Q3 2022 Enviva Inc Earnings Call
Good morning, and welcome to Visa Inc. 's third quarter of 2022 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Please note. This event is being recorded I would now 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 MBIA, Inc. Third quarter of 2022 earnings Conference call.
We appreciate your interest in and support of and Viva and Thank you for your participation today.
On this morning's call, we have John Keppler, Chairman and Chief Executive Officer Thomas.
Thomas Smith, President and shall I, Havent executive Vice President and Chief Financial Officer.
Our agenda will be for John Thomas and Shai to discuss our financial and operating results and to provide an update on our current business outlook and operations.
Then we will open 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 with new or changed events or circumstances.
In addition to presenting our financial results in accordance with GAAP. We will also be discussing adjusted EBITDA and certain other non-GAAP financial measures pertaining to completed reporting periods as well as our forecast.
Information concerning the reconciliations of these non-GAAP measures to their most directly comparable GAAP measures and other relevant disclosures is included in our earnings release.
Our SEC reports earnings release, and most recent investor presentation, which contain reconciliations of non-GAAP financial measures. We use can be found on our website at in vivo biomass dot com.
It is important to note that as a result of the simplification transaction, we announced on October 15, 2021, we were required to recast our 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 documents for more details on our recast of nonrecourse presentation.
I would now like to turn the call over to John .
Thank you Keith.
Good morning, everyone and thank you for joining us today.
As you saw in our earnings release, we delivered financial results for the third quarter of 2022.
Substantially in line with the expectations, we outlined in early October .
In particular, adjusted EBITDA was a significant step up over last quarter.
Youre, increasing by over 50% for the third quarter.
We also achieved a record adjusted gross margin per metric ton.
Ultimately $60 per metric ton, which represents roughly a 40% increase over last quarter.
Based on the continued operational improvements we are seeing across our fully contracted asset base and the seasonally strong second half of the year you've heard us describe we.
We expect fourth quarter results to be strong with another significant step up in adjusted EBITDA to approximately $113 million at the midpoint of our guidance range.
This means that for full year 2022, we believe we are on track to deliver results in line with our adjusted EBITDA guidance of 240 million to $260 million.
We declared a <unk> 90, and one half cents per share dividend for the third quarter.
And also reaffirmed our full year 2022 dividend guidance of $3 62 per share.
There are very few companies with a fully contracted business like ours underpinned by long term take or pay contracts with a contracted revenue backlog of over 21 billion.
And the contract weighted average remaining term of 14 years.
And it is because of our visible durable long term cash flows that we are able to be a rare combination of a high growth company and a strong stable dividend payer.
As we look into 2023, we're really starting to hit our stride as a corporation.
And we're coming up on our one year anniversary of the conversion from an MLP to a regular way C Corp.
We are currently forecasting adjusted EBITDA for 2023 to be in the range of $305 billion to $335 million.
Which will cover our stable current dividend of $3 62 per share at one one times at the midpoint of this range.
We will come back early in the new year with fulsome 'twenty to 'twenty three guidance as we complete our budget cycle.
Refine our shipping schedules with our customers.
What I can tell you now however.
Is that our manufacturing and terminal facilities are demonstrating asset availability and production throughput rates such that we expect to produce more than 6 million metric tons next year.
This productivity and the benefit of the multi plant expansions drives increased volume and improved fixed cost absorption.
And when combined with the benefit of the constructive pricing environment and inflationary escalators within our existing and new long term contracts.
We continue to be well positioned for robust cash flow growth, even in an environment with potential recessionary pressures.
And despite the broader energy market volatility new customer demand for alternatives to fossil fuels and drop in de Carbonization solutions continues to accelerate.
The magnitude of market opportunities with high quality counterparties across a wide range of use cases.
From renewable energy and heat generation.
The displacement of petroleum based hydrocarbons and hard to abate industries like steel cement and sustainable aviation fuel.
To support a remarkable level of contracting for us.
Year to date, we have announced close to $3 5 million metric tons per year of new agreements with both new and existing customers.
And we believe we are on track to announce an additional 2 million metric tons per year of new incremental long term contracted demand.
This demonstrates how serious are counterparties are ensuring up renewable energy feedstocks from secure sustainable and trusted sources.
We've built strong longstanding relationships with our customers who understand our ESG based purpose driven business.
And value the quality dependability and sustainability of the products, we're delivering worldwide.
