US-based Enviva Inc. the world's largest industrial wood pellet producer revealed changes to its capital allocation priorities in addition to providing a 2023 financial guidance update, in its financial and operating results report for first-quarter 2023 that was released on May 3, 2023.
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Enviva owns and operates ten plants with a combined annual production capacity of approximately 6.2 million tonnes in Virginia (VA), North Carolina (NC), South Carolina (SC), Georgia (GA), Florida (FL), and Mississippi (MS), and is constructing its 11th plant in Epes, Alabama (AL).
Enviva is planning to commence construction of its 12th plant, near Bond, Mississippi, in 2023, and exports its wood pellets to global markets through its deep-water marine terminals at the Port of Chesapeake, Virginia, the Port of Wilmington, North Carolina, and the Port of Pascagoula, Mississippi, and from third-party deep-water marine terminals in Savannah, Georgia, Mobile, Alabama, and Panama City, Florida.
In its first quarter 2023 results report Enviva outlined changes to its capital allocation priorities in addition to providing a 2023 financial guidance update and announced a large, long-term take-or-pay off-take contract with an existing Japanese customer.
The plans and initiatives underway to improve productivity and costs across Enviva’s current asset platform continue to fall behind expectations. While the board of directors remains convinced of management’s ability to deliver the originally forecasted operational and financial performance over time, it is clearly taking longer than expected, said John Keppler, Executive Chairman of the Board.
Revised capital allocation framework
The Board has decided to revise Enviva’s capital allocation framework, eliminating Enviva’s quarterly dividend in order to maintain conservative leverage, improve the operating cost and productivity of its current asset platform, implement a share repurchase program, and where appropriate, accelerate investment in new fully contracted plant and port assets.
To more conservatively underwrite that plan and ensure the ability of the Company to capture the value of the fully contracted growth ahead, after careful consideration with management, the board of directors evaluated the most accretive uses of the Company’s capital and decided to revise Enviva’s capital allocation framework, eliminating the Company’s quarterly dividend in order to preserve liquidity and a conservative leverage profile, maintain our current growth trajectory, potentially accelerate future investments in new fully contracted plant and port assets, and implement a limited share repurchase program, John Keppler explained.
Retain cash flow
With the elimination of the dividend, management expects to retain approximately US$1 billion in incremental cash flow during the period 2023 to 2026.
This provides incremental liquidity and investment into the productivity and operational improvements in its current assets and further reduces the need to access the capital markets to fund its current growth plans, which include the construction of the Company’s fully contracted wood pellet production facilities in Epes, Alabama (Epes) and near Bond, Mississippi (Bond).
We recognize this is an important departure from the plan we laid out at our Investor Day a month ago, but a lot has changed since then. Compared to our expectations, while our cost position has trended in the right direction, it has done so at a much slower pace than we had anticipated, in part due to slower volume growth, and in part due to a higher spend profile for the volume growth we did achieve, said Thomas Meth, President and CEO of Enviva.
This is the Company’s first authorization for share repurchases since its founding.
We know what the specific issues are: contract labor is too high, discipline around repairs and maintenance spend is insufficient, wood input costs need to come down further and stay there, and utilization rates at specific plants need to improve and stabilize at those improved levels. Because of where we are in our journey to bend our cost curve down while bending our production curve up, we feel it is prudent to take a much more conservative view of what our business can realistically achieve over the next eight months, Thomas Meth said.
Under the share repurchase program authorized by the board of directors, the Company can repurchase up to US$100 million in shares of the Company’s common stock opportunistically from time to time in the open market, or in privately negotiated transactions at prevailing market prices, or by such other means as will comply with applicable state and federal securities laws.
The timing of any repurchases under the share repurchase program will depend on market conditions, capital allocation priorities, liquidity and leverage positions, and other considerations.
Against this backdrop of operational challenges, we are undergoing an extensive review of where we are allocating our capital. We believe we have more accretive capital allocation alternatives, which start with improving returns from our existing fleet of assets, growing our fully contracted asset base, managing liquidity and leverage, and also include the potential to opportunistically repurchase our shares in the open market, which we believe have traded below their intrinsic value for some time, said Thomas Meth.
The program may be extended, modified, suspended, or discontinued at any time, and does not obligate the Company to repurchase any dollar amount or number of shares.
Although the future continues to be incredibly bright for Enviva’s business, we have had a difficult and disappointing start to 2023. Operating cost overages and production challenges were key drivers behind the first quarter’s poor performance. While plant production is increasing and we are reducing our operating cost position, neither improvement is materializing at the rate we forecasted a few months ago. Based on results from the first four months of the year, we believe it is prudent to take a more conservative view on the timing of our ability to deliver these improvements, said Thomas Meth.
