Enviva Partners [EVA] Conference call transcript for 2023 q3
2023-11-09 10:18:06
Fiscal: 2023 q3
Operator: Good morning, and welcome to Enviva Inc. Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the call over to Kate Walsh, Senior Vice President of Investor Relations and Corporate Communications. Please go ahead.
Kate Walsh: Good morning, everyone and welcome to Enviva’s third quarter 2023 earnings conference call. We appreciate your interest in and support of Enviva and thank you for your participation today. On this mornings call we have Glenn Nunziata, our Interim Chief Executive Officer and Chief Financial Officer. Our agenda will be for Glenn to discuss our financial and operating results and to provide an update on our current business outlook and operations. Then we will close the call. Today we will not be having a live question-and-answer session. During the course of our remarks, we will be making forward-looking statements which are subject to a variety of uncertainties and risks. Information concerning these 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 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 their 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 that we use can be found on our website at envivabiomass.com. I would now like to turn the call over to Glenn.
Glenn Nunziata: Good morning, everyone and thank you for joining us. By way of quick background, I joined Enviva a little less than three months ago as CFO. And today I’m honored to be speaking to you as both CFO and interim CEO. For the past few months, I have fully immersed myself in all aspects of the company’s operations and performance; including of course its financial processes and capital structure. Unfortunately, as you read in our press release and 10-Q filed this morning, this was a very disappointing quarter overall for the company. Spot market prices for wood pellets this year have not evolved in the way we anticipated and that weakness in the spot market caused us to significantly miss our expectations for the third quarter as well as materially reduce our expectations for the fourth quarter of this year. As a result, our profitability and cash flows are meaningfully lower than we had expected putting pressure on our covenants under our bank facility and overall liquidity. To address these near-term headwinds we are moving with urgency to execute a multifaceted transformation plan consisting of three key undertakings. First, we have launched a very focused effort on improving the profitability of our contracts with the intention of returning to a business model, which generates the vast majority of cash flow from predictable, profitable take-or-pay contracts. The single most important lever we have to ensure the long-term success of the business is improving the profitability of our current portfolio of contracts and ensuring that the value of those contracts more appropriately reflects the value we provide to customers. Second, we have engaged leading advisory firms specifically Lazard, Alvarez & Marsal and Vinson & Elkins to perform a comprehensive review of our capital structure with the intent of improving our financial position and strengthening our balance sheet. And third, we announced a realignment of senior leadership to strategically focus our resources on those first two pivotal undertakings. The leadership realignment is primarily comprised of two key changes. First, the Board of Directors has appointed me interim CEO. In this expanded role, I will lead all facets of the important initiatives we are taking to ensure the turnaround of Enviva. And very importantly, I will work diligently to restore credibility among our key stakeholders including our valued shareholders, lenders, bondholders, customers, vendors and employees. As we execute with urgency on these important steps, we have asked Thomas Meth to focus his energies almost exclusively on renegotiating our existing customer contracts given his long-standing relationships and understanding of each customer. And second, Mark Coscio previously our Chief Development Officer is taking on the role of Chief Operating Officer, providing oversight of our plants and ports in addition to our capital investment program. It's important to note that we are also evaluating a number of potential alternatives with the help of our advisers to alleviate the adverse liquidity impact of a series of transactions we're calling the Q4 2022 transactions. As many of you are aware, during the fourth quarter of last year, we entered into agreements with a customer to purchase approximately 1.8 million metric tons of wood pellets between 2023 and 2025. These purchase agreements were priced at market prices in effect at the time of the agreements. And roughly at the same time, we entered into additional wood pellet sales contracts with that same customer. That together with the existing sales contracts we had with that customer, totaled approximately 2.8 million metric tons with deliveries between 2022 and 2026. As described in much further detail in our Form 10-Q filed today, the Q4 2022 transactions have had a significant negative impact on our profitability, cash flows and liquidity, due to the negative current spread between the sale and purchase prices of the agreements and the anticipated loss on resale of those volumes given the current unfavorable spot market pricing environment. Absent a significant and near-term increase in wood pellet market pricing, we expect the Q4 2022 transactions will continue to have a negative impact on our profitability, cash flows and liquidity through 2025. Compounding these challenges are the operational challenges we reported during the first half of 2023 and the wood pellet spot market that has largely held market prices at levels unsupportive of creating margin through spot purchases or spot sales. As such, we anticipate that absent a cure we may be in breach of certain of our covenants under our senior secured credit facility as early as the end of the fourth quarter of 2023. Because of these conditions and events in the aggregate, you will see going concern language noted in our press release and Form 10-Q. As I noted earlier, we are moving forward with a sense of urgency to develop and execute a successful path through the near-term challenges. Importantly, as we look beyond the next few quarters, we remain optimistic regarding the long-term value inherent in this business and in this industry. We have a lot of work to accomplish in the near term, but once we navigate through these challenges, we believe Enviva will be in a stronger position to continue to lead the industrial biomass sector through this next significant leg of growth. Let's turn now to discuss the details of our third quarter results. There are two key highlights I'd like to acknowledge upfront because they are a real testament to the focus, talent and resilience of our entire team. First, production