I want to spend a few moments on sustainability now as it is the core of our value proposition.
And we've recently updated our website content with important information on harvesting in merchandising practices in the U S southeast.
Thomas Mirth and Veeva as President and co founder of in vivo with me has been a critical thought leader on sustainability since our founding almost 20 years ago.
We have built what is now the world's largest supplier of sustainably produced wood pellets in the U S southeast because of the region's thriving healthy in abundance for stocks.
The forest here, our large and growing.
With only a small percentage harvested each year and even more growing back every single year in areas, where we have cited our plants.
This healthy circular forest economy, where landowners grow trees care for them harvest their timber for both high value permanent carbon storage products like soft timber building products and furniture.
As well as for lower value paper pulp and bioenergy and then re grow their timberlands to begin the cycle again is why forest inventory in in vivo sourcing area has grown by 21% since may 11th.
Yeah.
There was such a strong sustainability story can be told here in the U S southeast and to help investors and stakeholders truly understand the important dynamics at work.
We're in the process of planning a number of site tours in four stores, along with an investor day to help unpack, where and how we source our fiber supply as well as how we execute our responsible sourcing policy.
I look forward to seeing many of you at these upcoming events and continuing our discussion about <unk>, leading sustainability practices and about how we're providing industry, leading transparency about exactly how we contribute to healthy forest management growing for stocks and climate change benefits.
I'll come back to round out our discussion and kick off our Q&A session, but before that I'd like to turn it over to Thomas to discuss incremental details on our sustainability priorities as well as to give some important color on our market and contractual developments and then half shai to discuss our financial highlights and priorities.
Yeah.
Thank you John and good morning, everyone.
I'd like to start by picking up where John left off on sustainability.
Four so critical to mitigating climate change and how we use forest is a critical critical pathway to net zero is of Paramount importance.
550 scientists from around the World recently issued a public letter to the President of the European Commission Parliament and Council, clearly, stating that working for us and the products generated from them, particularly in light of improved forest health and displacement of fossil life's carbon.
Provide a much greater carbon balance then untouched forests.
Scientists were United in stating wood from sustainably managed forests is senior to neutral and highlighted the critical role that Woody biomass from sustainably managed forests.
Play in climate change mitigation.
This is right in line with the leading authority on climate science, the United Nations' Intergovernmental panel on climate change.
The IPCC notes to sustainable Forest management strategy aimed at maintaining or increasing forest carbon stocks, while producing an annual sustained yield of timber fiber energy from the forest will generate the largest sustained mitigation benefit for climate change.
Yeah.
I Didnt Veeva, we go above and beyond and developed our track and trace program to provide leading transparency into the.
Sustainability of our wood sourcing practices and to align our practices and tracking with the ipcc's objectives, and the leading scientific views.
For the second half of 2021, our track and trace data tells us that when we procured wood fiber from our final harvest and Veeva is merchandising percentage was on average 35% across our procurement areas meaning.
Meaning that on average we take approximately 35% of the wood procured from our harvested site.
Given that we typically provide the lowest revenue per tons with a landowner.
This means the majority of the harvest was sold into applications like building products furniture in pulp and paper.
Our track and trace data will also tell you that we took 30% or less of the wood procured from 59% of the acres, where we procured would we also described that in the case of 12, 4% of harvested acres, we took more than 70% of the Merchandised wood.
They are good ecological and economic reasons for a higher than average percentage in those cases, such as sourcing wood from hurricane damage.
LT stage harvesting or when the harvest was predominantly pulpwood because of soil and market conditions.
As we've said before markets both forest product are the best defense against conversion to non forest land and that is a critical reason Wi forest inventory continues to grow we now procurement regions.
Let's turn now to a few notable updates on the market and our contracting.
As many of you know the European Union is in the process of updating the renewable energy directive legislation 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 by energy as a key climate change solution and will remain compatible with in vivo practices.
European demand remains unabated and in addition to our continuous long term contracting activities. The same tailwind that drive the longer term contract at driving new highly accretive near term opportunities with existing and new customers.
And although the near term opportunities don't reflect the same tenor of our long term contract Weil and auto transactions, where we are managing dislocations within our customers' demand profile or a durable component of our business and we will continue to drive value over the long term.
Yeah.
We also continued to see positive momentum in Taiwan, and Japan, and a very carritch with the direction and pace of our discussions there.
