Q2 2022 Enviva Inc Earnings Call
Good morning, and welcome to the <unk> and be Boss, Inc. Second quarter of 'twenty two earnings conference call at all.
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I would now like to turn the conference over to Kate Walsh, Vice President of Investor Relations.
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Thank you good morning, everyone and welcome to Visa, Inc. Second quarter 2022 earnings Conference call. We appreciate your interest in and support of Aviva and thank you for your participation today.
On this morning's call, we have John Keppler, Chairman and Chief Executive Officer.
Thomas Smith, President and Chief.
Executive Vice President and Chief Financial Officer.
Our agenda will be for John Thomas and Shai to discuss our financial and operational results and provide an update on our current business outlook and operations.
Then we will open up the call for questions.
During the course of our remarks and the subsequent Q&A session, we will be making forward looking statements, which are subject to a variety of risks.
Information concerning the risks and uncertainties that could cause our actual results to differ materially from those in our forward looking statements can be found in our earnings release as well as in our other SEC filings.
We assume no 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 our simplification transaction that 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 the Form 10-Q document for more details on our recast and non recast presentations.
I would now like to turn the call over to John .
Thank you Keith.
Good morning, everyone and thanks for joining us today.
As you saw on our press release and 10-Q filed yesterday.
The last few months have been a particularly productive and exciting time for in vivo.
Since we were last together.
We've had the opportunity to meet with a broad spectrum of our current investor base, new investors as well.
And these meetings in spite of the remarkable progress and results we have delivered in the now more than seven years since our IPO.
I'm consistently reminded that in vivo remains a show me story.
That's because there just aren't any pure play publicly traded comps like many other industries have.
And even with our track record of significantly outperforming benchmark indices like the S&P 500.
The MSCI ESG index, and the Russell 1000 over the past one year and three year periods.
Still arent any companies like us and almost any industry with anything close to our long term contracted revenue base.
Our durable cash flow and dividend or.
Our strong growth profile, ESG attributes and margin expansion opportunities across a wide range of economic and business cycles.
That's what makes us unique but it also means we need to continue to do a good job communicating what's going on in our business. What we expect to happen given the actions, we're taking and the investments, we're making and then consistently reporting back on how well we're doing with keeping those promises.
So if we look back at our last conversation together.
We described three important things, we expect to deliver this quarter.
First we said we expected that we would continue to make good progress improving our operating profile and cost position coming out of a challenging first quarter.
In our brief flash the market about six weeks ago, we reinforced just that.
Highlighting that we expected Q2 to deliver adjusted EBITDA in the range of $35 million to $40 million.
And today, we are pleased to report that based on improvements we realized in both production and costs. We delivered results at the top end of that range and set the stage for a very significant back half of the year.
Second we outlined the increasing production ramp at our newly commissioned and fully contracted Lucedale pellet production plant and increasing shipments from our new deepwater Marine terminal in Pascagoula, Mississippi.
Both of these remain on track and are a big part of the projected EBITDA uplift in the latter part of this year.
We also talked about starting construction of RFS, Alabama plant and our ability to potentially access new sources of debt capital to finance fully contracted plants like this.
Well <unk> is now in construction with ground clearing civil work site prep and major equipment deliveries beginning to commence.
We have also filed the air permit application for our next plant and bond Mississippi.
And in the midst of some pretty significant capital markets volatility, we were able to tap the tax exempt bond market for our $250 million issuance with a 10 year tenor priced attractively at 6% inside our prior long term notes, reducing our cost of capital.
That is a strategy and structure that is replicable for us and we have already received a similar inducement agreement, giving us confidence that we will be able to access the tax exempt market when appropriate for our bond Mississippi facility.
Finally, we describe the progress we expected to continue to make executing new long term off take contracts and our expectations about converting existing mou's, an LOI to binding contracts.
Today, we are very pleased to announce the signing of four new contracts across a broad range of both utility and industrial counterparts.
Do exactly that and ultimately could add over 8 million metric tons of new demand with contracts that range in duration from five to more than 15 years.
What we did not expect to realize as quickly as we have is the substantial increase in pricing that we've been able to secure both within our current contract portfolio.
Given our pricing escalation and pass through provisions.
As well as the increasing willingness and ability to pay higher prices from our new and growing customer set who faced an even more challenging pricing environment, given the limited alternatives available for stable fuel supply and low carbon substitutes.
It is important to note that the constructive market conditions from which we are benefiting today are translating into permanent margin improvements for us.
And that is happening at the same time that we're seeing our overall cost tower come down.
