Enviva Inc.

Good day and welcome to the NILA second quarter 2023 earnings conference call. All participants will be in listen-only mode. If you need assistance, please signal conference specialist, Vice President, the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Now I'd like to turn the call over to Ms. Kate Walsh, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to Enviva's second quarter of 2023 earnings conference call. We appreciate your interest in and support of Enviva, and thank you for your participation today. On this morning's call, we have Thomas Meff, President and Chief Executive Officer, and Shai Evan, Executive Vice President and Chief Financial Officer. Our agenda will be for Thomas and Shai to discuss our financial and operating results and to provide an update on our current business and outlook for operations. Then, we will open up the call for questions. During the course of our remarks and the 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 SEC filings. We assume no obligation to update any forward-looking statements to reflect new or changed events or circumstances. In addition to presenting our financial results in accordance with GAAP, we will also be discussing adjusted EBITDA and certain other non-GAAP financial measures pertaining to completed reporting periods as well as our forecast. Information concerning the reconciliations of these non-GAAP measures to the most directly comparable GAAP measures and other relevant disclosures is included in our earnings release. Our SEC reports, earnings release, and most recent investor presentation, which contain reconciliations of non-GAAP financial measures we use, can be found on our website at envivabiomath.com. I would now like to turn the call over to Thomas.

Good morning, everyone, and thank you for joining us. As you saw in our press release and 10Q filed yesterday, we've made good progress over the last few months. You will remember from our last earnings call in May that coming out of a very difficult and disappointing start to the year, we embarked on a focused journey to drive costs out of the business, and increase production levels at our current plants. In May, I personally took over the leadership of our operations team, and we have since made a number of important changes to start regaining the ground needed to return to levels of profitability we have demonstrated possible. As part of the changes needed to turn our cost position around, we recently executed a corporate restructuring program that is designed to reduce annual operating and overhead costs by $16 million, and which is expected to get our SG&A back on track for a company of our size. We should see some small cost savings uplift to our results in the back half of this year, with the full benefit of these changes expected to materialize in 2024. We've also made good progress with reducing the cost to produce and transport our wood pellets to our ports. We reduced our delivered at port cost, or DAP cost as we call it, by $3 per metric ton for second quarter 2023 as compared to first quarter 2023. And more importantly, our DAP cost for June was down by $9 per metric ton as compared to the first quarter of this year. Our DAP cost position for June was the lowest we've seen in over a year. Results achieved in June are a good sign, and with what we are seeing so far in the early innings of the third quarter, they appear to be continuing to improve. We are on the path to improve our annual operating position by $100 million, and I'm encouraged with the progress we're making. But there is still a lot of hard work left to do, and we are monitoring and managing very closely. Last quarter, We reset guidance expectations for 2023 and provided quarterly expectations for the remainder of the year. For the second quarter, we set a target range of $20 to $30 million of adjusted EBITDA. And yesterday, we reported results in line with this range with second quarter adjusted EBITDA of $26 million. During the second quarter, we made strides with reducing our cost of delivered fiber, as well as improving our cost discipline around the repairs and maintenance. We also successfully worked out all of the unnecessary contract labor that was weighing on planned financial performance. Those improvements were somewhat masked by a fairly large planned outage at our Waycross Georgia facility. When we acquired Waycross in 2020, we planned to undertake this outage within two or three years of owning the plant. And this past quarter, we completed that plan, and Waycross was back up and running by June. One of the key maintenance projects at Waycross was to replace emissions control equipment, and the new equipment should last for the next 10 years or so. It's important to note that since Waycross is currently the largest plant in our fleet and is one of the best performers from both the production and cost perspective, The outage dampened our typical run rate of produced volumes during the quarter by about 30,000 metric tons and muted some of the production and cost improvements that we were making at our other plants. Two of the plants we talked about having challenges with last quarter were our South Hampton, Virginia, and Greenwood, South Carolina facilities. Prior to the operational changes that started to take hold in June, Southampton has been operating unprofitably for a number of quarters. In June, we decided to change the way we're operating Southampton for now. We're running the plant with only one of the two dryers, generating around 65% of the plant's capacity at a much lower cost. With this production profile, we're running the plant in a very similar manner to Ahoskie, one of our lowest cost profile plants in the fleet. This gives us time to fix the underlying asset issues as well as to evaluate the best path forward for this plant. Our Greenwood plant's problems are different and less systemic than Southampton's. We were able to make small changes to a few process island bottlenecks, which have since raised production rates at the facility. We also are implementing a change in fiber procurement strategy at Greenwood, which includes procuring more hardwood because of its increasingly greater availability in the area. These two changes have improved the throughput and cost position over a relatively short period of time. As a result, Greenwood is on a path to reach its target production level and cost position during fourth quarter 2023. As we look to the second half of this year and what we expect to achieve, we are maintaining our full 2023 adjusted EBITDA guidance range of $200 million to $250 million, and we're updating our quarterly expectations for third and fourth quarter adjusted EBITDA. For third quarter, we're stepping down our expectations from the previous range of $70 million to $90 million of adjusted EBITDA to a range of $60 million to $80 million, primarily as a result of two factors. First, we decided to extend the maintenance outage at our Ahaskan North Carolina plant to lay the groundwork for the previously announced expansion that we plan to do at Ahoskey. The expansion, when completed, is expected to increase production capacity by approximately 45% at Ahoskey, which is one of the lowest cost positions in our fleet. And second, as we entered the back half of the year, we updated our shipping schedule. We pushed the late-game windows of a couple of ships from late September into early October. and therefore shifted the revenue and margin associated with those shifts from third quarter to fourth quarter. With updated expectations for fourth quarter, along with commercial opportunities we expect to materialize, we are raising our adjusted EBITDA expectations for the fourth quarter to $120 to $140 million, up from $110 to $130 million. The significant step-up in earnings expected in the fourth quarter over third quarter is underpinned by a number of factors that we have good visibility into, such as higher contract prices during the fourth quarter, we deliver on a higher percentage of more lucrative contracts, and we also have successfully repriced select legacy contracts in our negotiations to reprice other legacy contracts. Another pricing dynamic is that by the fourth quarter, All of our contract escalators related to 2022 inflation will be reflected in our headline prices. And in addition, we're working to drive an incremental $14 to $19 per ton out of DAP costs. Additionally, we're seeing small but steady increases in the production from our current asset fleet that will primarily benefit the fourth quarter. With Southampton on a path to recovery, Greenwood's challenges mitigated, and incremental production, process, and cost improvements across our asset fleet and corporate offices, we are determined to drive significant value from the tailwinds, supporting a very strong back half of the year. With that, I'll turn it over to Shai to go through our financials in more detail.