In terms of global supply for industrial Wood pellets, we're seeing the Pacific rim continued to grow as an important supply basin, which is expected to provide profitable third party purchase and sales opportunities for us.
And Veeva has a demonstrated track record of procuring volumes from different suppliers and geographies and selling them profitably into spot market opportunities and our long term contracts.
Market data suggests that volumes can be purchased on an fob basis in the Pacific rim for less than $200 per metric ton.
Market data also points to trading prices currently north of $400 per metric ton and European markets.
For companies like in Veeva with large scale portfolios of customers and shipping partners. These types of market dislocations can provide an opportunity to drive incremental value while meeting the needs of our customers.
This is a market tailwind that we may talk more frequently about in the future.
And to round out our market discussion I'll bring us back home to the U S with.
But inflation reduction Mack is strengthening the momentum behind our conversations with sustainable aviation fuel and biofuel producers there.
<unk> also enhanced support for bioenergy with carbon capture use and storage.
Which is emerging as a large scale negative permission solution that has the power to truly move the needle and decarbonising many sectors of our economy.
And with that I'll turn it over to Shai.
Thank you Thomas and good morning, everyone.
We generated net revenue of $226 million for the third quarter of 2022 as compared to approximately $237 million for.
For the third quarter of 2021 on Eureka and nonrecourse basis.
Net revenue increased by 37% year over year, driven primarily by an increase in our average sales price per ton.
As a result of a number of factors, including addressing dislocation in our customers and other producers supply chain.
Which enable incremental deliveries is elevated.
Pricing escalators and cost pass through mechanism inclusive of bunker fuel adjustment in our existing contracts.
With pricing several existing contracts and entering into new contracts at higher prices compared to historical prices.
Recent biomass spot market prices.
Well, a default give high single sales in European biomass indices have exceeded $400 per metric ton, which represents a substantial premium to the current long term contracted pricing cost and veeva weighted average portfolio and we will be able to capture some of that differential during the third quarter of 2022.
Even with biomass spot market prices more than double now versus this time last year biomass is the cheapest form of Tim on energy generation.
We buy them as being more affordable than coal natural gas and crude last ETS carbon pricing.
This is true not only in today's market, but all along the forward pricing curve.
Looking back to our quarterly results, we did exit the quarter with higher than average finished product teams and Don simply due to the timing of pre shipment delays caused by who we can in.
This increased our finished goods inventory by $20 million compared to where we exited 2021.
Adjusted gross margin for the third quarter of 2022 was $75 million.
Which represent an increase of approximately 120% as compared to $34 million for the third quarter of 2021 on the weakest bases.
And an increase of 33% as compared to the non recourse basis for the third quarter of 2021.
Adjusted gross margin per metric ton was approximately $60 per metric ton as John mentioned we.
Which represents an increase of 104% as compared to 29 <unk>.
And 36 for the third quarter of 2021 on a recast basis, and an increase of 24% as compared to the non recurring basis of $48 and 38 films.
Bill metric tonne.
The increase in adjusted gross margin and adjusted gross margin per metric ton was driven primarily by contract escalators.
Are tied to inflation industry, coupled with the repricing of select legacy volume and our ability to deliver a few shipments at market prices.
We are securing a material durable pricing uplift from our contract structure. In addition to being in a very favorable contracting environment.
Net loss for the third quarter of 2022 was $18 $3 million as compared to a net loss of 35 8 million for the first quarter of 21 on a recast basis.
Adjusted EBITDA for the third quarter of 2022 was $60 6 million compared to $14 2 million on a weekly basis.
And $62 9 million on.
On a nonrecourse basis for the third quarter 2021, respectively.
<unk>, we shared with the market that we expected adjusted EBITDA for the third quarter of 2022 to be in the range of 60 million to $65 million.
And we are pleased to be in line with that guidance range, even with the slide the sale of about $3 million and adjusted EBITDA to weaken in.
Distributable cash flow was $36 3 million for the third quarter of 2022 as compared to negative DCF of $3 6 million and positive DCF of $49 5 million.
For the corresponding quarter in 2021 on a recast and nonrecurring basis, respectively.
Our liquidity as of September 30th 2022, which includes cash on hand cash earmarked for the financing of our Epsilon and availability under our revolving credit facility.
$328 million.
Stepping back.
Look at full year 2022, we reaffirm our adjusted EBITDA guidance range in yesterday's press release, and expect a strong fourth quarter to generate over 40% of our 2022 adjusted EBITDA.
