Enviva Inc. (EVA) on Q2 2021 Results - Earnings Call Transcript
Operator: Good morning and welcome to the Enviva Partners, LP Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. 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 Kate Walsh, Vice President and Investor Relations. Please go ahead. Kate Walsh: Thank you. Good morning everyone and welcome to the Enviva Partners’ second quarter 2021 earnings 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 and provide an update on our current business outlook and operations. Then, we will open up the phone lines for questions. John Keppler: Thank you, Kate. Good morning everyone and thanks for joining us today. We've actually communicated quite a bit since our last quarter's earnings call. And while it has been an exciting quarter, and one which we achieved the major milestones, I'm also very happy to say it's been a straight down the fairway quarter for us, where we delivered the stable results you have come to expect. Given that, I'll keep my prepared remarks fairly short for this call. While COVID-19 and its various remain ever present in the headlines, we've been encouraged over the last few months to see the world making strides and reopening. Here at Enviva, our people have remained healthy and safe and that has enabled us to keep our plants and ports 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 in adjusted EBITDA. That's a 31% increase in adjusted EBITDA over the same period of last year. We continue to execute on our growth strategy, closing two significant accretive dropdown transactions. These acquisitions increase Enviva's fully contracted production capacity by 14% and increased our deep-water marine terminal throughput capacity by 38%. The projected increase in annual adjusted EBITDA of around $45 million once these assets are fully ramped, translates into an investment multiples of about eight times adjusted EBITDA, again, right in line with past transactions for plants and terminals. Shai Even: Thank you, John, and good morning everyone. As John mentioned, our solid results for the second quarter of 2021 were 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 corresponding quarter of 2020. The significant increase in net revenue is a result of incremental for the sales, as we commence deliveries to new customers and deliver louder volumes to existing customers. Adjusted gross margins for the second quarter of 2021 was $56.1 million, an increase of $14.1 million or 33.4%, as compared to the second quarter of 2020. Adjusted gross margins and net return was approximately $41 for the second quarter of 2021, performed at $49.55 per metric ton in the second quarter of 2020. The decrease in adjusted gross margin for metric ton was primarily attributable to increased purchases of pellets from third parties, that generally as a lower margin than our produced volumes. Adjusted gross margin was also impacted by costs and care during the commissioning of expansion project at a number of outlets. Net income for the second quarter of 2021 was $2.6 million, compared to net income of $8.5 million for the second quarter of 2020. Adjusted net income was $9.8 million for the second quarter of 2021 as compared to adjusted net income of $8.7 million for the corresponding quarter in 2020. As 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 2022. The significant increase in adjusted EBITDA was driven primarily by higher revenue. Although we began signing contracts with Japanese counterparties a few years ago, deliveries into Japan are really just starting to ramp this year. John Keppler: Thanks Shai. From a market development perspective, as you may have seen two 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 in 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 III, further heightened member countries obligations to increase the share of renewables, such as biomass in their energy generation portfolio. RED III proposals also outlined refinements to the sustainability criteria for biomass, and as proposed, they're generally in line with the Enviva’s practices. Another advancement in the EU that is worth highlighting is the constructive carbon price environment that has developed. This November 2020, EU Emissions Trading System prices have more than doubled, allowing energy generated by biomass to be more profitable than carbon intensive feedstocks like coal and 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 transitions the biomass usage. In Germany, following last year's formal adoption of the Coal Exit Law, regulations for long-term financial support to decarbonize district heating networks, with renewable alternatives, including biomass are expected to be finalized during the third quarter of this year, with regulations for dedicated power plants 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 heating power generators into long-term 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 Enviva, where steel mills, cement manufacturers, line producers and chemical plants are evaluating large scale coal to biomass switching. Enviva has delivered multiple test cargoes to large European industrial customers that are piloting biomass as a decarbonisation solution for their operations. Operator: We will now begin the question-and-answer session. And the first question comes from Elvira Scotto with RBC Capital Markets. Please go ahead. Elvira Scotto: So I know you talked about inflation, some inflationary pressures. But can you comment on labor? Are you seeing any impact from labor shortages? John Keppler: So not directly Elvira, as you know, we generally tend to build plants where there are lots of trees in few people. And so what we have is, we like to believe is a relatively stable workforce. Where 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 three or four people per facility. But what you have is given some of the unemployment benefits, 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 apply. But as that has begun to abate, I think that are those entry level applicants that have returned and reasonably enforced. Elvira Scotto: And then I know we've talked about Germany for a while. Can you give us an update there? And then, in your prepared remarks, you note that Enviva has been in commercial or had commercial discussions underway with multiple major utility operators of heating networks and power generation facilities. Can you provide any more granularities on those discussions? And if you were to convert those discussions into contracts, how big that opportunity in Germany in aggregate before Enviva? John Keppler: Yes, absolutely, Elvira. And I think we're pretty excited about the progress that we continue to make in Germany. As you know, that the country that put itself on a path to eliminate and coal as a generating resource similar to the way they've done so on nuclear. And it made some very, very substantive and strong commitments to decarbonisation. I think you'll also note that in the passage of the Fit to 55 package and some of the reason announcements from the German Supreme Court. They're looking for incremental specificity on exactly how and when and how they're going to deliver