Thank you, Thomas, and good morning, everyone. Let's start with the second quarter results. We generated net revenue of $301.9 million for the second quarter of 2023 as compared to $296.3 million for the second quarter of 2022. Net loss for the second quarter of 2023 was $55.8 million as compared to a net loss of $27.3 million for the second quarter of 2022. The adjusted gross margin for the second quarter of 2023 was $41.4 million as compared to $54.8 million for the second quarter of 2022. The $13.4 million decrease year-over-year is attributable to two main factors. First, we received $6 million of support payments in the second quarter of last year that we did not receive in the second quarter of this year, which was planned and part of our expectation, given the payout terms with our simplification transaction in October of 2021. And second, we had higher shipping costs compared to the second quarter of last year, given the fact that we have more deliveries going into Japan this year versus last year. Adjusted gross margin per metric ton was $31.80 for the second quarter of 2023, compared to $42.94 for the second quarter of 2022. Adjusted EBITDA for the second quarter of 2023 was $26 million, as Thomas mentioned. This compares to $39.5 million for the second quarter of 2022, and the $13.5 million decrease year-over-year is attributable to differences in support payments and shipping costs. And VIVA's liquidity as of June 30th, 2023 was $565.6 million, which includes cash on end, including cash generally restricted to funding a portion of the cost of our Epps, Alabama plant and Bond, Mississippi plant and availability under our senior secured revolving credit facility. On the topic of Epps and Bond, we recently applied for advanced energy projects tax credit included as part of the Inflation Reduction Act incentives. If we are successful, we could be awarded tax credit that can be monetized for a value from 6% to up to 30% of the total eligible capital investment cost of each project. Given the timing of cash flow spending curves related to EPS and bond, we have lowered our full-year 2023 total capital expenditure guidance range to $335 million to $365 million, down from $365 million to $415 million, which represents a decrease of $40 million, or 10% at the midpoint of the ranges. Payments related to our EPS and bond capital projects are pushed out to future periods as compared to our prior estimates, but this deferral of cash outflows does not impact the timing of our planned in-service dates of mid-2024 for EPS and mid-2025 for bond. Our deferral of the timing of certain Greenfield spend items was somewhat offset by a higher spend on expansions and productivity improvements within our existing asset fleet. We are now projecting to spend between $75 million and $85 million on small capital projects up from our previous expectation of $50 million to $70 million. Part of the increase of this category of capital investment is related to the acceleration of work being done at our Husky plant. We continue to expect to spend approximately $20 million during 2023 on maintenance capex. Our commitment to conservatively managing Enviva's balance sheet remains unchanged, and we continue to target a long-term leverage ratio of 3.5 times to four times as per our credit agreement. We may exit 2023 around five times per our credit agreement, depending on the timing of working capital, given how much activity is planned for the fourth quarter of this year. But it will be temporary, and we will work to get back to our long-term target range in 2024. As a reminder, our covenant threshold under the credit agreement is 5.75 times. With that, I would now like to turn it back to Thomas.

