Enviva Inc.

Good morning and welcome to Enviva Incorporated's fourth quarter of 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. I would now like to turn the conference call over to Kate Walsh, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to Enviva's fourth quarter and full year 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 Thomas Smith, President and Chief Executive Officer, and Shai Evans, 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 outlook and operations. Then we will open the call up 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 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 forecasts. 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. RCC 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 mvivabiomass.com. 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 2021 financial results in accordance with GAAP to reflect that transaction. Today, we will discuss 2021 historical financial results on a recast basis or non-recast basis, depending on the reference point. please refer to our earnings release and Form 10-K document for more details on our recast and non-recast presentations. As is our practice, we will be opening up the line to questions following our prepared remarks describing the financial and operating results for fourth quarter and full year 2022, as well as what we have planned and expect for 2023 and beyond. We also hope you will be able to attend our inaugural Investor Day, scheduled for April 3, 2023, where we will have another opportunity to go into detail about the core drivers of success in the business, as well as our plans and strategy to capture the remarkable opportunity we have to continue to grow and deliver shareholder value. I would now like to turn the call over to Thomas.

Thank you, Kate. Good morning, everyone, and thank you for joining us today. When I assumed the role of President and CEO last year, I got the chance to get to know many of you, some for the first time, but for many, it has given us a renewed opportunity to be reminded of the tremendous potential that we saw when we co-founded the company almost two decades ago. As I've been able to share, we are a growth company, serving an increasing array of markets and customers around the world helping address one of the most critical challenges of our time, climate change. But it's not just an idea or a technology. We're an industrial company with a tremendous growth trajectory that generates cash. Our job and the unparalleled opportunity that comes along with it to increase shareholder value is to continue to grow the long-term contracted sales in the business that you know is the core of our operating strategy and to do so at an increasing level of profitability and cash flow generation amid dynamic market conditions. As we kick off today's discussion, I'd like to set the stage about what you are going to hear me and Shai talk about. First, we firmly believe in the cash flow profile of this business and have strong conviction around our ability to not only deliver $305 million to $335 million in adjusted EBITDA for 2023, but also to double adjusted EBITDA over the next four years and to self-fund our growth by 2027. Second, we continue to have incredible momentum with our customers, having signed 800,000 metric tons per year of new long-term incremental volumes in December and another 600,000 metric tons per year with a new set of customers in just the last few weeks all at higher pricing than we have seen historically. Third, we announced the $250 million equity investment in the company by our major investors and board members, those who know our business the best, demonstrating incredible confidence in our growth trajectory, the strength of our business, and the value creation we have ahead of us. Fourth, we will discuss the accounting change, which led to 89 million of adjusted EBITDA being deferred to future periods. But in no way does it change the fundamentals of our business. We sign and execute against long-term take-or-pay agreements and expect to generate the vast majority of margin from our underlying operations fulfilling these contracts. Fifth, 2022 was certainly a transition year for us, and while we delivered record-breaking volumes from our large and growing production fleet, our cost position was higher than we had anticipated. Inflationary adjustments and pass-throughs in our contracts covered us well, but dramatically improved supply chain conditions combined with lower energy costs and lower delivered fiber costs in our operations coupled with higher fixed cost absorption rate in 2023 will deliver a significant uplift to expected cash flow, setting us up for a strong year in 2023 and beyond. Finally, our commercial services capability, which provides accretive margin expansion opportunities, benefiting from market dislocations which will continue to be a key incremental opportunity to drive value into this business. Let's turn first to discuss our fourth quarter 2022 earnings in more detail. We executed a strong quarter with record volumes delivered to our customers at sales prices higher than we had forecasted. We were projecting a sizable step up in activity from third quarter 2022, and we achieved that. with volumes delivered increasing by 35% quarter over quarter. As compared to fourth quarter 