash flow and scale. We will also want the next potential credit rating update and seek to further reduce our long-term cost of capital.
Now, I would like to turn it back to John.
Thanks, Shai. The partnerships contract book continues to be well balanced through at least 2025. With the addition of the recently executed 270,000 metric tons per year contract with a biomass fire power plant sponsored by the Equis Group, the largest independent infrastructure investment manager in Asia. The weighted average remaining term of the partnerships off-take contracts now stands at 11.4 years.
And our revenue backlog is $10.6 billion, including volumes under the firming contingent contracts held by our sponsor and its development joint venture, including the newly executed contract with another major Japanese trading house. Our weighted average remaining contract term and product sales backlog would extend to 13.8 years and almost $20 billion, respectively.
This significant demand for our product is driven by the increased efforts around the globe to push for firm commitments phase out coal, limit the impact of climate change, and cut greenhouse gas emissions to achieve net zero by 2050. These commitments, and the corresponding incremental policies and action plans, underpin the continued strong growth expected in global demand for biomass.
The recently announced European Green Deal, which aims to decarbonize the European Union’s entire economy, and transform the EU into the first climate-neutral continent by 2050 is a great example. Against this backdrop, we recently hired a general manager for the continent and a country manager in Germany to accelerate our sales efforts and strengthen our customer fulfillment organization in support of our growth in Europe.
More specifically within the EU, both the lower and upper houses of the Dutch government have now passed the law to phase out coal fired power generation by 2030. The Dutch government has committed to a new incentive program for renewable energy, the SDE ++, and confirmed that biomass-based technologies are eligible to participate in this new program.
In Germany, the government continues to progress the implementation of the coal commission’s recommendations in many German cities including Berlin, Frankfurt, Hamburg, and Munich have set regional full phase-out targets, ranging from 2022 to 2030, well ahead of the national mandate of 2038. We expect those market drivers to yield incremental long-term off-take contracts beyond what we and our sponsor have already signed.
And with the scale and reliability our leadership and sustainability practices and our sponsors robust development pipeline has earned the Enviva brand increasing recognition in the market as demonstrated with the substantial long-term off-take contracts we’ve signed over the last year.
As our contract backlog expands and diversifies with continued growth in markets in both Europe and Asia, our sponsor continues to develop additional production in Terminal facilities, which we expect to have the opportunity to acquire.
As you know, construction is currently underway at the Lucedale plans and the Pascagoula Terminal, and our sponsor is completing development activities and expects to make a final investment decision for the Epes plant and the first half of 2020. In addition, our sponsor has filed permit application require to increase production capacity, and it’s currently operating Greenwood plant to 600,000 metric tons per year.
We’ve said all of these assets, along with the assets that will be needed to fulfill the contract that backlog held by our sponsor to be made available to the partnership for drop-down.
As we continue to grow, we remain focused on driving our sustainability efforts, not only to provide for the transparency, but also to have a meaningful impact on conserving forests and growing more trees in the areas in which we operate.
Our Track & Trace program is one of our signature tools. And we continue to innovate in this industry leading supply chain transparency program. For instance, we’ve begun testing blockchain technology with our wood suppliers to provide an immutable auditable ledger, to provide incremental verification and certainty around the origin of our feedstock that goes all the way back to the specific point of harvest in the forest.
Following through on our commitment to transparency and stakeholder engagement, yesterday, we published our first year end impact report under the responsible sourcing policy, in which we have reported on the progress and the impact we’ve made putting our policy into action.
Through collaboration with several partners, we made significant progress in implementing each of the provisions under our RSP. For instance in 2019, we launched and then expanded a pilot longleaf restoration program, and rolling more than 1,000 acres. In close collaboration with our conservation partners and the environmental community, this program harvests low-grade wood from challenged forest tracts in order to enable the restoration of longleaf pine and its associated high-quality wildlife habitat to that specific landscape.
So this is only the start. This restoration work, combined with our ongoing program to protect sensitive bottomland ecosystems via the Enviva Forest Conservation Fund, enables us to work hand-in-hand with our environmental, state, and community stakeholders to create better outcomes for forests, carbon and biodiversity.
In addition, and for the first time, we enrolled more than 14,000 acres of forest land into our FSC Certified Forest Management Group. This helps landowners develop and publish long-term sustainable forest plans for their forestland. And we also developed a methodology for monitoring post-harvest forest regeneration through satellite and remote sensing technology, which greatly enhances our ability to analyze forest health on the tracts from which we receive wood.
This is pretty important and has a direct impact on improving the greatest natural asset we have in the effort to fight climate change, which is healthy, growing forests.
Close out the call, we continue to be a company focused on clearly laying out our goals and then going out and accomplishing those goals, maybe even doing a little better. We exited the year by delivering results for the fourth quarter and full year 2019, exactly as we said we would
For 2020, we expect to deliver adjusted EBITDA between $165 million and $175 million and to distribute between $2.87 and $2.97 per unit, before considering the benefit of any drop-down acquisition opportunities, a fully contracted plants imports that we expect to be made available from our sponsor.
With a combined contract backlog that’s grown by a third in just the last year, standing now at almost $20 billion and a balance sheet that has never been stronger. We’re well positioned to more than doubled 2019 adjusted EBITDA over the next few years.
