Enviva Inc. (EVA) Q1 2023 Earnings Call Transcript


Good morning, and welcome to Enviva Inc.’s First Quarter 2023 Earnings Conference Call. [Operator Instructions] 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.

Kate Walsh

Thank you. Good morning, everyone, and welcome to Enviva’s First Quarter of 2023 Earnings Conference Call. We appreciate your interest in and support of Enviva, and thank you for your participation today.

On this morning’s call, we have John Keppler, Executive Chairman of the Board; Thomas Meth, President and Chief Executive Officer; and Shai Even, 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 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

I would now like to turn the call over to John.

John Keppler

Good morning. Thank you for joining us. It’s clear from our earnings release and 10-Q filed yesterday that the cost and productivity challenges of the first quarter that the team outlined a month ago are deeper and more significant than understood at the time. And that the positive effects of the improvement initiatives are taking longer than expected, with the benefits expected to be realized still ahead.

The poor operating performance at the end of last year, combined with limited progress in a very disappointing first quarter is a reality that the team has internalized. And as a result, the company is resetting guidance this morning. Thomas will walk through that guide given our revised expectations about what the company can accomplish in the near term, as well as highlight some important changes he has made to the operations leadership in the company to get the team better aligned on how to reliably deliver the productivity and cost position we have demonstrated possible.

With that reset and the quarterly guidance provided, you can expect the team to report on our progress clearly and consistently throughout the year, describing where we have engineered improvement and where we have more work to do. Also as part of this reset, our Board of Directors, in consultation with management undertook a process to reconsider Enviva’s capital allocation policy. After a careful review of potential alternative uses of cash flow, the Board has decided to revise Enviva’s capital allocation framework by eliminating the company’s quarterly dividend, in order to prioritize maintaining strong liquidity and a conservative leverage profile, maintaining our investment plans to increase the efficiency and cost position of our existing plants, generating internal funding and timing flexibility for our current investment plans in new, fully contracted plant and port assets and authorizing an opportunistic share repurchase program.

This shift in capital allocation also gives us flexibility to potentially accelerate organic and inorganic growth in the future, with less reliance on accessing the capital markets. We firmly believe this revision to our capital allocation framework is the best way to create durable value for all of Enviva shareholders. These changes reposition Enviva from a yield and growth company, to a pure-play growth company, something I think the market has been telling us for some time. And given the robust opportunity set in front of us, we are improving our ability to take full advantage of the highly visible long-term growth ahead.

As many of you know, I stepped down from Enviva last year to deal with some difficult medical issues. I’m very fortunate to have those largely behind me now. But I’m also privileged to have the opportunity to be back at Enviva in a different role than before, but no less committed to the company’s success. And like the other members of the Board, no less convinced in our ability to return to the high levels of financial performance you have seen from us historically.

Now I’d like to turn the call over to Thomas.

Thomas Meth

Thank you, John, and good morning, everyone. I’m going to take some time to walk through our first quarter results and our 2023 guidance update as it is a significant change to our expectations. Let’s start with first quarter results. When we held our Investor Day discussions a little over a month ago, we knew we would have a soft first quarter, but it was only when we completed closing the March books and had a view on preliminary results for April that we fully understood the depth and extent of the softness.

We reported $3.4 million of adjusted EBITDA for the first quarter of 2023. This is a significant departure from our original expectations of approximately $40 million to $50 million. There are 4 main drivers of the difference between actual results and expectations. First, as we discussed at Investor Day, we have customer mix impacting our results. This is a straightforward shift of higher-priced deliveries with lower cost from the first quarter to the second half of this year but it accounts for about $16 million of that difference. Second, we had approximately $10 million of unplanned repairs and maintenance expenses during the quarter. This is very high.

Unpacking this a bit in select plants, operations leadership and prioritized production over cost management, and we saw cost overages as a result. I call these tonnes at any cost and that isn’t the way to run a plant. To address this, we’re actively changing our culture, discipline and controls around cost management. And to that end, we have made some operational leadership changes exceeding 2 of our senior operations executives, elevating leaders and general managers in the company that have demonstrated strong commitments to both cost and operational discipline, especially safety.

