Enviva Partners [EVA] Conference call transcript for 2022 q1
2022-05-05 16:23:01
Fiscal: 2022 q1
Operator: Good morning and welcome to Enviva Incorporated First Quarter of 2022 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Kate Walsh, Vice President of Investor Relations. Please go ahead.
Kate Walsh: Thank you. Good morning everyone and welcome to Enviva Inc’s first quarter of 2022 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 John Keppler, Chairman and Chief Executive Officer; and Shai Even, Executive Vice President and 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 call for questions. During the course of our remarks and the subsequent 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 other SEC filings. We assume no obligations 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 non-GAAP financial measures pertaining to completed reporting periods as well as our forecast. Information concerning the reconciliations of these non-GAAP measures to their most directly comparable GAAP measures and other relevant disclosures is included in our earnings release. It is important to note that as a result of the simplification transaction we announced on October 15, 2021, we were required to recast our historical financial results in accordance with GAAP to reflect that transaction. Today, we will discuss 2021 historical financial results on a recast basis or on non-recast basis depending on the reference point. Please refer to our earnings release and Form 10-Q document for more details on our recast and non-recast presentation. I would now like to turn the call over to John.
John Keppler: Thank you, Kate. Good morning everyone and thank you for joining us today. As you have heard me describe consistently during the past 24 months, we have been fortunate to have been largely insulated from the widespread and unexpected geopolitical economic and pandemic related pressures confronting the global economy, but we have not been immune. And we saw a subset of impacts affect us in the first quarter, several of which we previewed on our last call together. As you’ll recall, the first quarter is our seasonally softest quarter. This year it was also impacted by a lower plant availability due to Omicron related absenteeism affecting our plant level workforce as well as failures by some of our trucking and rail partners to consistently service our plants, which required us to curtail production in several instances. We also incurred incremental costs in certain areas of our cost tower, such as cost of fiber and logistics expenses as we work to mitigate our workforce and supply chain disruptions. We’re pleased to report that the pandemic related issues are largely behind us now. We are also optimistic that the efforts our logistic partners are making will soon put their challenges firmly in the rearview mirror as well. This means that the operational issues we faced should be largely temporary. What we see as permanent, however, is the market and sales growth momentum as we execute agreements with major power generators and industrials in hard to abate sectors for the long-term supply of lower carbon renewable fuels and sustainably produce raw material inputs. The same dislocations caused by inflation energy price volatility due to the war in Ukraine and supply chain challenges causing scarcity and urgent requests for delivery for many commodities are translating into durable pricing increases for our current agreements and ones that we are signing for future deliveries. I will spend some time on those exciting new contracts in a moment, especially our developments in Germany. Before we get there, given where first quarter results landed and taking stock of how we see the next seven months of the year on hold, we are revising certain 2022 guidance metrics to better reflect our assessment of the implications for the short-term. As noted in our release, we are reducing our adjusted EBITDA guidance to a range of $230 million to $270 million from the original range of $275 million to $300 million. The 10% shift in the top end of the range for adjusted EBITDA is primarily driven by three key factors. First, lower production. We estimate that lower production and sold volumes for full year 2022 will have a negative impact of approximately $10 million on adjusted EBITDA. This is an isolated, identifiable and short-term issue. Second, our Lucedale plant startup date was delayed to the end of March, which is expected to have an impact of approximately $10 million for 2022 as a 12 month ramp up period is effectively shifted to the right by a bit more than a quarter. And third, we expect to purchase fewer third party volumes this year, simply due to the limited physical liquidity of industrial grade wood pellets, which was exacerbated by Russian and Baylor Russian supply being closed off to the market. Additionally, while we expect SG&G to be about $5 million higher for the year, given our further acceleration of fully contracted new plant and capacity development that is expected to be offset by about a $5 million pricing uplift for the year, which we believe is durable and should continue to grow well into 2023 and beyond. We also still expect the shape of our adjusted EBITDA profile during 2022 to look a lot like prior years with the back half of the year being a big step up over the first half. We are projecting that roughly two thirds of our earnings will be back half weighted with the first half generating, roughly one third of our expectations. So net-net, we’re still forecasting solid growth for this year with adjusted EBITDA using the midpoint of the range still expected to increase by over 10% as compared to 2021. We’ve also given a preliminary look to adjusted EBITDA in 2023 given all we know today about our contracted volumes pricing and cost. 2023 adjusted EBITDA have to be in the range of $305 million to $335 million in line with FactSet consensus estimates for most of our analysts covering the business. But importantly, we are also seeing full year adjusted, gross margin per metric ton of roughly $50, which is higher than we have given guidance to in the past. Given how we see the balance of 2022 shaping up and the continued growth in 2023 and beyond what’s not changing is our 2022 dividend guidance of $3.62 per share, which also represents a 10% increase over 2021. For the first quarter of 2022 we declared a dividend of ninety and one half cents per share, which represents a 15% increase over last year’s comparable period. For the remainder of 2022, we intend to flatten out the quarterly dividend to ninety and one half cents per share. We continue to be very proud of our rare combination of being a high growth company and a strong dividend pair. We’re the largest global player in an industry where the total addressable market is rapidly expanding and new use cases for our product continue to emerge. We are virtually unmatched in terms of the fully contracted date of our business and the highly visible and durable cash flow growth that our business generates, as well as the truly remarkable growth prospects ahead of us. We are very pleased to have announced yesterday that we have signed our first series of German agreements, including a memorandum of understanding with the German