Thank you, Shai. Our short-term focus certainly has been on improving productivity and reducing costs as quickly and durably as we can across our portfolio. We've also been having constructive conversations with our customers regarding raising sales prices of some of our legacy contracts, given that our whole industry has been suffering from cost tower increases that have outpaid sales price increases over the past couple of years. We're having encouraging conversations on this front with our customers in large part because biomass is a very physical commodity that is structurally short supply, and the long-term demand growth profile for our business continues to be very strong. I'm very happy to announce that we've sold our first two shipments to a new credit-worthy European customer for delivery into Poland, which is a new and emerging market for us. Poland is one of the highest per capita consumption rates of coal globally and has historically been very dependent on Russian fossil fuels. And because of those factors, we expect to see significant sales opportunities develop in Poland. In Europe, the European Union is expected to finalize the text related to its renewable energy directive by October, which we expect will continue to provide demand tailwinds for woody biomass, given how important this renewable resource is to the net zero targets of the EU member nations. Our industry continues to be persistently structurally short supply, so signing new contracts into new jurisdictions, such as Poland, means that new production capacity must get built. And thus, these new contracts are underwriting our large-scale, fully contracted capacity expansions. As a reminder, our new capacity is modeled after Lucedale, Cottondale, and Waycross, which are our best-performing plants. Currently, our Epps, Alabama plant is under construction and progressing well. Epps continues to progress on schedule and on budget and is expected to be operational by mid-2024. For our Bond, Mississippi plant, we're moving forward with partnering with an EPC firm, which will help provide cost and construction certainty, and we expect to have an EPC contract finalized by the end of this year. Because Enviva's top financial priority is effectively managing liquidity and leverage as we drive towards our profitability and growth targets, we're closely monitoring the progress we're making with reducing our cost profile, improving production rates of our existing asset fleet, and repricing legacy contracts to better reflect our current operating environment. To the extent we're not on pace with reaching our targets, we have the opportunity to defer the build time in a bond and move the in-service date back by approximately 6 to 12 months without impacting customer commitments, therefore enhancing our near-term liquidity and leverage profile and potentially reducing the likelihood of needing to access capital markets to fund any remaining needs related to bonds. This deferral of bond timing would move the planned in-service date from mid-2025 into 2026. And on the topic of capital allocation, our top two priorities, as outlined last quarter, have not changed. As I just mentioned, we remain steadfast in prioritizing effective management of our liquidity and leverage. Secondly, we're certainly prioritizing improving our operating costs and the productivity of our current asset platform. These have been and will continue to be our focus areas. Last quarter, we announced that our Board of Directors authorized a share repurchase program. To date, we have not repurchased shares, and our current plan does not contemplate repurchases for the remainder of 2023. Once we make the necessary progress on our first two capital allocation priorities, we should be able to consider returning value to shareholders by using this tool opportunistically. Before we open the call for questions, I'll give a quick recap of what we have discussed this morning. To start off, we achieved adjusted EBITDA for second quarter in line with our expectations and are reaffirming adjusted EBITDA guidance for full year 2023. In the back half of this year, we're projecting a material increase in earnings and cash flow as compared to the first half of the year with significant cost reductions, improved production, and increasing sales prices being the primary contributors to the projected step change in results. The changes we've made over the past few months are taking hold. As evidenced by the advances we achieved in June and the performance we've seen in the first part of the third quarter, and finally, our top two capital allocation priorities have not changed. We're focused foremost on liquidity and leverage with improving our operating cost position and asset productivity a very close second priority. We have a lot of work to do to rebuild the strength of this company and capitalize on the growth ahead of us. We know what needs to be done, and those fixes are exactly what you will continue to see us execute over the coming months and quarters. Now let's open the call for questions.