Net revenue and volume up
Net revenue for the first quarter of 2023 was US$269.1 million as compared to US$233.0 million for the first quarter of 2022.
The increase of approximately 15 percent year-over-year was primarily driven by incremental volumes produced and sold, in large part due to production contributions from Enviva’s newest plant in Lucedale, Mississippi being fully ramped during first-quarter 2023.
Enviva delivered approximately 20 percent more volume to customers during the first quarter of 2023 compared to the first quarter of 2022.
The increase in net revenue was also bolstered by an uptick in average sales price per tonne as a result of annual price escalators in its contracts, as well as new contracts, typically having higher pricing than its legacy contracts.
Net loss for first-quarter 2023 was US$116.9 million as compared to US$45.3 million for first-quarter 2022. Net loss for the first quarter of 2023 included US$40.4 million of non-cash interest expense associated with the Deferred Gross Margin Transactions (DGMT).
Gross margin was US$(20.7) million for the first quarter of 2023 as compared to US$(0.3) million for the first quarter of 2022.
Adjusted gross margin for the first quarter of 2023 was US$21.3 million as compared to US$50.7 million for the first quarter of 2022.
The decrease in adjusted gross margin year-over-year was according to Enviva primarily attributable to the following factors:
- Customer mix: Approximately US$16 million of gross margin was shifted to the second half of 2023 from first-quarter 2023 as a result of customer delivery adjustments, whereby more tonnes were sold and shipped in the quarter to Japanese customers as a result of requests from a few of its European customers that were managing supply chain challenges to delay such shipments to the second half of 2023. Generally, Japanese contracts currently have slightly lower sales prices per tonne and higher shipping costs than European customers to whom these deliveries are scheduled to be made in the second half of the year.
- Repairs and Maintenance and Contract Labor: Approximately US$10 million of unplanned repairs and maintenance expenses were incurred during the quarter, including overages in contract labor expenses.
- Isolated costs: Approximately US$5 million of expenses were incurred during the first quarter of 2023 related to third-party consulting fees associated with plant optimization initiatives and professional fees.
- Deferred Gross Margin Transactions (DGMT): Approximately US$4.6 million of gross margin is deferred to future years due to the accounting for sales related to shipments delivered to a large European customer with whom Enviva also has a third-party pellet purchase agreement (associated with the same customer as in its fourth-quarter 2022 results).
Adjusted gross margin per tonne (AGM/MT) for first-quarter 2023 was US$17.93, as compared to US$46.27 for first-quarter 2022. The year-over-year decrease was driven by the same factors that impacted the adjusted gross margin.
Adjusted EBITDA for first-quarter 2023 was US$3.4 million as compared to US$36.6 million for first-quarter 2022. The year-over-year decrease was driven by the same factors that impacted adjusted gross margin and from incremental sales, general and administrative expenses.
Enviva’s liquidity was US$634.4 million as of March 31, 2023, which included cash on hand, including cash generally restricted to funding a portion of the costs of the acquisition, construction, equipping, and financing of its Epes and Bond facilities, as well as availability under its US$570.0 million senior secured revolving credit facility.
Revised 2023 guidance
Enviva continues to advance productivity and cost-reduction initiatives designed to improve the operating and financial performance of its fully contracted assets. Notwithstanding a difficult start to the year, produced tonnes in the first quarter of 2023 increased by 7.7 percent over the first quarter of 2022.
During the first quarter of 2023, management was able to reduce the delivered at port (DAP) cost per tonne by approximately US$9, which was well below management’s expectations. Management’s execution plan is now targeting a further US$20 reduction in DAP costs by year-end 2023.
Despite the improvements underway, the rate of productivity increases and cost reduction is slower than management’s prior expectations for the full-year 2023. As a result, management is reducing its estimates for full-year produced volumes in 2023 to approximately 5 million to 5.5 million tonnes, as compared to the prior forecast of 5.5 million to 6.0 million tonnes.
For third-party procured volumes, Enviva is forecasting these to be within a range of 500 000 to 1 million tonnes, as compared to its prior estimate of 1.0 million to 1.5 million tonnes, which, net of contracted tonnes that have been deferred by customers due to planned and unplanned outages in power generation facilities, creates a balance between its wood pellet deliveries and customer demand for the remainder of the year.
Management continues to expect net revenue per ton to be approximately US$234 per tonne for the full-year 2023.
Given the impact of the challenging performance of first-quarter 2023, which was approximately US$50 million below management’s expectations for adjusted EBITDA, as well as the impact of the updated production and cost estimates, Enviva is revising its full-year 2023 guidance expectations for net loss and adjusted EBITDA.