While our capital expenditure guidance range, we narrow the range slightly dropping I end of the range by 10 million to.
To now be $255 million.
$265 million.
The previous range of 255 million.
The $275 million.
Our commitment to conservatively managing <unk> balance sheet remains unchanged and we continue to target a leverage ratio of three 5% to full time based on our credit facility.
Although as we execute our growth plan, we may exceed that range for a particular quarter. So we expect to manage back to that range.
And for full year 2022, we expect to exit the <unk>.
Well below full time.
From a dividend coverage perspective over the long term, we are targeting a robust dividend coverage ratio of one five times and we focused achieving that target in 2025.
As we execute our growth plan of building six plans over the next four to five years, we'll continuously evaluate financing alternative available to us.
Although capital markets remains volatile we have a number of alternative available to us to finance the debt portion of our growth strategy.
One option is the municipal bond market, which we believe could continue to provide attractive financing.
For example, the Mississippian business Finance Corporation is already approved and inducements resolution, which provides us with the opportunity to consider financing a portion of our next plan.
Inbound, Mississippi with tax exempt greenbaum.
Given our evaluation of EPC construction alternatives. In addition to our proven sales execution model traditional energy infrastructure project finance presents another potentially attractive financing alternative for fully constructed new plant and pools of assets.
With that I would like now to turn back to John .
Thanks Shai.
Building on <unk> last point about our capacity growth plans, because our industry is persistently structurally short supply.
Signing new contracts means new capacity must get built.
And thus this remarkable pace of contracting is in turn underwriting our large scale fully contracted capacity expansions.
As we've discussed we are underway with construction of our plant in <unk>, Alabama.
<unk> designed and permitted to produce $1 1 million metric tons per year and will be the largest industrial wood pellet production plant in the world.
We're also making progress on our plans to start construction of our plant in bond Mississippi.
Bond is designed to be similar in size to our EFS facility and we expect to begin construction in early 2023 subject to the receipt of necessary permits.
With a completion date planned for the middle of 2024.
Apps and bond or the second and third plants and our growing Pascagoula cluster.
And plans are underway for the clusters fourth plants.
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 plans 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.
We continue to expect to add six new plants over the next four to five years with the likelihood that we will add more after that.
Apps bond in the fourth plants in our Pascagoula cluster of February in our series of six and.
And next on a growth path is the addition of three new plants across our savanna, Wilmington and Chesapeake clusters.
Before we open up the call for questions ill give a quick recap of what we've discussed this morning.
First.
And we have a delivered results in line with our expectations for the third quarter of 2022.
And we're on track to deliver a strong fourth quarter.
Second we reaffirmed our 2022 adjusted EBITDA guidance range and expect to generate between 240 and $260 million for full year 2022.
Third we declared a <unk> 90, and one half cents per share dividend for the third quarter and reaffirmed full year 2020 dividend guidance of $3 62 per share.
And finally and most importantly, we described how we continue to be a critical part of the thriving sustainability story of the force in the U S southeast.
I want to take a moment before we open up the call for Q&A to acknowledge the effort are in Veeva team is putting in day in day out helping the company deliver on the tremendous opportunities we have ahead.
I am very proud to see that our team continued to focus without distraction on orders quarter when veeva.
Ensuring our continued safe reliable and sustainable operations that deliver climate change benefits today.
A lot of work ahead of us, but a lot to look forward to it.
And as many of you know I'm quite fond of saying, we're just getting started.
Now, let's open up lines for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Today's first question comes from Jordan Levy with <unk> Securities. Please go ahead.
Good morning, all and thanks for the update.
First I wanted to see if we could try and reconcile some of the volume the volumes for the quarter.
Recognize that there are some.
Hurricane related shipment delays as well as some spot market opportunities.
You discussed.
It just seems like if I'm, if I'm running the numbers I would've expected some growth volumes, even with the delays. So just seeing if we could get some additional color there.
Yes, Jordan Thank you.
I think we described in our October release, which we expected in the neighborhood of 13, $1 3 million three 5 million.
Tons for the quarter and we actually came in just a little bit shy I don't think about 90000 tons short with 80000 tons left on the dock due to hurricane Ian.
So I think that pencils out pretty soon.
Got it thanks for that.
And then on the <unk>.
Somewhat related note and I know Shai talk to this in his prepared remarks.