utility. This new customer is focused on providing base load, dispatch-able, renewable energy, and our pellets will be used to displace coal in one of its large power plants. We expect this MoU to become a firm contract within the next 12 months. This contract, as I mentioned, is large with delivered volumes over the 10- to 15-year term, expected to be at least one million metric tons per year, which means this contract alone could underwrite the construction of the new plant. We also announced yesterday that we signed a letter of intent with another new German customer to serve a completely new industrial vertical for us. This new customer intends to use in Enviva’s wood pellets to phase out fossil fuels and generate green process heat in their manufacturing facilities in Germany. Delivered volumes under this 10-year agreement are expected to be around a 100,000 metric tons per year with deliveries to start as early as 2023. We expect to convert this LOI to a firm contract within the next few months. To facilitate the delivery of wood pellets to our growing customer base in Germany, and to enhance the returns we generate from this emerging market, we are partnering with one of Germany’s leading logistic service providers to develop an inbound logistic supply chain from strategic port terminals to industrial quarters throughout Germany. As part of the agreement, we will consider highly accretive, incremental capital investment opportunities related to import reception, storage, transloading and other terminal infrastructure, with a plan to replicate what we are successfully operating at our export terminals along the coast of the Southeast U.S. So again, pretty solid growth and new exciting opportunities and momentum augmented by increasing volumes, we are supplying to our existing customer base. In today’s geopolitical environment the security of energy supply is an equally important driver for customers purchasing our wood pellets as is the energy transition itself. Countries and companies are not only facing extremely high and volatile fossil fuel prices while they navigate towards net zero goals. But they now also need to revisit the long term security of supply for the carbon feed stocks they’re sourcing. This congruence is further complicated by the fact that there are limited large scale alternatives available for renewable base load and batch-able power and heat generation, and even fewer low carbon feed stocks to substitute in hard to abate sectors. With this as a backdrop demand for both urgent deliveries and long-term contracts for Enviva’s sustainable woody biomass products and fuels has never been stronger. I’ll come back in a moment to discuss some key sustainability attributes of our business and our asset and capacity growth plans. But now I’d like to turn it over to Shai, to share more detail on our financial highlights.
Shai Even: Thank you, John. And good morning, everyone. We generated net revenue of $233 million for the first quarter of 2022 as compared to $241 million for the first quarter of 2021. Net revenue decreased by 3% year-over-year primarily due to metric tons sold being down by 4.6%. Metric tons sold decreased due to low plant availability related to the Omicron related absenteeism John mentioned, which not only impacted us, but also a number of our logistic providers as well. These are mainly temporary issues, and we are seeing many of them resolve. Many of our rail and track providers have been quite public about the progress they are making hiring, and their expectation of being able to provide service consistent with pre-pandemic levels. Adjusted gross margin for the first quarter of 2022 was $50.7 million up 3% from the first quarter of 2021 on a basis. Adjusted gross margin per metric ton was $46.25 as compared to $42.73 cents for the first quarter of 2021 on a basis. The uptick adjusted gross margin per metric ton of 8.2%, year-over-year was driven primarily by contract price escalators that are tied to inflation industries. This pricing app uplift is a durable benefit and should continue to improve cash flow on a go-forward basis. Net loss for the first quarter of 2022 was $45.3 million as compared to a net loss of $1.5 million for the first quarter of 2021 on a basis. Net loss for the first quarter of 2022 includes costs that resulted from the significant impact Omicron had on our operations during the quarter, as well as incremental cost incurred as a result of the war in Ukraine. Adjusted EBITDA for the first quarter of 2022 was $36.5 million, compared to $46.3 million generated for the first quarter of 2021 on an non-recurring basis. When we announced a simplification transaction last year we said that roughly $40 million of a SG&A expenses would be brought into EVA and the $10 million decrease in adjusted EBITDA year-over-year is impacted by us absorbing those costs as planned. Distributable cash flow was $25.3 million for the first quarter of 2022 as compared to $30.4 million for the corresponding quarter in 2021. Similar to adjusted EBITDA, the year-over-year decrease is due to absorbing SG&A cost from our simplification transaction as planned. Our liquidity as of March 31, 2022, which included cash on hand and availability under our revolving credit facility was $280 million. As we have consistently demonstrated in prior year. We expect that the back half of the year will be a significant step up from the first providing two-thirds of our annual adjusted EBITDA for the business. As John pointed out, we revised certain full year 2022 guidance metrics, which means we should expect the second quarter to look a lot like the first before significantly accelerating through Q3 with another step up in Q4. And although, we are accelerating our highly accretive capacity expansion plans, our total CapEx guidance for 2022 is now changing. And thus we are reaffirming our total CapEx range for 2022 of $255 million to $275 million. Our CapEx spend is expected to be back end weighted with around 60% of the spend happening in the second half of 2022. In terms of leverage, we expect to stay well within the terms of our credit agreement. Our commitment to conservatively managing Enviva’s balance sheet is unchanged. We continue to expect to transition to a fully self-funding growth model over time and we will increasingly use cash flow generated from our business to do so. The timing of this transition is dependent on the cadence of new plant construction. And John will give an update on our asset growth outlook shortly. Over the long-term, we are targeting a dividend coverage ratio of 1.5x and we expect to have the financial flexibility to increase dividends over time. Stepping back to look at the big picture. I’m very proud of the resilience and strength of our business model. Notwithstanding the short-term temporary challenges we encountered during the first quarter of this year, our business model is set up to protect us from most of the macro pressure that are dominating new headlines, including the impact of a potential recession. There just isn’t another fully contracted company with a similar profile of visible, doable cash flow going at this rate. And we believe we have much more shareholders value yet to unlock. Now, I would like to turn it back to John.