We are benefiting not only from enhanced purchasing power as we expand in size and scale, but we are also unlocking value from taking advantage of existing operational leverage within our asset base.
And as expected we are seeing fixed cost absorption rates improve in tandem with increased production.
And should we find ourselves in a period of global economic contraction that reduces cost for labor steel trucking and consumable goods, we stand to not only maintain but truly strengthen our operating position and financial results.
Focusing in on what you expect for the rest of 2022.
You will recall from our previous discussions that the first quarter of the year is typically our seasonally softest quarter and thus the first half of the year usually represents about one third of our earnings for the year.
The fourth quarter is typically our seasonally strongest quarter with the back half of the year, representing about two thirds of our earnings and we are set up for what we expect to be a record fourth quarter. Both in terms of EBITDA and margin per ton.
Yeah.
Given this advantaged backdrop, we are reaffirming our adjusted EBITDA guidance for 2022 in the range of $230 million to $270 million.
And our 2022 dividend guidance of $3 62 per share, which represents a 10% increase over 2021.
And we see a clear path to further increasing return of capital to shareholders over time, especially as we continue to project EBITDA for 2023 in the range of $305 million to $335 million and project. The 2024 could achieve a further 25% uplift over that range.
And Veeva is a rare combination of a pure play ESG company with a growth trajectory and a dividend yield that are both in the 98 percentile of the S&P 500 companies.
We are 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 are 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.
I'll come back to give an update on our asset expansion plans and kick off our Q&A session, but first I'd like to turn it over to Shai to discuss our financial highlights and then to Thomas to give some important color on our market and contractual developments.
Thank you John and good morning, everyone.
We generated net revenue of $296 million for the second quarter of 2022 as compared to $286 million for the second quarter of 2021 on a recast basis.
Net revenue increased by 4% year over year, driven primarily by an increase in our average sales price per ton.
As a result of annual price escalators in our contracts as well as elevated pricing environment for biomass.
And we've I was able to help address specific dislocations in our customers and other producers supply chain. During the second quarter of 2022, rescheduling certain contracted deliveries into future periods, which enabled prompt delivery to other customers requiring incremental deliveries is elevated.
Biting.
Recent biomed market prices as well as the forward curve pricing of certain European biomass indices have exceeded $300 per metric ton, which represents a substantial premium to the current long term contracted by single roughly 200 to $220 per metric ton cost and veeva.
Weighted average portfolio and we were able to capture some of that differential during the second quarter of 2022.
Even with biomet, both market prices being roughly double now versus this time last year biomass is the cheapest form of thermal energy generation in Europe with biomass being more affordable than coal natural gas and crude plus EU ETS carbon pricing not only in today's market.
But all along the forward buy think of.
Biomass compelling economics are certainly providing a strong tailwind in our current contracting environment.
Pivoting back to our quarterly results, we did exit the quarter with higher than average finished product inventory simply due to the timing of two shipments. This.
The ships were loaded in early July as opposed to late June thus pushing the revenue into the third quarter of 2022.
Adjusted gross margin for the second quarter of 2022 was $54 8 million.
Which represent an increase of 6% as compared to $51 7 million for.
For the second quarter of 2021 on a recast basis.
Adjusted gross margin per metric ton was approximately $43 per metric ton, which represent an increase of close to 14% as compared to $37 90 for the second quarter of 2021 on a recast basis.
The increase in adjusted gross margin and adjusted gross margin per metric ton was driven primarily by contract price escalators that are tied to inflation indices, coupled with our ability to deliver a few shipments at market prices.
We are securing material durable pricing uplift from our contract structure. In addition to being in a very favorable contracting environment.
These pricing tailwind are expected to continue driving margin expansion on a go forward basis.
Net loss for the second quarter of 2022 was $27 $3 million as compared to a net loss of $24 9 million for the second quarter of 2021 on a recast basis.
Adjusted EBITDA for the second quarter of 2022 was $39 5 billion.
Compared to $25 $7 million generated for the second quarter of 2021 on a recast basis.
In June we shared with the market that we expect adjusted EBITDA for the second quarter of 2022 to be in the range of 35 million to 40 million.
And as John mentioned, we are pleased to have achieved the high end of that range.
Distributable cash flow was $21 3 million for the second quarter of 2022 as compared to $5 $7 million for the corresponding quarter in 2021 on a recast basis.
Our liquidity as of June 30 of 2022, which included cash on hand cash earmarked for the financing of our Epsilon and availability on our revolving credit facility was 184 million.
Our liquidity at the end of the quarter does not include the proceeds we received from the tax exempt green bonds, we issued in the middle of July .
