Enviva Reports 2Q 2023 Results

Enviva Inc. (NYSE: EVA) (“Enviva,” the “Company,” “we,” “us,” or “our”) today released financial and operating results for second-quarter 2023 and provided a progress update on cost-reduction and productivity improvement initiatives across its operations.

Financial Update

• Reported a net loss of $55.8 million for second-quarter 2023, as compared to a net loss of $27.3 million for second-quarter 2022; net loss for second-quarter 2023 was in line with the previously disclosed guidance range
• Reported adjusted EBITDA for second-quarter 2023 of $26.0 million as compared to $39.5 million for second-quarter 2022; adjusted EBITDA for second-quarter 2023 was in line with the previously disclosed guidance range
• Reaffirmed net loss guidance range for full-year 2023 of $186 million to $136 million
• Reaffirmed adjusted EBITDA guidance range for full-year 2023 of $200 million to $250 million
• Lowered full-year 2023 total capital expenditures guidance range to $335 million to $365 million, from $365 million to $415 million, representing a decrease of 10% at the midpoint of the ranges; total capital expenditure reductions were primarily driven by updated timing of cash flow spending curves related to the Epes, Alabama (“Epes”) and Bond, Mississippi (“Bond”) projects, partially offset by higher expected spending on several smaller growth projects; the lower spending does not impact the planned in-service dates of Epes (mid-2024) and Bond (mid-2025)

During second-quarter 2023, Enviva significantly heightened its focus on initiatives to improve productivity and costs across its current platform, in conjunction with progressing contract negotiations, including repricing certain legacy contracts, in a constructive pricing environment for both near-term deliveries and long-term, take-or-pay off take contracts.

Key Takeaways

• Reduced production costs related to wood pellets delivered at port (“DAP”) by $3 per metric tons (“MT”) for second-quarter 2023 as compared to first-quarter 2023, with average DAP cost per MT for the month of June achieving a reduction of approximately $9 per MT as compared to first-quarter 2023
• Initiated a corporate restructuring designed to reduce cash costs by approximately $16 million on an annualized basis
• Sold two shipments to a new credit-worthy European customer for delivery into Poland, a new and emerging market for Enviva

“For the second quarter of 2023, Enviva delivered results in line with our expectations, and we are making progress with initiatives underway to reduce costs and improve productivity across our operations,” said Thomas Meth, President and Chief Executive Officer. “We recently initiated a corporate restructuring that is designed to reduce overhead costs to align our organization with the growth we have ahead of us today. We also reduced our delivered at port cost by $9 per MT in June as compared to the first quarter of this year, but there is certainly more work to be done to achieve our goals for the rest of this year.”

“Along with company-wide cost reductions, we are focused on working with customers to increase our sales price per MT as well as placing our Epes, Alabama plant in service on time and on budget in mid-2024. We are on a journey to bend our cost curve down while driving our production and profitability up, and we believe the work we are focused on currently will strengthen our liquidity and leverage over time, and ultimately support a self-funding growth program.”

Second-Quarter 2023 Financial Results

During the second quarter of 2023, Enviva initiated a series of cost-reduction and productivity-improvement initiatives across its plant and port assets. Operating and financial performance for the month of June began to demonstrate the positive impact of these efforts, as evidenced by DAP cost per MT decreasing by approximately $9 per MT for the month of June as compared to first-quarter 2023.

The table below outlines reported second-quarter 2023 results as compared to second-quarter 2022:

$ millions, unless noted	2Q23	2Q22	Change
Net Revenue	301.9	296.3	5.6
Net Loss	(55.8)	(27.3)	(28.5)
Gross Margin	10.4	16.8	(6.4)
Gross Margin $/Metric Ton	8.02	13.19	(5.17)
Metric Tons Sold (in millions of tons)	1.302	1.275	0.027
Non-GAAP Metrics
Adjusted Gross Margin*	41.4	54.8	(13.4)
Adjusted Gross Margin $/Metric Ton*	31.80	42.94	(11.14)
Adjusted EBITDA*	26.0	39.5	(13.5)
*Adjusted gross margin, adjusted EBITDA, and adjusted gross margin per metric ton are non-GAAP financial measures. For a reconciliation of non-GAAP measures to their most directly comparable GAAP measure please see the Non-GAAP Financial Measures section below

Net revenue for second-quarter 2023 was $301.9 million as compared to $296.3 million for second-quarter 2022, an increase of approximately 2% year-over-year.