that massive decarbonization. And so at the Coal Exit Law has now come into force, the regulations that will promulgate and enable both operators have places like district heating networks, that have been principally fired with fossil fuels, to convert to things like things like biomass and so that draft regulation is now out. Frankly, we're pretty excited about it. And the number of the customers within we're working to now have what they believe is a 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've given us an election year, there's probably a little bit of noise around timing on that. But again, all these pieces remain firmly on track given Germany's commitment to decarbonization. And as we look at the total addressable market, we would see the total addressable market in the sort of 5 million to 7 million tons per year range, which should, if you believe that we're able to maintain our overall market position, translate into a couple million tons for Enviva. Elvira Scotto: And then, you also mentioned in your prepared remarks that the global industrial sector is an emerging market opportunity for Enviva. Is there any way you can quantify how big that opportunity could be? And then is that just in Europe or is that opportunity elsewhere like in the U.S. as well? John Keppler: Well, I think that that as jurisdictions around the world, really begin to understand the pricing mechanisms for the carbon intensity of industrial activity. Lots of opportunities will open up -- excuse me, around the world. Of course, Europe is leading, that is as oftentimes they have historically, and reducing remarkable opportunity in the industrial adjacencies. You've heard us talk about steel, demand, line, chemicals, sugar, frankly any one of those markets, and frankly even getting one of those customers in those markets. Like you've heard me reference previously, a single steel company in Europe consumes as much coal as the equivalent wood pellet market as it existed for the industrial generation of power and heat existed few years ago. So you've got not just sort of step functions in market growth and potential, but as industries look at decarbonisation, we're obviously very happy with the test cargos that have been successfully processed for a number of utility or potential industrial customers around the world. We generally tend to see a really robust market in those areas of industry that are very, very difficult to decarbonize. And so tremendous opportunity, again, multiple segments, multiple customers at scale that differently dwarf in industrial wood pellet market as it stands today. Elvira Scotto: And then my last question, I promise, can you provide a little more detail on BECCS? Specifically, how do you see that evolving? And then how does the economics work for Enviva? John Keppler: Yes, so I think, I would characterize it more from our customers' basis itself. Again, we're pretty good at making sure that we deliver the right product at the right time at the right place around the world, and if that's ultimately used in power and heat generation, or ultimately for carbon capture and sequestration or displaced in industrial activities, we're really fueled supply chain partner. But put our customers who are investing very heavily in best approaches, I think that the opportunities out there is given the world focus on net zero, you're going to need negative emission solutions as part of that. And that's available now and 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 as 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 pound range, that's probably something that's on for scale, which is not too far away from where power prices and carbon prices are right now. Operator: The next question comes from Pavel Molchanov with Raymond James. Pavel Molchanov: Thanks for taking the question and appreciate you guys providing the detail about Fit for 55. As relates to Europe, I saw a small off-take agreement in the Netherlands. Is that going to be country number four for Enviva in the European market? John Keppler: So, Pavel, great to talk to you, and thanks. As a practical matter, we've delivered into the large scale utility generating market in the Netherlands for some time. The MOU and delivery that we just announced into the Netherlands, yesterday, really are focused on a new segment. And again, that's a focus on the industrial segment in Netherlands, an area that that particular country has been intensely focused on is. As you may recall, they have essentially announced the end of fracking and the growing in field and the utilization of natural gases as a resource to most of the industrial customers across the nation. And so, the generation of steam and thermal loads across the industrial sector there, they need to intensely focus on decarbonizing. And of course biomass and the 12-year subsidy that exists for that today, for high temperature heat applications, is a very attractive alternative for a number of industries, looking to both decarbonize your own industrial activities to do so on profitable generation opportunities. And so that's, I think, another entry point for us in the market segment that we believe is going to grow very rapidly both in the Netherlands as well as elsewhere across Europe. Pavel Molchanov: That's helpful. Japan, I realized will be a relatively modest slide for your revenue mix this year, because of course, the drop down just closed. But how much do you think that will be of revenue in '22? John Keppler: So I think you've got a relatively linear growth profile in terms of this percentage of revenue growing from, if you look two years ago, zero to about 50% by 2025. And so as those contracts continue to come to life. And as Shai mentioned in his remarks, we've begun substantive deliveries last year, really ramping this year, and you can expect that growth curves to occur effectively linearly between 2021 and 2025. Pavel Molchanov: Okay, so, 10% this year or 20% next year, roughly? John Keppler: I think it's a little bit more than that next year, I think you're sort of hitting 25%, 50%, 75% of that 50. For instance, we have 40 ships heading to Japan this year. Pavel Molchanov: And any impact that you're noticing from the COVID situation in Japan, which needless to say, it's been getting worse rather than better? John Keppler: No, our deliveries have continued uninterrupted to customers around the world. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to John Keppler for any closing remarks. John Keppler: 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 Enviva team continued to work very hard every day, safely and reliably displacing coal, 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. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.EVA Ratings Summary
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Related Analysis
Enviva is Not a Buy Even After 60% Stock Drop
Enviva Inc (NYSE:EVA) had a rough start to the year with a Q1/23 miss coupled with a guidance reduction and dividend elimination. The company lowered its 2023 adjusted EBITDA guidance to $200-250 million from the $305-$335 million it had affirmed at its investor day on April 3.