John Keppler: Thanks, Shai. To pick up on Shai’s last point of Enviva being a fully contracted business. Our contracted revenue backlog remains over $21 billion with a weighted average contract maturity of more than 14 years. Our contracted revenue backlog is complimented by a growing customer sales pipeline in excess of $40 billion. Given our robust contracted position, our growing demand profile and the persistent structural short that remains in the market, we are also aggressively expanding our production capacity. With Lucedale now ramping production, we will begin construction in the coming weeks on our next large scale fully contracted plant in Epes, Alabama. Epes is designed and permitted to produce 1.1 million metric tons per year, and will be the largest industrial wood pellet production plant in the world. This fully contracted plant is expected to generate approximately $65 million in annualized adjusted EBITDA once the plant is fully ramped or better than a five times multiple of invested capital. At this time last year, we were still buying smaller dropdown assets from our former sponsor on a 7.5x investment multiple, that’s an incredible improvement on accretion. And when you think about multiplying that by the next five plants we’re building, you can understand why we have such conviction around our long-term growth profile. We also recently announced that our next greenfield development will be in Bond, Mississippi. Bond will be similar in size to our Epes facility and we expect to begin construction in early 2023. Lucedale, Epes and Bond are the first three plants in our growing Pascagoula cluster and plans are underway for the cluster’s fourth plant. One of the very attractive aspects to building out the Pascagoula cluster is the operational leverage we have at our Pascagoula terminal and the enhanced returns we expect to generate as we add new plants and increase terminal throughput. We expect to make a decision on the side for our fourth Pascagoula cluster plant around the end of this year. Next on our path to doubling production capacity from 6.2 million metric tons per year to over 13 million metric tons per year is the addition of a new plant in each of our Savannah, Wilmington and Chesapeake clusters. We continue to expect to add six new plants over the next five years with the likelihood that we’ll add more after that. A lot of work ahead of us, but a lot to look forward too and as I’m fond of saying, we’re just getting started. Before we open up the call to questions, I want to take a moment to give an update on the sustainability attributes of our business, especially in light of birthday being just two weeks ago. As a pioneer in the biomass industry, we’ve built a business focus on our core values, caring about people in our communities, fighting climate change by displacing coal and ensuring that we are growing more trees, managing our business under industry-leading sustainability practices that ensure that we are delivering favorable impact to energy and the environment right in line with the IPCC guidance. We source our renewable wood fiber from the U.S. Southeast, a region where forests are primarily owned by private land owners. And these sustainably managed forests have grown by over 40% over the last 25 years. While at the same time, supplying more than 20% of global demand for forest products, including bioenergy, making it one of the most vibrant, robust, and growing forest resources in the world. Further, far from depleting timber resources, USDA data shows that in the areas where we buy wood fiber forests have increased by 21% over the last 10 years since we began our operations because of the positive impact and long-term markets that Enviva creates for landowners to keep their landholdings in forest and, in fact, plant more trees. Enviva leads the industry in sustainability and responsible sourcing, strictly adhering to our Responsible Sourcing Policy and our industry-leading Track & Trace® technology to ensure we are keeping our forests healthy, thriving, and growing. All of the wood we procure, regardless of its form, is low-value. In the competitive market for sawtimber and other high-value wood, landowners can receive 6 to 9 times more than the price for fiber that Enviva pays, eliminating any incentive for the landowner to sell high-value tree to us for a much lower price. There are, however, few buyers in our regions today for the residual tops, limbs, commercial thinnings what used to be sold as pulpwood neither are there natural markets for the understory, diseased or crooked trunks and trees, that are both byproducts of a traditional sawtimber harvest and impediments to replanting and regrowth after the higher value timber sales have occurred. As a result, by turning low value or unmarketable wood from a harvest into productive, low-carbon renewable fuels and feedstocks, we are symbiotic with the broader forest products sector, delivering tangible benets for the climate as well as economic value to landowners. On Earth Day, President Biden signed an Executive Order recognizing the role American forests play in wildfire resilience and climate change mitigation with the White House specically highlighting in its Fact Sheet its wide-ranging support for healthy forest economies, including grants to expand markets for innovative wood products and wood energy that support sustainable forest management. We are incredibly privileged to have the opportunity to continue to build a company and a unique platform that delivers real climate change benefits today at scale. We are also fortunate to be able to define our company in relatively simple terms. The world wants less carbon, more quickly and more cost effectively from secure sources and that’s exactly what we offer. Now let’s open up the call for questions.
Operator: Thank you. Now begin the question-and-answer session question. First question comes from Jordan Levy of Truist. Please go ahead.
Jordan Levy: Good morning, all. Exciting to see the three announcements related to the Germany market that that’s been a market that you’ve been working on developing for a while now and maybe a combination of policy being rolled out in recent geopolitical events have kind of spurred that into action. I’m wondering if you could give us an updated sent on the potential market opportunity there both on the utility and industrial side and what that can mean for your growth trajectory in the coming years.
