Enviva Inc.

Good morning and welcome to the InViva Partners LP third quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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 Woosh Ma. Vice President and Treasurer, please go ahead.

Thank you. Good morning and welcome to the InViva Partners LP Third Quarter 2020 Financial Results Conference Call. We appreciate your interest in InViva Partners and thank you for participating today. On this morning's call, we have John Kepler, Chairman and CEO, and Shai Evans, 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 phone 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 be prematurely 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 our most recent 10K and our other filings with the ICC. 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 forecasts. Information concerning the reconciliations 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 like to now turn it over to John.

Thank you, Woosh. Good morning, everyone, and thanks for joining us today. When we connected last quarter, we had a lot to share. At that time, we had just closed two transformative acquisitions and successfully completed the issuance of both equity and debt that attracted pricing to finance these acquisitions in a highly volatile market. Since then, I'm quite pleased to report that we have had a pretty straightforward few months as we have focused on integrating our new assets and delivering on our business plan against the similarly turbulent backdrop. I probably could have shortened my prepared remarks this morning by simply saying everything went just as expected. But at Enviva, we do not take setting and meeting expectations lightly. To ensure that the integration of the Greenwood and Waycross plants progressed just as we promised, It took seamless teamwork from expanded cross-functional team at the corporate, regional, and plant levels. To be able to deliver uninterrupted operations amid the evolving COVID-19 pandemic, it required our manufacturing and health and safety teams to continue to rethink and redesign our processes and procedures, and then diligently follow them. I'm happy to report that all the hard work and extra effort, as well as the durability and resilience of our business model, once again paid off. To date, our operational and financial results remain largely unaffected by the evolving coronavirus pandemic. The Greenwood and Waycross operations are well on their way to being integrated into our portfolio, delivering operating results right in line with our expectations. With the contributions from these new additions to our fleet, we reported our highest ever quarterly adjusted EBITDA and are firmly on track to deliver our full year guidance. Based on our performance this quarter and our expected full year results, which includes the benefit of the recent acquisitions, our board declared a distribution of 77.5 cents per unit for the third quarter, which represents our 21st consecutive distribution increase and is 15.7% higher than the distribution for the same quarter of last year. In addition, we reaffirmed our guidance to distribute at least $3 per unit for full year 2020, which would maintain the roughly 13% distribution category we recorded since our IPO over five years ago. Our recent acquisitions increased our presence in the Southeast U.S., and our operating portfolio now spans seven contiguous states, from Virginia all the way through North Carolina, South Carolina, Georgia, Florida, Alabama, and Mississippi. With the development and construction activities underway at our sponsor, We expect to continue to expand this footprint by adding additional assets around our and our sponsors' terminals in Chesapeake, Virginia, Wilmington, North Carolina, Savannah, Georgia, Panama City, Florida, Mobile, Alabama, and Pascagoula, Mississippi, as demand for our product continues to grow in our existing markets and rapidly emerges in new ones. Enviva is leading an industry that plays an increasingly critical role in the global fight against climate change. The climate benefits of sustainably produced wood pellets continue to garner international recognition, and we are keenly focused on promoting forest growth and providing incremental transparency. On the subject of stewardship, we are excited about adding Garrity Lansing to our Board of Directors and benefiting from his deep experience and expertise in forest management and socially responsible investing, as we continue to deepen our thought leadership in sustainability. I will take some time at the end of this call to provide more details on the long-term market drivers, our sustainability practices, and the development activities taking place with the partnership and our sponsor. But I would like to now turn it over to Shai to discuss our financial results for the third quarter.