Metric tons sold during second-quarter 2023 were 1.302 million MT, as compared to 1.275 million MT during second-quarter 2022, representing a 2% increase in volumes year-over-year. Second-quarter 2023 volumes benefited from our Lucedale, Mississippi plant being fully ramped; however, a scheduled extended outage conducted at Enviva’s Waycross, Georgia plant (“Waycross”), one of Enviva’s top-performing plants, as well as our Amory, Mississippi plant (“Amory”) being offline following tornado damage suffered in March 2023, dampened the aggregate increase in produced volumes. The extended Waycross outage, which included installing improved emissions control equipment, was completed during April and May, with a return to full production in June. Operations at Amory are expected to resume by October 2023.

Production volumes achieved in June 2023 reflect the initial benefits of operational changes being made at certain of Enviva’s plants. In particular, since the latter part of second-quarter 2023, Enviva has been operating the Southampton, Virginia plant (“Southampton”) at half of its nameplate capacity while we retrofit an underperforming dryer line. Southampton had been operating unprofitably for the past several quarters, and with recent changes, Enviva expects the plant to operate on a financial breakeven basis in the second half of 2023. Currently, Enviva is evaluating alternatives to return Southampton to profitability on a go-forward basis.

At Enviva’s Greenwood, South Carolina plant (“Greenwood”), small manufacturing process changes made during second-quarter 2023 (which raised production rates at the facility) and a change in fiber procurement strategy (to include more hardwood purchases) both improved the cost position over a relatively short period of time. As a result, Greenwood is on a path to reach its target production level and cost position during fourth-quarter 2023.

Net loss for second-quarter 2023 was $55.8 million as compared to $27.3 million for second-quarter 2022. The increase in net loss year-over-year was primarily attributable to three factors: (i) higher shipping costs in second-quarter 2023 due to more deliveries into Japan year-over-year, (ii) restructuring costs, including severance expenses, related to the corporate reorganization that was initiated during second-quarter 2023, and (iii) higher interest expense, including interest expense on repurchase accounting, during second-quarter 2023.

Gross margin was $10.4 million for second-quarter 2023 as compared to $16.8 million for second-quarter 2022. The decrease in gross margin year-over-year is primarily driven by higher shipping costs in second-quarter 2023 due to more deliveries into Japan year-over-year, which were partially offset by improvements in fiber costs and plant-level operating costs.

Gross margin per MT for second-quarter 2023 was $8.02 as compared to $13.19 for second-quarter 2022, with the decrease year-over-year attributable to the same factors that impacted gross margin.

Adjusted gross margin for second-quarter 2023 was $41.4 million as compared to $54.8 million for second-quarter 2022. The decrease in adjusted gross margin year-over-year was primarily attributable to higher shipping costs due to more deliveries into Japan year-over-year coupled with lower support payments, which were partially offset by improvements in fiber costs and plant-level operating costs.

Adjusted gross margin per metric ton for second-quarter 2023 was $31.80, as compared to $42.94 for second-quarter 2022. The year-over-year decrease was driven by the same factors that impacted adjusted gross margin.

Adjusted EBITDA for second-quarter 2023 was $26.0 million as compared to $39.5 million for second-quarter 2022. The year-over-year decrease of $13.5 million was primarily driven by the reduction in adjusted gross margin of $13.4 million. Adjusted EBITDA for second-quarter 2023 excludes $2.7 million of cash-based employee severance expenses incurred as part of the Company’s corporate restructuring initiative.

Enviva’s liquidity was $565.6 million as of June 30, 2023, which included cash on hand, including cash generally restricted to funding a portion of the costs of the acquisition, construction, equipping, and financing of our Epes and Bond facilities, as well as availability under our $570.0 million senior secured revolving credit facility.

2023 Guidance

Enviva continues to advance cost-reduction and productivity initiatives designed to improve the financial and operating performance of its fully contracted assets. To that end, Enviva executed a corporate restructuring intended to achieve a leaner operating model with narrowed priorities focused on the core of our business: producing and selling pellets safely, sustainably, and more profitably. As noted above, Enviva incurred $2.7 million of cash-based employee severance expenses in the second quarter of 2023 associated with this restructuring, and we expect to incur approximately $5 million of cash-based severance expenses during the third quarter of 2023. This corporate restructuring is expected to reduce cash costs by approximately $16 million on an annualized basis.