John Keppler: Jordan, thank you very much. We’re incredibly excited about the progress that we’re making in Germany. You’re right. It has been a key target market for us real – really initiated by the German government’s conviction around ending coal and the coal exit law. Certainly, that has spurred a lot of utility consideration as we’ve talked about in the past of conversion of existing coal fired infrastructure into repowered biomass fire both power and combined heat and power assets. And this first large utility customer of ours is one that we’re obviously very, very excited about as an entry point for us, large scale million ton per year plus type contract really gives us a strong foothold and continuing to expand the opportunity to facilitate the energy transition in Germany. And so we do expect follow-on opportunities there over the course of the next several months. And certainly as the question about energy security becomes just as prominent in the decision making of many of our utility partners as is the focus on decarbonization. And so as we’ve guided to in the past, within the core power and heat generating sector, we would look at a 5 million to 10 million ton per year market as that continues to mature. So again, lots of opportunity there, great long-term structured agreements that are frankly complimented by what we see in the industrial sector. And we’re very, very pleased to announce today another major contract into that sector. Frankly in a segment that we haven’t talked about before it’s beyond the sectors we’ve talked about historically. So as new use cases continue to evolve estimates on the total addressable market continue to increase. And as we’ve shared in the past, if you sort of benchmark yourself on, if you think about the utilization of coal today in one, perhaps large steel manufacturer in Europe, that’s about 20 million tons. There are multiple folks like that. I wouldn’t suggest that we’re going to displays a 100% of that, but 10% of a number like that is a even with one customer is a very large number. And so as you’ve seen in some of our prepared remarks and some of our published materials and our investor decks and the like, we tend to think that there is an opportunity for 20 million to 30 million tons per year at a pricing that continues to match or better than what we have historically seen in the utility segment driven by both scarcity and frankly, the difficulty in mitigating the carbon intensity of some of these industries, there really aren’t any other alternatives. So very excited about it, really encourage, I would point out and reinforce that the opportunity for us to leverage a capability that, that frankly, we don’t talk a lot about. Generally the – is the terminal and distribution infrastructure that, that we’re frankly really quite good at from the export side of our business. Our ability to replicate that with people like greenness in Germany and across Continental Europe provide some substantial operating leverage and margin expansion potential for us as we continue to grow this business really excited about it. Great toehold in a number of these sectors and lots of runway ahead of us for margin expansion and durable volumes.
Jordan Levy: Thanks. John. And maybe as my follow-up more on the macro side of things, you guys pointed to a $10 million negative impact from lack of the third-party volumes in the market. And it seems clear that the spot market right now is pretty constrained for a number of reasons. But you also pointed to a $5 million positive.
John Keppler: Jordan, it sounds like we lost you there for a second. Yes. You’re back now. The last I heard was – Jordan you back.
Jordan Levy: Yes. I’m here.
John Keppler: Okay. So comments on the – certainly the near-term supply dislocations that we’re seeing. Clearly, the have been fairly substantially impacted by the war in Ukraine. You’ve got certainly the limitations around Russian volumes and Belarusian wood fiber challenging production in that region too. So a market that was already structurally short, you’ve now seen roughly 2 million metric tons per year be pulled out of that market. And I think, again, some broader supply challenges around the world is making that even more difficult. The spot market opportunity for us, to the extent, that we can drive incremental production gives us the opportunity, if you look at some of the recently reported transactions in the $300 plus per ton range, obviously we’ll be looking to try and tackle some of those. But the general durable pricing uplift that we’ve seen and guided to for the back half of this year. And certainly in the uplift that we see going forward in the 2023 and beyond, those same – the same challenges for Q1 are translating into durable pricing uplift for us going forward. And we look to monetize that on a go forward basis quite substantially.
Jordan Levy: Thanks. And even though, I cut off, I think you got to the second half of my question that I didn’t get to ask anyway. So appreciate that and appreciate the responses.
John Keppler: Well, Jordan, thank you so much, always good to talk to you.
Operator: Thank you. Next question is from John Mackay with Goldman Sachs. Please go ahead.
John Mackay: Hey everyone. Good morning. Thanks for the time. Why don’t we start, so we’ve had a couple MOUs announced over the last couple quarters now? You’ve given us some details on timing on when you expect to convert them. But maybe if you could just give us an update on where some of them stand, including maybe the big one, like J-Power and some of the others on SAF. Thanks.
John Keppler: Yes, John, thank you so much. I will tell you the relaxation of the travel restrictions for COVID particularly into Japan has helped us remarkably accelerated a number of the things that we’ve had both underdevelopment and frankly under contract there too. I mean, the ability for us to get our development teams directly face-to-face with a number of our key contracting partners really has put that back on an acceleration path. Clearly, we saw some challenges in being able to be face-to-face. Even though, we do have strong team Tokyo. The efforts right now are really focused on plant level specifics across a whole host of our contracting counterparties. And so the ability to get our people there has really, really helped us out there, certainly, when we look at the broader MOU profile. As we enter into a number of these new segments, one of the most important things that, frankly, customers who have for the very first time begun entering into these long-term take or pay contracts, obviously, 10, 15, 20-year duration. That has a take or pay component to it, and a notional value in some cases, $1 billion, $2 billion. Their ability to secure and know, and underwrite the fuel supply at known economics is the first step of that. Before they can consider really the rationalization of exactly how and when in each one of their, frankly, multi-location facilities, they can then implement the appropriate conversions to. So the MOU or LOIs are really important for a step to get all those key critical terms, the benefit of the bargain for both parties in ink on a sheet of paper, so that we’re all understand the terms of the trade. From there, and that’s why it’s about a six to 12 month conversion. There’s a lot of education about for, in many these industries, the take or pay obligations, the contract nature of these pieces. And then the engineering and focus, of course, on actually converting each one of these industries and their particular manufacturing processes to consume biomass. That generally occurs right in parallel with a permit timeline that many of our customers will undertake. And so as a result, this has entered sort of our contracting profile, a really important first steps that give everyone a really good set of certainty around the pricing, the volume, the terms, and then we convert that over time into the actual agreements and then begin deliveries. Some of the earlier ones will certainly are well on track to deliveries commencing around the end of next year with substantial deliveries in the – across the overall portfolio of the incremental contracts beginning in about 2024 as we had articulated in some of our prepared remarks, some pretty attractive pricing opportunities that provide for durable margin expansion over time, too.