The third area of pressure on our results this quarter relates to approximately $5 million of costs incurred related to professional fees, some tied to plant optimization initiatives. We have one plant that is significantly underperforming our expectations, and we have a highly specialist firm engaged to help us turn it around. And those isolated costs are reported in the first quarter. We also incurred extra accounting and financing fees during the quarter, in part due to the complicated fourth quarter and year-end we went through.

Fourth and final, we did have some shipments that were subject to the deferred gross margin transactions accounting with similar treatment to what we saw at year-end. This accounted for approximately $4.6 million, and we expect the deferral to reverse in 2024 and 2025. All that adds up to a $36 million decrease from what we’re expecting at the beginning of the year. It’s a very difficult start to the year. And while production and costs in the first quarter are generally our seasonally most difficult. The improvement in cost and productivity are not materializing at the rate we expected when we enter 2023.

Based on results from the first 4 months of the year, we’ve taken a more conservative view on what this business will deliver in the short term and we are reducing our adjusted EBITDA expectations for 2023 from $305 million to $335 million to $200 million to $250 million. Let me unpack the 2 main drivers of the step down in guidance.

Approximately $30 million of the decrease between the previous guidance midpoint of $320 million and the revised midpoint of $225 million is related to the weakness in the first quarter of 2023. The remaining $65 million is related to shift in timing expectations as to when productivity and cost improvements are fully realized. To break down the revised guidance further, we are providing quarterly expectations for the next 3 quarters to improve transparency around our realistic expectations for the remainder of the year.

For the second quarter, we are forecasting adjusted EBITDA to be in the range of $20 million to $30 million. For the third quarter, we’re forecasting adjusted EBITDA of between $70 million to $90 million. For the fourth quarter of 2023, we are forecasting adjusted EBITDA of between $110 million and $130 million. The ranges are primarily driven by our assumptions around production levels and our ability to drive costs out of the business.

I am personally overseeing our operations team now. I know there is a lot of ground we can make up in the near term to get back on track. And it’s my responsibility to do just that. As I’ve said, we are making progress.

For instance, from December to March, we reduced the delivered cost of raw material to the company by approximately $3 per ton and drove fixed cost per tonne across our total plants down approximately $6 per ton. While it’s clearly not been as fast as we expected. It’s also not as hard as it sounds. It does, however, require diligent day-to-day management and alignment of the team in how we execute the strategy.

We have a portfolio of 10 plants, 3 of which those in Lucedale, Cottondale and Waycross are consistently capable of outperforming expectations on both volume and cost. They are also our largest plants. Four of our plants performed reliably, but in production rates or costs that are off from the demonstrated performance. 2 of our plants, Greenwood and South Hampton are what we call dryer limited meaning that we’re either bottlenecked at the drive because of its inherent evaporative limitations to reduce the moisture content in the raw material, which is the case at Greenwood or on a reliability or operability basis which is the case at South Hampton, where the original [dry line] needs refurbishment.

With plans in place for each of these challenges and opportunities built around the general management philosophy of staff in our facilities with well-trained operators who skillfully and safely deliver reliable output, continuously improved over time, led by effective managers within [duly] understood and controlled cost position. It’s manufacturing 101, the blocking and tackling of standard work, known and managed equipment set points and eliminating unplanned downtime.

This is what we call operational discipline. We have that in spades at Waycross, Cottondale and Lucedale and have much of that in place at each of our other facilities. The exception is South Hampton, where in addition to the technical challenges with staffing and turnover issues that are also staining in the way of progress. That’s also a big reason why we have brought in a third-party operational improvement consultant to assist. When we successfully execute this year and make up the lost ground like I know we can. We will exit this year roughly at the run rate we expected when we started 2023.

I’ll now turn it over to Shai to take us through a deeper dive of our finances.

Shai Even

Thank you, Thomas, and good morning, everyone. Let’s start with first quarter results. We generated net revenue of $269.1 million for the first quarter of 2023, as compared to $233 million for the first quarter of 2022. Net loss for the first quarter of 2023 was $116.9 million, as compared to a net loss of $45.3 million for the first quarter 2022. Net loss for the first quarter of 2023 included noncash interest expense associated with the deferred gross margin transaction of $40.4 million.