Working capital has built maybe if we could just talk to historic levels, there and then kind of the impact of the.
The delays and how we should expect working capital to trend over the coming quarters.
Yes. Thank you Jonathan for the question kind of like.
I'm thinking about the question.
On working capital and cash flow focus activities, maybe I'll try a land packages.
For the <unk> for the third quarter.
Adjusted EBITDA of about 61 million.
Then as you know during the sales growth that we are making the coupon payment on the bonds. So we have timing of higher interest cash paid which is about $25 million for the quarter.
The inventories that we mentioned in our prepared remarks, so it affected.
At the timing effect on of vocational for multiple activities is about 10 million.
And when you take into account also the support payments that.
Part of the simplification structure and used to be before dystrophication used to be part of the MSA fee waivers included.
In California, the activities, you're adding about $6 million.
And then there is some of the acquisition integration cost.
<unk>, which is about $4 million and Thats, how we get to cash flow from opening activities of about $17 million below the third quarter.
Gotcha.
Okay. Thanks for the color and ill take the rest offline.
The next question comes from John Mackay with Goldman Sachs. Please go ahead.
Hey, everyone. Good morning, Thanks for the time, let's start on the on the contracting side. So nothing new this quarter, but John you alluded to I guess 2 million tons of contracts potentially.
Under flight could you just maybe clarify some timing when you expect those to come in and maybe give us an update more broadly on the set of Mou as you guys have talked about it last couple quarters. Thanks, John Yeah, absolutely John Thank you and I'm, sorry, I missed you in the field a couple of weeks ago.
I would point out that actually in the quarter, we executed an agreement with all of their fuels for up to 750000 metric tons per year for a sustainable aviation fuel production here in the U S.
A critical segment for us as we continue to look at the total addressable market. There. So I think we actually made some pretty important progress in the quarter as you look at sort of the full year impact.
We're sitting at about $3 5 million metric tons per year of new agreements that we penciled out new long term contracts.
And.
In our prepared remarks, we did point to about 2 million metric tons per year across a broader into segments that we expect to bring cross line over about the next six months and let me actually ask Thomas to lean in on sort of where those segments wireless socs and geographies, let's talk some segments and use cases, yes, absolutely Hey, John .
Good to hear you again.
The contracting of momentum that we have has not slowed down at all.
And the 2 million tons that John talked about are really across the board in many geographies, we're seeing discussions and negotiations of contracts in European countries like Germany like Poland in.
The UK other places in Europe , both on the power and heat side as well as the heart debated industry side.
We've also talked about Taiwan, we're seeing substantial momentum there.
And of course, Japan continues to be.
Big growth market for Us I would also point out that.
Some of the volumes that we're now asked for or really.
For post 2027 volumes.
That is a key criterion.
We see that generators are thinking about the next 10 or 15 years.
What they have contracted so far and we're really excited about that.
That part of the momentum that we're seeing really materialized strongly.
Now.
Alright, thanks, Thanks for that update let's turn to.
Another part of the market I guess, maybe pricing was really good. This quarter you guys talked about spot benefits. You also introduced this idea of May.
Maybe doing more spot or more kind of optimization cargoes going forward.
Talk about just how much of the quarter that benefit was and how much maybe if we're looking into 'twenty three or maybe a long term EBITDA, what you expect to kind of.
Benefits could look like in the overall EBITDA mix.
Yes, it's a great question, John and I think as we started out the year as we commented on the implications of the war in Ukraine.
That had the effect of dampening third party volume availability, which given that.
A quite large participant in the market very large book of both production assets as well as well as our long term off takes across a range of geographies.
That has been a part of our business and you've seen that consistently reported historically for.
For 2022, we expect it to be see a dampening of that given the product availability and some of the challenges in Europe whats kind of happened in the meantime of course is that markets markets have begun to emerge in places like the Pacific Rim. This is an area from which we've procured historically I think as we've described in our 10-K, we have structured long term contracts.
With.
A partner in British Columbia for volumes, there and increasingly what we're seeing is our ability to begin to access.
New production out of places in Southeast Asia, and elsewhere, Australia included where we're able to move some of those volumes into our Japanese contracts because of our portfolio of shipping contracts and long term agreements.
Into the Asian marketplace and so this is a part of our business. It is a part of our business that has enabled because of our long term contracted position and the agreements that we have both with our customers and shipping partners that enable that logistical flow right. This is still a very very physical business and you have to be able to access cargo access the product as well as move it.