Thank you, John. For the third quarter of 2020, net revenue was $225.6 million as compared to $157.4 million for the corresponding quarter of 2019, driven primarily by a 40% increase in metric tons sold. During the third quarter of 2020, we also recorded $9.4 million of other revenue, which included $8.2 million we were paid to modify shipments and there are take-or-pay off-take contracts that otherwise would have been presented in product sales. For the third quarter of 2020, gross margin was $25.6 million as compared to gross margins of $26.5 million for the corresponding period of 2019. Adjusted gross margin was $56.8 million for the third quarter of 2020 as compared to $41 million for the third quarter of 2019. The increase in adjusted gross margin during the third quarter of 2020 was primarily due to increases in metric tons sold and higher other revenue. Adjusted gross margin for metric tons was $50.13 for the third quarter of 2020, in line with adjusted gross margin of $50.56 for the third quarter of 2019. Net income for the third quarter of 2020 was $1.4 million as compared to net income of $8.9 million for the third quarter of 2019. Adjusted net income was $11.2 million for the third quarter of 2020 as compared to adjusted net income of $17.4 million for the corresponding quarter of 2019. Lower net income and adjusted net income for the third quarter of 2020 were primarily due to costs associated with the recent acquisitions, including $4.9 million of acquisition and integration costs and $9.3 million of incremental depreciation, amortization, and interest expenses. For the third quarter of 2020, the partnership generated adjusted EBITDA of $54.4 million, an increase of 38% from the third quarter of 2019. The increase in adjusted EBITDA was driven primarily by higher metric tons sold and other revenue. Distributable cash flow prior to any distribution attributable to incentive distribution rights paid to our general partners was $42.2 million, which results in a third quarter 2020 distribution coverage ratio of 1.11 times. At the end of the third quarter, the partnership liquidity, which includes cash on end and availability under our $315 million Revolunt Head Facility, was $215.3 million. As you will recall, when we completed our recent acquisitions, we increased our full-year 2020 guidance. On the heels of our solid third quarter financial results, we are very happy to reaffirm this updated guidance and continue to expect full-year net income to be in the range of $33.9 to $43.9 million, adjusted EBITDA to be in the range of $185 to $195 million, and distributable cash flow to be in the range of $134 to $144 billion prior to any distributions attributable to incentive distribution rights paid to our general partners. The partnership also reaffirmed our previous guidance to distribute at least $3 per common unit for full year 2020. The guidance amounts do not include the impact of any additional acquisitions or drop-downs. Consistent with prior years, we expect the second half of 2020 to be a significant step up from the first half with the fourth quarter being stronger than the third. Our financial policies remain unchanged, and we continue to target a conservative leverage ratio of 3.5 to four times, and a distribution coverage ratio of 1.2 times on a forward-looking annual basis, and we expect our full-year 2020 distributable cash flow to cover 2019 distribution by at least 1.2 times. Now, I would like to turn it back to John.