Thank you, now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To draw your question, please press star then two. This time we'll pause momentarily to assemble the roster. First question. Excuse me, first question will be from Jordan Levy, Truist, please go ahead.

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

Yeah, Jordan, absolutely. Good morning, and thank you for the question. The buckets that we're seeing here are as follows, right? First and foremost, we're expecting that Southampton to be in a very different spot going forward. In Q2, Southampton was still a $5 million drag, and we expect that to end and the plan to be breakeven for the second half of the year. That's not the final state of that plan. Obviously, we expect it to come back to profitability, but that's where it's included in our forecast for the second half of the year. When we start for Q3 first, right, so $5 million for Southampton, and cost management will certainly be another big bucket. Repair and maintenance, contract labor will be lower than in Q2. What we have started in June will certainly continue and will drive costs lower. We're certainly going to see higher fixed cost absorption. That's another bucket, equal size bucket in Q3 over Q2. We expect to make an incremental 150,000 metric tons. That will reduce fixed cost absorption, certainly, and provide incremental margin by shipping incremental ships into our contracts. And then we do starting to see a revenue uptick through some of the higher-priced contracts that we typically see in the second half of the year. It's much more pronounced in Q4 than in Q3, but certainly is really starting to drive incremental margin in Q3. If we then go to Q4 and take Q3 to Q4, again, reminder, we still have Southampton not Losing money. We talked in Q1 about a shift of a customer of $16 million to Q4, or to the second half, that is coming through in Q4. We're going to see an incremental... The remaining buckets are cost management will drive out another significant amount. We continue to have high sales volumes. Then I'll unpack a little bit more. We have some small growth projects in our – we're executing against small growth projects, which are very creative in both Losedale and Cottondale. For example, we're adding two pellet presses at Losedale. And Amory and Ahoskey are back in service. That's going to be a significant uplift for the second half of Q4. Then we will have, and that's certainly at least half of what we're going to project for the step up in Q3 and Q4, is that we have changed contracts and repriced contracts in the past. That's flowing through. We have generally higher-priced contracts that we didn't have to reprice. They were higher-priced to begin with, and they are most pronounced in Q4. All the escalators are fully running through. And then we have, we've talked about that 20% of our annual EBITDA comes from general commercial activity that's back half-weighted. It's particularly pronounced in Q4. That can include some, an opportunity to free up some volume to benefit from expected higher prices in Q4. It's certainly nowhere near as pronounced as we have seen in Q4. If that materializes, you're certainly moving to the higher end of the range.

Gotcha. I appreciate all that detail. Very helpful. And then maybe just a separate follow-up. Just talking through some of the initiatives you're working on to bring up profitability at some of the plants, just considering sort of the portfolio as a whole, Curious how you think about, as you go through this and you bring on new plants and that sort of thing, how you think about optimizing that portfolio and if you would consider selling down some of the lower performing assets and how you think about that.