Adjusted gross margin for first quarter 2023 was $21.3 million as compared to $50.7 million for the first quarter 2022. The decrease year-over-year is attributable to the cost and volume challenges Thomas discussed earlier. Adjusted gross margin per metric ton was $17.93 for the first quarter 2023 compared to $46.27 for first quarter 2022.

Adjusted EBITDA for first quarter 2023, was $3.4 million as compared to $36.6 million for first quarter 2022. Enviva’s liquidity, as of March 31, 2023, was $634.4 million, which includes cash on hand, including cash generally restricted to funding a portion of the cost of our Epes, Alabama plant and Bond, Mississippi plant and availability under our senior secured revolving credit facility.

Our growth plan for 2023 is not changed and we expect to invest in total capital expenditures in the range of $365 million to $415 million, with the majority of the spend on our greenfield developments. We expect to invest approximately $310 million at the midpoint of our expectation in the build-out of our apps and bond plans with approximately $60 million being invested in projects across our fleet to improve volume and cost profiles, primarily directed to our underperforming plans.

Similar to prior years, our CapEx spend is scheduled to be back-end weighted. We continue to expect to spend approximately $20 million during 2023 and on maintenance CapEx. Our commitment to conservatively managing Enviva’s balance sheet remains unchanged, and we continue to target a leverage ratio of 3.5x to 4x as defined in our credit agreement. We expect to exit 2023 a little above that, but it will be temporary, and we expect to get back to our target range early in 2024. As a reminder, our covenant threshold under the credit agreement is 5.75x.

With that, I would now like to turn it back to Thomas.

Thomas Meth

Thank you, Shai. Look, disappointing start to the year, no question. March and April is certainly starting to look better, but improvements are not as fast as we needed and as we expected. Our short-term focus has to be on improving productivity and reducing costs as quickly and durably as we can. Although our near-term outlook has changed, the long-term growth profile of our business and industry, it has never been stronger.

Worldwide demand for our product continues unabated. Yesterday, we announced a new sizable take-or-pay contract with an existing Japanese customer for 300,000 metric tons per year with deliveries starting in tandem with the new capacity we have coming online. In Europe, the European Union will finalize the text related to its Renewable Energy Directive, 3 over the next month which we expect will continue to provide demand tailwinds to woody biomass, given how important this renewable resource is to the net-zero targets of the EU member nations.

Our industry continues to be persistently, structurally short supply. So signing new contracts like the one we just announced, means new production capacity must get built. And therefore, these new contracts are underwriting our large-scale fully contracted capacity expansions.

As a reminder, our new capacity is modeled of the Lucedale, Cottondale and Waycross, which are, as I’ve said, our best performing plants. Currently, our Epes, Alabama plant is under construction and progressing well. Epes is expected to be operational mid-2024. For our Bond, Mississippi plant, we’re moving forward with partnering with an EPC firm, which will help provide cost and construction certainty, and we plan to construct at least 2 new greenfield plants of the Bond under this approach as well.

Before we open the call for questions, I’ll give a quick recap of what we’ve discussed this morning. To start off, our results this quarter were much softer than we expected, mainly driven by cost position that is not acceptable, but we believe it can be remedied in the short term. We do know what the problems are, and we’re taking the necessary steps to fix them, but we are recalibrating our forecast as to when we will realize the full benefits of our actions and that has led us to reduce our 2023 guidance expectations.

We also have taken a very hard look at our capital allocation priorities and in lieu of maintaining a dividend. We have revised our policies to focus first and foremost on liquidity and leverage with improving our operating cost position and asset productivity, a very close second priority. Our third priority is to opportunistically return capital to shareholders through share repurchases. And fourth, to the extent it is appropriate, we will accelerate our greenfield developments.

We have a lot of work to do to rebuild the strength of this company and regain the ground we have lost. We know what needs to be done. And those fixes are exactly what you will see us execute over the coming months and quarters.

Now let’s open the call for questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from Elvira Scotto with RBC Capital Markets.

Elvira Scotto

Thanks for the detail that you provided. But I guess I have a few questions. First, I mean, what — maybe a little more detail here on what changed materially from the Analyst Day on April 3 when your first quarter was already done, and you kind of affirm the guidance and now to cause such a big downward revision to EBITDA? And then you mentioned that you believe you can remedy these issues, but why do you believe you can remedy these issues in the short term?

