Q1 2022 Enviva Inc Earnings Call
Good morning, and welcome to MB is incorporated first quarter of 2020.
Earnings Conference call.
All participants will be in listen only mode. If you need assistance. Please signal conference specialist by pressing the Sparky followed bicycle.
After today's presentation there'll be an opportunity to ask questions.
This event is being recorded.
And now I'd like to turn the conference over to Kate Walsh, Vice President of Investor Relations. Please go ahead.
Thank you good morning, everyone and welcome to Visa Inc. 's first quarter of 2022 earnings Conference call.
We appreciate your interest in and support of Indiana, and Thank you for your participation today.
On this morning's call, we have John Keppler, Chairman and Chief Executive Officer, Shai, even chief 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 operation 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 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.
It is important to note that as a result of the simplification transaction, we announced on October 15th 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 a non recast basis, depending on the reference point.
Please refer to our earnings release and Form 10-Q document for more detail on a recap and non recast presentation.
I would now like to turn the call over to John .
Thank you Kate good morning, everyone and thank you for joining us today.
Yeah.
As you've 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 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 serve as our plants.
Which required us to curtail production in several instances.
We also incurred incremental costs in certain areas of our cost our such.
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 challenge is 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 and 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 request 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.
Yes.
Before we get there.
Given where first quarter results landed and taking stock of how we see the next seven months of the year unfold.
We are revising certain 2020 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.
Lower production.
We estimate that lower production and sold volumes for full year 2022, we will have a negative impact of approximately $10 million on adjusted EBITDA.
This is an isolated identifiable and short term issue.
Second <unk>.
Lucille plant startup date was delayed to the end of March which is expected to have an impact of approximately $10 million for 2022. That's 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 Belorussian supply being closed off to the market.
Additionally.
While we expect SG&A 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 <unk>.
2023 is penciling out 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're also seeing full year adjusted gross margin per metric ton of roughly $50, which is higher than we have given guidance 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 <unk> 90, 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 <unk> 90, and one half cents per share.
We continue to be very proud of a rare combination of being a high growth company and a strong dividend payer.
We're the largest global player in an industry, where the total addressable market is rapidly expanding and new use cases for our products continue to emerge.
We're virtually unmatched in terms of the fully contracted nature 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're 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 this possible renewable energy and our pellets will be used to displace coal and 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 1 million metric tons per year.
Which means there's one contract alone could underwrite the construction of the new plan.
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 and gave us wood pellets to phase out fossil fuels and generate green processes in their manufacturing facilities in Germany.
Delivered volumes under this 10 year agreement are expected to be around 100000 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 burgeoning market. We are partnering with <unk> group.
One of Germany's leading logistics service providers to develop an inbound logistics 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 trans loading and other terminal infrastructure with a plan to replicate what we are successfully operating at our export terminals.
One of the coasts of the southeast U S.
So again pretty solid growth in 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 as 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 then I'll also need to revisit the long term security of supply for the carbon feedstocks their sourcing.
This Congress is further complicated by the fact that there are limited large scale alternatives available for renewable baseload, and <unk> power and heat generation and even fewer low carbon feedstocks to substitute and hard to abate sectors.
With this as a backdrop.
Demand for both urgent deliveries and long term contracts word Viva 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.
Thank you John and good morning, everyone.
We generated net revenue of 232 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 ton sold being down by four 6%.
Metric ton sold decreased due to lower planned availability related to the <unk> related Occupancies, and John mentioned, which not only impacted us.
But also a nonbeliever logistic providers as well.
These are mainly temporarily issues and we are seeing many of them result.
Many of our rail and truck providers.
Quite public about the bogey that theyre, making hiring and the 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.
3% from the first quarter of 2021 on a nonrecourse basis.
Adjusted gross margin per metric ton was $46 25.
As compared to $42 73 for.
For the first quarter of 2021 on a nonrecourse basis.
The uptick in adjusted gross margin and metric tonne of eight 2% year over year was driven primarily by contract price escalators tied.
To inflation indices.
This pricing 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 nonrecourse basis.
Net loss for the first quarter of 2022 includes costs that resulted from the significant impact Omnicom Ed on our operations during the quarter as well as incremental cost incurred as a result of the wall 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 a non recourse basis.
When we announced the simplification transaction last year, we said, that's roughly $40 million of SG&A expenses would be brought into EMEA and a $10 million decrease in adjusted EBITDA year over year is impacted by us absorbing those cost as planned.