Well, look, based on what we've seen, so let me take a step back here. We made very, very significant changes two months ago, right? That is not a whole lot of time, but we've made incredible progress. And we've really created a bottoms-up plan, plans by plan, as to how do we get every single plan to a profitable level, right? And every one of these plans either is there or has that potential in a very short period of time to actually get back to profitability. The capital required to get there is very small. The plans can absolutely do this. the way they are built with operating with a different level of accountability and with a different level of cost discipline and operational discipline. So we have 10 plans in service and all of those plans will create profitability against our underlying contract book. I think you asked specifically about apps. I want to remind folks again that I feel really good about the way we're building apps. It is modeled after Losedale, Cottondale, and Waycross. Those are our best performing plants. They have our lowest cost per ton. Losedale is the last plant we've built. So clearly that's a really good sign for how we're executing new plants. We know how to do this. And EPS will have the highest level of automation consistent with those three plants. And I feel really good that that particular plant will have a you know, top three cost position on a cost per ton basis.

Thanks so much for the answers.

Thank you. Next question will be from Alvarez Grotto of RBC Capital. Please go ahead.

Hey, thanks. Good morning, everyone. Can you talk a little bit more about your progress on repricing these legacy contracts? Specifically, you know, what percent of these contracts have you repriced and And what do you think you can reprice higher? I mean, is the goal here 100%? Like, where do you think this can go?

Avair, good morning. Thank you for that question. Look, I would love to reprice 100%, but that's not the expectation, right? We have repriced or created different profitability at a few of our contracts, and that's the order of magnitude was around $20 per ton for these type of contracts. When we're targeting $18 to $25 in increased profitability, that will come through, for example, different pricing, but there are also value creation opportunities that we have in those customer relationships, like we have just announced in Q1, that can drive incremental margin of $18 to $25 to these contracts. We are making good progress. We're negotiating with multiple counterparties. We expect some of that to actually start flowing through for the rest of the year. And then as we complete that exercise over the next couple of months, we'll also be able to include that in when we are ready for 2024 guidance in what that's going to look like on a sustainable go-forward basis.

Okay, thank you. And then just help me understand, the guidance for the rest of the year, what percent of that is based on some of this potential spot business that you referenced?

Look, I think the way to look at this is that if some of that happens as part of the commercial activity, it will happen in Q4. And if we're successful in that, it certainly helps us to get to the higher end of the range. That's the order of magnitude that we're seeing for that part of the business.

Okay, great. That's helpful. And then you mentioned that you can defer the timeline. You have the opportunity to defer bond. When would you make a decision like that? What are the specific milestones you're looking for, and when do you think you could make that decision on whether to defer it up?

Yeah, absolutely. We're keeping that plan on track. We're negotiating EPC contracts to give us full optionality that if we so choose to execute a bond against the current plan. But we, as I've said, we have the opportunity to delay that plan by six months or by 12 months, and that decision will be made at some point in the earlier part of next year. Okay.

Great. Thank you. I'll circle back.

Absolutely. Thank you for your questions, Elvira.

Thank you. Next question will be from Graham Prince. Oh, Raymond James. Please go ahead.

Hi. Good morning. Thanks for taking the questions. I guess for my first one, I was wondering if you're able to disclose the volume expectations that correspond to the 3Q and 4Q guidance numbers.

So, we expect about a 10% increase from Q2 to Q3, and then a little bit more than 10% from Q3 to Q4. And again, the drivers for that, as I've said, are, you know, way across, back on track. We are seeing June over April and May increase. really a step of unreliability of the plans that I think will continue. We have really made good progress in a very short period of time. And in Q4, we have Amory back on track, a Husky, some of the growth projects that will drive that incremental 10-plus percent for the fourth quarter.

Understood. And just to clarify... especially for that 4Q number, that gross number you gave is excluding any spot sales. Those would just kind of be on top.

Well, so what we've said is there's certainly a higher level of third-party volumes that we're going to purchase, right? I want to point that out. And then some of the commercial activity, if it happens, if market price is do increase as we expect, certainly can give us the opportunity to get to the higher end of the range there.

Okay, perfect. And then for my follow-up, great to see the first sales into Poland. Just curious if you're able to provide any additional color around pricing, contract length, just any additional details. Yeah, absolutely.