improvements across our plant fleet helped increase sales volumes by 14% year-over-year and 10% sequentially versus the second quarter of 2023. And second, our delivered at port costs were $152 per metric ton during the third quarter, down $9 per metric ton from $161 per metric ton in the second quarter. Improvement quarter-over-quarter was primarily driven by increased production coupled with lower fixed costs such as repairs and maintenance and contract labor. While we acknowledge the progress that these continued operational improvements represent, our overall results came in well-below our expectations. Net revenue decreased approximately 2% year-over-year as lower commercial services activity dampened revenue per metric ton, which more than offset volume improvements. Net loss for the third quarter of 2023 was $85 million as compared to $18 million for the third quarter of 2022. The increase in net loss year-over-year was primarily attributable to four factors. First, during the third quarter we determined that the Southampton Virginia plant had improved operating production costs by operating with a single dryer line and decided to permanently shutdown the second underperforming dryer line. As a result, we recognized $21 million of asset impairment charges in the quarter. Second, we incurred higher interest expense including $22 million of interest expense on repurchase account. Third, the corporate restructuring program we've been executing since the second quarter of 2023 resulted in restructuring costs recorded in the third quarter inclusive of $6 million of severance expenses. And fourth, we simply had higher cost of goods sold because we sold more volume during the quarter. Adjusted EBITDA for the third quarter of 2023 was $36.6 million as compared to $60.6 million for the third quarter of 2022. The year-over-year decrease of $24 million was primarily driven by revenue per metric ton being 17% lower year-over-year coupled with higher SG&A expenses as a result of us engaging financial and legal advisers in connection with a comprehensive review of our capital structure and negotiations with customers. The lower sales price per metric ton year-over-year was again primarily due to the weak spot market dynamics this year versus 2022. During the third quarter 2022, biomass spot market prices as well as the forward curve pricing of certain European indices exceeded $400 per metric ton. That's a substantial premium to our current long-term contracted pricing of roughly $200 to $220 per metric ton across our portfolio. Said another way, average spot market prices for the third quarter of 2023 and year-to-date are both approximately 50% lower than the fourth quarter of 2022. In August 2023, when we reaffirmed our expectations for third quarter including an adjusted EBITDA range of $60 million to $80 million, we factored in a significant volume of spot sales. We assumed an average sales price on this volume that was much higher than our contracted book. Our liquidity at the end of third quarter 2023 was $440 million, which included $315 million of unrestricted cash and approximately $125 million of cash restricted to funding a portion of our greenfield plants in Epes, Alabama and near Bond, Mississippi. As of the end of September 2023, we had drawn the full amount available under our $570 million senior secured revolving credit facility. As we look ahead to the end of the fourth quarter of 2023, due to the liquidity factors and comprehensive review I've discussed, together with lower expected commercial activity, we have decided to withdraw our forward-looking guidance including our previous sales price per metric ton, net loss, adjusted EBITDA and total capital expenditures guidance for 2023 and future years. However, we did want to share some of our assumptions for the fourth quarter based on what we know today. We are anticipating that fourth quarter results excluding any impacts from the Q4 2022 transactions could potentially be weaker than the results for the third quarter of 2023. While we generally experienced an uptick in biomass consumption in the fourth quarter of each year as winter heating demand drives higher commercial value and allows us to capitalize on increased wood pellet demand and higher spot prices that dynamic has not yet materialized this year. It is also important to note that we are incurring higher SG&A expenses associated with the important work we are doing with our financial and legal advisers. With respect to total capital expenditures for the year, we are being extremely vigilant with cash management while navigating through our leverage and liquidity headwinds. We remain keenly focused on investing in the construction of the Epes facility and have made approximately 40% of that total investment to date. Getting Epes up and running on time and on budget is one of our top priorities, given its expected impact on our production capacity and ultimate profitability. Additionally, we are progressing with the development of our Bond facility, although we are evaluating a potential deferral of six to 12 months related to the construction of the Bond plant in light of ongoing liquidity management initiatives. We continue to invest in Epes and Bond because we believe the cash flow contribution of these two plants is important to our successful path forward and we want to maintain momentum with our production growth in a disciplined way. However, we will continually reevaluate our material capital expenditures. While we recognize you may have questions after the news we've shared this morning, the fact of the matter is we have a great deal of work ahead of us, before we will be in a position to provide satisfactory answers to many of those questions. As a result, we will not be holding a live Q&A session today. I'm sure that's disappointing to many of you but please know we are committed to coming back to the market in due time with more concrete updates and we will be happy to address your questions at that time. As I wrap up our call, I'll conclude with a few key takeaways. First, our recent operational turnaround efforts are yielding results, as evidenced by higher production at a lower cost this quarter. As we expand our focus to tackle improvements in our revenue generation and capital structure, I am encouraged and motivated by what I see our team being able to accomplish. Second, while we are navigating significant near-term headwinds, we are taking decisive steps to strategically refocus executive skill sets, strengthen our capital structure and liquidity and ultimately better position Enviva to be a strong leader in the industrial biomass sector through this next leg of growth. Finally, the long-term outlook for our business and our industry is compelling and I look forward to providing updates on our progress in the coming months. Thank you.
End of Q&A: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