Distributable cash flow was $25 3 million for the first quarter of 2022 as compared to $30 4 million political floating quarterly in 2021.
Similar to adjusted EBITDA diesel yield decrease is due to absorbing SG&A cost from our certification 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 pi on yields we expect the back half of the year will be a significant step up from the first providing details of our annual adjusted EBITDA for the business.
As John pointed out we revised sales and 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, we did another step up in Q4.
And although we are accelerating our highly accretive capacity expansion plan.
Capex guidance for 2022 is not changing and that 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 this has been happening in the second half of 2022.
In terms of leverage we expect to stay well, we deemed the terms of our credit agreement.
Also make mid to conservatively managing <unk> 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 the 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 one five times and we expect to have the financial flexibility to increase dividends over time.
Stepping back to look at the Big picture I am 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 for most of the macro pressures that are dominating news headlines, including the impact of a potential recession.
The adjusted and another fully constructed company with a similar profile or visible durable cash flow growing 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 .
Thanks, Sean.
To pick up on <unk> last point of in vivo 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 complemented 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 <unk>, Alabama.
<unk> is designed and permitted to produce $1 1 million metric tons per year.
And we'll be the largest industrial wood pellet production plant in the world.
This fully contracted plan is expected to generate approximately $65 million.
And 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 seven five times 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 apps facility and we expect to begin construction in early 2023.
Lucedale apps and bond or.
For the first three plants and our growing Pascagoula cluster and.
And plans are underway for the clusters 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 increased terminal throughput.
We expect to make a decision on the site 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.
The addition of a new plant in each of our savanna, 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 to 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 Earth day, 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.
To 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 for US are primarily owned by private landowners and these sustainably managed forests have grown by over 40% over the last 25 years, while at the same time supply 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 <unk>.
Far from depleting timber resources.
USDA data shows that in the areas, where we buy wood fiber for US has increased by 21% over the last 10 years. Since we began our operations because of the positive impact and long term markets that in vivo helps create for landowners to keep their landholdings in for us and in fact plant.
More trees.
And we have a leads the industry in sustainability and responsible sourcing.
Strictly adhering to our responsible sourcing policy and our industry, leading track and trace technology to ensure that we are keeping our forest healthy thriving and growing.
All of the wood, we procure regardless of its forum is low value.
And the competitive market for soft timber in other high value would landowners can receive six to nine times more than the price for fiber than in Veeva pays eliminating any incentive for the landowner to sell a high value trees to us for a much lower price.
There are however, a few buyers in our regions today for the residual tops limbs commercial things.
What used to be sold is pulpwood.
Neither are there natural markets for the understory diseased or diseased or cricket trunks and trees that are both byproducts of the traditional sawtimber harvest and impediments to replant again re growth after the higher value timber sales have occurred.
As a result by turning low value or Unmarketable would from a harvest into productive low carbon renewable fuels in feedstocks.
We are symbiotic with a broader forest product sector, delivering tangible benefits for the climate as well as economic value to landowners.
On Earth day, President <unk> signed an executive order recognizing the role of American Force play and wildfire resilience and climate change mitigation.
With the White house, specifically highlighting in this factsheet its wide ranging support for healthy for us 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're also fortunate to be able to define our company and relatively simple terms.
The world wants less carbon more quickly and more cost effectively from secure sources and.
And Thats exactly what we offer.
Now, let's open up the call for questions.
Thank you and I will begin the question and answer session.
Ask a question you May press Star then one of your Touchtone phone.
Using a speakerphone please pick up your handset before pressing the keys.
Well to answer your question. Please press Star then two.
This time, we'll pause momentarily to assemble the runoff.
First question comes from Jordan Levy. Please go ahead.
Good morning, all exciting to see the.
Three announcements related to the Germany market.
That's been a market that <unk> been working on developing for a while now and maybe.
Combination of policy being rolled out in recent geopolitical events that kind of spirit.
I'm wondering if you could give us an updated sense on that.
Potential market opportunity there both in the utility and industrial side and what that could mean for your growth trajectory in the coming years.
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.
<unk> 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 <unk>.
Coal fired infrastructure into re powered biomass fired both power and combined heat and power assets. In 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 in 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.
<unk> is just as prominent in the decision making of many of our utility partners as is the focus on de carbonization and so as we've guided to in the past within the within the core power and heat generating sector. We would look at five 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 complemented by what we see in the industrial sector and we're very very very pleased to announce today.
Another major contract into that sector.
<unk>.