During second-quarter 2023, management was able to reduce DAP cost by approximately $3 per MT as compared to first-quarter 2023, and reduced DAP cost by $9 per MT from first-quarter 2023 to June 2023. As part of management’s execution plan, we are targeting a further $14 to $19 per MT reduction in DAP cost by year-end 2023 as compared to June’s DAP cost of approximately $149 per MT, for a DAP exit run rate of $130 to $135 per MT, adjusted for net calorific value (“NCV”). NCV is a component of our sales price related to the energy content of the fiber in our product and typically ranges from $6 to $8 per MT in additional revenue. DAP improvements are expected to be driven primarily by continued reductions in delivered fiber prices and increases in fixed cost absorption rates, along with further cost discipline in repairs and maintenance expenditures.

Management expects net product sales price per MT to be within a range of $230 to $240 per MT for full-year 2023.

Enviva is maintaining its full-year 2023 net loss guidance range of $186 million to $136 million and its adjusted EBITDA guidance range of $200 million to $250 million, but adjusting expectations for the balance of net income (loss) and adjusted EBITDA between the third and fourth quarters.

Third-Quarter Guidance Update

Enviva is maintaining its net loss range for third-quarter 2023 of $25 million to $5 million, but revising its adjusted EBITDA guidance range to contemplate (i) an extended outage underway at Enviva’s Ahoskie, North Carolina plant (“Ahoskie”) as part of its planned capacity expansion and (ii) updated shiploading schedules for a selection of vessels that are now expected to load in early October as opposed to the end of September. Adjusted EBITDA guidance for third-quarter 2023 excludes approximately $5.0 million of cash-based severance expenses related to Enviva’s recently initiated corporate restructuring.

As previously disclosed, Enviva is planning to expand Ahoskie’s nameplate capacity by 45%, to approximately 600,000 metric tons per year (“MTPY”) from 410,000 MTPY. Recently, we made the decision to take advantage of a maintenance outage required to repair a main line in Ahoskie’s water supply to install equipment which prepares the site for the upcoming capacity expansion, including adding emissions control equipment. This project is expected to increase costs during the quarter by $3 million and the lost production cost is expected to be approximately $2 million, for a total impact to net income and adjusted EBITDA of approximately $5 million. Together with the shiploading shift from the end of the third quarter to the beginning of the fourth quarter, these two factors are expected to reduce third-quarter 2023 net income (loss) and adjusted EBITDA by approximately $10 million. As a result, adjusted EBITDA guidance for third-quarter 2023 is now expected to be in the range of $60 million to $80 million, lowered by $10 million from the previous expectation of $70 million to $90 million.

Fourth-Quarter Guidance Update

Enviva is revising its net income and adjusted EBITDA guidance ranges upward for fourth-quarter 2023 to account for the shift in shiploading timing from the third quarter into the fourth quarter. Enviva also deferred higher-priced deliveries in first-quarter 2023 into the fourth quarter. Importantly, there is seasonality to Enviva’s business, whereby the fourth quarter experiences an uptick in biomass consumption due to winter heating demand coupled with seasonal impacts to the amount of solar and wind energy available to power grids. Additionally, historically, we have seen higher commercial value materialize in the fourth quarter, and there are a number of wood pellet supply and demand dynamics that are expected to be supportive of that activity this year.

Enviva’s net income for the fourth quarter is now expected to be in the range of $40 million to $60 million, increased from the previous estimate of $20 million to $40 million. Adjusted EBITDA is now expected to be in the range of $120 million to $140 million, increased from the previous estimate of $110 million to $130 million.

The expected significant step-up in revenue and margin during fourth-quarter as compared to third-quarter 2023 is also underpinned by the following factors: (i) continued improvement in DAP cost per MT, with DAP cost per MT projected to decrease by $14 to $19 per MT during the second half of 2023, (ii) productivity improvements related to production rates at current plants projected to increase MT sold as compared to prior periods, (iii) contract price escalators related to 2022 fully reflected in sales prices per MT, and (iv) repricing of select legacy contracts increasing sales price per MT.