Net loss guidance for 2023 is now projected to be a range of US$186 million to US$136 million, changed from the prior estimate of a net loss range of US$48 million to US$18 million.
Adjusted EBITDA for 2023 is projected to be within a range of US$200 million to US$250 million, which is reduced from previously provided guidance of US$305 million to US$335 million.
Approximately US$30 million of the delta between the previous guidance midpoint of US$320 million and the revised midpoint of US$225 million is related to the weakness in first-quarter 2023 and the remaining US$65 million is related to a shift in timing expectations to when productivity and cost improvements are more fully realized.
Enviva’s quarterly income and cash flow are subject to seasonality and the mix of customer shipments made, which varies from period to period.
The business usually experiences higher seasonality during the first quarter of the year as compared to subsequent quarters, as colder and wetter winter weather increases the costs of procurement and production at its plants.
Adjusted EBITDA is heavily weighted towards the second half of the year, which is driven by the following factors:
- Seasonality benefits and productivity improvements related to production
- Cost reduction programs underway being more fully realized
- Increase in revenue per tonne as a result of the majority of deliveries being related to higher-priced contracts; key drivers include regular seasonality, annual price escalators being fully represented, and new higher-priced contracts accounting for an increasingly larger percentage of shipments.
Enviva expects total capital expenditures (inclusive of capitalized interest) to be back-end weighted for 2023, and continues to forecast that it will range from US$365 million to US$415 million for 2023, with investments in the following projects:
- Greenfield site development and construction projects, ranging from US$295 million to US$325 million.
- Expansion and optimization of its plants, ranging from US$50 million to US$70 million.
- Maintenance capital for existing asset footprint of approximately US$20 million.
Biomass continues to be very price competitive
Enviva’s customers are renewing existing contracts and signing new contracts in large part due to the urgent need to reduce lifecycle greenhouse gas (GHG) emissions from their supply chains and products while securing reliable, affordable, renewable feedstocks over the long term.
There are limited large-scale alternatives available for renewable baseload and dispatchable power and heat generation, and even fewer sustainably sourced feedstocks to substitute in hard-to-abate carbon-intensive industries.
Additionally, the carbon price environment in the European Union (EU) continues to strengthen, which reinforces the cost-competitiveness of biomass.
According to Enviva, wood pellets are currently the cheapest form of thermal energy generation in Europe, and the Company’s long-term contracted wood pellets at US$220 to US$260 per tonne makes biomass generation in the EU more profitable than conventional generation, especially compared to delivered liquified natural gas (LNG) prices.
Biomass continues to be very price competitive, with biomass currently forecasted to be cheaper than natural gas and coal at all points along forward curves.
New 10-year take-or-pay off-take contract
A new 10-year, take-or-pay off-take contract with an existing investment-grade Japanese customer that is utilizing biomass in its power-generating facilities was also announced.
Deliveries of approximately 300 000 tonnes per annum are expected to commence in line with new capacity additions. The contract is subject to conditions precedent.
On average, new long-term off-take contract pricing over the last 12 months is approximately 20 percent higher than Enviva’s existing long-term off-take contracts scheduled to expire over the next three years.
The pricing of Enviva’s long-term, take-or-pay off-take contracts are not generally exposed to, nor predominantly driven by, current commodity prices, but rather its customers’ longer-term view of securing a long-term, cost-competitive, and renewable, sustainable feedstock over timeframes spanning from 5 to more than 20 years, which may relate to goals of achieving net-zero targets.
As of April 1, 2023, Enviva’s total weighted average remaining term of take-or-pay off-take contracts is approximately 14 years, with a total contracted revenue backlog of approximately US$23 billion.
This contracted revenue backlog is complemented by a customer sales pipeline exceeding US$50 billion, which includes contracts in various stages of negotiation.
Given the quality and size of this backlog and the current customer sales pipeline, Enviva believes that it will be able to “support the addition of at least four new fully contracted wood pellet production plants and several highly accretive capital-light projects over the next four years. We expect to construct our new fully-contracted wood pellet production plants at an approximately 5 times, or better, adjusted EBITDA project investment multiple.”
Although we are very disappointed in our start to 2023, we are committed to returning to much better levels of operating cost control, asset utilization, and productivity. We believe in the cost position we have delivered historically and that the production levels we have demonstrated are achievable on a reliable, go-forward basis, and look forward to consistently reporting on our progress. I am also pleased to note that given the strong future contracted growth we have in hand, the pace of our investment continues to be on track, and with the changes we have announced today, we have the opportunity to continue to deliver this growth with lower risk and limited needs to access the capital markets, ended Thomas Meth.