Thomas Meth

Elvira, great question. Let me walk you back a little bit to how we got to where we are. As we prepare the plan for 2023, we were benefiting from the productivity and cost profile of September and November — October — September, October, November. And we made great progress. The plants were running well, cost position was good. That gives us a lot of confidence for where we’re going into 2023.

We — and as we then moved into December, as we previously thought — talked about, polar vortex set us back and created certainly a little bit of noise into Q1. When we went to Investor Day, we thought they were behind us. Volumes had recovered. We do not have March results or April results yet. And what we realized was that January and February that the polar vortex [indiscernible] our operational challenges.

The cost position that we then realized in March and April, was substantially higher than we had thought. We thought we were going to be $20 lower than we ended up. We drove some costs out, but certainly nowhere near what we actually expected. And so all in all, when we were at the Investor Day, we knew we had pressure of about $15 million in our cost position, but it ended up being closer to $30 million in that cost position. And so when you think about what that left us in April, still challenging better again than March, but again, not where we need to be. And so with that in mind, we have to reset expectations here and just provide a much more realistic cost profile.

So your second question is how do we drive cost down, right? We’ve actually made really good progress on the volume, still not quite where we wanted volume to be in February, March, but we never made more tons as an enterprise than in February and March. And so it’s really primarily a cost position issue.

Our R&M, repairs and maintenance costs, way exceeded our expectations. But we know how to manage that on an ongoing basis. Our contract labor was way higher. We just lack discipline there. And then as we talked about in the prepared remarks, throughout the last couple of weeks, we took a deep dive into the South Hampton plant that was really disappointing. And we realized that it’s going to take us just more time and more effort to get that plant to the potential that it is going to have.

So when you think about what does that mean for the guidance going forward, right? We’re going to drive another $10 out of our cost position in the second quarter. But compared to where we thought we were going to be, it’s not — again, it’s not a revenue question. It’s a cost question. We do think we’re going to be about $30 million below what we thought coming into this year. But from March to June, $10, $12 will come out of the cost tower.

One of the things that we see as a real tailwind at the moment is the cost of delivered wood has come down substantially. What we’ve bought the last couple of weeks is lower than any wood we’ve bought over the course of 2022. So making really good progress there. And the cost discipline that we have now very aggressively instilled with the changes in operational leadership will show substantial improvement in debt discipline and contract labor, repairs and maintenance because the plants don’t need to spend some of those cost pockets, it’s a matter of discipline.

As I’ve said, I am much closer to the plants now than I’ve ever been. I’m personally managing the operational — from an operational leadership perspective, what we need to do. Some of the plants run exceptionally well, day in and day out. Lucedale, Waycross, Cottondale are prime examples of what we can do. We have certainly elevated the leadership of those plants in our operations to make sure that all plants adhere to the discipline to get to the reliability, the volumes, the cost position that we know we do every day at some of our best-performing plants.

Let me just add one last piece before I’ll let you ask more questions if you want. All of our plants have proven that they can hit the volumes and the cost position. This is not something that you have to believe that we’re going to step change into something that we have not seen before.

We have seen this before. At every single one of our plant, both from a volume perspective and from a cost perspective and the discipline that we’re instilling personally led by me, will get us back on track. It’s going to take us a little bit longer than we had thought. And so with that, we felt it’s just prudent to provide a more conservative view that we know we can achieve.

Elvira Scotto

Okay. So I guess, just as a follow-up to that, if I look at your 2023 guidance, it’s a pretty wide range between the low end and the high end of your EBITDA guidance. I guess maybe talk a little bit about what drives the low end versus the high end? And then I guess the bigger question is, what’s the potential that you don’t make the low end? Like what would have you actually even missed the low end of your guidance?

Thomas Meth

So Elvira, I’ll go back to — we wanted to provide a guidance that is conservative [indiscernible]. We don’t have to — I believe a whole lot. But it comes down to cost position. And the guidance range comes down to how fast can we drive costs down, right? If we actually increase the reliability faster than the midpoint of the range and create more reliability faster, we’re certainly going to come out at the higher end of the range, right? None of that is dependent on spot markets or revenue lift. This is all around how fast can we reduce our cost per ton? Will we maintain the cost improvement that we have seen in the wood fiber, the fundamentals, the macroeconomic fundamentals, which certainly suggests that we’re on a very good path there. And when we see the weekly cost of the wood costs that are running over our scale, that gives us good confidence that we’re on a very good track.