In a segment that we haven't talked about before it's beyond the cement steel line SaaS sectors that we've talked about historically, so as new use cases continue to evolve estimates on the total addressable market continue to increase.
As we've shared in the past.
If you sort of benchmark yourself on if you think about the utilization of <unk>.
Coal today, and one perhaps large deal.
Manufacturer in Europe , that's about 20 million tonnes, there are multiple folks like that.
I wouldn't suggest that we're going to displace a 100% of that but 10% of a number like that is that 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 in our investor deck and the like we.
We tend to think that there is an opportunity for 20% 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 these industries there really aren't any other alternatives. So very excited about it really encouraged I would point out and reinforced that the opportunity for us.
To leverage a capability that frankly, we don't talk a lot about generally is the terminal and distribution infrastructure that we're frankly really quite good at from the export side of our business our ability to replicate that with people like <unk> in Germany and across Continental Europe provides them.
Substantial operating leverage and margin expansion potential for us as we continue to grow this business really excited about it great great toehold in a number of these sectors.
And lots of runway ahead of us for margin expansion and durable volumes.
Thanks, John and then maybe as my follow up more on the macro side of things you guys pointed to a $10 million negative impact from lack of 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 Jordan it sounds like we lost.
You there for a second.
Yes, yes.
Yes, Youre back now at the last the last I heard was that.
Yeah.
Jordan you back.
Yep Yep.
Okay.
Couple of comments on comments on the certainly the near term.
Supply dislocations that we're seeing that clearly the baltics have been fairly substantially impacted by the war in Ukraine.
<unk> got certainly the limitations around Russian volumes, and Belarusian wood fibre challenging production in that region too. So 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 against some some broader supply challenges around the world is making that even more difficult.
<unk>.
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 and the 300 plus $1 per ton range. Obviously, we will be looking to try and talk to 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 into 2023 and beyond.
Those savings.
Same challenges for 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.
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 I appreciate it.
I appreciate the responses.
Well Jordan. Thank you so much always good to talk to you.
Thank you. The next question from Jeremy <unk> Goldman Sachs. Please go ahead.
Hey, everyone. Good morning, Thanks for the time.
Why don't we why don't we start we've had a couple of them I'll use announced over the last couple of quarters now.
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 others on Saf. Thanks.
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.
<unk> has put that back on an acceleration path clearly clearly we saw some some challenges in being able to be face to face even though we do have a strong team in Tokyo with the efforts right now are really focused on plant level specifics across a whole host of our 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 began entering into these long term take or pay contracts multi obviously 10, 15 20 year duration.
It 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 that fuel supply at known economics as the first step of that.
Before they can consider really the rationalization of exactly how and when and each one of their.
Frankly, multilocation facilities. They can then implement the appropriate conversion, Steve so the Mou or the LOI is a really important first step to get all of 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 lot of education about for in many of these industries, the take or pay obligations. The contract nature of these pieces and then the engineering and focus of course on on on actually.
Converting each one of these industries and their particular manufacturing processes to consume consume biomass that generally occurs right in parallel with the permit timeline that many of our customers we will undertake and so as a result.
Has ensured our contracting profile are 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 overtime into 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 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.
Alright that was that a thorough I appreciate that thank you and maybe picking up on that last piece.
The gross margin guidance for next year was helpful.
Talking about a couple of moving pieces here, maybe if or if we're just walking from kind of where we sit now to there.
You could breakout how much is maybe getting better pricing across the board versus getting a little more comfortable with some of these cost pressures right now.
Thanks.
Yes, great question, so when we when we've talked about our contracted portfolio.
The contracts into which we've entered.
Each have various pricing escalators, some RPI and CPI driven some are fixed escalators and so on an average basis.
What we see is probably a little less in 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.
But net net when you look at it sort of the guide that we would have given historically to the mid <unk>.
Roughly 50 or better now that's a 10% increase in a fully contracted business that is a very attractive margin per ton margin per metric ton increase.
Headline price big portion of it obviously youre inflating your margin inherently by inflated headline price. So we certainly don't see the similar inflation and the underlying cost hour, which is providing about that 10% increase year over year.
And what we would say is that as a first step of many that we see going forward in 2023 and beyond.
Alright, thanks for that maybe if I can squeeze in just one more.
The new.
The Mou in LOI in Germany makes sense, maybe if you could talk a little bit more about the partnership you have launched as well and just seeing if I heard you right. It that youre thinking about specific investments I guess and continental Europe itself, maybe if you could just kind of talk about what that could look like.
