Enviva Inc. (NYSE:EVA) Q2 2023 Earnings Call Transcript

Enviva Inc. (NYSE:EVA) Q2 2023 Earnings Call Transcript August 3, 2023

Operator: Good day, and welcome to the Enviva Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. Now, I’d like to turn the call over to Ms. Kate Walsh, our Vice President of Investor Relations. Please go ahead.

Kate Walsh: Thank you. Good morning, everyone, and welcome to Enviva’s second quarter of 2023 earnings conference call. We appreciate your interest in and support of Enviva, and thank you for your participation today. On this morning’s call, we have Thomas Meth, President, and Chief Executive Officer; and Shai Even, Executive Vice President, and Chief Financial Officer. Our agenda will be for Thomas and Shai to discuss our financial and operating results and to provide an update on our current business and outlook for operations. Then we will open up the call for questions. During the course of our remarks and the Q&A session, we will be making 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 as well as in our SEC filings.

We assume no obligation to update any forward-looking statements to reflect new or changed events or circumstances. In addition to presenting our financial results in accordance with GAAP, we will also be discussing adjusted EBITDA and certain other non-GAAP financial measures pertaining to completed reporting periods as well as our forecast. Information concerning the reconciliations of these non-GAAP measures to the most directly comparable GAAP measures and other relevant disclosures is included in our earnings release. Our SEC reports, earnings release, and most recent investor presentation, which contain reconciliations of non-GAAP financial measures we use can be found on our website at envivabiomass.com. I would now like to turn the call over to Thomas.

Thomas Meth: Good morning, everyone, and thank you for joining us. As you saw in our press release and 10-Q filed yesterday, we’ve made good progress over the last few months. You will remember from our last earnings call in May that coming out of a very difficult and disappointing start to the year, we embarked on a focused journey to drive costs out of the business and increase production levels at our current plans. In May, I personally took over the leadership of our operations team and we have since made a number of important changes to start regaining the ground needed to return to levels of profitability we have demonstrated possible. As part of the changes needed to turn our cost position around, we recently executed a corporate restructuring that is designed to reduce annual operating and overhead costs by $16 million, and which is expected to get our SG&A back on track for a company of our size.

We should see some small cost savings uplift to our results in the back half of this year with the full benefit of these changes expected to materialize in 2024. We’ve also made good progress with reducing the cost to produce and transport our wood pellets to our ports. We reduced our delivered at port cost or DAP cost, as we call it, by $3 per metric ton for second quarter 2023 as compared to first quarter 2023. And more importantly, our DAP cost for June was down by $9 per metric ton as compared to the first quarter of this year. Our DAP cost position for June was the lowest we have seen in over a year. Results achieved in June or a good sign, and with what we are seeing so far in the early innings of the third quarter, they appear to be continuing to improve.

We are on a path to improve our annual operating position by $100 million, and I’m encouraged with the progress we’re making, but there is still a lot of hard work left to do and we are monitoring and managing very closely. Last quarter, we reset guidance expectations for 2023 and provided quarterly expectations for the remainder of the year. For the second quarter, we set a target range of $20 million to $30 million of adjusted EBITDA. And yesterday, we reported results in line with this range with second quarter adjusted EBITDA of $26 million. During the second quarter, we made strides with reducing our cost of delivered fiber as well as improving our cost discipline around the repairs and maintenance. We also successfully worked out all of the unnecessary contract labor that was weighing on planned financial performance.

Those improvements were somewhat masked by a fairly large planned outage at our Waycross, Georgia facility. When we acquired Waycross in 2020, we planned to undertake this outage within two years or three years of owning the plant. And this past quarter, we completed that plan and Waycross was back up and running by June. One of the key maintenance projects at Waycross was to replace emissions control equipment and the new equipment should last for the next 10 years or so. It’s important to note that since Waycross is currently the largest plant in our fleet and is one of the best performers from both the production and cost perspective, the outage dampened our typical run rate of produced volumes during the quarter by about 30,000 metric tons and muted some of the production and cost improvements that we were making at our other plants.