Thanks, Shai. Notwithstanding the COVID-19 pandemic, regulators, policymakers, utilities, and power generators across the world continue to make incremental commitments to phase out coal and limit the impact of climate change. And we believe these tailwinds will drive strong growth in long-term sustainable demand for our product. The European Union policy progression over the last 12 months serves as a good example of a global leader that consistently advanced the fight against climate change. The EU first announced the European Green Deal in December of last year, with the aim of making Europe the first climate-neutral continent by 2050. Next, it followed up with a proposed European climate law in March to enshrine this net-zero target into legislation, even while the continent was deep in the fight against the coronavirus. In September, the European Commission went one step further in proposing a 2030 greenhouse gas emissions reduction target of 55%, at the top end of the previously contemplated range. Notably, just in October, the European Parliament voted to further push the 2030 target to 60%. This aggressive approach was matched just last week, when Japan's new Prime Minister, in his first policy speech to the Parliament since taking office last pledged that the country would be carbon neutral by 2050. As you know, Japan has been underway with substantial decarbonization efforts, including the feed-in tariff system for renewables that has enabled much of the more than 3 million metric tons per year of long-term demand that we and our sponsor have contracted over the last several years. But this net zero announcement, combined with the Japanese government's prior commitment to shut down or decarbonize 100 coal plants in the country, suggest we will continue to see tremendous growth in this market. Facing out coal is critical to limiting the impact of global warming. Biomass plays a fundamental role in this response to climate change and is a requirement in every single pathway the UN IPCC has laid out in order to achieve the goal of limiting temperature increases to 1.5 degrees Celsius above pre-industrial levels. Germany is a good example of a major economy making an unprecedented commitment to translate the IPCC guidance directly into tangible environmental benefit. Following the early passage of the Coal Exit Law, several policy initiatives are now exploring the subsidy framework that will be necessary to support leveraging bioenergy produced from healthy, growing, sustainable forests and displacing coal by converting existing infrastructure from coal to low-carbon fuels like wood pellets. As the final legislative process unfolds over the next several months, the partnership and its sponsor remain in ongoing dialogue with multiple large utilities and power and heat generators about their plans to convert existing coal-fired assets to biomass. Similarly, the UK government, in its response to the annual progress report produced by the Committee on Climate Change, recently announced its plan to publish a new comprehensive strategy to decarbonize its economy, in order to achieve its net zero target, and confirmed that several linchpin decarbonization strategies, such as the deployment of sustainably sourced biomass in carbonation with carbon capture, are forthcoming. As part of our commitment to provide incremental transparency into the sustainability of our business practices, the partnership and our sponsor recently published our first Corporate Sustainability Report, This report provides a description of Enviva's 16-year sustainability journey, from the partnership's humble beginnings as a startup in 2004, to publicly traded company with a global footprint that is Enviva today, featuring a comprehensive review of our contribution to fighting climate change, our fiber procurement approach and forest land conservation efforts, our environmental health and safety processes, our human capital and diversity policies, and our corporate governance practices. As one of InViva's founders, I'm particularly proud of this report, as it describes not only how far we've come, but how big the opportunity is ahead. Many of these opportunities involve innovation and new ideas about how to further promote forest growth and carbon sequestration, and protect forest habitats in the Southeast U.S. To note one example of this, our sponsor recently formed a partnership with a widely recognized innovator, and North America's leading developer of forest carbon offsets. By leveraging Finite Carbon's online platform, INVIVA is helping private landowners participate in the program to receive income in exchange for their commitment not to harvest particular tracts of their land, and therefore facilitate the conservation and protection of forest habitats that are critically important to biodiversity, wildlife, and carbon storage, such as bottomland hardwood forests. Given how important forest lands are to mitigating climate change, the symbiotic relationship between the healthy demand for forest products and landowner decisions to continue to invest in forest land translates into a powerful combination for policymakers around the world. This natural synergy is driving continued increases in the worldwide demand for our product. The partnership's current contract portfolio, which includes the 20-year, 270,000 metric ton per year Ichihara contract that just went firm in September, has a total weighted average remaining term of 12.8 years and a total product sales backlog of $14.9 billion. Assuming all volumes under the firm and contingent offtake contracts held by our sponsor and the sponsor joint venture were included, our total weighted average remaining term and product sales backlog would increase to 13.7 years and $19.4 billion. To meet the growing contracted demand for sustainably produced biomass within the partnership, we have continued commissioning our expansion project at the Northampton plant. We also have begun commissioning new equipment related to the expansion project at our Southampton plant and expect to complete the installation of all equipment around the end of this year. At Greenwood, procurement and detailed engineering activities are well underway. and the project to expand that plant's production to 600,000 metric tons remains on track for completion by year-end 2021. Finally, the construction of our sponsor's fully contracted Losedale plant and the Pascagoula terminal remain on track for completion mid-year 2021. In addition, our sponsor expects to complete the purchase of the project site and commence certain pre-construction activities for our next fully contracted plant later this year. in Epps, Alabama. The final investment decision by our sponsor is expected around the end of the year. What's pretty astonishing is that when complete, our current operations, combined with the development projects I just described, will establish a footprint across the Southeast US that supports more than 4,000 jobs with an annual economic impact of close to $3 billion. As I've said before, It is a privilege to be able to grow this business at a time when so much of the world continues to face challenging and uncertain circumstances. And although it might seem like a quiet quarter, it was really quite busy as the Enviva team focused on executing our business plan, integrating the Greenwood and Waycross plants that combined to increase the partnership's production capacity by more than one third and delivering exactly what we have promised. As a result, we were able to print our highest quarterly adjusted EBITDA ever, generating $54.4 million. We again increased our distribution, now for the 21st consecutive time, and we reaffirmed our increased guidance for the year. And with the increasingly critical role we play in the efforts to fight climate change, we are really just getting started. As I close, I want to thank all of my colleagues at InViva for their hard work and relentless focus on keeping our people healthy, and operating our business uninterrupted. I've had the pleasure of making my way to each of our plants and ports over the past several weeks to reconnect safely and with all of the CDC directed social and professional distancing. And while the pandemic is certainly a challenge, I can tell you that the excitement, the enthusiasm, and the commitment to the job at hand has never been stronger. I'm continually humbled by the dedication of colleagues who work hard every day to make sure we can deliver on the promises we have made well into the future. We have a strong and durable business model made stronger by the people at InViva. Thank you. Operator, can you please open the line for questions?