We are pleased with our recent green bond issuance, which represent the first diamond Veeva has exited the municipal bond market, even in a challenging prolonged period of capital market volatility, we successfully raised $250 million.
Of 10 years of tax exempt green bonds at a 6% rate to fund our Alabama plant build.
We expect that the municipal bond market could provide an attractive financing option for future Greenfield project as well.
For example, the Mississippian business Finance Corporation has recently approved an inducement resolution, which provide us with the opportunity to consider financing a portion of our next plan build in bond, Mississippi with tax exempt green bonds.
Yeah.
Stepping back to look at full year 2022, we reaffirmed our guidance ranges in yesterday's press release and as John mentioned, we expect a strong back half of the year to generate over two thirds of our 2022 adjusted EBITDA.
Based on what we know today, we are projecting adjusted EBITDA for the third quarter to be roughly 50% higher than the second quarter and we are projecting record results for the fourth quarter of 2022, such that the fourth quarter could alone represent 40% of our 2022 adjusted EBITDA.
Also may demand to conservatively manage and Veeva balance sheet remains unchanged and we continue to target a leverage ratio of $3 5 million to full time based on our credit facility.
Although as we execute our growth plan, we may exceed that range for a particular quarter also but we will always manage back to that range and for full year 2022, we expect to exit the year below four times.
From a dividend coverage perspective over the long term, we are targeting a robust dividend coverage ratio of one five times and we've focused achieving that target in 2025.
With that I would like to turn it over to Thomas.
Thanks, Scott and good morning, everyone. It's great to be participating on today's call and I am pleased to share some exciting developments on both market size and our contracting progress.
Let's start with our new slate of contracts we've signed.
Yesterday, we announced the signing of four contract additions, including the conversion of our previously announced Mou.
And in LOI into binding take or pay contracts in.
In our prior communications, we outlined a plan to bring several of these agreements across the finish line over a three to six month period.
Given the urgency of our customers.
So not only decarbonize their operations.
But also lock in a secure reliable supply of low carbon feedstock, we're seeing an unprecedented pace of contracting right now.
The Mou we converted.
With a European industrial customer, we've using our product to replace lignite coal and natural gas used in their operations, which span across Europe .
Initial shipments over a 15 year term are expected to start next year with planned volumes ramping to approximately 600000 metric tons per year by 2031.
And just for context. This one contract represents the annual production volume from our Greenwood, South Carolina plant, So really nice slice of additional contracted growth.
The second contract, we announced yesterday was the conversion of a letter of intent we announced back in May with the German industrial customer that intends to use our product to generate green process heat in their manufacturing facilities. This.
This contract is for 10 years for approximately 60000 metric tons per year with deliveries expected to start in the coming weeks.
The third contract, we announced is with a new customer in Germany, where our pellets will be used in thermal heating systems. This contract is for five years with delivery. Starting later this year and with volumes expected to be around 150000 metric tons per year.
The fourth and final agreement, we announced is with a longstanding EU based customer and.
In consideration for additional delivered volumes under our existing contract term.
And our counterparty agreed to reprice volumes under this agreement at terms more reflective of the current environment.
This is a great example of our current customer base wanting to secure incremental supply in a structurally short market and given market conditions and a long term perspective that dramatically improves their ability to pay customers are willing to enable to collaborate with us to achieve a win win out.
Income.
Under this specific new agreement, we expect to deliver an incremental 720000 metric tons through 'twenty 'twenty seven largely from volumes produced from our upcoming production capacity expansions across the southeast U S.
These contract additions as well as some incremental repricing in our existing contract portfolio are being executed at a significant premium to our historical weighted average contract prices, reflecting the value of our customers place on secure long term affordable low carbon feedstock.
And thanks to the progress we all need to make in the large scale decarbonization efforts of utilities and hard to abate industries.
It is important to note that we remain keenly focused on fulfilling our long term supply commitments and today's strong pricing and contracting tailwind are incentivizing our teams to explore all options available to accelerate capacity expansions across our fleet.
There are limited alternatives available to our customers.
And with carbon and fossil fuel prices remaining at elevated level customers are willing and able to commit long term to higher prices for biomass.
Let's turn now to a few notable updates on the market.
As many of you know the European unit is in the process of updating the renewable energy directive legislation.
Which establishes common rules and targets for the development of renewable energy across all sectors of the economy to help the EU reached its ambitious energy and climate goals.
Currently.
Bioenergy accounts for almost 60% of the renewable energy used in Europe , and we are encouraged with the direction in which the legislative process is headed.
We believe that the final legislation will ultimately continue to support the essential role of sustainable bioenergy as a key climate change solution and will remain consistent within veeva practices.