John Mackay: All right. That was thorough. I appreciate that. Thank you. Maybe picking up on that last piece, the gross margin guidance for next year was helpful. And you’ve talked about a couple moving pieces here. Maybe if we’re just walking from kind of where we sit now to there. If you could break up how much is, maybe getting better pricing across the board versus getting a little more comfortable with some of these cost pressures right now abating. Thanks.
John Keppler: Yes. Great question. So when we’ve talked about our contracted portfolio, the contracts into which we’ve entered, each have various pricing escalators. Some are PPI and CPI driven, some are fixed escalators. And so on an average basis, what you see is probably a little less than total reported headline inflation, because some of them are fixed and some of them are of course, get the full pass through of that. But net-net, when you look at, its sort of the guide that we would’ve given historically to the mid-40s to roughly 50 or better now. That’s a 10% increase in a fully contracted business. That’s a very attractive margin for metric ton increase, headline price, big portion of it, obviously you’re inflating your margin in inherently by inflating the headline price. So we certainly don’t see the similar inflation in the underlying cost tower, which is providing about that 10% increase year-over-year. And what we would say is, that’s the first step of many that we see going forward in 2023 and beyond.
John Mackay: All right. Thanks for that. Maybe if I can squeeze in just one more, the new – so the MOU and LOI in Germany, makes sense. Maybe if you could talk a little bit more about the partnership you’ve launched as well, and just seeing if I heard you right or that you’re thinking about specific investments, I guess in Continental Europe itself. Maybe if you could just kind of talk about what that could look like? And maybe what costs could be in returns could look like? Thanks.
John Keppler: Yes. Look, we’ve got a very attractive capital investment profile in the business as we described in announcing the progress that we’re making on the Epes plant. This is a sub 5x in investment multiple that generate about $65 million in annualized adjusted EBITDA for an asset that we would be building in Northern Alabama on a fully contracted basis to serve our contract counterparties around the world. A component of our overall infrastructure that we don’t talk about as explicitly as perhaps the new plant development is really our investment in the terminaling capacity, where we’re aggregating from a distributed set of plant assets into a single point of reception, storage, loading for transportation and delivery around the world. The operating leverage that we’re able to realize on investment like that is absolutely remarkable. Certainly, the marginal cost for every incremental ton through over that fixed asset provides for durable margin expansion that you see within our own cost hour. We’re seeking to replicate that in Europe, principally in Germany, because of the fragmented nature of our customer set there. The industrial activity of reception, storage, transloading and distribution downstream to our customers we believe is a margin capture opportunity for us as we go forward. That would be consistent with or frankly, better than what we would expect to be a more traditional plant level investment because of the such substantial operating leverage that we see in these fixed cost assets, like our terminals.
John Mackay: Interesting. All right. I appreciate that detail. Thanks for the time today.
John Keppler: Absolutely. Thank you so much.
Operator: Thank you. Our next question comes from Elvira Scotto, RBC Capital Markets. Please go ahead.
Elvira Scotto: Good morning, everyone. I have a few questions here somewhere on the guidance. So what gives you the confidence that the challenges that we saw in the first quarter are largely behind us? And can you talk about what gets you to the low end versus the high end of your 2022 guidance? And then maybe also just talk about the COVID impact that you outlined. How does that compare to the COVID impact last year or at the heart – or at the height of the pandemic?