Although the stock is down around 61% since the earnings release on May 3, analysts at RBC Capital said they will remain on the sidelines until having more visibility into costs and contracted cash flow and see a material improvement in execution. The analyst cut their price target on the stock to $10 from $32 while reiterating their Sector Perform rating.
Enviva is Not a Buy Even After 60% Stock Drop
Enviva Inc (NYSE:EVA) had a rough start to the year with a Q1/23 miss coupled with a guidance reduction and dividend elimination. The company lowered its 2023 adjusted EBITDA guidance to $200-250 million from the $305-$335 million it had affirmed at its investor day on April 3.
Although the stock is down around 61% since the earnings release on May 3, analysts at RBC Capital said they will remain on the sidelines until having more visibility into costs and contracted cash flow and see a material improvement in execution. The analyst cut their price target on the stock to $10 from $32 while reiterating their Sector Perform rating.
Enviva’s Review Post Q3 Results
Enviva Inc. (NYSE:EVA) recently reported largely in-line Q3/22 results and re-affirmed its 2022 and 2023 adjusted EBITDA guidance. Analysts at RBC Capital provided a review of the company following the results, expecting it to benefit from market dislocations, which they believe should help it achieve its outlook by improving its adjusted gross margin.
The analysts updated their estimates and lowered their price target to $63 from $76 as they incorporate higher financing costs. The Sector Perform rating remained unchanged.
The analysts now forecast 2022/2023 adjusted EBITDA of $240 million/$307 million (vs. prior $240 million/$306 million) and DCF of $162 million/$203 million (vs. prior $167 million/$212 million). The analysts introduced their 2024 adjusted EBITDA and DCF estimates of $400 million and $282 million, respectively.
Enviva Downgraded to Sector Perform From Outperform at RBC Capital
RBC Capital downgraded Enviva Inc. (NYSE:EVA) to sector perform from outperform, lowering their price target to $76 from $80.
While the analysts still believe in the longer-term growth potential for the company, they mentioned that the near-term headwinds, specifically around costs, are likely to cap any meaningful share price upside.
According to the analysts, in a normal inflationary environment the company’s cost escalators could more than cover its cost increases. However, in the current inflationary environment with PPI running at approximately 10%, the analysts have less visibility on cost recovery.
The analysts lowered their H2/22 adjusted EBITDA estimates to the low end of the company’s guidance given the potential for elevated costs and shipment delays in Q4. The analysts expect 2022/2023 full-year adjusted EBITDA to be $230 million/$300 million.
Enviva Downgraded to Sector Perform From Outperform at RBC Capital
RBC Capital downgraded Enviva Inc. (NYSE:EVA) to sector perform from outperform, lowering their price target to $76 from $80.
While the analysts still believe in the longer-term growth potential for the company, they mentioned that the near-term headwinds, specifically around costs, are likely to cap any meaningful share price upside.
According to the analysts, in a normal inflationary environment the company’s cost escalators could more than cover its cost increases. However, in the current inflationary environment with PPI running at approximately 10%, the analysts have less visibility on cost recovery.
The analysts lowered their H2/22 adjusted EBITDA estimates to the low end of the company’s guidance given the potential for elevated costs and shipment delays in Q4. The analysts expect 2022/2023 full-year adjusted EBITDA to be $230 million/$300 million.