I'll note that not only is it exciting to have just announced four new contracts with European Counterparties.
But these contracts also underscore the confidence our customers have in the us ongoing support for biomass as a critical pathway to achieving climate change goals.
Getting a little more granular for a moment one of the key industrial verticals that is attracting significant regulatory support on a global scale is sustainable aviation fuels.
Less than a year ago, the worlds allies adopted bold policy initiatives, such as refuel EU. The U S renewable fuel standard and the U S. Sustainable Sky's Act to achieve net zero carbon emissions by 2015.
Most recently the European Parliament voted to adopt draft rules to require.
To account for at least 85% of EUA aviation fuel by 2050.
Similarly, the UK announced to introduction of and Saf mandate, requiring at least 10% of jet fuel to be produced sustainably by 2030.
Additionally, the international Energy Agency's World Energy outlook 2021 report notes that biofuel is expected to account for approximately 15 and 40% of total aviation fuel in 2030 in 2015, respectively.
And just last week here in the U S. A deal was struck by the Senate Democrat, which includes a biodiesel tax credit and a new SaaS incentive.
We currently have two customer agreements relating to the production of Biofuels, one in Europe and one in the U S who are progressing plans to commence operations in 2023, and 2024 and with the current regulatory support coupled with the scaling up of low carbon transportation fuels refining capacity.
We're nearing the inflection point, whereby we can fundamentally change the carbon footprint of fly.
And rebates well positioned to play an important role into large scale decarbonization of transportation fuels as our wood biomass product is a proven low carbon feedstock into the production process of biodiesel by a methanol and SaaS.
And before I turn it back to John I'll give a quick update on the progress we're making in Taiwan.
It was around this time last year, we began to build a sales presence in Taipei and that investment is certainly paying off.
Recently, Taiwan's state owned electricity company type power announced plans to convert a large coal fired unit of a symptom power plants to biomass in order to meet the Taiwanese government policy objectives around increasing the amount of renewable energy generation the.
The project is scheduled to produce approximately 3000 gigawatt hours of renewable energy after 2025, which translates into demand for roughly one $8 2 million metric tons of biomass annually.
Even in Veeva size scale and track record with deliveries into the Asian market, we expect to be an important partner in <unk> biomass supply chain.
And with that I'll turn it back to John .
Thanks Thomas.
As Tom highlighted.
The increasing market opportunities for in vivo with high quality counterparties across a range of use cases.
For our renewable energy generation to the displacement of fossil fuel based carbon and hard to abate industries has never been more robust and the pace of contracting has never been this strong.
Because our industry is persistently structurally short supply.
New contracts mean, new capacity must get built.
And thus this unprecedented pace of contracting is in turn underwriting the acceleration of our capacity expansions.
As I mentioned earlier, we recently commenced construction of our plant in <unk>, Alabama.
Absence, designed and permitted to produce $1 1 million metric tons per year and.
And we will be the largest industrial wood pellet production plant in the world.
This fully contracted plant is expected to generate approximately $65 million in annualized adjusted EBITDA. Once the plant is fully ramped.
We expect to complete construction of apps in the back half of 2023.
Which gives us conviction in our projected significant step up in adjusted EBITDA for 2024, as <unk> ramps to its nameplate capacity.
We're also making swift progress on our plans to start construction of our plant in bond Mississippi.
Bond is designed to be similar in size to our apps facility.
And we expect to begin construction in early 2023 with.
With a completion date planned for the middle of 2024.
Absent bond or the second and third plants and our growing Pascagoula cluster 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 deepwater Marine 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 the year.
Additionally, we have recently filed for a permit for an accretive expansion of our Husky North Carolina plant.
We are planning to increase capacity at a husky by 45% subject to receiving the necessary permits.
We continue to expect to add six new plants over the next five years with.
With the likelihood that we'll add more after that.
Apps bond in the fourth plant at our Pascagoula cluster, our diverse three in our series of six.
And next on our growth plan is the addition of three new plants across our savanna, Wilmington and Chesapeake clusters.
Before we open the call for questions I will give a quick recap of what we've discussed this morning.
First in.
In Veeva delivered results at the top end of our expectations for the second quarter of 2022.
And I'm pleased to report that many of the short term challenges we experienced in the first half of the year are proving either transitory or manageable over time.
Second we reaffirmed our 2022 guidance range and expect to deliver a strong back half of the year.
With the fourth quarter projected to be a record in terms of both adjusted EBITDA.
And adjusted gross margin per metric ton.
Third.