Quite efficiently enter into markets, where we have contracted demand from a from a pricing perspective, I think what we're seeing right. Now is certainly the seasonal benefit as we look historically across the Companys financial performance year over year. The second half of the year is generally our strongest period here with the fourth quarter typically being our.
This quarter has been a.
Consistent pattern for us and we would expect that to continue so <unk> got a seasonal benefit in the second half of the year large uptick in pricing generally in the fourth quarter for a number of underlying factors. Obviously the margin expansion is really the way we operate the business. So we're able to operate in an environment, where our costs are generally lower in the second half of the year and we're able to.
<unk> generally higher price conditions, given the this sort of winter season, and so where some of our deliveries fall.
What I'd say on the on the durable pricing increases and we've talked a little bit about this in the past, but the inflationary conditions in our in escalators in our contracts are providing a very significant uplift in pricing.
That has continued and certainly the recent sort of eurozone front of 11% in the UK print a similar number.
That hasnt actually been factored into our escalators in those contracts, we would expect that 2023 number to be appropriately reflective of.
The increases in that with the contracts that are existing within the firm.
We've also talked a bit about the repricing of certain existing contracts and sort of win win situations with our customers for incremental volume and of course the entry into new.
New contracts at a much higher price than what you would've seen certainly several years ago and our overall contract portfolio that.
That combined with what we see as some of the dislocations that we're able to monetize and again, it's been relatively modest.
I described a few vessels in the quarter.
The dislocations in the opportunity to sell into some of the high priced spot market I think will provide important value for us potentially in Q4, and certainly as part of our our earlier 2023 guide, which we'll come back in early in the year.
And give a more fulsome perspective on it.
I appreciate the color. Thank you.
The next question comes from Ryan Levine with Citi. Please go ahead.
Good morning.
I appreciate the update and your track and trace disclosures on your website.
I think it would be helpful. If you could speak to how that's material to your contracts to the extent that any of your customers have the ability to change terms or <unk>.
Any allen.
Data were to be different than they were two or expect.
There is any real law change provisions in any of your any of your contracts.
Ryan This is <unk>.
Thomas Let me take this.
So first of all we have.
Robust third party audits through SPP day build on.
Audits on Dfc in FSC.
And of course, we were in compliance with all of these audits and and Thats the basis for our contractual <unk>.
Clients with our customers our track and trace system goes way above and beyond all of that.
And it creates incredible transparency.
Thats.
Our customers like regulators like because it just shows that we was front footed where we're trying to take this industry to do.
To an entirely different level of what's possible through our transparency from a contractual basis from a regulatory basis. There are no issues whatsoever.
So.
Again I.
I'm glad we.
We have the opportunity to explain dredging traits.
And it is going to continue to be a core part of our of our <unk>.
Discussions with our with our customers and regulators, but we go above and beyond.
And Ryan is it specific to your question is we've talked about previously.
Our contracts generally provide for.
The limited exposure of any two in Veeva for change in law risks.
Okay.
The contracts are based on.
Audited disclosure that you are providing to the market and your customers.
Is that am I hearing that correctly.
That's correct. So when we enter into an agreement we have a very we have a specified sustainability standard that has an effect at the time of the entry into the contract and all of our deliveries have complied with any of our required contractual provisions to the extent that any of the lost James.
That is generally borne by the.
By our customer.
I appreciate the disclosure I guess and then shifting gears you mentioned several times specific brand market developments.
How does that impact your longer term strategy, both on third party volumes and ability to operate within your existing contract structures.
So the base of our business and our core value proposition is to deliver volumes under long term contracts to our customers.
The ability to do so with.
New or smaller producers that entered the market, we've done that from a domestic basis too.
You would've seen in sort.
Our earlier stage of growth.
And so third party volumes are a part of this business, but they are enabled by the fact that we have the long term contracted.
Volume position in these contracts with our customers around the globe that enables us in a very physical commodities. We described a moment ago in a very physical delivery model that enables us to capture basin differentials between where volumes can be procured in the shipping differential between certain of those.
Procurement basis on where the volumes are ultimately delivered again the base model for US has been to produce on a very favorable and incredibly sustainable resources in the southeast U S deliver that those volumes ratably and durably into our European and Asian customer set and the fact that volumes can be produced in other regions.
It means that to the extent you can capture in our logistics differential we seek to do so and the value that can be created there should generally accrue to the largest supplier and ultimately deliver a this product around the world.