In conclusion, I’d like to thank all the great people in Enviva for their hard work in 2019 and for their continued dedication in 2020 and beyond. Thank you.
Operator, can you please open the line for questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Brian Maguire with Goldman Sachs. Please go ahead.
Hey, this is Derrick Laton on for Brian.
Hey, good morning, Derrick.
Hey, good morning. Thanks for all the details. And I think the 2020 guidance on EBITDA makes sense. I think you guys have mentioned maybe previously that the 2021 EBITDA range, you could expect maybe between $210 million and $240 million, just assuming you get Hamlet in the Mid-Atlantic expansion projects coming through there. Is that kind of the right way to think about the medium-term growth opportunity for you guys?
So Derrick, thank you very much. As you heard us talk about in our prepared remarks and we did reaffirm the guidance we gave for the $2.87 to $2.97 very consistent with uptick in EBITDA you articulated and nothing in the trajectory of the business has changed. And clearly, as we’ve mapped out, our trajectory of being on a path to double the 2019 adjusted EBITDA is pretty exciting. So, I think that’s the right way to look at.
Okay. Thank you for that. And then, I think the midpoint of the 2020 distribution guidance that you reaffirmed implies about a 10% increase in the distribution is pretty sizable there relative to the last couple of years. Is that kind of the right way to think about that going forward as you continue to grow maybe in the high single digits or low double digit even our distribution growth?
Certainly, if you look historically, that’s right in line with what we’ve done historically and I think that’s a reasonable trajectory going forward.
Okay. And then just last one for me, just the EBITDA margin expansion is pretty sizable in the fourth quarter. Looks like you guys are benefiting pretty nicely from the operating leverage and some cost savings. I’m just thinking about other areas for margin opportunity in 2020? You did mentioned in the commentary around the outlook, the expectation for, is a price increases on the long term contracts. Is that more related just a typical inflationary offset increases? Or are there any additional pricing opportunities out there for you this year?
So, when we talked about the organic growth inside the business, the range we look at is roughly 7% to 10%. And that’s really driven in three buckets. One is, the headline price increases that we see in our long term contracted position that occur year-on-year. As well, we look at productivity improvements inside the plant where our production teams have very specific continuous improvement targets that really drive additional operating leverage and capacity expansions inside that on a very low capital cost basis.
And then, there’s the cost reduction that we see just given the continued scale of the business and our ability to drive costs down to the business. Those are really the three buckets and as you pointed out, those are important part of the overall margin uplift. There’s nothing unique this year. That is pricing specific though.
Okay. Got it. I’ll turn it over. Thanks, guys.
The next question comes from Pavel Molchanov with Raymond James. Please go ahead.
Thanks for taking the question. So, you referenced Germany again with the coal phase out? Does it surprise you a little bit that it’s been 12 months since the parliament approved the coal plan? And yet, we still haven’t really seen any actual contracts for pallets from German power companies?
Actually, not at all. I think we’ve tried to be pretty consistent in our expectations around the market development. And frankly what we see and what we tried to talk a little bit in the prepared remarks is that the cities are being even more aggressive and sort of the national level of Parliament focus on the exit. And where you see cities like Hamburg and Berlin setting even more aggressive targets that will exit their hard assets well in advance of the 2038 mandate, we continue to be pretty excited about that.
I think the notation that we made of putting people in Germany; we’ve got a country ahead in Germany, that’s being stopped out. And we remain in direct dialogue with many of the major utilities on exactly their plans for conversions and how we’re going to build the — change deliver product into Germany. Very similar market development strategy that we had for Japan. And as we’ve got previously, we’d expect for initial test deliveries or 12 months contract executions to begin over the next 12, 18, 24 months and deliveries right thereafter.
Okay. And then kind of following up on the Japan aspect, can you just remind us when do you begin deliveries into the Japanese market? If you can provide kind of quarterly guidance on that would be helpful. And what are the volumes in the most near term perspective?
So, a great question, Pavel. Material contract deliveries begin in 2021. And as it will — what we’ll do is, we’ll provide, as we continue to execute the — Shai pointed out a number of these continue to go firm. But by 2025, that ramp between 2021 and 2025, if you look at the $7 million run rate that we talked about, $3.5 million go into Japan in 2025, so 2021 to 2025, zero to $3.5 million.
And then, just to clarify, the $3.4 million that you have in Japan in terms of backlog, that essentially five, planned forth, that the right approach?
I think it’s actually a little bit more than that, because we got — as we got some existing assets that hanging around the hoop at roughly 600,000 tons and then you’ve got the expansions that we have underway in some of our existing facilities. The most recently constructed facility, the Hamlet plant is about 650. As it gets through its full ramp this year, 600 at the end of the year.
And then Lucedale is really more of a 700s plant. And so that’s really the expectation. So we have a range and as that continues to grow, you’ll see the size get a little bit bigger as Lucedale plant is. But again, pretty significant operating leverage, and so we’re pretty excited what’s the backlog represents is that the new —
That’s great. Well done. Thank you guys.
Appreciate it, Pavel. Thank you.
This concludes our question-and-answer session. I would now like to turn the conference back over to John Keppler for any closing remarks.
Well, we certainly appreciate everyone’s time today. Thank you for joining us. As you know, I’m fond of saying that we are just getting started and that is still the case. We look forward to chatting again next quarter. Thank you.
This conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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