We announced four new contracts, including the conversion of an Mou and an LOI to binding contracts, which reflect a strong contracting and pricing environment. We're in.
And finally, our contracting success is underwriting our next series of production capacity expansions, which were projecting will drive an adjusted EBITDA CAGR of over 25% in 2022 through 2024.
The effort our team is putting forth day in and day out is remarkable and we are on track to doubling the size of the company over the next five years.
In the near term.
As we look to close out 2022 successfully here's what you can expect from us.
First.
We will continue to ramp production and mitigate cost pressures to deliver a strong Q3 and a significant step up over Q2.
From there for Q4, we expect that the benefits of volume produced from Lucedale as it nears the completion of its ramp.
Combined with a higher headline pricing that we are beginning to realize.
We will enable us to post a record quarter, both in terms of produced volumes and margin per ton.
Closing out our year within the expected range for adjusted EBITDA of $230 million to $270 million.
Along the way we.
We will look forward to reporting on our construction progress at ups is that new fully contracted plant begins to come out of the ground.
And also our design and permanent completion for the new bond plant to follow and the final site and the Pascagoula cluster, we expect to announce around the end of the year.
Of course in parallel.
Can expect us to continue to convert <unk> and new opportunities in our sales pipeline into binding long term contracts to capture the value of the strong pricing environment. We're in.
We are incredibly privileged to have the opportunity to continue to build the company and a unique platform that delivers real climate change benefits today at scale.
The world wants less carbon more quickly and more cost effectively from secure sources and thats exactly what we offer.
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.
Now, let's open up the call for questions.
Okay.
Thank you.
We will now begin the question and answer session.
I'll ask a question you may place then one on your telephone keypad.
If you are using a speakerphone please pick up your handset.
Thanks for your question to Keith.
A question Press Star then two at this time, we will pause momentarily.
Simple roster.
Okay.
Okay.
Our first question comes from.
Jordan Levy.
Tom.
Lewis Securities. Please go ahead.
Sure.
Good morning, and congratulations on the contract.
Mr.
Yes.
Maybe to start on the financial side.
Shall I touched on some of those in his prepared remarks, but with the conversion and so on you've got a lot of investors who are new to the story than just getting up to speed on the history of the company.
In our discussions.
Presses demand environment and the benefits of the growth plan are pretty clear, but we get more questions around where the dividend stands in the context of the overall.
Overall growth plan. So we wanted to see if we could just get your updated thoughts on the value and size of the dividend maintained throughout.
Throughout the course of three growth plan and that sort of thing.
Yeah.
Jordan. Thank you it's always good to connect and really appreciate the question and of course.
We're also very very encouraged by the recent contract executions. This is an important continue to click off measuring the growth in our business because each of these new contracts, obviously underpins a fully contracted new long term asset at very attractive investment multiples, which really drives.
Not only our historical year over year, EBITDA CAGR, but what we see going forward. If you do the math is a little bit north of about 25% and so as we described when we were initiating the the simplification transaction and the conversion transaction that 'twenty 'twenty. Two is it is a transition year for us as we grow into a self funded growth model.
And as part of that of course, we've moved from being a master limited partnership.
It was a partnership that increased its dividend every single quarter since our IPO into one that flattened that out as we as we really moved into this transition year and of course, the guidance of $3 62.
For full year 2022 represents a flat 90, and one <unk> dividend.
We've always manage this business with a keen focus and really a commitment to stable and durable return of capital with the opportunity to grow that over time.
Certainly the growth profile and if you look at it as we continue to grow in the out year growth in our cash flow associated with it I think it certainly gives us the opportunity to increase that dividend over time, but we feel very confident in the guide for 2022 and as we look at the acceleration of the growth plan of 2023, and 2024, we're going to be very mindful of our overall conservative.
Leverage profile, but maintain our commitment to stable and durable return of capital over time.
Thanks for that John .
A follow up maybe jump into the operational side, you've always been committed to fully contract and you have the projects as you just meant.
<unk>.
Before moving forward with them.
Clearly you've seen positive momentum on the demand side.
Just wanted to try and gauge where you will see line of sight today in terms of.
Greenfield and expansion projects that currently or could be fully fully contracted.
Along with your overall confidence as it stands today on fully contracting the extent of the growth plan over the next few years.
Yes, as you know.
Jordan fully contracting our asset base and certainly before we ever return to turn.
<unk>, it's a golden rule for this company we have done it since we founded the company we have never deviated and we don't plan to you know so when we talk about the.
It certainly adds being in construction apps fully contracted the bond facility being in construction at the beginning of next year fully contracted our ability to announce the fourth point and the Pascagoula.