John Keppler: Thank you. It’s really good question. We’ve been very, very privileged in this company. If you look at the – from the onset of the pandemic, the 20 plus months of uninterrupted, un-dislocated operations as the pandemic continued to ravage in various forms. The Delta variants certainly had people in our company affected, as we’ve shared in the past. We’re very fortunate that people weren’t getting COVID at our plants. The transmissibility of the Delta variant was certainly much lower than Omicron, which I’ll get to in a second. But we were able to keep our people safe. And when someone did fall ill, we were able to quarantine and isolate them and limit the impact of COVID quite remarkably. As the – as certainly as the vaccination rates in our own workforce, quite closely mirror the vaccination rates in general, across the Southeast U.S., which are generally lower than elsewhere. The Omicron variant quite substantially hit us in late December with a significant portion of our workforce affected. We gave some color to this on our last call together, but the infectivity of the variants, as well as the quarantine provisions of not only the individuals affected, but anyone that would’ve come in contact with of initially 10 days, fortunately that later in the period of subsided to five days under the CGC guidance. That kept a substantial fraction of several of our client’s workforces on the sidelines. We were able to mitigate some of that with contract labor or overtime. But ultimately our production profile was materially degraded in a number of these facilities compounded by what I would say is similar impacts in our supply chain from our logging and trucking workforce as well as what I would characterize as more broadly reported dislocations and disruptions in rail service. Many of the major rail service providers have continued to face staffing and hiring challenges, which means that when trucks or railcars or power doesn’t show up to our facilities, we oftentimes will have to curtail them, dampening production. So stopping production, because we have no place to store the pellets, having exhausted all of our onsite physical resources of trucks, railcars or storage on the site. The net impact to that if you try to quantify it is about 200,000 tons. So when you think about what the quarter should have been, we’re about 200,000 tons light in terms of our own production. Those are naturally the most profitable tons we didn’t make. And so from a contribution margin basis, that’s in the neighborhood of $12 million to $15 million, which meant that the quarter should have penciled out much more closely in line with the $50 million that we would’ve expected. So why are we – what do we think about the world going forward? Certainly, the staffing position that we have and the health of our workforce and the mitigation of, I think the Omicron variant in the rear view mirror gives us a fair bit of good confidence about our ability to mitigate this. Also what we’ve seen of course is, is our own investments in contracting with incremental trucking and other logistics providers. They give us a much greater comfort around our ability to manage and mitigate going forward that that capacity didn’t exist in the deepest trough of that challenge in Q1, which as we’ve shared in the past, it’s our seasonally most challenging quarter. You’ve got a wider procurement radius for fiber. So you saw some implications on sort of road miles and diesel from the spike and the war in Ukraine as well. But now that that procurement radius is of course shrunk, the warmer weather that we describe as the seasonal benefit of our operations, we do see that resolving fairly straightforward and are very excited about – have the opportunity to do for the balance of the year. That is why we certainly feel very comfortable in the back half guide. And if you tie together the 2023 preview that we gave, our expectations are exiting full year 2022 consistent with run rates we would’ve had before.
Shai Even: And also Elvira, as John mentioned in his comments, one of the reasons for the change to the guidance for 2022 is the shift to the right of the Lucedale plant – start of Lucedale. So if we think about 2022 and if we think about that we may see like a better production from Lucedale as well as low impact of COVID-19 and now lesser extent of impact from, well, Ukraine than how we can see like us meeting the higher side of the range of $270 million for 2022.
Elvira Scotto: Great, thank you. That is really, really helpful. Just to follow up on the production curtailments did that – how does that affect your contracted volumes were you still able to meet your contracted volumes? I know you have a plus or minus band around your contracted volumes, but is there any penalty for these production curtailments?
John Keppler: Yes. When you look at the aggregate production profile of our capacity, 200,000 tons on north of $6 million is what kind of 4%-ish, 3%. What that does for us is, is frankly, just ships deliveries, a bit to the range. And so we’ve been able to within our ranges, that are of our contractual obligations, we’re certainly at the lower end of those ranges, which means that we limit our opportunity to overdrive into certainly some of those contracts. That’s also compounded of course, by the challenges and the physical liquidity of lower third-party volumes that are available given some of the challenges in the geopolitical environment. But what it basically does is it shifted us a bit to the right. And so the delivery schedule moves to the right, which is why you see a little bit of that fall out of Q2 into Q3, and then obviously full year into 2023 as well.
Elvira Scotto: Great. Thank you. And then just to follow up on the question regarding the partnership with Rhenus Group, so how do you see that developing, I mean, is that a 50/50 partnership? What’s the timeline here? What sort of CapEx spend and when you add this sort of incremental spend would you still be able to fund this and your plants with internally generated cash?
John Keppler: No, it’s a great question. I think that we would be from an actual deployment of capital, we’re not within a 12 month window of thinking about putting dollars into steel or concrete in the next 12 months. But what we are doing is identifying really critical points in the overall both import infrastructure, as well as distribution infrastructure to our growing customer base in Germany, as well as continental Europe. Because – excuse me, because Rhenus has such a great footprint. We have the opportunity to evaluate multiple opportunities alongside their existing asset base bringing the knowhow that we have for high quality durable management of wood pellets that ensures the delivery to our customers on time in the right spec, in the right quantities and form factor. And that’s what we’re exploring with them right now. And so you look at it, as I mentioned in response to one of the previous questions was really around, okay, we have a great investments. We know exactly what every dollar into a pellet plant or a U.S. port looks like we think, we can do out or better than that in the opportunities in Europe. And frankly it’s filling a critical infrastructure and logistics need as the world continues to want to do something different than the traditional energy delivery mechanisms. Some of that’s clearly driven by the challenges in the war in Ukraine, the limitations on some of the things that used to come from east to west, and now the opportunity for us to fill a bunch of those gaps with renewable wood resources from the Southeast U.S., very attractive, both from a long term contracted basis and on a fundamental return on invested capital into these potential new infrastructure assets.
Elvira Scotto: Great. Thank you very much.
John Keppler: Good to talk to you. Thank you. Operator, do we have another individual with you?
Operator: One moment, please. Our next question comes from Ryan Levine of Citi. Please go ahead.
Ryan Levine: What is the diesel price exposure of the company in relation to suppliers that cannot be passed on to customers given the fiber basket based pricing, and how did that impact Q1 results in the outlook for the remaining portion of the year?