Capital Expenditures Guidance Update

Enviva has updated full-year 2023 expectations for total capital expenditures (inclusive of capitalized interest), and has reduced and narrowed the range to $335 million to $365 million from $365 million to $415 million, with investments now expected in the following projects:

• Greenfield site development and construction projects: Updated range to $240 million to $260 million, reduced from previous range of $295 million to $325 million. The lower range is primarily driven by an updated forecast related to cash flow spending curves related to Epes and Bond
• Expansion and productivity improvements of existing assets: Updated range to $75 million to $85 million, from the previous range of $50 million to $70 million in part due to the Ahoskie expansion work that is currently underway
• Maintenance capital for existing assets: Maintained expectations of approximately $20 million

Contracting and Market Update

Enviva’s customers are renewing existing contracts and signing new contracts in large part due to the urgent need to reduce lifecycle greenhouse gas emissions from their supply chains and products while securing reliable, affordable and renewable feedstocks over the long term. There are limited large-scale alternatives available for renewable baseload and dispatchable power and heat generation, and even fewer sustainably sourced feedstocks to substitute in hard-to-abate carbon-intensive industries.

Additionally, the carbon price environment in the European Union remains strong, which reinforces the cost competitiveness of biomass. Wood pellets are currently the cheapest form of thermal energy generation in Europe. Enviva’s long-term contracted wood pellets at $220 to $260 per MT makes biomass generation in the EU more profitable than conventional generation, especially compared to delivered liquified natural gas prices. Biomass continues to be very price competitive, with biomass currently forecasted to be cheaper than natural gas and coal at most points along forward curves.

Today, Enviva announced its first sales into the emerging biomass market in Poland, to a new credit-worthy European customer. Enviva has sold two test shipments for consumption in Poland that are scheduled to be loaded during third-quarter 2023. Poland has one of the highest per-capita rates of coal usage in the EU, and historically has been very dependent on Russian fossil fuels. Poland is progressing with its energy transition plans to meet 2030 and 2050 renewable energy targets, and in the Polish National Energy and Climate Plan, the government declared that “by 2030, the consumption of biomass for heat production in heating plants must grow almost 10 times.” The government is consolidating coal plants to manage the carbon transformation of its asset base, and is in the process of amending renewable energy regulation, which is expected to support the conversion of coal plants to biomass usage.

Driven in large part by the strong contracting environment in Europe, on average, Enviva’s new long-term off-take contract pricing over the last 12 months is approximately 20% higher than Enviva’s existing long-term off-take contracts scheduled to expire over the next 3 years.

Pricing of Enviva’s long-term, take-or-pay off-take contracts is not generally exposed to, nor predominantly driven by, current commodity prices, but rather our customers’ longer-term view of securing a long-term, cost-competitive, and renewable, sustainable feedstock over timeframes spanning from 5 to more than 20 years.

As of July 1, 2023, Enviva’s total weighted-average remaining term of take-or-pay off-take contracts is approximately 13.4 years, with a total contracted revenue backlog of approximately $23.1 billion.

This contracted revenue backlog is complemented by a customer sales pipeline exceeding $52 billion, which includes contracts in various stages of negotiation. Given the quality and size of this backlog and of our current customer sales pipeline, we believe we will be able to support the addition of at least two new fully contracted wood pellet production plants in addition to Epes and Bond, along with several highly accretive capital-light projects in the coming years. We expect to construct our new fully contracted wood pellet production plants at an approximately 5 times adjusted EBITDA project investment multiple.

European Union – Renewable Energy Directive Update

On June 19, 2023, EU ambassadors approved and published the Renewable Energy Directive III (“RED III”) text, pursuant to which primary woody biomass continues to be counted as 100% renewable and zero-rated in the EU Emissions Trading System (EU ETS), provided sustainability criteria are fulfilled. As the world’s leading producer of sustainably sourced woody biomass, Enviva is confident it will be able to meet all updated sustainability criteria, enabling its customers to continue to make an important contribution to achieving global climate goals.

The final approval of RED III by the EU Council of Ministers and the EU Parliament is expected to take place by October 2023, after which RED III will become law and the process for national implementation will begin. Member states will have 18 months for implementation.

The final language of RED III includes: additional sustainability criteria for woody biomass, with which Enviva is compliant; assurances that electricity-only plants already receiving subsidies will continue to do so, meaning Enviva’s existing off-take contracts are not impacted; continuing availability of financial support to electricity-only installations where Bioenergy with Carbon Capture and Storage (BECCS) is used (this is a pivotal technology for reaching net zero and a key focus for many of Europe’s power generators); and the availability of financial support for all other end uses of woody biomass, which should provide further tailwinds to Enviva’s growth in combined heat and power, hard-to-abate sectors, and advanced biofuels.