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, you will need to pick up the handset before pressing the keys. To withdraw your question, please press star then two. At this time we will pause momentarily to assemble our roster. Once again, that was star, then one, if you would like to ask a question. Our first question will come from Marshall Carver of Heikkinen Energy Advisors. Please go ahead.

Yes, everything was so straightforward. I didn't really have a question, but since there was nobody in queue, I thought I'd just throw out a question on, you know, you made those acquisitions earlier this year. Do you have any thoughts on the potential for further third-party acquisitions and any commentary on the potential M&A landscape right now?

Well, Marshall, thank you. It's great to hear from you, and I hope you guys are doing well. Look, absolutely interesting quiet quarter, pretty straightforward. We're obviously delighted with the progress that we're making on integration and acquisitions. We are a proven acquirer. The most recent Waycross acquisition was with the acquisition of the largest plant in the world that we didn't then currently own, which is consistent with the track record and the approach that we've taken in M&A historically. the assets that we would look at need to be pretty strategic. They also need to be competitive with what we would otherwise be able to develop and acquire from our sponsor, which has also proven to be relatively attractive investment and acquisition multiples. So from an M&A perspective, we're pretty judicious. We're pretty conservative in our thinking around it. It's got to be something pretty important. Either it's going to come with a strategic port location, a new fiber basket, It's got to be well-built. It's got to be in the right fiber basket. It's got to be in the right cost position. And there just aren't that many of those in the world. But when there are, we take a good long look at them.

Thank you. And I guess another question, in terms of lumber prices increasing in the last few months, does that have any – Could you talk about any impact there? I know you're buying pellets, which are at a huge discount and basically a side product of the lumber industry to a degree. Does higher lumber prices mean more lumber demand and therefore more opportunity for supply, which could potentially lower the cost for you? Or does it tend to go up at all with lumber prices or Do you have any comments, Larry?

No, you really sort of spotted the symbiotic nature of our fiber procurement with what the more traditional forest products industry undertakes. So increased demand for forest products and the high value components of that, like saw timber, telephone poles, and the like, which you are seeing increased demand for, means that there's a greater proportion of byproducts that the landowner ultimately needs to removed from that forest tract to enable more efficient and more effective reforestation. And so we're really an important part of that. And obviously with greater degrees of supply, that means that over time we tend to continue to see, and if you look historically at our financials, we've tended to realize a decline in our underlying fiber prices because of greater fiber availability.

Thank you, and good to see such a straightforward quarter. Thanks, Marshall.

Again, if you would like to ask a question, please press star, then 1. And our next question will come from Elvira Scotto of RBC Capital Markets. Please go ahead.

Hi. Good morning, everyone. I know you talked about Germany. Can you maybe just provide a little more color around – what you're seeing and hearing in your discussions in Germany, and then just maybe around when you could see a potential contract signing.

Yeah, absolutely. Elvira, great to hear your voice. So Germany, we began talking about Germany as the coal exit law began to be developed in that country as part of its broader participation in the EU landscape and the EU climate goals. which are important to note, are becoming increasingly more aggressive, right? Not only moving to net zero, but really looking at the European climate law as targeting 50% to 60% reductions, which are a very significant step up to what their historical expectations were. So you've got a pace of change that's accelerating across the European continent, and I'd say compliments about Japan, which is also pretty exciting. But in Germany, about 18 months ago, we articulated that this was coming into force. It's going to take a little bit of time for the regulations to mature, the policymaking to get into force. And what we've seen is progress is back on that pace. So the guide describes roughly 18.4 months. We're 18 months in. The preliminary framework is in place. In fact, that's been resolved favorably. put in place the binding law regulations on the framework that will enable major coal-fired generators to pert to lower-carbon fuels like wood pellets. So our dialogue with our customers is specific to our prepared parks needing to accelerate. We're in deep discussion and dialogue with them. And what we would expect is certainly over the course of the next 12 to 18 months, for us to have flexibility into the specific asset, the specific terms and conditions that we'll be supplying the appellates under long-term contracts for, and then of course, in parallel, undertaking the conversion processes for this. Some customers are ahead of that curve, some are the rationalization across their broader portfolio. But we can see the light at the end of the tunnel here. clear ability in the 5 to 10 million ton market. Obviously, as the European community continues to accelerate in its efforts against climate change, we think this is part of it, and we'll look forward to participating in that market.