Maybe what costs could be and returns could look like thanks.
Yes.
Well 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 apps plan. This is a sub five times investment multiple to 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 Terminalling capacity, where we're aggregating from a distributed set of planned assets into a single point of reception storage loading.
For our transportation and delivery around the world.
The operating leverage that we were able to realize on investment like that is absolutely remarkable.
Certainly the marginal cost for every incremental ton through over that tax asset provides for durable margin expansion that you see within our own with our own cost our 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 trans loading and.
<unk> 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 like our terminals.
Interesting alright, I appreciate the detail thanks for the time today.
Thank you so much.
Thank you. Our next question comes from Elvira Scotto RBC capital markets. Please go ahead.
Hey, good morning, everyone.
A few questions here.
Somewhere around the guidance. So what gives you the confidence that the challenges that we saw in the first quarter are largely behind us.
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-19 impact last year or at the heart alright, the height of the pandemic.
Alright. Thank you it's a really good question.
We've been very very privileged in this company and if you look at the from the onset of the pandemic. The 20 plus months of uninterrupted on dislocated operations.
<unk> continued to ravage in various forums that.
The Delta variance certainly.
Certainly had people in our company.
Affected.
As we've shared in the past, we're very fortunate that people weren't getting COVID-19 at our plants. The transmissibility of the Delta variant was certainly much lower than <unk> schedule in a second but we were able to keep our people safe and when someone when someone did fall ill and we were able to corn seed and isolate them and limit the impact of COVID-19 quite remarkably.
As the it.
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 <unk> quite substantially hit us in late December with a significant portion of our workforce affected we gave gave some color to this on our last call together.
But the interactivity of the variance as well as the <unk> provisions of of not only individuals affected that anyone that would have come in contact with.
Initially 10 days Fortunately that later in the period of subsided the five days under the CDC guidance.
I keep kept a substantial fraction of several of our plants work forces on the sidelines, we were able to mitigate some of that with contract labor overtime, but ultimately our production profile was materially degrade 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 and 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 productions are stopping production because we have no place to store the pellets, having exhausted all of our onsite physical resources of trucks railcars ore storage silos on site.
The net impact of that if you could try to quantify it is about 200000 tonnes. So when you think about what the quarter should have in we're about 200000 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 thats in the neighborhood of $12 million to $15 million, which meant that the quarter showed a pencil it out much more closely in line with the 50 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.
Mitigation of I think Fiona from Varian in the rearview mirror gives us a fair bit of good confidence about our ability to mitigate this.
Also what we've seen of course is our own investments in contracting with incremental trucking and other logistics providers that gives us a much greater comfort around our ability to manage and mitigate going forward is that that capacity didn't exist in the deepest trough of that challenge in Q1, which as we've shared in the past that's our <unk>.
<unk> most challenging quarter.
Got a wider procurement radius for fiber. So you saw some implications on sort of road miles on diesel from the spike in the warrant Ukraine as well.
But now that that procurement radius is of course shrunk.
Warmer weather that we described as the seasonal benefit of our operations.
We do see that resolving fairly fairly straightforward and are very excited about what we 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 you would have.
But <unk> had before.
And also our Fireeye 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.
The lower plant.
Startup of Lauder. So if we think about 2022 and if we think about that we may see a like better.
Better production from Luiz.
As well as a lower impact of COVID-19.
Lesser extent.
Impact from William Craig and how we can see like us meeting the highest right.
Side of the range of $270 million.
'twenty two.
Great. Thank you that is really really helpful.
To follow up on.
The production curtailments.
That.
How does that affect.
Your contracted volume what are you still able to meet contracted volumes I know you have a plus or minus band around the contracted volumes, but is there any penalty for these production curtailments.
When you look at the aggregate production profiles of our capacity 200000 tons on north of $6 million is kind of four ish percent 3%.
What that does for US is frankly, just shifts deliveries a bit to the right.
So we've been able to within within our ranges that are contractual.
Obligations, we're certainly at the lower end of those ranges, which means that we limit our opportunity to overdrive.
Certainly some of those contracts. That's also compounded of course by the challenges in the physical liquidity of lower third party volumes that are available given some of the challenges in the geopolitical environment.
What it basically does is it shifted a bit to the right.
And so the delivery schedule has moved 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.
Great. Thank you and then.
Just a follow up on the question on the question regarding the partnership with <unk> group.
So how do you see that developing I mean is that a 50 50 partnership.
Whats the timeline here, what sort of capex.