Cluster around the end of the year, we expect that to be fully contracted around that time as well of course, we just announced also an expansion of our <unk> facility. We do believe and of course, given the overall contract backlog that we have today also fully contracted.
Great homes, where every single ton of pellets, we can possibly produce for the next 10 15 plus years, given the weighted average contract maturity right in that ZIP code. So.
<unk> committed to fully contract the asset base and obviously in the current pricing environment, we're seeing margin expansion and opportunities that that provide for material uplift in long term AGM per ton and of course that translates directly into annualized adjusted EBITDA and cash flow that can be reinvested in the business.
And stable return to our shareholders.
Really encouraging thanks, Joe.
Good day.
Thanks Jordan.
Thank you.
The next question comes from the line of John Mccain with Goldman Sachs. Please go ahead.
Hey, good morning, everyone and thanks for the time I wanted to start on the cost side.
You guys talked a little bit about a few one offs in the first quarter and some momentum in getting through those internationally. It looks like second quarter was a little higher at least on a per ton basis can you talk about what youre seeing there or anything you can kind of quantify and how we should think about costs trending into the rest of the year and into 'twenty three.
Yes, John good to talk to you again.
As we talked earlier last on the phone together, we did exit Q1 with relatively high inventory balances, so youre seeing that flow through in the quarter and as John mentioned in his remarks. We also ended the quarter with a bit higher inventory given the move from essentially June 30 through about July 2nd of a number of ships. So you don't really get the full benefit of what we are.
Seeing in Q2 cost reductions along the way.
We're pleased about it obviously has a number of those issues that we talked about in Q1 being firmly in the rearview mirror. When you talk about planned absenteeism that COVID-19 related impacts that we saw there.
Naturally those are behind us and you saw an increase in productivity fixed cost absorption and the overall production profile of our assets and then the ones that we of course describe as both transitory as well as more manageable over time and diesel is a pretty good example of that certainly diesel spike in Q1, you look at the forward curve that is on a declining.
Curve. So we're encouraged by that but we also talk about how we manage that and certainly given where we see where we see exposure is really in our logging workforce and so as we described in Q1, which is our seasonally.
Softest quarter, and one where our loggers are frankly on tracks that are at a further procurement ratings, meaning meaning more more road miles transporting fiber to our plants that means the quantity exposure is higher in a quarter like Q1.
Difficult too difficult to manage on a tuesday, or Wednesday basis, but much more effective to manage month over month and what we've been able to do is migrate our logging workforce too.
Too much closer tracks so buying forward.
The rights to harvest the low grade timber from particular tracks, bringing those lagers in meaning that they have not only the benefit of a lower exposure to diesel price on that transitory curve as well as lower quantity.
You can take another step further and think about how much of the fiber processing you actually do on your own site, where we have electric shippers for instance, as opposed to some of our logging partners in the woods using diesel powered chipping equipment, and so you can change that mix and manage and mitigate your exposure to quantities of something like this.
So we're actually quite pleased in the overall overall cost quarter over quarter, you won't see the full benefit of that obviously until you kind of get to the back half of the year and as we get to the back half of the year. What we really see is not only the continued cost reductions that were engineering, but just as importantly, the long term durable pricing increases.
Expanding margins, we clearly gave a guide earlier in the year, so what that looks like for 2023 and beyond the record quarter. We're expecting in 2024 I'm sorry. In Q4. This year is really going to be a remarkable uplift again driving about back half of the year two to one in terms of.
The EBITDA generation of the business.
That's actually quite consistent with our historical profile, but youre getting a pretty significant uplift this year, because Q4 pricing realized pricing and volumes delivered into Q4, and certainly into 2020 three 'twenty 'twenty four and beyond.
Okay. Thanks, Thanks, Ed I'm, just curious if you might be able to quantify what the impact in Cogs from the higher inventory carryover carryover. So just trying to think about if you can get back to let's say 2021 levels on your Cogs per ton overall once again to let's say fourth quarter like you pointed out.
I think we I think we would focus more on it in terms of look we should be clear.
There continues to be uncertainty and volatility in the market and we would look at this much more on a margin per ton as opposed to an absolute cogs level. Some of that will of course be modestly blurred by a ramp up places like Lucedale as we continued to build assets within the overall portfolio, you'll see sort of.
Negative pressure on Cogs simply because of lower fixed cost absorption earlier in a production ramp so it's.
On a steady state basis, there's no reason to believe that 2021 numbers arent aren't achievable on a run rate basis, but youre going to see noise in the system because of bringing plants online. What you will see in an absolute basis as margin per ton continued to increase year over year.
Okay.