Appreciate it and one last question for me habits movement in diesel costs impact the quarter in your outlook.
So I think again these diesel.
We've seen that in our cost our obviously as we've described earlier.
Diesel was particularly volatile earlier in the year, you did see that impact.
Our delivered cost of fiber.
It has generally modulator that doesn't mean, it's gone away entirely.
But we have been able to operationalize and a number of changes.
In both the way that we procure fiber as well as the way that we process fiber and for instance.
Eliminating diesel and a chipper about replacing it with electric shipper, where we do some of that shipping mitigates our exposure to that but certainly it is something that our loggers in some of our truckers experience and we have to work and help them mitigate that.
Thank you.
As a reminder, if you have a question. Please press Star then one.
Our next question comes from Elvira Scotto with RBC capital markets. Please go ahead.
Yeah.
Hi.
Good morning, everyone.
You talked a little bit about some of your potential financing plan.
You look out across these different alternatives what.
Cost of financing do you expect I mean, given that we're in this rising rate environment and then just more broadly I mean, you have a lot of growth ahead of you. So can you just talk more broadly about your capital allocation plans.
In light of this growth that you have ahead of you and all of the plants that you need.
Over the coming years.
Yes.
I'm going to let shai lean in on the financing structures in markets and provide probably a little more visibility into how we're thinking about project finance and some of the muni things that even we don't quite recently, but I do think it's important to start with.
A little bit of a reminder, that for where we sit today, we're not even a year into the <unk>.
Conversion from Master limited partnership.
Our regular way C Corp, and one of the underlying drivers of that rationale was the preservation of capital that we were going to achieve on the basis of the elimination of the <unk>.
And the internalization of the construction activity as opposed to the acquisition of fully constructed assets from our sponsor and the combination of those things.
On a forecast basis preserves about $1 billion in cash.
First of all I agree with that.
Of course, that's mitigated by the incremental SG&A burden that we assumed as part of the acquisition of our sponsor.
But from an internal funding basis.
We should be laying approximately $1 billion better than the prior case, and so 2022, clearly a transition year as we articulated as we're growing our way into that self funding model and.
And as we look forward certainly that capital is an important part of our growth plans.
Because as we look to continue to conservatively manage the balance sheet, there will be a debt component to that we've recently raised.
For our particular tranche of debt associated with our <unk> facility, we access the muni market. It was an attractive financing. It was an avenue that had historically been available to us even as a master limited partnership, but given the given that that particular type of instrument doesn't travel very well between entities we had not.
We are not really approach that market, but boy, what a great opportunity we were able to tackle earlier this year and we certainly think that's replicable for us given that the Mississippi equivalent is already award an inducement agreement for the bond facility and one that we think is replicable going forward. It's not the only structure that's available for us in <unk>, perhaps you want to lean in a little bit on where we're seeing.
Some particular opportunities and how we think about this both near term and lumpy.
Thank you John No question that the debt capital markets are volatile.
But.
When we're looking at all the growth profile, we are developing plans at five times EBITDA multiple of approximately five times EBITDA multiple so our investments are very very accretive.
They are accretive to cash flows and earnings.
Yes.
When youre thinking about the Muni market is still open.
As volatile as the idled.
Pixel market also when Youre thinking about what we mentioned earlier about our ability to participate in.
Project financing market not as volatile.
Debt capital market. So all in there is an increase in cost but.
Not meaningfully meaningfully in a way that should.
That should impact our ability to continue to grow and build as.
As we mentioned earlier six plant over the next four to five years.
Okay great.
And then.
I know you've touched on this throughout some of the other questions in your prepared remarks, but hoping to maybe get a little bit more of a quantification.
Adjusted gross margin per metric ton of $75 can you quantity in the fourth quarter can you quantify.
What the biggest drivers are of that increase to $75. I mean is it. The fact that you have inflation escalator or is it what is the biggest driver and then as we look out into 2023, how should we see that trending and I know theres some seats.
Seasonal element to this but just.
No.
Generally speaking.
If we're exiting 2023 should we.
Its still be in that kind of $75 range say in the fourth quarter of 2023 do you expect it to be higher or do you expect that to moderate a little bit.
Well.
Thanks for the question I mean, as we've consistently demonstrated historically Q4 is generally our strongest quarter. So you'd actually expect to see an increase and I think we've guided to a pretty significant step up even for Q4 of this year.