And when you add this sort of incremental spend.
Would you still be able to.
This and your plants.
Internally generated cash.
No. It's a great question I think that we would be.
From an actual deployment of capital, we're not with Venezuelas month.
Thinking about putting dollars into into steel or concrete in the next 12 months.
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 and.
In Germany, as well as Continental Europe .
Because of <unk>.
Excuse me because this is such a great footprint.
We have the opportunity to evaluate multiple opportunities alongside their existing asset base, bringing the know how that we have for high quality durable management of wood pellets that ensures the delivery to our customers on time in the rights back in the right quantities and form factor.
And that's what we're exploring with them right now and so you would look at it as I mentioned in response to one of the previous questions.
It is 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 at or better than that and 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 their traditional energy delivery mechanisms some of Thats clearly driven by.
<unk> by the challenges in the war on 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 in the southeast U S very attractive both from a long term contracted basis and on a fundamental return on invested capital into these these potential new infrastructure assets.
Great. Thank you very much.
<unk>. Thank you.
Operator, do we have another individually with you.
One moment. Please again if you have a question. Please press Star then one.
Our next question.
Comes from Ryan Levine of Citi. Please go ahead.
What is the diesel price exposure of the company in relation to suppliers that cannot be passed onto customers given the fiber basket based pricing and how did that impact Q1 results and the outlook for the remaining question of the year.
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.
We do see what we saw in Q1 was.
It 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 company country at 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 in some of our truckers, who provides the hauling services.
Out of the woods altogether, and so we needed to provide on frankly 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 radii for fiber as our loggers need to get to drier and more accessible tracks in the colder weather.
Inter months, and so thats largely behind US now the short haul distances of our trucking generally downstream from our plants to our ports on mitigates the implications of diesel variability around that but thats that has exposure to our supply chain partners, who have who generally tend to deliver to us under.
A fixed tariff for a fixed rate for a period of time and so we have some cover against that not not unlimited.
But we are certainly affected by that in Q1.
More exacerbated Ryan frankly by the fact that the trucking capacity was eliminated limited by labor and so re contracted where 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.
Thanks, and then is there higher costs associated with the sale.
Project from a capex perspective, and are there any practical implications.
Contract delay with customer contracts.
No I mean, the Lucedale plant the construction for that is largely in the rearview mirror, we're completing sort of tick and tie in closeout of.
The contracts there youll see youll see the final capital retain its kind of go out as part of our.
<unk> reaffirmed Capex guide that we gave which didn't change so the amount we expected to spend on those deals what we spend on Lucedale Youre really we're now in the process depending upon the contractor of releasing retain its going through the equipment and performance testing all the things that closeout of contract that spend is expected to flow out and our Capex guide for the balance of the.
A year or.
So continues to be kind of kind of right in line on that.
The shift to the right is certainly we basically.
First quarter is not all that material production expectation in terms of tonnes. What I will tell you is this plant is ramping quite effectively.
We're optimistic about in terms of the Lucedale facility is that again early going but the ramp of this facility is at a much steeper in and frankly more advanced curve than anything we've done in the past and so thats pretty exciting for us that does give us some opportunity potentially to certainly overdrive.
As we as we get through the back half of the year, but no. There is no implications to.
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 described about 200000 tons short from our own production in Q1 that does shift the delivery schedule a bit to the right but.
We are quite optimistic and encouraged about our ability to grow through that.
And then last question for me around the labor in your prepared comments you spoke about using more third party labor.
Given some of the limitations that you've experienced in overtime is that is that a more permanent trend that you expect to continue and using a third party entity.
Additional costs.
No no not at all not at all and in fact some of the.
Admittedly amid a pretty pretty challenging Q1, one of the real bright spots.
Was some of the changes that we've made in our overall hiring strategy.
Really quite quite effective here is.
As large plants that are more mature for us. If we had an opening we would tend to think about filling and opening with an individual go recruit for that one spot we've completely changed the paradigm on hiring and has 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 <unk>.
Six weeks across the portfolio of our plants.
Ross trained multiple multiple opportunities for these folks and what we're seeing is really great retention and better performance over the first 90 days of employees and frankly, we've seen them a very long time, it's a really remarkable change and 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 rearview mirror.
Okay, great. Thank you.
Absolutely right all you could talk to you. Thank you.
Thank you.
Question comes from Pavel <unk> Raymond James Please go ahead.
Okay.
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.
Mothballed coal fired power plants being restarted.
As a way of reducing.
Imports of Russian Nat gas.