2021, Enviva delivered approximately 10% more volume to customers during the fourth quarter of 2022. We projected adjusted EBITDA for fourth quarter 2022 in the range of $103 million to $123 million. And based on that counting treatment, we had expected and which informed our guidance, we would have achieved adjusted EBITDA within that range, delivering around $108 million for the quarter. What we ended up printing for fourth quarter adjusted EBITDA was $18.6 million, and I'll unpack the difference between the two numbers now. During the fourth quarter, We had three separate customer requests to defer or cancel shipments related to independent operational challenges. For example, one customer had a fire in their storage silo and were unable to accept shipment due to insufficient onsite storage. We were able to accommodate these customers' requests, freeing up shipments for us to sell to an existing large European customer at a premium. That shift enabled us to take advantage of the strong pellet spot pricing conditions we saw during the fourth quarter. We had a number of pathways to capitalize on the strong demand for wood pellets during the fourth quarter, all of which would have enabled us to meet our guidance targets. And selling to our large European customer was the path we took. Separately, During the fourth quarter of 2022, we planned our third-party payload purchases for 2023 and beyond. As many of you know, historically about 15 to 20% of our annual volumes sold are sourced from third parties. And we expect that to be the case going forward. 22 was a little different because the war in Ukraine shut off about 10% of the world's biomass supply. And the spike in pellet prices made it uneconomical for us to procure the same level of third-party pellets this past year. During the fourth quarter, we entered into a long-term purchase agreement with one of the largest biomass trading companies in the world, who is also one of the largest consumers of biomass in Europe and is one of our long-standing customers. It is this customer to whom we sold the available shipments during the fourth quarter. This customer had elevated demand during the fourth quarter due to their strategy to manage through the energy-scarce European winter. From an accounting perspective, because we sold volumes to the same customer that we entered into a long-term purchase agreement with, the GAAP accounting rules require us to treat both the sales contract and long-term purchase contract as a contract modification of our original sales contract, thereby combining all new and historical purchase and sale transactions as if they were a single contract. This accounting treatment differed from our expectations and as well as from the assumptions that underpinned our guidance ranges. It's important to note that we've collected cash in full for these sales. The customer's biomass power generation facilities have fully consumed our pellets and nothing has changed with the underlying fundamentals and operating model of our business. We are referring to this unanticipated accounting treatment as the deferred gross margin transaction. as roughly $89 million of gross margin and adjusted EBITDA is not being recognized in fourth quarter 2022 results, but will be recognized in future years, and our current expectation is that approximately half of the deferred benefit will be recognized in 2024 with the other half in 2025. Again, no change to our business, cash collected in full, just a change in reporting periods as to when the benefit of the sales will be recognized. For full year 2022, excluding the deferred gross margin adjustment impact, we would have achieved adjusted EBITDA of approximately $244 million, which was within our expected range of $240 to $260 million. We did experience a short period of downtime at several of our facilities due to the polar vortex that hit the U.S. southeast in December, and we estimate that we lost about 4 million of adjusted EBITDA due to the extreme weather event, mainly due to lost volumes. We have consistently referred to 2022 as a transitional year for us as we executed the major corporate structural change of converting from a master limited partnership to a regular-weight corporation at the beginning of 2022. At the same time, we were navigating the tough macroeconomic backdrop that impacted industry and households globally. Enviva struggled with COVID and labor-related challenges early in the year, and severe disruptions in the service delivery of our rail and trucking partners during the first half of 2022 And along with inflationary pressures, we experienced a higher cost position in 2022 than we forecasted. As a result, while pricing escalators, inflationary protections, and other pass-throughs in our contracts helped us maintain and modestly grow margins, as Shai will discuss further in a moment, we're laser-focused on improving operational performance and cost management across our asset fleet, And I am happy to report we're making noticeable strides forward. We're certainly seeing tailwinds with the price of natural gas domestically being in the $2 to $3 per MMBTU range and lower diesel prices are having a positive impact as well. We're also seeing progress in driving increased output from our plants with several capacity improvements now in place, including some