John Keppler: Hey, Ryan, always good to talk to you. As we’ve talked about in the past, we actually have very limited diesel exposure within our direct operations. What we do see, and what we saw in Q1 was a selection of our fiber and trucking partners who faced a really abrupt and severe spike in diesel. As you might know, that particular part of the country had some of the lowest diesel inventories coming into that challenge. And so you saw a pretty significant spike. And what that did was it actually kept some of our loggers and some of our truckers who provide the hauling services, some out of the woods altogether. And so we needed to provide on frankly, a quite temporary basis to a subset of our loggers an increase in delivered fiber pricing, not directly tied to diesel, but really to account for the fact that in Q1, we have much larger procurement radio for fiber as our loggers need to get to drier and more accessible tracks in the colder weather winter months. And so that’s largely behind us now. The short-haul distances of our trucking generally downstream from our plants to our ports mitigates the implications of diesel variability around that. But that is exposure to our supply chain partners who generally tend to deliver to us under a fixed tariff or a fixed rate for a period of time. And so we have some cover against that, not unlimited but we were certainly affected by that in Q1 more exacerbated Ryan, frankly, by fact that the trucking capacity was limited, limited by labor. And so re-contracting or spot trucking opportunities to source that was much more expensive in that quarter than what you would expect either on a previous basis or on a go forward basis.
Ryan Levine: Thanks. And then is there higher cost associated with the Lucedale project from a CapEx perspective? And are there any practical implications of the contract delay with customer contracts?
John Keppler: No, I mean, the Lucedale plant, I mean, the construction for that is largely in the rear view mirror. I mean, we’re completing sort of the tick and tie and close out of the contracts there. And you’ll see the final capital retainage kind of go out as part of our the reaffirm – reaffirmed CapEx guide that we gave, which didn’t change. So the amount we expected to spend on Lucedale is what we spend on Lucedale, you’re really – we’re now in the process of depending upon the contractor of releasing retainage, going through the equipment and performance testing, all the things that close out of contract. That spend is expected to flow out in our CapEx guide for the balance of the year. So continues to be kind of right in line on that. The shift to the right is certainly we basically – the first quarter is not all that material production expectation in terms of tons. What I will tell you is this plant is ramping quite effectively. What we’re optimistic about in terms of the Lucedale facility is that, that again, early going, but the ramp of this facility is at a much steeper and frankly, more advanced curve than anything we’ve done in the past. And so that’s pretty exciting for us. That does give us some opportunity to potentially to certainly overdrive as we get through the back half of the year. But no, there’s no implications to directly to customers for that. Again, we don’t tie the production of any one of our plants to a specific customer set. So the portfolio approach as we describe about 200,000 tons short from our own production in Q1 that does shift the delivery schedule a bit to the right, but we’re quite optimistic and encouraged about our ability to grow through that.
Ryan Levine: And then last question for me around labor, in your prepared comments, you spoke about using more third-party labor, given some of the limitations that you’ve experienced in over time. Is that a more permanent trend that you expect to continue and using a third-party entity additional costs?
John Keppler: No, not at all, not at all. In fact some of the admittedly admitted a pretty challenging Q1. One of the real bright spots was some of the changes that we’ve made in our overall hiring strategy. It really quite effective here is. As large plants, that that are more mature for us, if we had an opening, we would tend to think about filling an opening with an individual, go recruit for that one spot. We’ve completely changed the paradigm on hiring and it’s proven incredibly effective. We were actually hiring cohorts now bringing, hiring into a balance of whether it’s 30 or 60 people, putting them in a training program for four to six weeks across a portfolio of our plants, cross-trained multiple opportunities for these folks. And what we’re seeing is really great retention and better performance over first 90 days of employees than frankly, we’ve seen them a very long time. It’s a really remarkable change in our hiring strategy, which is part of why we can talk about what we believe a number of these challenges being pretty firmly in our rear view mirror.
Ryan Levine: Okay, great. Thank you.
John Keppler: Absolutely, Ryan, always good to talk to you. Thank you.
Operator: Thank you. Next question comes from Pavel Molchanov of Raymond James. Please go ahead.
Pavel Molchanov: Thanks for taking the question. Let me ask a high level one about the European power sector. Since the war began, we have seen something that’s very uncommon in recent years, which is coal fired power plants being restarted as a way of reducing imports of Russian net gas. Does this trend represent a headwind for you or is it a tailwind or neutral?
John Keppler: Pavel, I think it’s pretty early going, right. We’ve got a lot of dislocation in energy, supply and demand across Europe right now. Commodity flows are uncertain. We – what I believe is probably durable for some period of time regardless of how the Ukrainian war ultimately resolves is the commodities from Russia will probably continue to be challenged in terms of delivery into Europe. That’s both gas, coal, a whole host of input commodities to not only the energy sector, but the industrial sector. And so I think it’s a mixed bag right now. I think that we do have some potential opportunities because what hasn’t changed is the level of conviction around mitigating climate change. And so if there are incremental coal fired assets that, that have a prospectively longer life to mitigate some of the energy security supply issues we do think that that is net a tailwind for the utilization of biomass and other renewable resources to displays the carbon intensity of energy generation. How that ultimately shakes out and over what period of time. My crystal ball is not great on that, but I would suggest that the opportunity set is increased and the pricing opportunity is further augmented by the general conditions we see continuing to evolve.
Pavel Molchanov: Okay. That’s helpful. In that same context, there have always been utilities and regulators in Europe that perhaps did not appreciate the sustainability attributes of bio power, the way other have? And given this uncertain fossil fuel supply environment that, you just described or is there a sense that more prospective customers are looking at biomass with that included as an attractive option than what they would’ve said three months ago?