Does this trend.
Represent a headwind for you or is it a tailwind or.
More neutral.
<unk> I think it's.
I think it's pretty early going right. We've got a lot of dislocation in energy supply and demand across across Europe right now commodity flows are uncertain.
What I believe is probably durable for some period of time, regardless of how.
Of how the how the Ukrainian.
We're ultimately resolve 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.
Input commodities to not only the energy sector, but the industrial sector.
And so I think I think it's a mixed bag right now.
I think that we do have some potential opportunities.
What hasnt changed is the level of conviction around mitigating climate change.
And so if there are incremental.
In incremental coal fired assets that have a prospectively longer life to mitigate some of the energy and security of supply issues.
We do think of that is isn't that a tailwind for the utilization of biomass and other renewable resources to displace 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 has increased and the pricing opportunity is further augmented by the general conditions, we see continuing to evolve.
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 others have.
And given this uncertain fossil fuel supply environment that you just described.
Is there a sense that.
More.
Prospective customers are looking at biomass wood pellets included as an.
An attractive option then.
They would have said three months ago.
<unk> I think you also cut out there, but the answer is an emphatic yes absolutely.
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 engage with folks.
In the Jeremy Jeremy context, especially who had had gas on a critical roadmap to <unk> de carbonization.
Given given its treatment under the Green taxonomy now focus almost exclusively on biomass.
That is clearly in both an energy security as well as a favorable tailwind in the in the policymaking environment and you can also see that discretely on a policymaking in sort of national level in places like Poland.
Where the alternatives are really just not great.
But the focus and the effort on de Carbonization continues to be of Paramount Paramount focus and biomass will play a critical role in that as well.
And then lastly.
Domestically, we have not seen.
$7 $8, an mcf natural gas for more than a decade.
Is there any prospect that some domestic.
Utilities.
Look for the first time.
Palette as.
Electricity source.
I think I think the U S market prevails as you and I have had the average out 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 customers are stable aviation fuels provider, we have a tremendous amount of reverse inquiry right now around biome ethanol really the very difficult pathway to decarbonize.
Because of the fossil fuel intensity and frankly, the limited substitution alternatives available worldwide from our renewable spaces.
There are substitution.
That can be achieved in the power generating sector here.
Ultimately.
We 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 valid.
<unk> with you.
Haven't seen $7 gas in a while.
Actually when we started operating this business in its infancy and 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 we are beginning to serve in Europe in the industrial sector also have manufacturing assets here in the us and the consumer drive forward, the carbonization and the <unk>.
Customers, they're serving I think is still pretty high and so we're optimistic about that too.
Thank you very much guys.
Well thank you.
Thank you next question will be from Kevin Butler.
Thank you again and partners. Please go ahead.
Just a couple of quick questions on some of the expansion first of all I noticed the.
The press release that the ups facility you are talking about approximately $65 million and adjusted EBITDA once it's up and running which seems a little bit higher than that kind of $50 million right. We've talked about the past and would seem to imply an investment multiple little bit closer to four times 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 are on the docket.
Yes, Kevin. Thank you so much for picking up on that it's a bigger plant within 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.
<unk> operating leverage a couple of times. These are large fixed cost assets.
When you when you run them at scale the return profiles absolutely remarkable.
Okay.
And then 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 youre managing three large expansion simultaneously.
In the past kind of talked about keeping it around too and I was wondering if you could talk about.
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.
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.
Sort of scale level and frame contracts for equipment purchases of our major process Islands.
More of our building copy approach.
We're working through right now is the level of standardization across our contracting partners, meaning that we're bringing the same civil mechanical engineering controls trades.
Bear with multinational or certainly national level contracting counterparties that can give us that leverage to do two plus III, perhaps even more assets at the same time because of the scale of their own workforce.
Great. Thanks, that's all for me.
Thanks, so much.
Thank you.
This concludes our question and answer session I would like to turn the call back over to John Keppler for closing remarks. Please go ahead.
Well it goes without saying that the midst of a very difficult Q1, we appreciate it.
Today and hopefully.
We got through in some of our prepared remarks.
These are temporal issues are transitory.
We've gotten through so many of them and we're very excited about what comes next.
<unk> got a track record.
<unk>.
A really good stable safe healthy operating workforce.
Thats back at it again day in day out.
Continuing to work very very hard everyday to reliably displace fossil fuels.
They are 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.
Okay.
Thank you.
This concludes our call. Thank you for attending today's presentation you may now disconnect.
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