The cost discipline that we’ve reimplemented will certainly drive to the range. And so I feel very confident that this is a conservative estimate. If we increase volume like we had anticipated initially, a little faster than our conservative view, we certainly have a shot at getting to the higher end of the range.

Elvira Scotto

Okay. Got it. And then I guess just my final question here. I appreciate like how difficult it was for you to eliminate the dividend. I do think from a financial perspective, it does appear to be the prudent thing to do. But given that, and what’s going on, what’s the rationale for announcing a buyback authorization at this time?

Thomas Meth

No. Thank you, Elvira. I appreciate your comment, that is a prudent thing. Look, I mean, we’ve thought for a long time that our share price is on the — I mean, our company is undervalued. And certainly, where we are today, it is certainly — when you rethink capital allocation, at share price that we see today, it’s certainly an obvious way to create total shareholder value here by creating a share-backed buyback program. And so it’s certainly to — as part of — even before today, we thought our valuation was way too low. And so that is just a logical consequence of that, that the Board considered and has given us the authorization.


Our next question comes from Mark Strouse with JPMorgan.

Mark Strouse

Kind of following up on Elvira’s comments there — questions there. The headwinds that you mentioned, can you go into a bit more detail as far as how much of that is within your control? I think you mentioned just now that the contract labor being too high, you lack discipline there. Just a bit more color on that or how to think about that just a more structurally higher labor cost across the world. And then the wood input costs coming down over the past few weeks that you mentioned, how is that being reflected in guidance? Are you assuming that, that stays there? Or what level are you baking in?

Thomas Meth

So I’ll start with your second question. So our guidance certainly assumes that wood costs are staying and to your first — staying where we’ve seen them now land. So I think that’s certainly one part. But more importantly, Contract labor is a classic example of being entirely within our control, right? We are fully staffed now. We’ve told — we’re fully staffed. We had a history of using contract labor where we were not fully staffed, and we lost the discipline to get contract labor out at a time when we were fully staffed. It’s entirely in our control. It’s completely unacceptable that we haven’t done this at the speed that we need to — and so it’s a very good example that when you’re fully staffed, you don’t need to have the same levels over time. You don’t need to have the same levels of contract labor. And that will certainly be a big part of driving our cost position down.

Mark Strouse

Okay. Okay. And then just a quick follow-up. The stock is down obviously pretty significantly since the peak last year. I know that’s not exactly your cost of capital. Can you talk just generally about your cost of capital, including project level debt what that looks like and any impact that, that might have on your willingness or ability to add more production and sign more long-term contracts?

Shai Even

Thank you, Mark. Thank you for the question. So as we mentioned during the Investor Day, Epes is fully funded and during Investor Day, we mentioned that what — to get like Bond to position that is fully funded, we mentioned about $275 million of regional debt is needed. And definitely, with the change in capital allocation that amount will be now lower. So we don’t see any reason not to believe that we’re now with the change in the — in our capital allocation in the prioritization of our capital allocation to see any reason not to continue with our growth program, with the potential to even further accelerate that as part of the prioritization.


Our next question comes from Ryan Levine with Citi.

Ryan Levine

[Indiscernible] is relatively simply. But if the customer contracts are take-or-pay, can you give us color as to why contracted volumes are delayed into the back half of the year in your prepared comments?

Thomas Meth

Yes. No, absolutely. So the contracts are take-or-pay. And when a customer has an operational challenge, for example, they will ask us on the basis of, hey, if you can help us we will absolutely take the volume, right? It’s always the premise, right? This requires us to actually agree to a change.

When do we agree to a change? When it’s accretive to us. And when we get a premium for that change, which in this case we did get. And so and it’s going to come back with a premium in the second half of the year. We — again, we only do these kind of things when we get rewarded for it financially. We have almost 200 ships on the water a year. And many of those ships provide an opportunity to create a little bit of extra margin through the commercial services business.

We have said previously that’s about 15% to 20% of our overall EBITDA. That continues to flow through our guidance that we have outlined today. That has not changed. And as part of that 15% to 20%, you can — we call that premium that we received from the customer to move the $16 million into a different period.