Sustainability Update

In June 2023, we commemorated the first anniversary of the Enviva Heirs Property Fund, launched to assist families in the U.S. Southeast secure clear and marketable title and capture sustainable value from their land assets through direct support for professional services, and to advocate for public policy solutions to help end involuntary land loss. The issue of heirs property predominantly affects southern Black landholders, and has been a significant driver of Black land loss over the last century – the Federation of Southern Cooperatives estimates that from 1910 to 2007, Black farmers lost approximately 80 percent of their land, from about 20 million acres to about 1.9 million acres today.

Enviva is committed to making a positive impact in the communities we call home. Recognizing that there are well-established groups who have been working in this space for decades, Enviva has formalized partnerships over the past year with the Sustainable Forestry and Land Retention Project and other regional organizations like the Winston County Self Help Cooperative, the Roanoke Electric Cooperative, and the Black Family Land Trust. With the help of these organizations, we have invested more than $200,000 in assisting families retain and manage approximately 800 acres of land in Enviva’s operating footprint in the first year of the Fund. In addition to securing legal land ownership for families, the Enviva Heirs Property Fund is supporting educational initiatives and training on best practices for forest and land management, sustainable farming techniques, and harvest merchandising. Enviva remains committed to working with families, landowners, and well-established organizations to support land retention efforts in the states in which we operate.

Asset Update

Construction of Epes is progressing well, and we continue to expect that the facility will be operational in mid-2024. The Epes plant has been designed using learnings from the Company’s existing ten plants to deliver an improved and modernized model known as the EVA-1100. The new blueprint is being used as the standardized plant design for our future 1.1 million MTPY production capacity plants, including Epes.

In addition to Epes, we are moving forward with our process to enter into construction agreements with one or more EPC firms to complete the engineering, procurement, and construction of Bond and future similar plants. We have all the necessary permits in hand for our Bond development, and expect to have a signed EPC agreement during fourth-quarter 2023.

Because Enviva’s top financial priority is effectively managing liquidity and leverage to achieve our targets, we are monitoring the progress we make with the cost profile and improving production rates of our existing asset fleet. To the extent we are not on pace with reaching our targets, we have the opportunity to defer the build timing of Bond and move the in-service date back by approximately six to twelve months without impacting customer commitments, thus enhancing our near-term liquidity and leverage profile, and potentially reducing the likelihood of needing to access capital markets to fund Bond. This deferral of Bond timing would move the planned in-service date from mid-2025 into 2026.

We continue to project that average cost per plant for the next four greenfield projects (including Epes and Bond) will be approximately $375 million, and we also expect a five-times, or better, project-level adjusted EBITDA investment multiple, which implies annual plant-level adjusted EBITDA of $75 million to $90 million, when the production ramp is complete. Our expectation is that Epes will generate a five-times return, with subsequent plants achieving a higher return on invested capital given the higher off-take contract pricing environment relative to most of our historical long-term off-take contracts.

Enviva recently submitted applications for both Epes and Bond related to the “Qualifying Advanced Energy Project Credit (48C) Program”. If successful, Enviva could be granted investment tax credits that can be monetized for a value up to 30% of the total eligible capital investment cost of each project. Enviva expects to be notified in the coming months as to the likelihood of receiving such tax credits.

For the complete press release, click here.

About Enviva

Enviva Inc. (NYSE: EVA) is the world’s largest producer of industrial wood pellets, a renewable and sustainable energy source produced by aggregating a natural resource, wood fiber, and processing it into a transportable form, wood pellets. Enviva owns and operates ten plants with a combined production capacity of approximately 6.2 million metric tons per year in Virginia, North Carolina, South Carolina, Georgia, Florida, and Mississippi, and is constructing its 11^th plant in Epes, Alabama. Enviva is planning to commence construction of its 12^th plant, near Bond, Mississippi, in 2023. Enviva sells most of its wood pellets through long-term, take-or-pay off-take contracts with primarily creditworthy customers in the United Kingdom, the European Union, and Japan, helping to accelerate the energy transition and to defossilize hard-to-abate sectors like steel, cement, lime, chemicals, and aviation. Enviva exports its wood pellets to global markets through its deep-water marine terminals at the Port of Chesapeake, Virginia, the Port of Wilmington, North Carolina, and the Port of Pascagoula, Mississippi, and from third-party deep-water marine terminals in Savannah, Georgia, Mobile, Alabama, and Panama City, Florida.

Contact:

Kate Walsh – Vice President, Investor Relations – Investor.Relations@envivabiomass.com

Source: Enviva, Inc.