I'm very... That one I'm really happy about because we've been investing in the Polish market for quite a while, and to see that materialize now is really something that is a good next step. We're selling two ships to Poland, and there is a total of about 60,000 tons. We've said... Previously, that new contract, the new contract environment that we're seeing certainly allows us to benefit from substantially higher pricing in new contracts that we've seen historically, and that is also consistent with this Polish opportunity. When you think about test shipments of 60,000 tons, you can infer that that's a lot for a test shipment, and that means that the opportunity for these kind of offtakes are larger volumes, right? You're very quickly getting to million-ton opportunities here per project, and we understand that if that test is successful, that in the next couple of months, we'll see contracting activity in Poland pick up, which will provide the opportunity to get to longer-term off-take agreements that with significant volumes, with credit-worthy counterparties in a new geography for us.

Great, great. Yeah, sounds like good progress. Thank you very much. I'll pass it along.

Thank you very much.

Thank you. Our next question will be from Mark Strauss of J.P. Morgan. Please go ahead.

Yes, it's Jeroen from MARC. Thank you for taking our questions. First, I just want to look at some of the puts and takes in the $14 to $19 reduction for the rest of the year in the DAP costs. But I just want to focus right now on the fiber cost here. How much of that $14 to $19 is coming from fiber reductions? And then given the lag that you had between contracting the fiber pricing and when it's recognized in your P&L, do you feel like you have pretty good visibility into the end of the year for the pricing impact there?

Yes. Drew, great to hear from you, and thank you for the question. So when you think about the – I'll start with Q2 and then take it all the way to the end of the year, right? Okay. in Q2 fiber costs reduction was about 50% of the reduction that we saw. And as we've previously discussed, it takes a month or two for the purchases across the scale to actually turn into lower cost revenues. And so we're seeing that now in June, right? If you heard me talk in May, that what we saw come across the scale in April really showed progress. And in June, that actually then really flowed through. And we'll continue to see that. We certainly expect some more fiber improvement, but most of the $14 to $19 will come from other buckets. And the other buckets, I would say $5 of that will be improved fixed cost management. That is R&M spend, contract labor, cost control. We're managing this business very, very tightly. And what we've started to see really take hold in June still is potential growth. And that will drive five of the $14 to $19 out. And then we've really demonstrated increases in volume. That leads to fixed cost absorption. It is probably about half of the $14 to $19. And how fast we can get to the potential of these plants on a reliable basis will define whether we're going to end up coming out of this year at $14 or $19. I would say that... Previously, when a less reliable plant had a bad day, it was down, for example, a day and a half. Now, a bad day means we're losing a couple hundred tons a day. It's very, very different already in what we're seeing come through in June, and that gives us confidence that we're on the right path to increase volume and fixed cost absorption in addition to some of the cost management improvements that we've seen.

Understood. That's very helpful. I just want to circle back on bond quickly. Is there any rules of thumb we can kind of think about for how you guys are going to make this decision upon timing? If you're in the guide throughout the rest of the year, is it fair to assume that's going to be on track from there? Or is there other things that are going into that decision that we might not be able to see from here? And then just lastly on that, are there any costs associated with a delay that could weigh on profitability?

I will start with the second part. We don't expect any material costs for a delay. So we have really good optionality there. Look, I think if and when we hit our numbers or continue to hit our numbers for the second half of the year, that's going to be a key input factor. I I will say that we also have to make sure we understand what 24 will look like what cash flow from operations will look like in 24 and 25 and the key input factor for me is for that is Have we driven a cost position into our business that will generate the vast majority of our profitability and from manufacturing boot pellets against our existing long-term contract book. And is that cost position sustainable or exposed to variability going forward? I believe that we can actually create those cost improvements in a sustainable way that we're not exposed from volatility going forward. And if that's the case, that will be a key input factor because that will give us the the conviction, the credibility that we're back to where we were two years ago. And then, of course, looking at the capital markets, access to that will define timing. If we need to supplement our existing cash flows with capital market activity, that we'll see certainly early next year where we are, and then we're, I think, in a very good position to make a decision.

Understood. Much appreciated, Thomas. I will pass it along. Thank you very much, Drew.

Thank you. Again, if you have a question, please press star then 1. Next question will be from Ryan Levine of Citi. Please go ahead.