Through the plans we talked about having challenges with last quarter where our South Hampton, Virginia, and Greenwood, South Carolina facilities. Prior to the operational changes that started to take hold in June, South Hampton have been operating unprofitably for a number of quarters. In June, we decided to change the way we’re operating South Hampton for now. We’re running the plant with only one of the two dryers, generating around 65% of the plant’s capacity at a much lower cost. With this production profile, we’re running a plant in a very similar manner to Ahoskie one of our lowest cost profile plants in the fleet. This gives us time to fix the underlying asset issues as well as to evaluate the best path forward for this plant. Our Greenwood plant problems are different and less systemic than South Hampton.

We were able to make small changes to a few process island bottlenecks, which have since raised production rates at the facility. We also are implementing a change in fiber procurement strategy at Greenwood, which includes procuring more hardwood because of its increasingly greater availability in the area. These two changes have improved the throughput and cost position over a relatively short period of time. As a result, Greenwood is on a path to reach its target production level and cost position during fourth quarter 2023. As we look to the second half of this year and what we expect to achieve, we are maintaining our full 2023 adjusted EBITDA guidance range of $200 million to $250 million, and we’re updating our quarterly expectations for third and fourth quarter adjusted EBITDA.

For third quarter, we’re stepping down our expectations from the previous range of $70 million to $90 million of adjusted EBITDA to a range of $60 million to $80 million, primarily as a result of two factors. First, we decided to extend the maintenance outage at our Ahoskie, North Carolina plant to lay a groundwork for the previously announced expansion that we planned to do at Ahoskie. The expansion when completed is expected to increase production capacity by approximately 45% at Ahoskie, which is one of the lowest cost positions in our fleet. And second, as we enter the back half of the year, we opted our shipping schedule. We pushed the Lucedale [ph] of a couple of ships from late September into early October, and they have shifted the revenue and margin associated with those ships from third quarter to fourth quarter.

With the updated expectations for fourth quarter, along with commercial opportunities, we expect to materialize, we are raising our adjusted EBITDA expectations for the fourth quarter to $120 million to $140 million, up from $110 million to $130 million. The significant step-up in earnings expected in the quarter over third quarter is underpinned by a number of factors that we have good visibility into such as higher contract prices, during the fourth quarter, we deliver on a higher percentage of more lucrative contracts, and we also have successfully repriced select legacy contracts in our negotiations to reprice other legacy contracts. Another pricing dynamic is that by the fourth quarter, all of our contract escalators related to 2022 inflation will be reflected in our headline prices.

And in addition, we’re working to drive an incremental $14 to $19 per ton out of DAP costs. Additionally, we’re seeing small but steady increases in the production from our current asset fleet that will primarily benefit the fourth quarter. With South Hampton on a path to recovery, Greenwood challenges mitigated and incremental production process and cost improvements across our asset fleet and corporate offices, we are determined to drive significant value from the tailwinds supporting a very strong back half of the year. With that, I’ll turn it over to Shai to go through our financials in more detail.

Shai Even : Thank you, Thomas, and good morning, everyone. Let’s start with the second quarter results. We generated net revenue of $301.9 million for the second quarter of 2023 as compared to $296.3 million for the second quarter of 2022. Net loss for the second quarter of 2023 was $55.8 million as compared to a net loss of $27.3 million for the second quarter of 2022. Adjusted gross margin for the second quarter of 2023 was $41.4 million as compared to $54.8 million for the second quarter of 2022. The $13.4 million decrease year-over-year is attributable to two main factors: First, we received $6 million of support payments in the second quarter of last year that we did not receive in the second quarter of this year, which was planned, and part of our expectation given the payout terms with our simplification transaction in October of 2021.

And second, we had higher shipping costs compared to the second quarter of last year given the fact that we have more deliveries going into Japan this year versus last year. Adjusted gross margin per metric ton was $31.80 for the second quarter 2023 compared to $42.94 for the second quarter 2022. Adjusted EBITDA for the second quarter of 2023 was $26 million, as Thomas mentioned. This compares to $39.5 million for the second quarter of 2022, and the $13.5 million decrease year-over-year is attributable to differences in support payments and shipping costs. Enviva’s liquidity as of June 30, 2023, was $565.6 million, which includes cash on hand, including cash generally restricted to funding a portion of the cost of our Epes, Alabama plant and Bond, Mississippi plant and availability under our senior secured revolving credit facility.