Certainly on a margin basis that reflects the seasonal benefit that we got in the second half of the year. So you would expect that to replicate on that seasonal component second half over first half in 2023, and probably again in 2024.
The headline price increases, obviously headline price increases margin.
And it's in all of the above.
Impact right the fact that the inflationary.
Provisions within each of our contracts are providing meaningful durable.
<unk> increases and increased margin frankly.
Faster rate than we're seeing some of the impact on the cost out, but thats why the business model works, so well right I mean, when you think about where you think about something like natural gas, where we have some exposure because of our <unk> and our operating fleet and then sort of a derivative impact on power what thats doing is obviously, that's driving inflationary pressures that are increasing our headline pricing. So so.
In an environment like that you are seeing margin expansion.
On the basis of headline price increases, even while you have some impact on the cost out.
What do we see in 2023, well, obviously, we're going to come back and drilling.
Early in the year and give more fulsome guide, but we've tried to be quite specific about we are seeing specific headline pricing increases within our existing contracted book of business because of the contractual provisions.
Bring in that escalation in price based on whether it's U K CPI Eurozone CPI USPI is betting on this particular contract inflating the headline price puts in place the margin of course.
Similarly.
Thompson the team has done a very very good job of looking and working with our customers on repricing certain of our legacy contracts and consideration for things like additional volume and others to create a pricing environment much more consistent with the current long term long term environment than what we would've executed five or seven years ago, and finally of course, the new contracts that we're entering into an.
Now coming to life at a much higher price than what we would've seen historically and so we do think it is both durable and then of course, there is the seasonality impact of that which specific back again second half next year be very strong in Q4 of this year to be quite.
Quite remarkable for and we deliver what we think is possible.
Great that's helpful.
And then just the last question for me looking at your cash flow from operations.
It looks like this.
This quarter cash flow from operation.
With a positive 17 million, you're still running at a negative year to date when do you think you.
Could be at a point, where your cash flow from operations kind of on an annual basis is.
Positive.
Thank you Andrea for the question. So what we mentioned like came in.
In our press releases that you should expect to see from us.
Dividend coverage ratio in 2023 of approximately one one times the way we are calculating it we are taking into account.
Taking into account our projected <unk>. So when you kind of like the midpoint of between 205 to 235 million below say $320 million and Daniel subtracting from that the interest.
Cash paid.
Expense paid in 2023 and subtracting the.
Moderator maintenance capital expenditures in 2023 and that the dividend should give you a sense about how strong is that you should expect to see the cash flow from opioid activities. Obviously 2022 was a transition year as we mentioned as we move forward and partnership to the C.
<unk>, so the way like fuel.
Few adjustment.
To adjusted EBITDA and the most notable I can mentioned is the support payments that you expected coming out of the simplification, we said $25 million.
Of payments in 2021, and $24 million in 2022, and 2023 only about 6 million.
So that's kind of like a winding down.
And then we also like in 2022 of the Wil acquisition integration code the dose that we're part of the mainly because of the.
The simplification and then conversion that all of these are winding down to de Minimis 9 billion in Q4 of 2022, and you shouldn't expect them to reoccur in 2023.
The bottom line.
Strong cash flow from operating activities in 2023.
Got it but youre using distributable cash flow as a proxy for cash flow from operations. Thank you for taking EBITDA minus interest expense minus maintenance capex rate.
Youre using DCF as as the proxy for cash.
But also you should expect like on a full year basis, you should expect moderate changes in the accounts receivable inventories and payable format is recall that we have a very quick cycle cash cycle collection cycle.
Inventories over the course of there should be a relatively stable efficiency cash consuming inventory as we mentioned on a out of that about 90% of that has been collected five day. Some completion certificate of completion than that 10% is collectively about.
About 30 days later, so very small users of vacation on an ongoing basis.
Ongoing basis in working capital.
Okay, great. Thank you very much that's all I had.
Great. Thank you.
This concludes our question and answer session I would like to turn the conference back over to John Keppler for any closing remarks.
Thank you very much and thanks, everyone for taking the time to join again today.
We do continue to be incredibly privileged the opportunity to build this company and the unique platform that it is where we deliver exactly what the world wants less carbon.
More quickly and more cost effectively from secure sources.
We look forward to continuing to offer that to deliver that sustainably.
And we'll look forward to connecting.
And just a few short months. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.