Ryan Levine

Given the implications to the capital structure of those decisions, do you have the ability to force them to take the volumes and receive the cash flow to preserve the capital structure?

Thomas Meth

Yes, absolutely. We can — it’s a take-or-pay contract. We could tell the customer, sorry, we don’t really find an opportunity Unfortunately, we can’t help you. We didn’t do this in this case, but we could.

Ryan Levine

Right. And then in terms of the guidance, so you think in your comments, you mentioned that you knew about $15 million cost decline at the time of the Analyst Day when the guidance was reaffirmed. Can you give us a little color as to what new information you are in, since then? And I guess on that [indiscernible], just so we understand some of the numbers, in the transcript or the press release, you highlighted a $50 million shortfall to management expectations on adjusted EBITDA versus a $30 million shortfall to company guidance.

Can you help us kind of understand what the differences between some of these numbers?

Thomas Meth

So at Investor Day, we’re certainly — we thought we might be — we would be trending towards the low end of the original guidance range, but we absolutely thought we were within the guidance range and we thought it was still possible. And the improvements that we — that were underway did not materialize. And as we close the books in April, March cost — the March cost position was significantly higher than what we had anticipated. And then as we don’t have the final numbers for April, but clearly, we know that April was lower than certainly we saw at the beginning of the year, but we have not seen the cost reductions that we anticipated. And with that, the outlook for the rest of the year changed as we drive cost out of the business, we’re certainly starting at a higher cost base. And so that’s why we had to acknowledge that with a reasonably conservative view, Q2 will be about $30 million in EBITDA lower than we had thought. And the remaining $35 million will be divided over Q3 and Q4.

Again, we believe we can drive costs out of the organization exactly like we anticipated from a goal perspective, but it’s going to take us longer to really drive that out of the cost position and with that, we’re — it’s just shifting a little bit to the right. The other piece of information is that over the last couple of weeks, our deep dive in South Hampton clearly indicated that it’s going to take us longer to rebuild that drive that we’ve outlined. And that’s another reason that’s setting us back.

Ryan Levine

Okay. And then just a follow-up on the $50 million shortfall versus management expectations versus a $30 million shortfall versus company guidance? What’s the difference?

Shai Even

We didn’t really — Ryan, for the first quarter, we didn’t really provide guidance for the first quarter. So I think that like a — we can take this.

Thomas Meth

No, so we moved $16 million into the different period. And $30 million is the miss on the cost bases compared to our original budget, right? And so that’s why we print it, if you take this together, $16 million and $30 million. We printed $4 million, and we had $4.6 million of incremental DGMT.


Next question comes from Pavel Molchanov with Raymond James.

Pavel Molchanov

A month ago, you obviously were sticking with the $0.905 dividend and today you zeroed it out. What was the thinking in doing a full dividend suspension instead of a cut, 50% or even 75% preserving some kind of income for the investor.

Thomas Meth

Pavel, great question. So the Board evaluated and found more accretive value for our shareholders and shoring up our balance sheet and an investment in our current fleet clearly necessary and future assets growth. And of course, the return of capital through the share buyback was certainly another consideration that — from an accretion perspective and for total shareholder return. And — when you think about the priorities that we’ve outlined: first, liquidity and leverage; secondly, investing in our existing asset fleet; third, the share buyback program; and fourth, under the right circumstances, moving up some of our investments in new plants. All this together led us to believe that a complete elimination of the dividend was a better new capital allocation strategy than any of the alternatives.

Pavel Molchanov

Will you ever consider restoring the dividend? And if so, under what circumstances?

Thomas Meth

So absolutely, Pavel. We have not moved away from our growth program here. We believe in 2026, we’re going to hit $500 million in EBITDA. That has certainly not changed. And we believe we’re going to build — that requires 2 more plants to get to $500 million in EBITDA and restoring our cost structure.

Those are the 2 key elements that we need. And then beyond that, we can certainly generate more growth, but we are getting to a point where we’re certainly going to be able to consider going back to paying a dividend without in any sort of form limiting our growth potential. But the one thing that’s clear is that when we look at our opportunities and our potential, the focus on growth is certainly a key part of our strategy. And the tailwinds from RED III that we just talked about a couple of weeks ago, are certainly materialize.