John Keppler: Yes. Pavel, I think you also cut out there, but the answer is an emphatic. Yes, absolutely. The – what we continue to see in terms of the customer perspective on a shift from whatever fossil fuel profile they had been considering before to a renewable resource biomass is absolutely part of that mix. We had folks in our engaged with folks in the German context, especially who had gas on a critical roadmap to decarbonization given its treatment under the green taxonomy. Now focus almost exclusively on biomass. I mean that, that is clearly in both an energy security as well as a favorable tailwinds in the policy making environment. And you can also see that discretely on a policy making in sort of national level in places like Poland, where the alternatives are really just not great. But the focus and the effort on decarbonization continues to be a paramount, paramount focus and biomass will play a critical role in that as well.
Pavel Molchanov: And then lastly domestically, we have not seen $7, $8 and mcf natural gas for more than a decade. Is there any prospect that some domestic utilities might look for the first time at pallets as a electricity source?
John Keppler: I think the U.S. market privileges you and I had the opportunity to shout in the past. I think the U.S. market will ultimately be large for us, but not necessarily in the power generating sector. What we have is our first U.S. customer is a sustainable aviation fuels provider. We have a tremendous amount of reverse inquiry right now around bio methanol really the very difficult pathways to decarbonize because of the fossil fuel intensity and frankly the limited substitution alternatives available worldwide from a renewable spaces. There are substitutions that can be achieved in the power generating sector here. Ultimately I remain convicted that unfortunately, the U.S. does not have the same level of conviction around decarbonization of the energy sector that you see elsewhere in Europe, clearly that is somewhat driven by the supply and demand dynamics of actually available and secure sources of fossil fuels. We benefit quite significantly from that here without perhaps the same urgency or alternatives and pricing construct that you see around the world, even in the face of, in Pavel I’m agreeing with you. We haven’t seen $7 gas in a while actually, when we started operating this business and its infancy. Some of the things we were doing was displacing $12, $15 gas in industrial applications. Can that materialize here? Sure. But I tend to think that it will be more along the lines of the industrial sector as opposed to the utility sector. And of course, many of the multinationals that, that we are beginning to serve in Europe, in the industrial sector also have manufacturing assets here in the U.S. and the consumer drive for decarbonization. And the customers that they’re serving I think is still pretty high. And so we’re optimistic about that too.
Pavel Molchanov: Thank you very much, guys.
John Keppler: Well, thank you.
Operator: Thank you. Next question will be from Kevin Pollard, Pickering Energy Partners. Please go ahead.
Kevin Pollard: Just a couple of quick questions on some of the expansion. First of all, I noticed in the press release that the S facility you’re talking about approximately $65 million in the adjusted EBITDA once it’s up and running, which seems a little bit higher than the kind of 50 million rate we’ve talked about in the past, and would seem to imply an investment multiple a little bit closer to four times, the five times target. And I was wondering if you could elaborate on, what’s driving those improved economics, and is that something that we could apply to some of the future expansions on the docket?
John Keppler: Yes. Kevin, thank you so much for picking up on that. It’s a bigger plant with, in a higher pricing contracting environment. This is as we think about penciling out the facilities going forward certainly we benefit from higher price contracts, larger scale assets that drive again, previously operating leverage a couple times. These are large fixed cost assets. When you run them mid scale, the return profile is absolutely remarkable.
Kevin Pollard: Okay. And in terms of the talk about accelerating the expansion plan, I guess, with Pascagoula number four, is that would seem to put you in a position where you’re you, you’re managing three large expansion simultaneously. And I think you’d, in the past kind of talked about keeping it around two, and I was wondering if you could talk about, the steps you’ve taken to kind of give you that, that project management capability and how it might affect your ability to pull forward additional expansions in the future.
John Keppler: Yes. Super, super question. One of the critical things that we’re doing is evaluating our contractor counterparties right now. We certainly have benefited from a sort of scale level and frame contracts for equipment purchases of our major process islands. That’s the core of our building copy approach. What we’re working through right now is a level of standardization across our contracting partners, meaning that we’re bringing the same civil mechanical engineering controls trades of to bear with multinational or certainly national level contracting counterparties that that can give us that leverage to do to plus three, perhaps even more assets at the same time because of the scale of their own workforce.
Kevin Pollard: Great. Thanks. That’s all for me.
John Keppler: Thanks so much.
Operator: Thank you. That concludes our question-and-answer session. I’d like to turn the call back over to Mr. John Keppler for closing remarks. Please go ahead.
John Keppler: Well, it goes without saying that amidst a very difficult Q1 we appreciate today and hopefully, we got through in some of our prepared remarks. These are temporal issues. They’re transitory, we’ve gotten through so many of them and we’re very excited about what comes next. We’ve got a track record of a really good, stable, safe, healthy operating workforce. That’s back at it again, day in, day out continuing to work very, very hard every day to reliably displace fossil fuels. They’re doing a great job and we’re excited to continue the progress that we’re making, growing more trees and fighting climate change. We’re very excited about what comes next, and we really appreciate everyone taking the time with us today. And we’ll look forward to talking again over the coming weeks in the next quarter, in the meantime, stay safe and healthy. And thank you very much.
Operator: This concludes our conference. Thank you for attending today’s presentation. You may now disconnect.