Hey, everybody. What drove the timeline to announce the expansion of Olasky? And are there any resources that are being dedicated to the cost reduction initiatives that are going to be repurposed for this expansion?

Right. Great question. Look, I mean, we recently decided that it was not the right time to do what we needed to do at Ahoskey. The project will cost approximately $3 million. and we're installing equipment which prepares the site for upcoming capacity expansion. On the one hand, to shut a plane down for a couple of weeks is never a good time, but we thought this was really improving the optionality for us to think about this on a long-term basis. This business has to be looked at from a long-term basis, and with preparing us for an expansion and installing the right and necessary equipment there puts us on a path to maximize long-term profitability for this business, and that includes asking. From a project execution perspective, The resources that we're using are separate and distinct from all the cost reduction initiatives. They do not cannibalize each other, if that's what you're getting at, despite the fact that we certainly reduced our headcount quite substantially, certainly not in those areas that are required to drive costs out of the business and complete that Husky step change.

Okay. And then a follow-up on that, in terms of some of the severance costs that you disclosed that will be impacting the third quarter, is there going to be any that will continue into the fourth quarter? And more broadly, how have you been seeing turnover trends in recent weeks?

Ryan, thank you for that question. So we expect this reduction force to be completed in Q3, and the associated cost with that, you know, end with the $5 million that we have outlined for Q3. Our focused management of the plants has really had a positive impact on morale on the operations team. And, I mean, when you go to the plants, the go-get attitude of rolling up your sleeves and focusing on the things that matter is really, really nice to see. And so before, and I exclude, obviously, the reduction in force, but we did see over the last two or three months turnover come down in a really, really positive form, and we expect that trend to continue.

Great. Thanks for taking my question.

Absolutely. Thank you, Ryan.

Thank you. Next question will be a follow-up from Alvarez Cotto of RBC Capital. Please go ahead.

Hey, thanks for taking the follow-up question. Can you remind me, can you use the muni bonds for bonds? And then when you think about financing that, what rate do you expect? What interest rate would you expect to be able to finance that?

First, I think that we do still have deposits from the tax exam for the bond Mississippi plant available to us. We haven't used the deposits. We do have that part of the restricted cash that we're holding at the end of the quarter. We have... cash available for the EPS plan and for the bond plan. At the end of the quarter, that was about $153 million. We do have the potential of coming back to the market, to the capital market, for the issuance of additional tax exempt bonds for the bond project. However, we've seen the market conditions now and where our bonds are trading, and we think that that will not be prudent to come back to the market now. As a result, We're talking about, Thomas mentioned, the flexibility that we have with the timing of when we're going to make a decision on when we're going to spend additional funds and make a final decision on investment in bonds. So we're going to look at what Thomas mentioned already, how we're executing our plan, looking to see our cash flow from operating activities in 2023, looking at our forecast for 2024, and then make a decision about the timing for bond and the potential timing of coming back to the capital market for additional tranche for the, of tax exempt bonds for a potential tranche for the bonds blend using the potentially the tax exempt market.

Okay, great. Thank you very much for that.

Thank you, Ravira.

Thank you. Our next question will be a follow-up for Jordan Levy of Truist. Please go ahead.

Hey, just a quick follow-up. I appreciate you didn't have any additional deferred margin transactions this quarter, which is good to see. Is it fair to say you don't anticipate any more of these transactions as we get into 3Q and 4Q?

Jordan, our forecast does not include any incremental deferred gross margin transactions.

Thanks. Appreciate that. I would point out, Jordan, in regard to the fair growth margin transaction, we did have like cash collected of about $8 million that is not part of our CFO for the quarter, but it's part of financing activities. I would say that the way that we are looking at that, we're looking at that more like as additional $8 million that should be like from economic perspective because it's a collection of sales to a customer should be viewed as a type of cash flow for more operating activities.

That's helpful. Thanks, Shai.

Thank you. Thank you, Jordan.

Thank you. This concludes our question and answer session. I'd like to turn the conference back over to Thomas Meth for closing remarks. Please go ahead.

Well, thank you for taking the time to join us today. We look forward to connecting in the coming months to continue updating you on our progress, particularly around our cost reductions in operations, and wish you a Great rest of your day.

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.