On the topic of Epes and Bond, we recently applied for advanced energy projects tax credit included as part of the inflation reduction incentives. If we are successful, we could be awarded tax credit that can be monetized for a value from 6% to up to 30% of the total eligible capital investment cost of each project. Given the timing of cash flow spending related to Epes and Bond, we have lowered our full-year 2023 total capital expenditure guidance range to $335 million to $365 million, down from $365 million to $415 million, which represents a decrease of $40 million or 10% at the midpoint of the ranges. Payments related to our Epes and Bond capital projects are pushed out future periods as compared to our prior estimates, but this deferral of cash outflows does not impact the timing of our planned in-service dates of mid-2024 for Epes, and mid-2025 for Bond.

Our deferral of the timing of certain greenfield spend items was somewhat offset by a higher spend on expansions and productivity improvements within our existing asset fleet. We are now projecting to spend between $75 million and $85 million on small capital projects, up from our previous expectation of $50 million to $70 million. Part of the increase of this category of capital investment is related to the acceleration of work being done at our Ahoskie plant. We continue to expect to spend approximately $20 million during 2023 on maintenance CapEx. Our commitment to conservatively managing Enviva’s balance sheet remains unchanged. And we continue to target a long-term leverage ratio of 3.5 times to 4 times as payroll credit agreement. We may exit 2023 around 5 times payroll credit agreement depending on the timing of working capital, given how much activity is planned for the fourth quarter of this year.

but it will be temporary, and we will work to get back to our long-term target range in 2024. As a reminder, our covenant threshold under the credit agreement is 5.75 times. With that, I would now like to turn it back to Thomas.

Thomas Meth : Thank you, Shai. Our short-term focus certainly has been on improving productivity and reducing costs as quickly and durably as we can across our portfolio. We’ve also been having constructive conversations with our customers regarding raising sales prices of some of our legacy contracts given that our whole industry has been suffering from cost price increases that have outpaced sales price increases over the past couple of years. We have an encouraging conversation on this front with our customers in large part because biomass is a very physical commodity that is structurally short supply and the long-term demand growth profile for our business continues to be very strong. I’m very happy to announce that we’ve sold our first two shipments to a new creditworthy European customer for delivery into Poland, which is a new and emerging market for us.

Poland is one of the highest per capita consumption rates of coal globally and has historically been very dependent on Russian fossil fuels. And because of those factors, we expect to see significant sales opportunities develop in Poland. In Europe, the European Union is expected to finalize the text related to its renewable energy directive by October, which we expect will continue to provide demand tailwinds for woody biomass, given how important this renewable resource is to the net zero targets of the EU member nations. Our industry continues to be persistently structurally short supply. So, signing new contracts into new jurisdictions, such as Poland means that new production capacity must get built. And thus, these new contracts are underwriting our large-scale, fully contracted capacity expansions.

As a reminder, our new capacity is modeled off the Lucedale, Cottondale, and Waycross which are our best performing plants. Currently, our Epes, Alabama plant is under construction and progressing well. Epes continues to progress on schedule and on budget and is expected to be operational by mid-2024. For our Bond, Mississippi plant, we are moving forward with partnering with an EPC firm, which will help provide cost and construction certainty, and we expect to have an EPC contract finalized by the end of this year. Because Enviva’s top financial priority is effectively managing liquidity and leverage as we drive towards our profitability and growth targets, we’re closely monitoring the progress we’re making with reducing our cost profile, improving production rates of our existing asset fleet, and repricing legacy contracts to better reflect our current operating environment.

To the extent, we’re not on pace with reaching our targets, we have the opportunity to defer the build time in Bond and move the in-service state backed by approximately six months to 12 months without impacting customer commitments, therefore, enhancing our near-term liquidity and leverage profile and potentially reducing the likelihood of needing to access capital markets to fund any remaining needs related to Bond. This deferral of Bond timing would move the plant in-service date from mid-2025 into 2026. And on the topic of capital allocation, our top two priorities, as I outlined last quarter, have not changed. As I just mentioned, we remain steadfast in prioritizing effective management of our liquidity and leverage. Secondly, we’re certainly prioritizing improving our operating costs and the productivity of our current asset platform.