Okay. If I can squeeze one just relating one in just in terms of.
Margins moving up on some of the higher pricing realizations can you guys talk about maybe just how much spot margin you were able to capture this year sorry.
Sorry, this quarter just from a tonnage perspective, and how you know how.
How much availability to do.
Going forward, yes, it was actually very little in Q2.
As both John and Tom has described their prepared remarks. It was it was a few shipments so very very modest.
Okay, Alright, that's it from me thanks for the time I appreciate it.
Thanks, Sean.
Thank you.
Next question comes from the line of.
Scott.
RBC capital markets. Please go ahead.
Hey, good morning.
Everyone.
Looks like Youre, making some decent progress here on contract.
<unk> and.
And you're setting yourself up nicely.
For the coming year.
To touch on.
Guidance for the floor.
Okay.
The guidance.
We have from the $230 million to $270 million guidance for adjusted EBITDA, but when I take into account the comments that you made about the re queue in.
50% higher than that.
Q4, two representing about 40% of the total EBITDA for the year.
Yes.
So can you walk me through that.
Yeah.
Shipment of IRA I think thank you for the question I think that what we can describe again remind you again as we said before we are expecting the second half of data to generate about two thirds of our adjusted EBITDA for the full year the percentage on more of an indication how the second half of the year will shape kind of like giving indication that.
Q3 is a big step compared to Q2 big step up we mentioned that over 50% over Q2, and then Q4, we expect it to be kind of locale.
That does it from the beginning of the.
Our strongest quarter of data as we are getting much more of a volume from the ramp up of Duluth mill plant.
As well as getting benefits of the higher prices.
And on contract.
Using the shipping schedule. So we do expect Q4 to be about 40% of overall adjusted EBITDA for the year. This is all consistent with the ratio of two thirds. One third so what we are seeing with all of that will still like.
Within the range of $230 million to $270 million.
And there's no deviation from that.
Oh.
Oh, okay.
Yes.
Okay.
That's helpful.
I'll provide some hotels I know you touched on this a little bit but around working capital.
And then you mentioned that the timing of some shipments affected I think inventory.
Detail and around working capital and when you can expect that to.
To reverse because it appears to be yet.
Decent drag on your cash flow.
Sure I think that.
Thats a good question so what we experienced in the second quarter is that we have.
Relative relatively large.
<unk> of our sales during the month of June so it wasn't right. There Bill I would like maybe you would otherwise losing as a result, we ended up with the very large AR balance so we kind of like increased.
Our working capital on a al for the quarter by about $40 million also like as John mentioned to US two ships slipped to the beginning of July that's another about $70 million increase overall just for the quarter we experienced between.
And in inventory as an increase in working capital of about $47 million.
What we've seen for now is that all of Eylea. We collected so there is no issue of course with the island, we expecting kind of like.
That component of the working capital too.
Then back to normal that we should we do expect to generate cash flow from <unk>.
Welcome to <unk> throughout the rest of the deal.
Okay.
The last question Oh go ahead, okay. So Elvira this is John good to talk to you again by the way.
I'm, sorry, we missed the opportunity to connect early in the quarter, but.
I wanted to just come back around because what one one aspect of your question around guidance that we didnt really cover yet is kind of what drives the high end or the low end of that range and what you really see is.
Of the production ramp of Lucedale, you've got a significant volume way too on our relative portfolio of assets basis, hitting late in Q4, and so how many of those vessels ultimately sale in Q4 versus Q1 is going to be a really important driver and then what contract mix give.
Given the shipping schedule that were finalizing right now really hits in Q4 versus Q1, especially given.
The repricing as well as the new higher priced contracts that we've entered into and so we're mapping those shipping schedules right now which is why the range continues to be a little bit wider than we'd otherwise expect right now that obviously comes into great relief over the next several weeks and certainly during the quarter and so it will be in a position to provide a much tighter.
Guide as we get to the <unk>.
November earnings call.
Okay, Great and then.
Wondering if you could provide.
If you have this.
What.
Can you quantify on the EBITDA uplift.
What comes from volume.
From incremental volumes versus.
Hi, Paul.
Over over what period over what period of time Elvira.
Yes, I mean, I guess in 2023, and then 2020 or because youre talking about the big step up for both years.
Yes, so let's walk back from 2020 for obviously, a pretty significant uplift in 2024, largely volumetric Lee driven by higher volumes at higher prices too right. So you've got the benefit of the <unk> facility.
Coming online in 2024 so.
Very large plant largest one eight to $1 1 million tons, and if you do sort of the implied.
