\nEnviva Inc. (NYSE: EVA) (\u201cEnviva,\u201d the \u201cCompany,\u201d \u201cwe,\u201d \u201cus,\u201d or \u201cour\u201d) today released financial and operating results for first-quarter 2023, discussed changes to its capital allocation priorities in addition to providing a 2023 financial guidance update, and announced a large, long-term take-or-pay off-take contract with an existing Japanese customer.<\/p>\n
\n\u201cAs we will describe today, the plans and initiatives underway to improve productivity and costs across Enviva\u2019s current asset platform continue to fall behind expectations. While the board of directors remains convinced of management\u2019s ability to deliver the originally forecasted operational and financial performance over time, it is clearly taking longer than expected,\u201d said John Keppler, Executive Chairman of the board. \u201cTo more conservatively underwrite that plan and ensure the ability of the Company to capture the value of the fully contracted growth ahead, after careful consideration with management, the board of directors evaluated the most accretive uses of the Company\u2019s capital and decided to revise Enviva\u2019s capital allocation framework, eliminating the Company\u2019s quarterly dividend in order to preserve liquidity and a conservative leverage profile, maintain our current growth trajectory, potentially accelerate future investments in new fully contracted plant and port assets, and implement a limited share repurchase program.\u201d<\/p>\n
\nWith the elimination of the dividend, management expects to retain approximately $1 billion in incremental cash flow during the period 2023 to 2026, providing incremental liquidity and investment into the productivity and operational improvements in its current assets and further reduce the need to access the capital markets to fund its current growth plans, which include the construction of the Company\u2019s fully contracted wood pellet production facilities in Epes, Alabama (\u201cEpes\u201d) and near Bond, Mississippi (\u201cBond\u201d).<\/p>\n
\nUnder the share repurchase program authorized by the board of directors (\u201cBoard\u201d), the Company can repurchase up to $100 million in shares of the Company\u2019s common stock opportunistically from time to time in the open market, or in privately negotiated transactions at prevailing market prices, or by such other means as will comply with applicable state and federal securities laws. This is the Company\u2019s first authorization for share repurchases since its founding.<\/p>\n
\nPresident and Chief Executive Officer Thomas Meth commented, \u201cWe recognize this is an important departure from the plan we laid out at our Investor Day a month ago, but a lot has changed since then. Compared to our expectations, while our cost position has trended in the right direction, it has done so at a much slower pace than we had anticipated, in part due to slower volume growth, and in part due to a higher spend profile for the volume growth we did achieve.\u201d<\/p>\n
\nMeth continued, \u201cWe know what the specific issues are: contract labor is too high, discipline around repairs and maintenance spend is insufficient, wood input costs need to come down further and stay there, and utilization rates at specific plants need to improve and stabilize at those improved levels. Because of where we are in our journey to bend our cost curve down while bending our production curve up, we feel it is prudent to take a much more conservative view of what our business can realistically achieve over the next eight months.\u201d<\/p>\n
\nMeth concluded, \u201cAgainst this backdrop of operational challenges, we are undergoing an extensive review of where we are allocating our capital. We believe we have more accretive capital allocation alternatives, which start with improving returns from our existing fleet of assets, growing our fully contracted asset base, managing liquidity and leverage, and also include the potential to opportunistically repurchase our shares in the open market, which we believe have traded below their intrinsic value for some time.\u201d<\/p>\n
\nThe timing of any repurchases under the share repurchase program will depend on market conditions, capital allocation priorities, liquidity and leverage positions, and other considerations. The program may be extended, modified, suspended or discontinued at any time, and does not obligate the Company to repurchase any dollar amount or number of shares.<\/p>\n
Key Takeaways:<\/b><\/p>\n \n\u201cAlthough the future continues to be incredibly bright for Enviva\u2019s business, we have had a difficult and disappointing start to 2023,\u201d said Meth. \u201cOperating cost overages and production challenges were key drivers behind the first quarter\u2019s poor performance. While plant production is increasing and we are reducing our operating cost position, neither improvement is materializing at the rate we forecasted a few months ago. Based on results from the first four months of the year, we believe it is prudent to take a more conservative view on the timing of our ability to deliver these improvements.\u201d<\/p>\n First-Quarter 2023 Financial Results<\/b><\/p>\n \nEnviva reported certain accretive sales transactions in first-quarter 2023 to a large European customer with whom we also have a third-party pellet purchase agreement which resulted in a deferral of gross margin (the \u201cDeferred Gross Margin Transactions\u201d or \u201cDGMT\u201d). The cash has been collected in full for the sales, and the accounting treatment is similar to the DGMT we reported in our fourth-quarter 2022 financial results. The DGMT transactions in first-quarter 2023 are with the same customer that gave rise to the DGMT in fourth-quarter 2022.<\/p>\n \nThe DGMT resulted in a decrease of $29.7 million in net revenue for first-quarter 2023, with a decrease to both gross margin and adjusted EBITDA of $4.6 million. Enviva expects the DGMT related to these sales to have the opposite effect on gross margin and adjusted EBITDA in 2024 and 2025, increasing gross margin and adjusted EBITDA over those years.<\/p>\n \nReported metric tons sold for first-quarter 2023 were reduced by 0.1 million MT for the tons sold pursuant to the DGMT.<\/p>\n \nThe table below outlines reported first-quarter 2023 results as well as the DGMT impact:<\/p>\n\n
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