deep bottlenecking and process throughput upgrades we have completed. Another important improvement is the work we've done around our high grading of our workforce. And with improved supply chain conditions as we enter 2023, we expect to deliver a meaningful lower cost position in our cost per peloton over time. I'm really looking forward to have an opportunity to do a much deeper dive on the attributes of operational improvement and our expected plant level efficiency improvement at our upcoming investor day. In the meantime, I will call out that the strong end to 2022 paves the way for a solid 2023. We reaffirmed our preliminary 2023 outlook for adjusted EBITDA and are guiding to a range of $305 million to $335 million to see some embedded upside in that range as we execute our plan moving forward. Given that the market for our product remains structurally short in supply while strong customer demand continues, we monitor dislocations in the marketplace and are increasingly transacting when pricing dynamics and contract flexibility provide opportunities to generate incremental gross margin. For example, at times when prices for incremental deliveries are elevated, NViva has the opportunity to reduce a certain percentage of contracted shipment and deliver our produced or purchased product into sales contracts at these higher prices. Conversely, when spot market prices are depressed, NViva has the opportunity to purchase attractively priced third-party volumes and increase a certain percentage of deliveries into our existing higher-priced long-term contracts. Additionally, given NViva's wide-spanning customer and shipping portfolios, we take advantage of opportunities to deliver cargoes procured regionally more proximate to our customers, generating incremental gross margin by reducing the cost of delivery relative to shipping costs implied in our long-term off-take contracts. We expect these logistics and commercial services to continue to grow commensurate with our growing backlog of fully contracted sales. We have a tremendous growth trajectory ahead of us, which is underpinned by a significant capital expenditure program. We're executing to put new plans in service. Our capital allocation policy is focused on reinvesting retained cash flows into our business while maintaining ample liquidity and protecting our conservative leverage position, which is truly conservative for companies like ours, which have long-term take-away contracted cash flows. Based on our capital allocation policy, we expect to maintain our 2023 dividend payout at the 2022 level, whereby we expect to pay 90.5 cents per quarter for an annual dividend of $3.62 per share. We definitely see the ability to increase the dividend over time and returning incremental value to shareholders is certainly top of mind for our management team. But we're also balancing that view with our target of fully self-funding our capital expenditures program by 2027. Our conviction in the growth trajectory of our business is reinforced by the customer discussions we have day in and day out, and more importantly, the decision making we see our customers taking at the ground level. We announced three new industrial contracts, two related to European industrial companies that are converting from coal to biomass in their manufacturing processes. And one from another customer, a global sustainable fuels company that is building a facility in the US to produce biofuels, including bio crude for blending into sustainable aviation fuel. These three new contracts build on the nine agreements we announced during 2022. The momentum behind the energy transition is undeniable, and perhaps nowhere more so than in the biofuels industrial vertical. We recently delivered test deliveries to two major oil companies in Europe who are co-processing bio-based feedstock in their existing refineries and are in flight with constructing standalone biorefineries. Within the last year and a half, Enviva has signed three SAP-related contracts that represent close to 2 million metric tons per year of deliveries. The new contracts we have announced recently have been predominantly European-focused, which is a good indication of the direction of travel that the European Union's Renewable Energy Directive 3 is taking. which is being negotiated right now between the EU Parliament, Council, and Commission. We are confident that the legislation will conclude favorably for sustainable woody biomass, and we should experience tailwinds from REDD3, which is likely to be finalized during the second quarter of this year. Before I turn it over to Shai, I'll share some details about the equity deal we have in progress. Given the scale and pace at which we are building out our asset platform against the backdrop of continued inflation and rising interest rates, we have received commitments for approximately $250 million of common equity through a pipe transaction with shareholders like Riverstone and Inclusive Capital, who have a deep understanding of our business and are convicted in the tremendous potential for shareholder value creation ahead for us. The equity will be priced up the markets close today, and we view the capital raise as bolstering our balance sheet liquidity and maintaining our leverage at a very comfortable level. I'll now turn it over to Shai.