Great. Thank you. And then, you know, the EU, as you noted, has become or has accelerated their big organization goals. The EU recently made hydrogen a pillar in its decarbonization efforts. Do you see any impact if we start to see hydrogen grow within that renewable pie, do you see any impact to biomass growth in the EU?

It's a great, great question. You know, we look at hydrogen like a lot of potential emerging technologies. There's a lot of hope. There can be, at times, hype around that. I think hydrogen certainly has a role to play. It's a speculation, of course, on both cost and time. And ultimately, these things can tend to be resolved over a longer period of time. But the pace of change and the urgency to get a climate change requires these accounts. and why biomass becomes such an important tool in the overall policy box is because it can realize today the cost at high against the intermittency of solar and wind as the potential for hydrogen and the five other flavors that may come forward for longer-term benefits, but in a much more speculative way on cost and time. That's why we can see makers, not just in Europe, but that elsewhere, particularly Asia, so intensely focus on the integration of biomass to displace some of the most intense carbon emissions alternatives of fossil fuels.

Great. Thank you very much.

Thanks, Elmer.

The next question comes from Moses Sutton of Barclays. Please go ahead.

Hi. Thanks for taking my question. Pretty clean, straightforward quarter. Just one general question on my end. Any updated thoughts on ever converting to a C-Corp or sort of solving for the demand for a different company structure? Thinking through not only what's happened with some MLPs, but also yield codes, other LPs like the Brookfield vehicles and how they've performed since those changes. Or do the tax benefits of the MLP structure really make such a change not worthwhile to even entertain?

Moses, always good to chat with you and great question as always. You know, the MLP structure that we've been in and the sponsor-led drop-down profile of particularly a high-growth MLP like ourselves has worked pretty well for us. If you look historically, we've been able to generate a 13% distribution category since our IPO, and we've continued to grow pretty aggressively, including through some pretty choppy periods both this year and last year in terms of the capital markets. So for us, it's a model that works well, not so much solely for the purposes of the tax structure, but really more so on the allocation of risk and responsibility and activity between the sponsor and the partnership. We have been convicted about ensuring that the partnership is fully insulated from the development, the contracting, the construction activities of large-scale infrastructure assets. That's largely been driven by the scale of the organization. Historically, as a small company, a smaller company at IPO, it may have been too big a bite for us to develop assets on our own balance sheet. And I think that time and scale begins to make sure that we can think about where that right alignment of risk and allocation is. Heretofore, most of that big development has been done upstairs. We've started to put our nose under the tent, so to speak. We've got two great expansions underway at the Northampton And Southampton facilities were modestly expanding the production at the recently acquired Greenwood asset. And we tend to think that there's a good runway ahead for incremental expansions within our current portfolio. As we think about developing larger scale assets, when we get to the right scale and size, I think that does begin to raise important questions in the future about what that right allocation of risk and responsibility is. Here to force worked really, really well. We're certainly on the path to more than doubling the size of last year's EBITDA, and obviously that then from a free cash flow profile might create some different opportunities about how we would choose to reinvest free cash flow directly into larger scale investments within the partnership. But I think we're still a bit off from that yet.

Great. No, that makes a lot of sense. That's all I have on my end. Thanks for the update there. Congrats on the smooth operations.

Moses, thank you. Great to talk to you.

This concludes our question and answer session. I would like to turn the conference back over to John Kepler for any closing remarks.

Well, I wanted to thank everyone for taking the time to join us today. Obviously, there's a lot going on in the world. We're quite privileged to be in the position that we're in, and we believe that we have a responsibility to keep it up. I'm looking forward to connecting with everyone again next quarter, and until then, please stay safe and healthy. We're all in this together, and together we're all going to get through it. We'll chat soon. Thank you.

The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.