GM equivalent of $65 million in annualized adjusted EBITDA Youre not going get the full benefit of that obviously in 2024, but but that's a pretty healthy.
EBITDA per ton perspective, so <unk> got apps as apps is pretty pretty important there as it comes online at the end of Q3, I'm, sorry, Q4, 2023, and so then in 2023, you've got some important step ups in pricing <unk> got lucedale volumes on a full year basis and the benefit of the pricing escalators.
On the repricing that you see in our contracts. So you've got margin expansion north of $50 per metric ton.
In terms of what we've previously guided to relative to our historic AGM in the mid Forty's really important step up in 2023 volume and price and again volume and price in 2024.
Alright, Thank you very much.
Absolutely great stability.
Thank you.
Next question comes from the line of Pavon.
Okay Raymond James Please go ahead.
Thanks for taking the question.
You touched on some of the regulatory.
Nuances early or if we zoom in on that.
European Union Parliamentary Committee proposal to restrict.
Primary biomass from the.
Energy mix.
What's the latest on that proposal and what are the next steps that we should expect.
Great Great to talk with you.
I'll actually let Thomas speak to the regulatory environment in a second but as you know the most important metric we continue to look at and certainly as the regulatory environment continues to evolve whether it's domestically or internationally is the behavior of our customers and this quarter, we again.
<unk> announced a whole new tranche of contracts. These are all European contracts with European customers, who bear the regulatory risk associated with any potential change in regulation and they just signed up for higher prices over longer terms and more volumes and so we're very convicted by the direction of travel for the regulatory environment. Let me go ahead.
In turn the answer about the process.
And how we think this continues.
Unfold to Tom as you might know you've met before.
<unk>.
Speak to you again.
I mean first of all we are.
We're very confident that.
This regulatory process will come to a positive conclusion.
Whereas sustainable biomass like we deliver to the European Union will of course qualify as we've quantified in the past that both that you've outlined as an outlier since we have had the each revote.
Sure.
And in September we will have the the primary vote and clearly all related parties and stakeholders are working on a compromise that will be much more favorable than what we had seen at the ANV votes.
On top of that.
Both the council and the commission will ultimately after carried through to the final resolution are very pro biomass and so the final compromise should be much closer to what the council on the commission.
I propose rather than <unk>.
Some of the noise that we had seen in the past.
And I.
And I will tell you when you think about the broader context of energy in Europe .
It's not just only about sustainability anymore as much as that continues to be very important it's about energy security.
And Europe wherever you go no as they cannot exclude.
Any alternatives, particularly low carbon alternatives.
There gas prices because of the Ukrainian crisis, and so from just an overall pragmatism realogy perspective biomass will not be included and I'm very confident that we're going to find that a very positive resolution.
Once this process is over and the first half of 2023.
Yes.
Let me, let me follow up on the other side of the World.
Talk about maybe half of your product sales.
Going to Japan by the middle of this decade.
In that first of all is that still the case and number two.
Will you have interest or appetite in developing production capacity on the west coast of North America to serve the Japanese market.
Super question.
Certainly our existing contract book would tell you is that about 50% of our forward contracted volumes go into Asia and about 50% go into Europe .
Given that get power pricing is increasingly being set at the marginal price on delivered LNG.
We certainly see upward pressure on pricing and a constructive pricing environment for us both in places like Japan and elsewhere in Asia, and just as importantly of course it in Europe .
Clearly the pressure on the energy security question is accelerating contracting.
Frankly far in excess of even what we had predicted.
For the European customer set but that doesn't mean that Asia lags all that far behind.
But I think that we should we should be honest that the pricing environment for a globally delivered commodity where customers in Europe face an environment of LNG plastic implied cost carbon carbon <unk> etfs basis means that the willingness and ability to pay in the European sector currently exceeds that and where we see.
Other jurisdictions and so there may be a period of time, where our contracting accelerates and a greater rate in the European context, while over a longer period of time.
Asian market catches up.
From a from an export and capacity basis.
We continue to rack and stack opportunities in lots of different jurisdictions.
Generally don't pencil out as favorably as the southeast U S that doesn't mean that that's a never do it somewhere else and we've talked a little bit about the opportunities in California, although that more likely will be production in California, staying in California for things like sustainable sustainable aviation fuel or more difficult to abate sectors.
Yes.
Thank you very much guys.
Well great to talk to you.
Thank you.
Well again, thank you everyone for joining us on our Q2 call. Obviously, we believe we're set up for.
Very important back half of the year and setting the stage for an even stronger 2023 and 2024.
Soon.
Thank you.
On France has now concluded. Thank you for attending today's presentation you may now disconnect.
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