Japan, we just evidenced the growth potential in Japan by signing another contract with a Japanese customer, right? So growth is certainly the focus of this company in the medium term. And as part of that growth profile, we’re going to generate cash that will allow us eventually to revisit our capital allocation program.

Pavel Molchanov

And lastly, can we get an update on older fields?

Thomas Meth

Pavel, the sustainable aviation fuel space, in general, is still going very, very strongly. We continue to work with many counterparties in that space. All of them are asking the same question, where is the wood fuel coming from? And whether it’s in the boardrooms or whether it’s in their financing questions, and we are providing a key solution for that. And we’re one of the only ones who can provide that solution. That is something we’re working on with Alder. But it’s not limited to Alder. Alder is progressing, and we believe that they, as — like many other companies, are going to successfully deploy capital to build plants to generate sustainable aviation fuels. And so one of our great partners, and we have many more that we’re working with.


Our next question comes from Jordan Levy with Truist Securities.

Jordan Levy

Thomas, maybe start out with you. I wanted to see if I could get a sense of how you all have historically looked to evaluate productivity and cost profile on a plant level basis. And how you’re thinking about that potential changes there as we go forward.

Thomas Meth

So when you go back to 2020, 2021, we had a strong sense of cost control. Our cost position was predictable. And then as we went into 2022, cost position certainly went up, right? We initially thought it was more temporal through the war in Ukraine and inflationary pressures. We really struggled through the first quarter with pandemic-related issues. And it certainly turned out that — and we had expansions that we did at many of the plants. And so what we’ve seen in September, October, November is that these expansions were starting to really flow through on a daily basis. And where we have struggled a little bit is certainly on the reliability of those new plants.

We have certainly struggled a little bit with third-party cost management, and we have struggled with turnover, right? And particularly those elements are — the good news is many of these, if not all of them, are actually within our control. And so we believe we can get the cost down like we’ve said. We’re certainly working very hard to train people. The issue with turnover is not that you can’t replace people, but it takes 6 months for these people to be the necessary operators that they can actually problem solve independently in a [indiscernible], for example, in a plant.

We’ve made good progress there. but not as fast as we thought. And so we know what needs to be done. We have the skilled labor in place and the retention plans and productivity is driven by uptime of the plants, in addition to cost management. And the uptime of the plants is not — in some plants, it’s not quite where it needs to be. It’s a core focus of ours. I think we’re making progress.

As I’ve said, and the trajectory will show. We’ll report out on this — on the progress. So we’ll provide on a go-forward basis, given that this, in the short term, is our #1 key initiative. We’ll provide more detail as we go forward that the analyst community as well as our investors can measure progress.

Jordan Levy

I appreciate that. And maybe shifting over to the contract side. As we go through ‘23 and into ‘24, you have a large portion of the mix starts to shift over to Japan contracts. I’m just curious if that acts as another headwind in terms of cost, given higher shipping costs and if you all have addressed that in your [thinking?].

Thomas Meth

Absolutely. It’s a great question. So no, this will not have any negative implications. In fact, we, of course, received a headline price that accounted for higher shipping costs. And so a lot of these contracts that we have in Japan should provide the same or better margins like we’ve seen historically. I will also say that the contracting environment right now is certainly providing us with an opportunity to enter into contract at a substantially higher contract price than we’ve seen historically.

Certainly, pricing is up 20% compared to what we’ve seen historically. And so that will start to roll through. That actually will start to roll through already in the second half of this year. That’s why revenue number for Q1 was $219, on average, it’s going to be $234 this year. And certainly, as contracts roll through, you’ll see revenue per ton increase.


This concludes our question-and-answer session. I would like to turn the conference back to Thomas Meth for any closing remarks.

Thomas Meth

Thank you, everyone, for taking the time to join us today. We’ve outlined today that — in the short term, #1 priority is cost reductions. Our revenues are like as expected, our cost position is not. But we will fix that. We have that in our control, and we’ll report out on our progress.

And we look forward to providing progress updates on that and our business throughout the coming months as we execute that improvement plan, and deliver much better quarterly results going forward. Thank you for joining us today.


The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.