These have been and will continue to be our focus areas. Last quarter, we announced that our Board of Directors authorized a share repurchase program. To date, we have not repurchased shares and our current plan does not contemplate repurchases for the remainder of 2023. Once we make the necessary progress on our first two capital allocation priorities, we should be able to consider returning value to shareholders by using this tool opportunistically. Before we open the call for questions, I’ll give a quick recap of what we have discussed this morning. To start off, we achieved adjusted EBITDA for second quarter in line with our expectations and are reaffirming adjusted EBITDA guidance for full year 2023. In the back half of this year, we are projecting a material increase in earnings and cash flow as compared to the first half of the year with significant cost reductions, improved production and increasing sales prices being the primary contributors to the projected step change in results.

The changes we have made over the past few months are taking hold as evidenced by the advances we achieved in June and the performance we’ve seen in the first part of the third quarter, and finally, our top two capital allocation priorities have not changed. We’re focused foremost on liquidity and leverage with improving our operating cost position and asset productivity, a very close second priority. We have a lot of work to do to rebuild the strength of this company and capitalize on the growth ahead of us. We know what needs to be done and those fixes are exactly what you will continue to see us execute over the coming months and quarters. Now let’s open the call for questions.

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Q&A Session

Operator: [Operator Instructions]. First question will be from Jordan Levy, Truist. Please go ahead.

Jordan Levy: Good morning, all, and I appreciate all the commentary you provided. Just talking through the initiatives that you’re working on. Maybe if we could just dig in a bit to the 3Q and I guess, subsequently, the 4Q guide. You mentioned a few factors that are driving the big uptick in 4Q. Can you just help us quantify how to think about the benefit of the cost reduction versus the higher price that you expect to realize? And then what goes into that, I think, $14 to $19 reduction in DAP that you talked to?

Thomas Meth : Yes, Jordan, absolutely. Good morning. And thanks for the question. The buckets that we’re seeing here are as follows, right? We’re — first and foremost, we’re expecting that South Hampton to be in a very different spot going forward. In Q2, South Hampton was still a $5 million drag, and we expect that to end and the plant to be breakeven for the second half of the year. That’s not the final state of that plant. Obviously, we expect it to come back to profitability, but that’s where we — it’s included in our forecast for the second half of the year. When we start for Q3 first, right, so $5 million for South Hampton. And cost management will certainly be another big bucket. Repair and maintenance, contract labor will be lower than in Q2.

What we have started in June will certainly continue and will drive costs lower. We’re certainly going to see higher fixed-cost absorption. That’s another bucket, equal size bucket in Q3 over Q2. We expect to make an incremental 150,000 metric tons that will reduced fixed cost absorption certainly and provide incremental margin by shipping incremental ships to our — into our contracts. And then we do starting to see a revenue uptick through some of the higher price contracts that we typically see in the second half of the year. It’s much more pronounced in Q4 than in Q3, but certainly is really starting to drive incremental margin in Q3. If we then go to Q4 and take Q3 to Q4, again, a reminder, we still have South Hampton not losing money.

We talked in Q1 about a shift of a customer of $16 million to Q4 that is — or to the second half that is coming through in Q4. We’re going to see an incremental — the remaining buckets are cost management will drive out another significant amount. And we will have — we continue to have higher sales volumes. Then I’ll unpack a little bit more. We have some small growth projects in our — we’re executing against small growth projects, which are very accretive in both Lucedale and Cottondale. For example, we’re adding two pellets at Lucedale and Amory and Ahoskie back in service. That’s going to be a significant uplift for the second half of — for Q4. Then we will have — and that’s certainly at least half of what we’re going to project for the step-up in Q3 and Q4 is that we have changed contracts and repriced contracts in the past that’s flowing through.

We have generally higher-priced contracts that we didn’t have to reprice. They were higher price to begin with, and they are most pronounced in Q4. Although escalators are fully running through. And then we have — we’ve talked about the 20% of our annual EBITDA comes from general commercial activity that’s back half weighted. It’s particularly pronounced in Q4. That can include some — an opportunity to free up some volume to benefit from expected higher prices in Q4. It’s certainly nowhere near as pronounced as we have seen in Q4. If that materializes, you’re certainly moving to the higher end of the range.